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PETITIONER: COMMISSIONER OF INCOME-TAX,BOMBAY CITY I, BOMBAY

       Vs.

RESPONDENT: AFCO (P) LTD., BOMBAY

DATE OF JUDGMENT: 15/10/1962

BENCH:

ACT: Income Tax-Rebate-Claim by private company for rebate-"Claim to  Which  the provisions of s. 23A of  the  Income-tax  Act cannot  be made applicable"-Indian Income-tax Act, 1922  (11 of 1922), s. 23-A-Finance Act, 1955 ( 15 of 1955), s.  2,Sch. 1, Part 1, Item B.

HEADNOTE: For  the  year  of  account  ending  March  31,  1955,   the appellant, a private limited company, earned a total  income of  Rs.  49,843.  The company declared a’  dividend  of  Rs. 11,712 on July 13, 1955, and before the close of the year of assessment  1955-55 declared an additional dividend  of  Rs. 5,612, thereby distributing in the aggregate dividend  which was not less than                             767 60%  of  the  total income, reduced by  the  income-tax  and supertax payable by it.  The company then claimed rebate  at the  rate  of one anna in the rupee on the  amount  computed according  to Sch. 1, Part 1, Item B, read with s. 2 of  the Finance Act, 1955.  The Income-tax authorities rejected  the claim  on the ground that the expression "company  to  which the  provisions  of s. 23A of the Income-tax Act  cannot  be made  applicable" in the provision of law aforesaid  in  the Finance  Act, 1955, on which the appellant  company  relied, referred  to  a company against which  in  no  circumstances could  an  order under s. 23A be made, and  private  limited companies  being  companies in respect of  which  an  ’order under  s.  23A could be made if  the  conditions  prescribed relating  to  distribution of dividend were  fulfilled,  the benefit  of  rebate  was not admissible  in  favour  of  the appellant  company.   The Appellate Tribunal  and  the  High Court took the view that the benefit of a rebate provided by the Finance Act could not be denied to a private company  if the  conditions prescribed in s. 23.A(1) of  the  Income-tax Act  were fulfilled, because, according to their  view,  the expression  "can  not be made applicable" only refers  to  a state of affairs in which having regard to the circumstances an order tinder s. 23A could not be made. Held, that the appellant company was entitled to the  rebate claimed by it. The  expression  "to which the provisions of s. 23A  of  the Income-tax Act can not be made applicable" in Sch.  1,  Part 1,  Item B, of the Finance Act, 1955, meant that the  appli- cability  of s. 23A of the Income-tax Act depended  upon  an order to be made by the Income-tax Officer, and not upon any exclusion by the provisions of the Act.  It was only when an order  under  s.  23A  would  not,  having  regard  to   the circumstances, be.justified that the right to obtain  rebate

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under the Finance Act was claimable.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 21. of 1962. Appeal  by special leave from the judgment and  order  dated September  23,  1958,  of  the Bombay  High  Court  in  I.T. Reference No. 87 of 1957. H.N. Sanyal, Additional Solicitor-General of India, N. D. Karkhanis and R. N. Sachthey, for the appellant. A.V. Viswanatha sastri, J. B. Dadwhanji, O. C. Mathur and Ravindra Narain, for the, respondent, 768 1962.  October 25.  The judgment of the Court was  delivered by SHAH, J.-For the year of account ending March 31, 1955, Afco Private Ltd.-a private limited company-earned a total income which  was  finally computed in  assessment  proceedings  by order  of  the Income-tax Tribunal, at  Rs.  49,843/-.   The company  declared  a dividend of Rs. 11,7121-  on  July  13, 1955, and before the close of the year of assessment 1955-56 declared  an  additional  dividend  of  Rs.5,612/-,  thereby distributing  in the aggregate dividend which was  not  less than 60% of the total income, reduced by the income-tax  and super-tax payable by it. The company then claimed rebate  at the  rate  of one anna in the rupee on the  amount  computed according  to Schedule 1, Part 1, Item B read with s.  2  of the Finance Act 15 of 1955.  The Income-tax Officer and  the Appellate Assistant Commissioner rejected the claim  because in  their  view  the claimant was a  company  to  which  the provisions of s. 23A of the Income-tax Act could not be made applicable.   In appeal, the Income-tax Appellate  Tribunal, Bombay ’, reversed the order of the Income-tax  authorities. The  Tribunal  opined that the expression  "cannot  be  made applicable" in Item B of Part 1 of Schedule 1 of Finance Act 15  of 1955 must be read in conjunction with s. 23A  of  the Income-tax  Act, and the benefit of rebate provided  by  the Finance Act, 1955, cannot be denied to a Private Company  if the conditions prescribed in s. 23A(1) are fulfilled. The following question referred by the Tribunal to the  High Court   of  judicature  at  Bombay  was  answered   in   the affirmative :-               "Whether on the facts and in the circumstances               of  the  case,  the  assessee  company  having               distributed  dividends  of  over  60%  of  the               company’s  total  income less  income-tax  and               super-tax  payable thereon is entitled to  the               rebate of                769               1 anna per rupee on the undistributed  balance               of  profits as provided in clause (1)  of  the               proviso  to  item  B  of Part  1  of  the  1st               Schedule to the Finance Act of 1955 ?" By the Finance Act 15 of 1955 Schedule 1 Item B read with s. 2  of  the Act rates of tax were prescribed in the  case  of companies. Item B providedthat  "in  the case  of  every company-                               Rate             surcharge on the whole of total income  Four annas  one twen-                               in the           tieth  of                               rupee            the rate                                                specified                                                in the pre-                                                ceeding

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                                              column.               Provided that in the case of a company  which,               in respect of its- profits liable to tax under               the Income-tax Act for the year ending on  the               31st   day  of  March,  1956,  has  made   the               prescribed  arrangements for  the  declaration               and payment within the territory of India,  of               the  dividends payable out of  such  profits.,               and has deducted super-tax from the  dividends               in  accordance  with the  provisions  of  sub-               section (31) of section 18 of that Act-               (i)   where  the total income, as  reduced  by               seven annas in the rupee and by the amount, if               any,  exempt  from  income-tax,  exceeds   the               amount  of any dividends (including  dividends               payable  at a fixed rate) declared in  respect               of the whole or part of the previous year  for               the assessment for the year ending on the 31st               day of March, 1956, and the company is a  corn               any to which the provisions of section 23A  of               the Income-tax Act cannot be made  applicable,               a rebate               770               shall  be allowed at the rate of one anna  per               rupee on the amount of such excess ;               (ii)x          x         x          x" By s. 23A(1) of the Income-tax Act at the material time  the Income-tax Officer was authorised to order a company to  pay super-tax,  at the rate of eight annas in the rupee  in  the case of a company whose business consisted wholly or  mainly in  the  dealings in or holding of investments, and  at  the rate  of  four annas in he rupee in the case  of  any  other company, on the undistributed balance of the total income of the  previous  year,  that is to say, on  the  total  income reduced  by the amounts of income-tax and super-tax and  any other  tax  payable under any law in excess of  the  amounts allowed in computing the income, and in the case of  Banking companies   in  addition  to  the  taxes,   funds   actually transferred  to a reserve fund, and the  dividends  actually distributed,  if any, where in respect of any previous  year the profits and gains distributed as dividend by the company within the twelve months immediately following the expiry of that previous year were less than 60% of the total income of the  company  of  that  year  as  reduced  by  the   amounts aforesaid, unless the Income-tax Officer was satisfied  that having  regard to losses incurred by the company in  earlier years  or  to  the  smallness of the  profits  made  in  the previous  year,  the  payment  of a  dividend  or  a  larger dividend  than that declared would be unreasonable.   It  is manifest  that  the order under s. 23A(1)  would  (excluding certain  procedural  conditions) be ordinarily made  if  the company has distributed by way of dividend within the twelve months  immediately following the expiry of  the  accounting year less than the prescribed percentage of the total income as reduced by the, amount of taxes paid in the case of  non- Banking  Companies and reserve fund in addition  thereto  in the case of Banking Companies  771 By  the  first  paragraph of sub-s. (9) of s.  23  A  it  is provided that "Nothing contained in this section shall apply to  any  company  in  which  the  public  are  substantially interested or to a subsidiary company of such company if the whole  of the share capital of such subsidiary  company  has been  held  by  the  parent  company  or  by  its   nominees throughout  the previous year." This clause is  followed  by

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two  explanations.   Explanation  1,  in so  far  as  it  is material to this case, provides :-               "Explanation   1-For  the  purposes  of   this               section,  a  company shall be deemed to  be  a               company in which the public are  substantially               interested-               (a)         x          x          x          x               (b)   if  it  is  not  a  private  company  as               defined in the Indian Companies Act, 1913 (VII               of 1913), and               (i)   x    x    x    x               (ii)  x    x    x    x               (iii) x    x    x    x               Explanation 2.- x    x    x    x" Section  23A was enacted to prevent evasion of liability  to pay   super-tax  by  shareholders  of  certain  classes   of companies  taking  advantage of the  disparity  between  the rates  of  super-tax  payable  by  individuals  and  by  the companies.   The rates of super-tax applicable to  companies being lower than the highest rates applicable to  individual assessees, to prevent individual assessees from avoiding the higher   incidence   of  super-tax  by  the   expedient   of transferring  to companies the sources of their income,  and thereby  securing  instead of dividends the benefit  of  the profits  of the company, the Legislature had by Act  XXI  of 1930, as modified by Act VII of 1939, enacted a special 772 provision  in s. 23A investing the Income-tax  Officer  with power, in certain contingencies prescribed in the section to order  that  the  undistributed balance  of  the  assessable income  reduced  by the amount of taxes  and  the  dividends shall be deemed to have been distributed at the date of  the general  meeting.  By the Finance Act 15 of 1955 s. 23A  (1) was amended and the Income-tax Officer was directed to  make an  order that the Company shall be liable to pay  super-tax oil the undistributed balance at the rates prescribed  under the section.  But by virtue of sub. s. (9) of s. 23A the or- der  can be made only in respect of a company in  which  the public  are not substantially interested or of a  subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent  company or by its nominees throughout the previous year, and by  cl. (b)  of the first explanation thereto a private  company  as defined in the Indian Companies Act, 1913, is not a  company in  which the’ public are substantially interested.  It  is, therefore,  competent to the Income-tax Officer to  pass  an order  under  s.  23A  (1) if  the  conditions  thereof  are fulfilled  directing  payment  of  super-tax  by  a  private company  at  the rates prescribed by the Finance Act  15  of 1.955 on its undistributed balance.  To reduce the rigour of this  provision the Legislature has provided for  inducement in  the form of rebate on the difference between nine  annas in  every rupee of the total net income, and the  amount  of dividend   declared,  to  companies  which   have   declared dividends  so as not to attract the application of an  order under s. 23A.  But that benefit is admissible only in favour of  companies to which the provisions of s. 23A of  the  Act cannot be made applicable.    The  Income-tax  authorities  held  that  the  expression company to which the provisions of s. 23A of the  Income-tax Act cannot be made applicable’ is descriptive of a class  of companies  against  which in no circumstances can  an  order under s. 23A of the  773 Indian Income-tax Act be made, and private limited companies

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being companies in respect of which an order under s. 23A of the Income-tax Act can be made if the conditions  prescribed relating  to  distribution of dividend  are  fulfilled,  the benefit  of rebate is not admissible in their  favour.   The Tribunal  and  the  High  Court  held  that  the  expression "’cannot  be  made  applicable" only refers to  a  state  of affairs in which having regard to the circumstances an order under  s. 23k of the Indian Income-tax Act cannot  be  made. In  our judgment the Income-tax Appellate Tribunal  and  the High  Court were right in so holding.  The  Legislature  has used  the  expression  "cannot  be  made  applicable"  which clearly means that the applicability of s. 23A depends  upon an order to be made by the Income-tax Officer, and not upon any exclusion by the provisions of the Act.  Before an order can be made under s. 23A of the Income-tax Act, the  Income- tax  Officer  has  to  ascertain  (i)  whether  the  company conforms  to the description in sub-s. (9) of s. 23A; if  it does’ the lncome-tax Officer has no power to make an order ; and  (ii) if the company is not one which falls  within  cl. (9)  of  s. 23A whether having regard to inadequacy  of  the declaration  of dividend, an order for payment of  super-tax should not, because of the losses incurred by the company in the earlier years, or to the smallness of the profits in the previous  year,  be made.  Satisfaction  of  the  Income-tax Officer as to the existence of several conditions prescribed thereby-  even  if the company is one which  does  not  fall within sub-s. (9) of s. 23A is a condition of the making  of the  order.   The language used by the  Legislature  clearly indicates  that it is only when an order under s.  23A  will not,  having regard to the circumstances’ be justified  that the right to obtain rebate under the Finance Act 15 of  1955 is  claimable.   The Legislature has not  enacted  that  the benefit  of rebate is admissible only to  companies  against which the order under sub-s. (1) of s.  23A  can  never   be made. 774 The Legislative history as disclosed by the earlier  Finance Acts supports this interpretation of the relevant provision. In the Finance Acts prior to 1955 rebate under Part I of the 1st  Schedule  Item B was admissible if the company  had  in respect of profits liable to tax under the Indian Income-tax Act  made  the prescribed arrangements for  declaration  and payment  of  dividends payable out of the  profits  and  had deducted super-tax from the dividends in accordance with  s. 18(3D) & (3E), where the total income reduced by seven annas in the rupee’ and the amount exempt from income-tax exceeded the  amount of any dividends declared and no order had  been made under sub-s. (1) of s. 23A of the Income-tax Act.   The right  to rebate arose under those Finance Acts if no  order under s. 23A was made.  The Income-tax Officer had therefore to  decide  even  before completing the  assessment  of  the company whether the circumstances justified the making of an order  under  S. 23A, and unless an order under s.  23A  was made  the  assessee  became entitled  automatically  to  the rebate  of one anna in the rupee.  Such a provision  led  to delay  in the disposal of assessment proceedings and  caused administrative   inconvenience.    It   appears   that   the Legislature  modified  the  scheme  of  granting  rebate  in enacting the Finance Act of 1955 with a view to simplify the procedure  and  avoid  delays, and not with  the  object  of depriving  the private limited companies as a class, of  the benefit  of rebate which was permissible under  the  earlier Acts. Counsel   for  the  Income-tax  Commissioner   invited   our attention to the Finance Acts of 1956 and 1957 and contended

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that  the  Legislature in dealing with the right  to  rebate under  Part  II  relating to the  rates  of  super-tax  used phraseology  which  restricted the right of rebate  only  to public  companies.  Ie must be noticed that even  under  the Finance  Act  of 1955 by Part II of Schedule 1,  item  D,  a rebate  of three annas per rupee of the total income was  to bf 775 allowed  to  companies in respect of profits liable  to  tax under the Income-tax Act for the year ending March 31, 1956, if the company had made prescribed arrangements for  payment of  dividend  payable out of profits and  for  reduction  of super-tax  from dividends in accordance with the  provisions of  sub-s.  3D  of s. 18 of the Act and the  company  was  a public  company  with  a  total  income  not  exceeding  Rs. 25,000/-.   This  provision  was slightly  modified  in  the Finance  Act of 1956 where the rebate admissible was at  the rate  of  five annas in the rupee,  (other  condition  being fulfilled)  if the company was a public company  with  total income  not exceeding Rs. 25,000/to which the provisions  of s. 23A could not be made applicable.  Under the Finance  Act of  1957  rebate  was  admissible  in  favour  of  companies "referred  to in sub-s. (9) of s. 23A of the income-tax  Act with  total  income not exceeding Rs. 25,000/-."  All  these provisions  about  rebate were enacted  in  prescribing  the rates  of  super-tax.   In  the  Finance  Act  of  1955  the Legislature in dealing with the right of rebate under Part I prescribing  rates  of  income-tax, made  it  admissible  in respect  of companies to which provisions of s. 23A  of  the Income-tax  Act could not be made applicable, whereas  under Part  II  prescribing rates of super-tax,  rebate  was  made admissible in respect of public companies having income  not exceeding  the prescribed amount and rebate at a lower  rate where  the income exceeded the prescribed limit.  If it  was intended  by  the  Legislature to  exclude  private  limited companies  from the benefit of rebate the Legislature  would have adopted the same phraseology as was used in that Act in dealing with the rebates in prescribing rates of  super-tax. The  legislative history instead of supporting the  case  of the  Income-tax  Department yields inference  against  their interpretation. We  are therefore of the view that the High Court was  right in holding that the company was 776 entitled to the rebate claimed by it.  The appeal  therefore fails and is dismissed with costs.                                           Appeal dismissed.