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PETITIONER: DISTRIBUTORS (BARODA) PVT. LTD.

       Vs.

RESPONDENT: UNION OF INDIA AND TWO ORS.

DATE OF JUDGMENT01/07/1985

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. CHANDRACHUD, Y.V. ((CJ) SEN, AMARENDRA NATH (J) MADON, D.P. THAKKAR, M.P. (J)

CITATION:  1985 AIR 1585            1985 SCR  Supl. (1) 778  1986 SCC  (1)  43        1985 SCALE  (1)1216  CITATOR INFO :  D          1986 SC1565  (9)  RF         1992 SC 803  (21)

ACT:      Income Tax Act 1961 Sections 80M(1) and 80AA:      Income by  way of  inter-corporate dividends-Deduction- Whether to be made with reference to full amount of dividend received  or   dividend  computed  in  accordance  with  the provisions of  the Act-Section 80AA-Whether retrospective in operation.      Constitution of India 1950, Article 141:      Supreme  Court-Declaration   of  law-To   be   certain, definite  and   correct-Judicial  decisions-Continuity   and consistency-Essentiality-Pointed   out-Earlier   ruling   of Court-Manifestly wrong,  proceeds upon  mistaken  assumption with  regard   to  existence  or  continuance  of  statutory provision,    contrary to another decision of Court-Doctrine of  stare  decisis-No  bar  to  over-ruling  such  decision- Decision  of   Court  in   fiscal  matters-Interference   in exceptional cases-Necessity of.      Interpretation of Statutes:      Statutory   provision-Meaning    of-Interpretation   on earlier  statutory   provision  in  different  language  and structurally different-Reference  to and reliance on-Whether permissible.      Words and Phrases-Meaning of:      ’Such income  by way  of dividends’-Meaning  of-Section 80M Income Tax Act 1961.

HEADNOTE:      The earliest  provision granting  exemption from  super tax in  respect of  inter-corporate dividend was made as far back as  9th December,  1933 in a Notification issued by the Governor General in Council and it provided as follows:-      "The Governor  General in  Council is pleased to exempt from super tax: 779      (i) So  much of  the income  of  any  investment  trust company as  is derived  from dividends  paid  by  any  other

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company which  has paid  or will pay super-tax in respect of the profits out of which such dividends are paid".      This provision  came  up  for  consideration  before  a Division Bench  of the  High  Court  of  Bombay  in  CIT  v. Industrial Investment  Trust Co.  Ltd. (1968) 67 I.T.R. 437. The High  Court guided by a decision of this Court in CIT v. South India  Bank (1966)  59 ITR  763 held that the dividend income which  was exempted  under the  notification would be the dividend  income received  by the  assessee and  not the said  income   less  any   further  amounts"   because   the notification must  be regarded  a self-contained one and not controlled by  any other provisions of the Act and there was no warrant  to construe the word income’ in the notification as total  income nor  to qualify the dividend computed under Section 12 of the Act.      A provision  of a  similar kind granting exemption from super tax  in respect  of certain  specified  categories  of inter-corporate dividend  was introduced  as Section  56A of the Income Tax Act 1922 by the Finance Act, 1953.      When the  Indian Income  Tax Act, 1922 was repealed and the Income  Tax Act,  1961 was  enacted with effect from 1st April, 1902,  Section 99,  subsection (i)  was introduced in the new  Act exempting  certain categories  of  income  from super tax  and one  such category was that set out in clause (iv) of Section 99 sub-section (1) which read as follows:      "99. (1)  Super-tax shall not be payable by an assessee      in respect  of the following amounts which are included      in his total income- (iv) if the assessee is a company,      any dividend  received by  it from  an Indian  company,      subject  to  the  provisions  contained  in  the  fifth      Schedule."      This provision  continued in force upto Ist March, 1965 subject to  a minor  inconsequential amendment  made by  the Finance Act, 1964.      This provision  did  not  come  up  for  interpretation before this Court only in Cloth Traders Case, but it came to be considered by some of the High Courts.      The three  High Courts  of Bombay,  Calcutta and Madras C.I.T v. New Great Insurance Company Ltd. (1963) 90 ITR 348, C.I.T v.  Darbhangha Marketing  Company Ltd.  1971 80 ITR 72 and Madras  Auto Service v. I.T.O. (1975) 101 I.T.R. 589] on a construction  of clause (iv) of sub-section (1) of section 99, took  the  view  that  the  entire  amount  of  dividend received by  the assessee  from an Indian Company was exempt from super tax and the exemption was not limited to dividend income computed in accordance with the provisions of the Act and forming part of the total income. 780      Section 99  sub-section (i) remained in force only upto the close of the assessment year 1964-65 and by an amendment made by  the Finance  Act, 1965,  Section 99 sub-section (1) was omitted  and chapter IVA and section 85A were introduced in the present Act with effect from Ist April, 1965. Chapter IVA comprised  section 80A  to  80D  providing  for  certain specified deductions  to be  made in computing total income, while  Section   85A  provided   for  deduction  of  tax  on incorporate dividends.      This Section  was also  considered by  the Bombay  High Court in  New Great Insurance Company’s Case. The High Court observed that  except for some minor verbal changes, section 85A was  almost in  the same terms as section 99 sub-section (1) clause  (iv), the  only real  difference being  that the exemption granted  under section  99 sub-section  (i) clause (iv) was in regard to super-tax, while the deduction allowed under section 85A was in regard to income tax, and held that

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under section  85A also,  the deduction  admissible  was  in respect of the entire dividend received by the assessee from an Indian  Company and  not in  respect of  dividend  income minus deductions  allowable under  the provisions of the Act in computing ’total income’      The spate of legislative changes did not come to an end with the  enactment of section 85A. The Original Chapter VIA and  certain  other  sections  including  section  85A  were deleted from  the present  Act by  Finance (No  2) Act, 1967 with effect  from Ist  April, 1968  and replaced  by the new Chapter VIA  which contains a fasciculus of sections from s. 80A to s. 80VV. Section 80A sub-section (1) provides that in computing the  total income  of an  assessee there  shall be allowed from  his gross total income, in accordance with and subject to  the provisions  of  Chapter  VIA  the  deduction specified in Section 80C to Section 80VV and sub-section (2) of that  Section imposed  a ceiling  on such  deductions  by enacting that  the aggregate  amount of such deduction shall not in  any case,  exceed the  gross  total  income  of  the assessee. The  expression "gross total income" is defined in clause (V)  of Section 80B to mean the total income computed in accordance  with the  provisions of the Act before making any deduction  under Chapter  VIA  or  under  Section  280D. Section 80M  is the  new section  which corresponds  to  the repealed Section  85A  and  it  provides  for  deduction  in respect of  certain categories of inter-corporate dividends. Several amendments  were made  subsequently in  this section but they relate primarily to the percentage of the income to be allowed as a deduction.      One amendment  that was  made by  the Finance Act, 1968 was that the words "received by it" occurring in sub-section (1) of  Section 80M were omitted with effect from Ist April, 1968, so  that right from the date of its enactment, section 80M sub-section (1) was to be read as if the words "received by it" were not in the opening part of that provision.      Petitioner No.  1 was incorporated as a Limited Company and Petitioner  No. 2  a Director  and shareholder  therein. Petitioner No  1 received  dividends on shares held by it in different domestic  companies and  paid interest  on  monies borrowed for  the purpose  of investment  in such shares. In the course  of its assessment for the assessment years 1970- 71 up to 1980-81, 781 Petitioner No.  1 claimed  that  the  deduction  permissible under Section  80M must  be calculated with reference to the full amount  of dividends  received by Petitioner No. 1 from the  domestic  companies  and  not  with  reference  to  the dividends as  computed in  accordance with the provisions of the Income  Tax Act, 1961. The assessments of Petitioner No. 1 were  actually completed on the basis of his claim and the view taken  by this Court in Cloth Traders Case in regard to the construction  of  Section  80M.  The  Revenue  preferred appeals against  such assessments  and  these  appeals  were pending at  different stages  at the time of filing the Writ Petition.      The Petitioner  No. 1  was entitled  to succeed  in the appeals as  well as  in the  original assessments which were pending before  the different  authorities, so  long as  the decision in  Cloth Traders  Case  stood  unaffected  by  any constitutionally valid legislative amendment.      However, with  a view to overriding the decision in the Cloth Traders  case with  retrospective  effect,  Parliament enacted Section  80AA and  since this  section was deemed to have been introduced in the Income Tax Act, 1961 with effect from 1st  April, 1968,  and it  provided that  the deduction

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required to  be allowed  under Section 80M shall be computed not with  reference to the gross amount of dividend received by the  assessee from  a domestic company but with reference to the  dividend income  as computed  in accordance with the provisions of  the Act,  the claim  of petitioner  No. 1 for deduction on  the basis  of  the  full  amount  of  dividend received by  it from  domestic companies  was liable  to  be rejected and  deduction could be allowed to Petitioner No. 1 only with  reference to  the  dividend  income  computed  in accordance with the provision of the Act.      The introduction of Section 80AA thus had the effect of enhancing the  tax liability  of Petitioner  No. 1  and  the petitioners  filed   a   Writ   Petition   challenging   the Constitutional validity  of Section  80AA on the ground that it enhanced  the tax  burden with retrospective effect going back for  a period  of  almost  12  years  and  consequently imposed  an   unreasonable  restriction   on  the  right  of petitioner No.  1 to  carry on  its business  in  breach  of Article 19 (1) (g) of the Constitution.      Dismissing the writ petition, ^      HELD-(By the Court)      1.  The  deduction  envisaged  by  sub-section  (1)  of Section 80  is required  to be  made with  reference to  the income by  way of  dividends computed in accordance with the provisions of  the Income  Tax Act and not with reference to the full amount of dividend received by the assessee. [802F, 809A]      2. Section  80AA  in  its  retrospective  operation  is merely declaratory  of the  law as  it always  was since Ist April, 1968 and no complaint can validly be made against it. [807E, 809D] 782      Cloth Traders Ltd. v. Additional Commissioner of Income Tax, 118  ITR 243,  over-ruled and  Cambey Electrical Supply Industrial Co.  Ltd. v.  Commissioner of  Income-Tax, (1970) 113 84, approved.      (Per Chandrachud  C.J., P.N.  Bhagwati, D.P.  Madon and M.P. Thakkar, JJ).      The Inquiry is not whether the view taken by the Bombay High Court in New Great Insurance Company’s case is correct. It must  be conceded  that it has been held to be correct in the decision  in Cloth Traders Case. However another view in regard to  the interpretation of Section 85A is possible. It is not  at all unreasonable to construe the words "income so included" as  meaning  the  quantum  of  income  by  way  of dividends included  in the  total income  of  the  assessee. These  words  in  the  context  in  which  they  occur  have obviously reference  to quantum  of the  income  by  way  of dividends to  which the  average rate of income tax is to be applied. That quantum is defined by these words and in order to determine  it, the  question is what is the income by way of dividends included in the total income and the answer can only be  that is  income computed  in  accordance  with  the provisions of  the Act.  It is  not  necessary  to  consider whether the construction placed on Section 85A by the Bombay High Court in New Great Insurance Company Case is correct or not, because interpretation of Section 85A is not concerned. It is  section 80M  which  has  to  be  construed  and  this section, is  materially different  from Section 85A. Section 80M cannot  be construed  in the light of the interpretation placed on  its predecessor  section by the Bombay High Court particularly  when   Section  80M   is   admittedly   worded differently from  its predecessor  section. Section 80M must be construed on its own language and its true interpretation

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arrived at  according to  the plain  natural meaning  of the words used by the Legislature. [795 D-H]      2. Section  80M is the new Section which corresponds to the repealed  Section 85A  and it  provides for deduction in respect of  certain categories of inter-corporate dividends. It is  the interpretation  of this section which constitutes the subject-matter  of controversy between the parties. [796 D]      3. What  is the  object behind  grant of  relief  under Section 80M. The main object of the relief under Section 80M is to  avoid  taxation  once  again  in  the  hands  of  the receiving company of the amount which has already borne full tax in  the hands  of the paying company. Now when an amount by way  of dividend  is received  by the  assessee from  the paying company  the full  amount of such dividend would have suffered tax,  in the  assessment of  the paying  company in order to  encourage inter-company  investments. In  order to encourage investments  the Legislature  intended  that  this amount should  not bear  tax once  again in the hands of the assessee either  its entirety  or to a specified extent. But the amount  by way  of dividend which would otherwise suffer tax in  the hands  of the  assessee,  would  be  the  amount computed in  accordance with  the provisions  of the Act and not the  full  amount  received  from  the  paying  company. Therefore, it  is reasonable  to  assume  that  in  enacting Section 80M  the Legislature  intended to  grant relief with reference to  the amount  of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying 783 company. The  Legislature could  certainly be attributed the intention to  prevent double  taxation but not to provide an additional benefit  which would  go beyond  what is required for saving  the amount  of dividend from taxation once again the hands of the assessee. [799 A-E]      4. Section  80M sub-section  (1) opens  with the  words "where  the  gross  total  income  of  an  assessee......... includes any  income by  way of  dividends from  a  domestic company" and  proceeds to  say that  in such  a case,  there shall be  allowed in  computing  the  total  income  of  the assessee, a deduction "from such income by way of dividends" of an  amount equal  to the  whole of  such income or 60% of such income  as the  case may be, depending on the nature of the domestic  company  from  which  the  income  by  way  of dividends  is  received.  The  opening  words  describe  the condition which  must be  fulfilled in  order to attract the applicability of  the provision contained in sub-section (1) of Section 80M. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic  company  "Gross  total  income"  is  defined  in Section 80B  clause (v)  to mean  "total income  computed in accordance with  the provisions of the Act before making any deduction under  Chapter VIA  or under Section 280D". Income by way  of dividends from a domestic company included in the gross total  income  would  therefore  obviously  be  income computed in  accordance with the provisions of the Act, that is after  deducting interest  on monies borrowed for earning such income.  If income  by way of dividends from a domestic company computed  in accordance  with the  provisions of the Act is  included in  the gross  total income,  or  in  other words, form  part of  the gross total income, the conditions specified in  the opening part of sub-section (1) of Section 80M would  be fulfilled  and the  provision enacted  in that sub-section would be attracted.                          [799G-800C]

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    5. The  words "such  income by  way of  dividends" must have reference  to the  income by way of dividends mentioned earlier and  that would be income by way of dividends from a domestic company  which  is  included  in  the  gross  total income. Consequently,  in order  to determine  what is "such income by  way of  dividends", the  question to  be asked is what is  the income  by way  of dividends  from  a  domestic company included  in the  gross total  income and that would obviously be  the income  by way  of dividends  computed  in accordance with  the provisions  of the Act. It is difficult to appreciate  how, when interpreting the words "such income by way  of dividends"  a dichotomy  can be  made between the category of  income and  the quantum of the income by way of dividends so included. [800H-801C]      6. There  is also  another  strong  indication  in  the language of  sub-section (1)  of Section  80M which  clearly compels taking the view that the deduction envisaged by that provision is  required to  be made  with  reference  to  the income by  way of  dividends computed in accordance with the provisions of  the Act  and not  with reference  to the full amount of  dividend received by the assessee. The indication was also  unfortunately lost  sight of by the Court in Cloth Traders case  presumably because  it was  not brought to the attention of  the Court. The Court observed in Cloth Traders case that the whole of the income by way of dividends from a domestic company  or 60%  of such income as the same may be, would be deductible from the gross total income for 784 striving  at   the  total   income  of  the  assessee.  This observation  appears   to  have   been   made   under   some misapprehension, because what sub-section (1) of Section 80M required is  that the  deduction of the whole or a specified percentage  must  be  made  from  "such  income  by  way  of dividends" and  not from the gross total income. Now when in computing the  total income of the assessee, a deduction has to be  made from  "such income  by way  of dividends"  it is elementary that "such income by way of dividends" from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub- section (1)  of Section  80M can possibly fit in it if "such income by  way of  dividends" were  interpreted to mean that full amount  of dividend  received by the assessee. The full amount of  dividend received  by the  assessee would  not be included in  the gross  total income, what would be included would  only  be  the  amount  of  dividend  as  computed  in accordance with  the provisions of the Act. If that be so it is difficult  to appreciate how for the purpose of computing the total  income from  the gross total income any deduction should be  required to  be made  from the full amount of the dividend. The  deduction required  to be  made for computing the total  income from  the gross  total income  can only be from the  amount of dividend computed in accordance with the provisions of  the Act  which would  be forming  part of the gross  total   income.  Whatever   might   have   been   the interpretation placed  on clause  (iv) of sub-section (1) of Section 99  and Section  85A the correctness of which is not in issue,  so far  as sub-section  ( )  of  Section  80M  is concerned, the  deduction required  to be allowed under that provision is  liable to  be calculated with reference to the amount  of   dividend  computed   in  accordance   with  the provisions of  the Act  and forming  part of the gross total income and not with reference to the full amount of dividend received by the assessee. [801G-802F]      7. Structurally  there is hardly any difference between Section 80E  sub-section (1) and Section 80M sub-section (1)

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and the  reasoning  which  appealed  to  the  Court  in  the interpretation of  sub-section (1)  of Section 80E in Cambay Electric Supply Industrial Company Ltd. v. C.I.T. must apply equally in  the interpretation of sub-section (1) of Section 80M. [803 B]      8. Ordinarily this Court would be reluctant to overturn a decision  given by  a Bench  of this  Court, because it is essential that there should be continuity and consistency in judicial decisions,  and law should be certain and definite. It is  almost as  important that  the law  should be settled correctly. But  there  may  be  circumstances  where  public interest demands  that the previous decision be reviewed and reconsidered. The doctrine of stare decisis should not deter the Court  from overruling  an earlier  decision, if  it  is satisfied that such decision is manifestly wrong or proceeds upon a  mistaken assumption  in regard  to the  existence or continuance of  a statutory  provision  or  is  contrary  to another decision of the Court. [805G-806A]      9. There  are over-riding  considerations which  compel reconsideration and  review of the decision in Cloth Traders Case. In the first place, the decision in Cloth Traders case was rendered  by this Court on 4th May, 1979 and immediately thereafter, with  in a  few  months,  Parliament  introduced Section 80AA  with retrospective effect from Ist April, 1968 with a  view to  over-riding the  interpretation  placed  on Section 80M in Cloth Traders case. The decision 785 in Cloth Traders case did not therefore hold the field for a period of  more than  a few  months and it could not be said that any assessee was misled into acting to its detriment on the basis  of that  decision. There  was no decision of this Court in  regard to the interpretation of sub-section (1) of Section 80M  prior to the decision in Cloth Traders case and there was  therefore no  authoritative pronouncement of this Court  on  this  question  of  interpretation  on  which  an assessee  could   claim  to   rely  for  making  its  fiscal arrangements. Another  circumstance which makes is necessary to reconsider and review the decision in Cloth Traders Case, is the  decision in Cambay Electric Supply Company case. The decision in  Cloth Traders case is inconsistent with that in Cambay Electric  Supply Company’s  case  Both  cannot  stand together. If  one is  correct, the  other must  logically be wrong and  vice-versa. It  is therefore necessary to resolve the conflict  between these  two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision  in Cloth  Traders Case,  and having considered and reviewed  the decision in Cloth Traders case come to the conclusion that  the  decision  in  Cloth  Traders  Case  is erroneous and must be over turned. [806C-807D]      (Per A.N. Sen, J. concurring)      The authority  and jurisdiction  of a  larger Bench  of this Court  to override  and over-rule  any  decision  of  a smaller Bench  cannot be  questioned. However, a decision of this Court  on any fiscal legislation involving the question of financial  benefit and  liability should  not normally be interfered with  and should  be interfered with only in very rare cases.  On the  basis of  the decision of this Court on any fiscal  legislation and  any matter  involving financial arrangements  and   adjustments,  parties  are  entitled  to arrange their  financial affairs and in fact they so arrange and adjust  the financial  affairs on  the basis  of the law laid down  by this  Court. Unsettling  a position settled by the decision  of this  Court may  lead to  the confusion and result in  financial instability,  causing serious prejudice not only  to the  parties concerned but also to the economic

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growth of the country as a whole. [808 C-E]      2. If  on interpretation of any provision of any fiscal legislation two  views may  be reasonably possible, a larger Bench of this Court may not interfere with a view taken by a smaller Bench  by this  Court mainly  on the ground that the other view appears to the larger Bench to be the better view and may  commend itself  to the larger Bench. If, however, a decision of  the smaller  Bench has necessarily to interfere with the  decision, as  this Court  will not  permit a wrong decision to operate as good law of the land. [808 F]

JUDGMENT:      ORIGINAL JURISDICTION: Writ Petition No. 2043 of 1981.      Under Article 32 of the Constitution of India      K.H. Kaji and M.N. Shroff for the Petitioners.      K. Parasaran, Attorney General and K.S. Gurumoorthy for the Respondents. 786      The following Judgments were delivered      BHAGWATI, J.  This writ  petition raises an interesting question of  construction of  Section 80 M of the Income Tax Act, 1961.  This question  would appear  to be  concluded in favour of  the assessee  by the  decision of  this Court  in Cloth Traders  Limited v.  Additional Commissioner of Income Tax, 118  ITR 243,  but the correctness of the view taken in that case  has been challenged in the present writ petition. Since the  decision in  Cloth Traders Case (supra) was given by a  Bench of three Judges, it is obvious that its validity can be  canvassed before  this Bench  which consists of five Judges. If  this Bench  too takes the same view in regard of the construction  of Section  80M as  that  taken  in  Cloth Traders case  (supra), it would become necessary to consider the question  of constitutional  validity  of  Section  80AA which was  introduced in the Income Tax Act, 1961 by Section 12 of the Finance (No. 2) Act 1980 with a view to overriding with retrospective effect the construction placed on Section 80M by  this in  Cloth Traders case (supra). If on the other hand, this  Bench disagrees  with the  view taken  in  Cloth Traders  case   (supra)  and   hold  that  even  before  the introduction  of  Section  80AA,  Section  80M,  on  a  true interpretation of  its language,  meant exactly what Section 80AA now retrospectively declares it to mean, no question of constitutional validity  of Section  80AA would  arise since Section 80AA  would then be merely declaratory of the law as it always  was and  would not be imposing any new tax burden with retrospective  effect. The  first question that we must therefore consider is as to what is the true construction of Section  80M   unaided   by   the   subsequent   legislative interpretation imposed  upon it  by the enactment of Section 80AA: do  we affirm  the view  taken in  Cloth Traders  case (supra) or do we dissent from it.      We have  given our  most anxious  consideration to this question,  particularly   since  one  of  us,  namely,  P.N. Bhagwati, J.  was a  party to  the decision in Cloth Traders case (supra). But having regard to various considerations to which  we  shall  advert  in  detail  when  we  examine  the arguments  advanced   on  behalf  of  the  parties,  we  are compelled to  reach the  conclusion that  Cloth Traders case must be  regarded as wrongly decided. The view taken in that case in  regard to  the construction  of Section 80M must be held to be erroneous and it must be corrected. To perpetuate an error  is no  heroism. To rectify it is the compulsion of judicial conscience.  In this we derive comfort and strength

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from the wise and inspiring words of 787 Justice Bronson in Pierce v. Delameter A.M.Y. at page 18: "a Judge ought  to be  wise enough  to know that he is fallible therefore everyday  to learn:  great and  honest  enough  to discard all  mere pride of opinion and follow truth wherever it may  lead:  and  courageous  enough  to  acknowledge  his errors".      We  may  begin  our  discussion  by  referring  to  the legislative history  of the provision enacted in Section 80M but before  we do so, a brief statement of facts may help to provide  the   back-drop  against   which  the  question  of construction  of   Section  80M  arises  for  consideration. Petitioner No.  1 was  incorporated as  a limited company on 10th November  1941 under the Baroda Companies Act, 1918 and at  all   material  times  it  carried  on  business  of  an investment company.  Petitioner No.  2  is  a  Director  and shareholder of  Petitioner No.  1. Throughout  the  material period with  which we  are concerned  in this writ petition, Petitioner No.  1 received dividends on shares held by it in different domestic  companies and  paid interest  on  monies borrowed for  the purpose  of investment  in such shares. In the course of its assessments for the assessment years 1970- 71 upto 1980-81, Petitioner No. 1 claimed that the deduction permissible  under  Section  80M  must  be  calculated  with reference to  the  full  amount  of  dividends  received  by Petitioner No.  1  from  domestic  companies  and  not  with reference to  the dividend  income as computed in accordance with the  provisions of the Income Tax Act, 1961. This claim was liable  to succeed  if the  view taken  in Cloth Traders case (supra)  in regard  to the  construction of Section 80M was correct  and some of the assessments of Petitioner No. 1 were actually  completed on  the basis  that this  claim was justified.  The   Revenue  preferred  appeals  against  such assessments and  these appeals  were  pending  at  different stages at  the time  of filing of the present writ petition. The assessments  for some  of the assessment years were also pending before  the Income  tax  Officer.  So  long  as  the decision in  Cloth Traders  case (supra) stood unaffected by any Constitutionally valid legislative amendment, Petitioner No. 1  was entitled  to succeed in the appeals as well as in the original  assessments which  were pending  consideration before different  authorities. But with a view to overriding the  decision   in   Cloth   Traders   case   (supra)   with retrospective effect,  Parliament enacted  Section 80AA  and since this section was deemed to have been introduced in the Income Tax Act, 1961 with effect from Ist April, 1968 and it provided that  the deduction  required to  be allowed  under Section 80M  shall be  computed not  with reference  to  the gross amount of dividend received by the assessee from a 788 domestic Company  but with  reference to the dividend income as computed  in accordance  with the  provisions of the Act, the claim  of petitioner No. 1 for deduction on the basis of the full  amount of  dividend received  by it  from domestic companies was  liable to  be rejected and deduction could be allowed to  petitioner no.  1 only  with  reference  to  the dividend income computed in accordance with the provision of the Act.  The introduction  of Section  80AA  thus  had  the effect of  enhancing the  tax liability  of petitioner No. 1 and the  petitioners  accordingly  filed  the  present  writ petition challenging  the constitutional validity of Section 80AA on  the ground  that it  enhanced  the  tax  burden  of petition No.  1 with  retrospective effect  going back for a period of  almost 12  years and  thus  imposed  unreasonable

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restriction on the right of petitioner No. 1 to carry on its business in breach of Article 19(1)(g) of the Constitution.      We may  first set  out the  history of  the legislation preceding the  enactment of  Section 80M, since considerable reliance was  placed on this history both in the decision in Cloth Traders  case (supra)  as also  in the  course of  the arguments  in   the  present  writ  petition.  The  earliest provision granting  exemption from  super tax  in respect of inter-corporate dividends  was  made  as  far  back  as  9th December 1933  in a  notification  issued  by  the  Governor General in Council and it provided as follows:           "The Governor  General in  Council is  pleased  to      exempt from  super tax-(i) so much of the income of any      investment trust  company as  is derived from dividends      paid by  any other  company which  has paid or will pay      super-tax in  respect of  the profits out of which such      dividends are paid."      This provision  came  up  for  consideration  before  a Division Bench  of the  High Court  of Bombay  in C.I.T.  v. Industrial Investment  Trust Co.  Ltd. (1968)  67 I.T.R. 437 and the  question was  whether the  dividend income exempted from super tax the entire income by way of dividend received by an  investment trust  company or  the dividend  income as computed in  accordance with the provisions of the Act, i.e. after deducting  the expenses  incurred in  earning it.  The High Court  of Bombay  held that  the "dividend income which was exempted  under the  notification would  be the dividend income received by the assessee and not the said income less any further  amounts"  because  "the  notification  must  be regarded as a self-contained one 789 and not  controlled by  any other provisions of the Act" and there was  "no warrant  to construe the word ’income’ in the notification as  total income  nor to  qualify the  dividend income specified  in the  said notification  as the dividend income computed  under Section  12 of  the Act." It was thus held that  the entire  amount of  dividend  received  by  an investment trust  company would be exempt from super tax and not the  amount of  dividend minus  the expenses incurred in earning  it.   It  may  be  noticed,  and  this  aspect  was emphasised by  the Bombay High Court, that what was exempted from super  tax under  the notification  was "so much of the income of  any investment  trust company  as is derived from dividends paid  by any  other  company"  and  there  was  no reference to  ’total income’ in the notification nor was any indication given in the notification that the income derived from dividends  which was  sought to  be exempted from super tax was  dividend income  forming part of ’total income’ and that is  why the  Bombay High  Court came  to the conclusion that the dividend income exempted under the notification was the entire  income  by  way  of  dividend  received  by  the assessee  and   not  the  dividend  income  as  computed  in accordance with the provisions of the Act.      The High  Court  of  Bombay  in  taking  this  view  in Industrial Investment Trust Company’s case was guided by the decision of this Court in C.I.T. v. South Indian Bank (1966) 59 I.T.R.  763. Since the decision in South Indian Bank case (supra) is  the only  decision of  this Court  respecting an allied provision prior to the decision in Cloth Traders case (supra), it  is necessary  to refer  to it in some detail in order to  see whether  it  really  supports  the  conclusion reached in  Cloth Traders  case (supra).  The question which arose in South Indian Bank case (supra) was in regard to the true interpretation  of a notification issued by the Central Government under  Section 60A  of the Indian Income Tax Act,

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1922. This  notification was  subsequent in point of time to the notification  which came  to be  considered by  the High Court of Bombay in the Industrial Investment Trust Company’s case, but  it came  up for  construction before  this  court earlier in South Indian Bank case (supra). This notification was in the following terms:           "No income-tax  shall be payable by an assessee on      the interest  received on the following income-tax free      loans issued by the former Government of Tranvancore or      by the former Government of Cochin, provided that such 790      interest is  received within  the  territories  of  the      State of  Travancore Cochin and is not brought into any      other part of the taxable territories to which the said      Act applies.  Such interest shall, however, be included      in the  total income of the assessee for the purpose of      section 16 of the Indian Income-tax Act, 1922......." The argument  of the  Revenue was  that the  exemption  from income tax granted under this notification was in respect of interest  receivable   on  securities   minus  the  expenses incurred in  earning it  and not  in respect  of the  entire amount of  interest because  it  was  only  that  amount  of interest arrived  at after  computation in  accordance  with Section 8  of the  old Act which was includible in the total income and liable to bear tax and the exemption from the tax could, therefore  only be  in respect  of such  amount. This argument was  negatived by  the court and it was pointed out by Subba Rao, J. that (p. 766):           "....this  notification  does  not  refer  to  the      provision of section 8 of the Income-tax Act at all. It      gives a  total exemption from income-tax to an assessee      in respect  of the  interest receivable  on  income-tax      free loans  mentioned therein.  It gives that exemption      subject two conditions, namely (i) that the interest is      received  within   the  territories  of  the  State  of      Travancore-Cochin, and  (ii) that  it is not brought to      any other  part of the taxable territories. It includes      the said  exempted interest  in the total income of the      assessee for  the purpose  of section 16 of the Income-      tax Act.  Shortly stated,  the notification  is a self-      contained one; it provides an exemption from income-tax      payable by  an assessee on a particular class of income      subject to specified conditions. Therefore, there is no      scope   for   controlling   the   provisions   of   the      notification with  reference to section 8 of the Income      tax Act. The expression ’interest receivable on income-      tax free  loans’ is  clear and  unambiguous. Though the      point of time from which the exemption works is when it      is received  within the  territories of  the  State  of      Travancore-Cochin, what  is exempted  is  the  interest      receivable. ’Interest  receivable’ can  only  mean  the      amount of  interest calculated  as per the terms of the      securities.   It   cannot   obviously   mean   interest      receivable minus  the amount  spent  in  receiving  the      same." 791 It will  be noticed that the entire basis of the judgment of the Court was that the notification was a self-contained one and it gave exemption from income tax in respect of interest receivable on  certain categories  of income tax free loans, without any reference to total income, or to "the provisions of section  8 of the Income tax Act at all." That is why the judgment pointed out that there was no scope for controlling the provisions of the notification with reference to section 8 of  the Income Tax Act and proceeded to hold that what was

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exempted  from   income  tax   under  the  notification  was "interest receivable"  that  is,  "the  amount  of  interest calculated as  per the  terms  of  the  securities"  without deduction of the "amount spent in receiving the same". There was nothing  in the  notification to  indicate that what was sought to be exempted was the amount of interest included in the total income’.      Thereafter a  provision  of  a  similar  kind  granting exemption from  super tax  in respect  of certain  specified categories of  inter-corporate dividends  was introduced  as Section 56 in the Indian Income Tax 1922 by the Finance Act, 1953. It  is however  not necessary  to  make  any  detailed reference to  this provision  since there is no decided case which has considered this provision or expressed any opinion upon it.      When the  Indian Income  Tax Act  1922 was repealed and the Income  Tax Act  1961 was  enacted with  effect from Ist April, 1962,  section 99  sub-section (i)  was introduced in the new  Act exempting  certain categories  of  income  from super tax  and one  such category was that set out in clause (iv).  Section  99  sub-section  (1)  clause  (iv)  read  as follows:           "99. (1)  Super-tax shall  not be  payable  by  an      assessee in  respect of the following amounts which are      included in  his total income .... (iv) if the assessee      is a  company, any  dividend received  by  it  from  an      Indian company,  subject to the provisions contained in      the Fifth Schedule." This provision  continued in  force  upto  Ist  March,  1965 subject to  a minor  inconsequential amendment  made by  the Finance Act  1964. Now  this provision  did not  at any time come up  for interpretation  before this  Court prior to the decision in Cloth Traders case but it 792 did came  to be  considered by  some of the High Courts. The question in  regard to  the interpretation of this provision which arose before the High Court of Bombay in C.I.T. v. New Great Insurance  Company  Ltd.  (1963)  90  I.T.R.  348  was whether the  exemption granted  under this  provision was in regard to  the entire  amount of  dividend received  by  the assessee from  an Indian  Company or  it was  limited to the dividend income  computed in  accordance with the provisions of the  Act and  forming part  of ’total  income’. The  High Court of  Bombay accepting  the contention  of the  assessee held that  on a plain reading of clause (iv) sub-section (1) of Section  99, it  was clear  that the exemption from super tax was  granted in  respect of "any dividend received by it from an  Indian Company"  and these last words, according to their plain  grammatical construction,  could mean  only one thing, namely, the entire amount of dividend received by the assessee from an Indian Company and nothing less. The Bombay High  Court   emphasised  the   word  ’received’   following immediately upon  the word  ’dividend’ and observed that the use of  this word  also showed  that the  exemption  was  in regard to  the dividend  received and  not in  regard to the dividend received  minus the  expenses. The  High  Court  of Bombay  pointed  out  that  the  words  "amounts  which  are included in his total income" in the opening part of section 99 sub-section  (1) did  not have  any limitative effect but they were used merely as a convenient mode of describing the different items  of income  set out in clauses (i) to (v) of that sub-section.  Clauses (i)  to (v) referred to different items of  income which were sought to be exempted from super tax under  sub-section (1)  of Section 99 and it was only if these items  of income  were included in the total income of

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the assessee  that the  question of exemption from super-tax would arise and hence the legislature used the general words "amounts which  are included  in his  total income"  in  the opening part  of sub-section (1) of section 99 as an omnibus formula  to   cover  these  different  items.  These  words, according to  the Bombay High Court, were descriptive of the items of  income a  included in the computation of the total income and were not indicative of the quantum of the amounts of the different items included in such computation and they did not,  therefore, have  the effect  of cutting  down  the plain natural meaning of the words "any dividend received by it from  an Indian company" which represented the quantum of income in  respect of  which exemption  from  super-tax  was granted under  the section.  It may  be pointed out that the same view  in regard  to the  construction of clause (iv) of sub-section (1) of Section 99 was taken by the Calcutta High Court in C.I.T. v. 793 Darbhanga Marketing Company Limited and this decision of the Calcutta High  Court was  noted with  approval by  the  High Court of  Bombay  in  New  Great  Insurance  Company’s  case (supra). The  same view  was also  taken by  the Madras High Court in  C.I.T.  v.  Madras  Motor  and  General  Insurance Company and  it was approved in a later decision of the same High Court in Madras Auto Service v. I.T.O. It would thus be seen that,  on a  construction of clause (iv) of sub-section (1) of  Section  99,  three  High  Courts,  namely,  Bombay, Calcutta and  Madras took the view that the entire amount of dividend received by the assessee from an Indian company was exempt from  super tax  and the exemption was not limited to dividend income  computed in  accordance with the provisions of the Act and forming part of the ’total income’.      This view  taken by  the three High Courts was strongly relied  upon   by  the   petitioners  in   support  of   the construction of Section 80M canvassed on their behalf and in fact the  decision in  Cloth Traders  case (supra) sought to derive  some   strength  from  this  view.  But  on  further reflection we  do not  see how  this view taken by the three High Courts  in regard to the construction of clause (iv) of sub-section  (1)   of  Section   99  can   assist   in   the interpretation of  an entirely  new section, namely, Section 80M which,  as we shall presently point out, is different in its structure,  language and  content from  clause (iv) sub- section (1)  of Section 99. We may point out that some doubt was raised  on behalf  of  the  Revenue  in  regard  to  the correctness of  this view taken by the three High Courts but we do  not think it necessary to consider whether this doubt is well  founded or not because we are of the view that even if the construction placed on clause (iv) of sub-section (1) of Section  99 by  the three  High Courts  were correct,  it cannot necessarily  lead to  the conclusion  that a  similar construction must  also be  placed on  Section 80M  which is different in  material respects  from clause  (iv)  of  sub- section (1)  of Section  99. It  is most  unsafe to  try  to arrive at  the true  meaning of  a  statutory  provision  by reference to an interpretation which. might have been placed on an  earlier statutory provision which is not only couched in different  language but is also structurally different We must therefore  construe the  language of Section 80M on its own terms  uninhibited by  any interpretation which may have been placed  on clause (iv) of sub-section (1) of Section 99 by any High Court. 794      We may,  proceeding further  with the  narration of the history of  the legislation,  point out that Section 99 sub-

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section (1)  remained in  force only  upto the  close of the assessment year  1964-65 and  by an  amendment made  by  the Finance Act  No. 10  of 1965  Section 99 sub-section (1) was omitted and  Chapter VI A and Section 85A were introduced in the present Act with effect from Ist April, 1965. Chapter VI A  comprised  Section  80A  to  80D  providing  for  certain specified deductions  to be  made in computing total income, while Section  85 A  in  so  far  as  material  provided  as follows:           "85A.  Deduction   of   tax   on   inter-corporate      dividends where  the total  income of an assessee being      company  includes   any  income  by  way  of  dividends      received by  it from  an Indian  company or  a  company      which has  made the  prescribed  arrangements  for  the      declaration  and   payment  of   dividends   (including      dividends on  preference shares  )  within  India,  the      assessee shall  be entitled  to a  deduction  from  the      income tax  with which  it is  chargeable on  its total      income for any assessment year of so much of the amount      of income  tax   calculated  at  the  average  rate  of      income-tax on  the income  so included  (other than any      such income on which no income-tax is payable under the      provisions of  this Act) as exceeds an amount of twenty      five per cent thereof.. This section  too came  to be  considered by the Bombay High Court in  New Great Insurance Company’s case (supra) because two of the assessment years with which the Bombay High Court was concerned in that case were assessment years 1965-66 and 1966-67 when Section 85A was in force. The Bombay High Court pointed out  that except  for  some  minor  verbal  changes, Section 85A  was almost in the same terms as Section 99 sub- section (1) clause (iv), the only real difference being that the exemption  granted  under  Section  99  sub-section  (1) clause (iv)  was in regard to super-tax, while the deduction allowed under  Section 85A  was in regard to income-tax. The same interpretation was, therefore, placed on Section 85A as in the case of Section 99 sub-section (1) clause (iv) and it was held  that under  Section  85A  the  assessee  would  be entitled to  deduction of income-tax in respect of the whole of  the  dividend  received  from  an  Indian  company.  The expression "where the total income...... includes any income by way  of dividends" in the opening part of Section 85A was construed as referring to the 795 category of  income by  way of  dividends received  from  an Indian company.  so that  if  this  particular  category  of income is  included in  the computation of total income, the assessee would  be entitled to a deduction of so much of the amount of  income-tax calculated  at  the  average  rate  of income-tax on  the "income so included" as exceeds an amount of twenty-five per cent of such income. The words "income so included" were  read to  mean not the quantum of the "income by way  of dividends"  included in  the total income but the income falling  within the  category of  "income by  way  of dividends from  an Indian  company" included  in  the  total income. Thus,  the view  taken by  the Bombay High Court was that under Section 85A also, the deduction admissible was in respect of  the entire  dividend ’received  by the  assessee from an Indian company and not in respect of dividend income minus deductions  allowable under  the provisions of the Act in computing ’total income’.      But here  again we are not concerned to inquire whether the view  taken by  the  Bombay  High  Court  in  New  Great Insurance Company’s  case (Supra) is correct, though it must be conceded  that it  has been  held to  be correct  in  the

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decision in Cloth Traders Case (Supra). We do feel, however, that another view in regard to the interpretation of Section 85A is  possible. It  is not at all unreasonable to construe the words  "income so  included" as  meaning the  quantum of income by  way of  dividends included in the total income of the assessee. These words in the context in which they occur have obviously  reference to quantum of the income by way of dividends to  which the  average rate of income tax is to be applied. That quantum is defined by these words and in order to determine  it, we  have to  ask the question: what is the income by  way of dividends included in the total income and the answer  can only  be  that  it  is  income  computed  in accordance with  the provisions  of the Act. But, as we have pointed out  above, it  is not necessary to consider whether the construction  placed on  Section 85A  by the Bombay High Court in  New Great  Insurance  Company’s  case  (supra)  is correct or  not, because  we are not concerned here with the interpretation of  Section 85A.  It is Section 80M which has to be construed and this Section as we shall presently show, is materially different from Section 85A. We cannot construe Section 80M in the light of the interpretation placed on its predecessor section  by the  Bombay High  Court particularly when Section  80M is  admittedly worded differently from its predecessor section. We must construe Section 80M on its own and arrive at its true interpretation according to the plain natural  language   meaning  of   the  words   used  by  the legislature. 796      It seems  that the spate of changes in this legislative provision did  not come  to an  end with  the  enactment  of Section 85A.  The original  Chapter VI  A and  certain other section including Section 85 A were deleted from the present Act by  the Finance  (No. 2) Act, 1967, with effect from Ist April 1968,  and replaced  by  a  new  Chapter  VI  A  which contains a  fasciculus of sections from Section 80A to 80VV. Section 80A,  sub-section (1) provides that in computing the total income  of an assessee there shall be allowed from his gross total  income, in  accordance with  and subject to the provisions of  Chapter VI  A, the  deductions  specified  in Section 80C  to Section  80VV and  sub-section (2)  of  that Section imposes  a ceiling  on such  deductions by  enacting that the  aggregate amount  of such deductions shall not, in any case, exceed the gross total income of the assessee. The expression "gross  total income" is defined in clause (v) of Section 80B  to mean the total income computed in accordance with the  provisions of the Act before making any deductions under Chapter  VI A  or under  Section 280 D. Section 80M is the new  Section which  corresponds to  the repealed Section 85A and  it provides  for deduction  in respect  of  certain categories  of   inter-corporate  dividends.   It   is   the interpretation  of   this  section   which  constitutes  the subject-matter of  controversy between the parties and hence it would be desirable to set it out in extenso. This Section has under-gone  changes from  time to time since the date of its enactment and we will therefore reproduce it in the form in which it stood when originally enacted:           "80M.  Deduction  in  respect  of  certain  inter-      corporate dividends-  (1) Where  the gross total income      of an  assessee being  a company includes any income by      way  of  dividends  received  by  it  from  a  domestic      company, there  shall in accordance with and subject to      the  provisions   of  this   section,  be  allowed,  in      computing the total income of the assessee, a deduction      from such income by way of dividends of an amount equal      to-

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         (a)  Where the assessee is a foreign company-           (i)  in respect of such income by was of dividends                received by  it from  an Indian company which                is not  such a  company as  is referred to in                Section 108  and which is mainly engaged in a                priority industry      80% of such income; 797           (ii) in respect of such income by way of dividends                other than  the dividends referred to in sub-                clause (i)                          65% of such income;           (b)  where the assessee is a domestic company-                in respect  of any  such  income  by  way  of                dividends                60% of such income" There were  several amendments  made  subsequently  in  this Section but  they relate  primarily to the percentage of the income to  be allowed  as a  deduction and  do not  have any bearing on  the question  of interpretation posed before us. One amendment  is however  material and that was made by the Finance Act  1968  by  which  the  words  "received  by  it" occurring in  sub-section (1)  of Section  80M were  omitted with effect  from 1st April 1968 so that right from the date of its enactment, Section 80M sub-section (1) was to be read as if  the words  "received by  it" were  not in the opening part of that provision.      Soon after  the enactment  of Section  80M  a  question arose before the Gujarat High Court in Addl. C.I.T. v. Cloth Traders Private  Limited whether  on a  true construction of that Section,  the permissible deduction is to be calculated with reference  to the  full amount of dividends received by the assessee  from a  domestic company  or with reference to the  dividend   income  computed   in  accordance  with  the provisions of the Act, that is, after deducting the interest paid on monies borrowed for earning such income. The Gujarat High Court  in a  Judgment delivered  on 28th November 1973, held that  the deduction  permissible under  Section 80M  is liable to  be calculated  with  reference  to  the  dividend income computed in accordance with the provisions of the Act and not  with reference  to the  full  amount  of  dividends received by  the assessee.  The assessee  being aggrieved by this judgment  preferred an  appeal to  this Court  and this appeal was  allowed  by  the  judgment  delivered  in  Cloth Traders Case  (supra). This  Court over-ruled the view taken by the  Gujarat High  Court  and  held  that  the  deduction required to  be allowed under Section 80M must be calculated "with reference  to the  full amount  of dividends  received from a domestic company and 798 not with  reference to  the dividend  income as  computed in accordance with  the provisions  of the  Act, that is, after making deductions provided under the Act." This decision was given by the Court on 4th May 1979.      Now,  according   to  Parliament,  this  interpretation placed on  Section 80M  by  the  summit  court  was  not  in conformity with  the legislative  intent and  it resulted in considerable  unjustified   loss  of   revenue.   Parliament therefore immediately proceeded to set right what, according to it  was an  interpretation contrary  to  the  legislative intent  and   with  a   view  to   setting  at  naught  such interpretation. Parliament, by Section 12 of Finance (No. 2) Act 1980,  introduced in  the Income  Tax Act, 1961, Section 80AA with  retrospective effect from 1st April 1968, that is the date  when Section 80M was originally enacted, providing

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that the  deduction required to be allowed under Section 80M in respect  of inter-corporate  dividends "shall be computed with reference  to the  income by  way of  such dividends as computed in  accordance with  the  provisions  of  this  Act (before making  any deduction  under this  Chapter) and  not with reference to the gross amount of such dividends". It is the validity of this new Section 80AA which is challenged in the present  writ petition.  But we  may make  it clear that what is  challenged is  not  the  prospective  operation  of Section 80AA.  That would clearly be unexceptionable because the Legislature  can always  impose  a  new  tax  burden  or enhance an  existing tax  liability with prospective effect. But the  complaint of the assessee was against retrospective effect being  given to Section 80AA, because that would have the effect  of enhancing  the tax  burden on the assessee by setting at  naught the  interpretation placed on Section 80M by the  decision in  Cloth Traders  case  and  reducing  the amount of  deduction required  to be  allowed under  Section 80M. However,  as pointed  out at  the commencement  of this judgment,  it   would  become   necessary  to  examine  this complaint   against    the   constitutional    validity   of retrospective operation  of Section  80AA only  if we affirm the interpretation  placed on Section 80M by the decision of this Court  in Cloth  Traders case.  If we do not agree with the decision of this Court in Cloth Traders case (supra) and take the  view that  the Gujarat High Court was right in the interpretation placed  by it  on Section 80M in Addl. C.I.T. v.  Cloth   Traders   Private   Limited   no   question   of constitutional validity  of the  retrospective operation  of Section 80AA  would remain to be considered, because in that event Section  80AA in  its retrospective operation would be merely  clarificatory   in  nature  and  would  not  involve imposition of any new tax burden. 799      We may  therefore first examine the language of Section 80M for  arriving at  its true interpretation. But before we do so,  let us  consider what  is the object behind grant of relief under  Section 80M.  It was common ground between the parties that the main object of the relief under Section 80M is to  avoid  taxation  once  again  in  the  hands  of  the receiving company of the amount which has already borne full tax in  the hands  of the  paying company.  Vide the written submission under  the heading  "Object of  relief on  inter- corporate dividends"  filed by the learned counsel on behalf of the  assessee in the course of the arguments. Now when an amount by  way of  dividend is received by the assessee from the paying  company, the  full amount of such dividend would have suffered  tax in  the assessment  of the paying company and it is obvious, that, in order to encourage inter-company investments,  the  Legislature  intended  that  this  amount should not  bear tax once again in the hands of the assessee either its entirety or to a specified extent. But the amount by way  of dividend which would other-wise suffer tax in the hands of  the asseesee,  would be  the  amount  computed  in accordance with  the provisions  of the Act and not the full amount received  from the  paying company.  Therefore it  is reasonable to  assume  that  in  enacting  Section  80M  the Legislature intended  to grant  relief with reference to the amount  of   dividend  computed   in  accordance   with  the provisions of  the Act  and not  with reference  to the full amount of  dividend received  from the paying company. It is difficult to  imagine any  reason why the Legislature should have intended  to give  relief with  reference to  the  full amount of  dividend received  from the  paying company  when that is  not the  amount with  is liable  to suffer tax once

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again in  the hands  of the  assessee. The Legislature could certainly be  attributed the  intention  to  prevent  double taxation but  not to  provide an  additional  benefit  which would go  beyond what  is required  for saving the amount of dividend from  taxation once  again  in  the  hands  of  the assessee. Bearing  in mind  these prefatory  observations in regard to  the legislative  object, we  may now  proceed  to construe the language of Section 80M.      Section 80M sub-section (1) opens with the words "where the gross  total income  of an  assessee........includes any income by  way of  dividends from  a domestic  company"  and proceeds to  say that in such a case, there shall be allowed in computing  the total  income of the assessee, a deduction "from such income by way of dividends" of an amount equal to the whole  of such income or 60% of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is 800 received. The  opening words  describe the  condition  which must be  fulfilled in  order to attract the applicability of the provision  contained in  sub-section (1) of Section 80M. The condition is that the gross total income of the assessee must include  income by  way of  dividends from  a  domestic company. "Gross  total income"  is defined  in  Section  80B clause (v) to mean "total income computed in accordance with the provisions  of the Act before making any deduction under Chapter VIA  or  under  Section  280D."  Income  by  way  of dividends from  a domestic  company included  in  the  gross total income would therefore obviously be income computed in accordance with  the provisions  of the  Act, that is, after deducting interest  on  monies  borrowed  for  earning  such income. If  income by  way  of  dividends  from  a  domestic company computed  in accordance  with the  provisions of the Act in  included in  the gross  total income,  or  in  other words, forms  part of  the gross total income, the condition specified in  the opening part of sub-section (1) of section 80M would  be fulfilled  and the  provision enacted  in that sub-section would be attracted.      Now it  was urged  on behalf  of the  assessee that the words "Where the gross total income of an assessee.......... includes any  income by  way of  dividends from  a  domestic company" in  the opening  part of sub-section (1) of Section 80M refer  only to  the inclusion  of the category of income and not  to the  quantum of  such income  and therefore  the words "such  income by  way of dividends" following upon the specification of  this condition,  cannot have  reference to the  quantum  of  the  income  included  but  must  be  held referable only  to category of the income included, that is, income by way of dividends from a domestic company. This was the same argument which found favour with the Court in Cloth Traders case (supra), but on fuller consideration, we do not think it  is well  founded. We  may assume with the Court in Cloth Traders  case that  the words  "where the  gross total income of  an assessee.............  includes any  income by way of  dividends from a domestic company" are intended only to provide  that a  particular category  of income,  namely, income by  way of  dividends from  a domestic company should form a  component part  of gross, total income, irrespective of what  is the  of quantum  income so  included but  it  is difficult to see how the factor of quantum can altogether be excluded when  we talk of any category of income included in the gross  total income. What is included in the gross total income in  such a  case is  a particular  quantum of  income belonging to  the specified  category. Therefore  the  words "such income by way of dividends" must be referable not only

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to the cate- 801 gory of  income included  in the gross total income but also to the  quantum of the income so included. It is obvious, as a matter of plain grammer that the words "such income by way of dividends"  must have  reference to  the income by way of dividends mentioned  earlier and that would be income by way of dividends  from a  domestic company  which is included in the gross  total income. Consequently, in order to determine what is  "such income  by way  of dividends", we have to ask the question:  what is the income by way of dividends from a domestic company included in the gross total income and that would obviously  be the  income by way of dividends computed in  accordance  with  the  provisions  of  the  Act.  It  is difficult to  appreciate how,  when we  are interpreting the words "such  income by  way of  dividends", we  can  make  a dichotomy between the category of income by way of dividends included in  the gross  total income  and the quantum of the income by  way of dividends so included. This Court observed in Cloth  Traders case that the words "such income by way of dividends" as  a matter of plain grammer must be substituted by the  words "income  by way  of dividends  from a domestic company" in  order to arrive at a proper construction of the section, but  there is  a clear fallacy in this observation, because in  making the  substitution it  stop short with the words "income  by way  of dividends from a domestic company" and does  not go the full length to which plain grammer must dictate us to go, namely, ’income be way of dividends from a domestic  company   included  in  the  gross  total  income" (emphasis supplied). Otherwise we would not be giving to the word ’such’  its full meaning and effect. The word ’such’ in the context  in which it occurs can only mean that income by way of  dividends from  a domestic company which is included in the  gross total  income and  that  must  necessarily  be income by  way of  dividends computed in accordance with the provisions of the Act.      There is  also  one  other  strong  indication  in  the language of  sub-section (1)  of Section  80M which  clearly compels us  to take the view that the deduction envisaged by that provision  is required to be made with reference to the income by  way of  dividends computed in accordance with the provisions of  the Act  and not  with reference  to the full amount of dividend received by the assessee. This indication was also  unfortunately lost  sight of by the Court in Cloth Traders case  presumably because  it was  not brought to the attention of  the Court. The Court observed in Cloth Traders case that the whole of the income by way of dividends from a domestic company  or 60%  of such income as the case may be? would be deductible from the gross 802 total income  for  arriving  at  the  total  income  of  the assessee. We  are afraid  this observation  appears to  have been made  under some  misapprehension,  because  what  sub- section (1) of Section 80M requires is that the deduction of the whole  or a specified percentage must be made from "such income by  way of  dividends" and  not from  the gross total income. Sub-section  (1) of  Section 80M  provides  that  in computing the  total income  of the  assessee there shall be allowed a  deduction from  "such income by way of dividends" of an amount equal to the whole or a specified percentage of such income.  Now when  in computing the total income of the assessee, a  deduction has  to be  made from "such income by way of dividends", it is elementary that "such income by way of dividends"  from which  deduction has  to be made must be part of  gross total  income. It is difficult to see how the

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language of  this part of sub-section (1) of Section 80M can possibly fit  in if  "such income  by way of dividends" were interpreted to  mean the full amount of dividend received by the assessee.  The full  amount of  dividend received by the assessee would  not be  included in  the gross total income: what would  be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be 50 it is difficult to appreciate how for the purpose of computing  the total  income from  the gross total income any deduction  should be  required to  be made from the full amount of  the dividend.  The deduction  required to be made for computing  the total  income from the gross total income can  only  be  from  the  amount  of  dividend  computed  in accordance with  the provisions  of the  Act which  would be forming part  of the  gross total  income. It  is  therefore clear that  whatever  might  have  been  the  interpretation placed on  clause (iv)  of sub-section (1) of Section 99 and Section 85A, the correctness of which is not in issue before us, so  far as  sub-section (1) of Section 80M is concerned, the deduction required to be allowed under that provision is liable to  be calculated  with reference  to the  amount  of dividend computed  in accordance  with the provisions of the Act and  forming part of the gross total income and not with reference to  the full  amount of  dividend received  by the assessee.      This  view  which  we  are  taking  in  regard  to  the construction of  sub-section (1)  of  Section  80M  is  also supported  by   the  decision  of  a  Bench  of  this  Court consisting of  one of us, Chandrachud, C.J. and Tulzapurkar, J. in  Cambay Electric  Supply Industrial Company Limited v. C.I.T. This decision was rendered by the Court on 803 11th April 1978 at least a year before the decision in Cloth Traders case,  but, unfortunately,  it appears,  it was  not brought to the attention of the Court when the Cloth Traders case was  argued, because  we have  no doubt  that if it had been cited,  the Court would have certainly made a reference to it  in the  judgment in  Cloth Traders  case. The Section which came  up for  consideration before the Court in Cambay Electric Supply  Company’s case  was undoubtedly a different one, namely,  Section 80E, but the reasoning which prevailed with the  Court in  placing a  particular interpretation  on sub-section (1)  of Section  80E would equally to applicable in the  interpretation of  sub-section (1)  of Section  80M. Section 80E  as it stood at the material time provided inter alia as follows in subsection (1):           "80E(1). Deduction in respect of profits and gains      from  specified  industries  in  the  case  of  certain      companies. -(1)  In the case of a company to which this      section applies, where the total income (as computed in      accordance with  the  other  provisions  of  this  Act)      includes any  profits and  gains  attributable  to  the      business of  generation or  distribution of electricity      or  any   other  form  of  power  or  of  construction,      manufacture or  production of  any one  or more  of the      articles or  things specified  in the list in the Fifth      Schedule, there  shall be allowed a deduction from such      profits and  gains of an amount equal to eight per cent      thereof, in computing the total income of the Company." The question which arose in Cambay Electric Supply Company’s case was  whether  unabsorbed  depreciation  and  unabsorbed development rebate were liable to be deducted in arriving at the figure  of profits  and gains exigible to deduction of 8 per cent contemplated in sub-section (1) of Section 80E. The argument of  the assessee  was precisely the same as the one

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advanced in  the present  case, namely, that the words "such profits and  gains" in  the later part of sub-section (1) of Section 80E  were intended  to refer only to the category of profits and  gains referred  to in  the earlier part of that provision, namely,  "profits and  gains attributable  to the business of generation or distribution of electricity or any other form  of power  or  of  construction,  manufacture  or production of  any one  or more  of the  articles or  things specified in  the list in the Fifth Schedule" and not to the quantum of  the profits  and gains  included  in  the  total income, so 804 that the  profits and  gains exigible  to the deduction of 8 per cent   were  the profits  and gains  attributable to the specified business in their entirety and not the profits and gains as  computed in  accordance with the provisions of the Act. The  assessee contended  that,  in  the  circumstances, unabsorbed depreciation  and unabsorbed  development  rebate were not  liable to  be deducted  from the profits and gains attributable to  the specified  business for arriving at the figure exigible to the deduction of 8%. This argument of the assessee was  rejected by  the Court and the Court held that the profits  and gains  exigible to  the deduction  of 8 per cent were  profits and gains computed in accordance with the provisions of  the Act  and forming part of the total income and hence unabsorbed depreciation and unabsorbed development rebate were liable to be excluded from the profits and gains attributable to  the specified  business in  arriving at the figure exigible  to 8  per cent  deduction. Tulzapurkar,  J. speaking on  behalf of  the Court analysed the provisions of sub section (1) of Section 80E in the following words:           "On reading  sub-section (1)  it will become clear      that three  important steps  are required  to be  taken      before the  special deduction permissible thereunder is      allowed and  the net  total income  exigible to  tax is      determined. First,  compute the  total  income  of  the      concerned  assessse   in  accordance   with  the  other      provisions of the Act, i.e., in accordance with all the      provisions except  section 80E;  secondly, ascerta what      Part of  the total  income so  computed  represses  the      profits and  gains attributable  to the business of the      specified industry (here generation and distribution of      electricity); and,  thirdly, if  there be  profits  and      gains so  attributable, deduct  8 per cent thereof from      such profits and gains and then arrive at the net total      income exigible to tax." The   learned   Judge   then   proceeded   to   apply   this interpretation of  sub-section (1)  of Section  80E  to  the facts of the case before him and observed:           "As    indicated    earlier,    sub-section    (1)      contemplates three  steps being taken for computing the      special deduction  permissible thereunder  and arriving      at the  net income  exigible to  tax find the first two      steps read  together contain the legislative mandate as      to how  the total income of which the profits and gains      attributable to the busi- 805      ness of  the specified  industry forms  a  part-of  the      concerned assessee  is to  be computed and according to      the parenthetical clause, which contains the key words,      the same  is to  be computed  in  accordance  with  the      provisions of  the Act  except section 80E and since in      this case it is income from business the same will have      to be  computed in  accordance with  sections 30 to 43A      which would  include section  32(2) (which provides for

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    carry forward of depreciation) and section 33(2) (which      provides for  carry forward  of development  rebate for      eight years).  In other  words, in  computing the total      income of  the concerned  assessee, items of unabsorbed      depreciation and  unabsorbed  development  rebate  will      have to  be deducted before arriving at the figure that      will become  exigible to  the deduction  of 8  per cent      contemplated by Section 80E (1). It will  thus be  seen that  according to this decision, the words "such  profits and  gains" in  the later  part of sub- section(1) of  Section 80E  were referable to the quantum of the profits and gains attributable to the specified business included in  the total  income as referred to in the earlier part of  the provision.  If  this  decision  lays  down  the correct interpretation of sub-section (1) of Section 80E the same interpretation  must also  govern the  language of sub- section (1) of Section 80M. Structurally there is hardly any difference between  Section 80E  sub-section (1) and Section 80M sub-section  (1) and the reasoning which appealed to the Court in the interpretation of subsection (1) of Section 80E must apply  equally in the interpretation of sub-section (1) of Section  80M. We  find ourselves wholly in agreement with the view  taken by  the  Court  in  Cambay  Electric  Supply Company’s case  and  we  must  therefore  dissent  from  the interpretation placed  on sub-section  (1) of Section 80M by the decision in Cloth Traders case (supra).      But, even  if in our view the decision in Cloth Traders case is  erroneous, the  question still  remains whether  we should over-turn  it. Ordinarily  we would  be reluctant  to over-turn a decision given by a Bench of this Court, because it  is   essential  that  There  should  be  continuity  and consistency in  judicial decisions and law should be certain and definite.  It is almost as important that the law should be  settled   permanently  as  that  it  should  be  settled correctly. But  there  may  be  circumstances  where  public interest demands  that the previous decision be reviewed and reconsidered. The doctrine of stare 806 decisis should  not deter  the  Court  from  over-ruling  an earlier decision,  if it  is satisfied that such decision is manifestly wrong  or proceeds  upon a mistaken assumption in regard to  the  existence  or  continuance  of  a  statutory provision or  is contrary  to another decision of the Court. It was  Jackson, J.  who said  in his  dissenting opinion in Massachusetts v.  United States:  "I see  no  reason  why  I should  be   consciously   wrong   today   because   I   was unconsciously wrong  yesterday". Lord  Denning also  said to the same  effect when  he observed  in Ostime  v. Australian Mutual Provident  Society: "The  doctrine of  precedent does not compel Your Lordships to follow the wrong path until you fall over  the edge  of the  cliff". Here we find that there are over-riding considerations which compel us to reconsider and review  the decision in Cloth Traders case. In the first place, the  decision in  Cloth Traders  case was rendered by this Court  on 4th  May  1979  and  immediately  thereafter, within a few months, Parliament introduced Section 80AA with retrospective effect  from 1st  April 1968  with a  view  to over-riding the  interpretation placed  on  Section  80M  in Cloth Traders  case. The  decision in Cloth Traders case did not therefore hold the field for a period of more than a few months and it could not be said that any assessee was misled into acting  to its detriment on the basis of that decision. There was  no decision  in regard  to the  interpretation of sub-section (1) of Section 80M given by any High Court prior to  the  decision  in  Cloth  Traders  case  and  there  was

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therefore no  authoritative pronouncement  of this  Court on this question  of interpretation  on which we assessee could claim to  rely for  making its fiscal arrangements. The only decision in  regard to the interpretation of sub-section (1) of Section 80M given by any High Court prior to the decision in Cloth Traders case, was that of the Gujarat High Court in Addi. C.I.T.  v. Cloth  Traders  Private  Limited  and  that decision took  precisely the same view which we are inclined to accept  in the present case. It is therefore difficult to see how  any assessee  can legitimately  complain  that  any hardship or  inconvenience would  be caused  to  it  if  the decision in  Cloth Traders  case was  over-turned by  us. If despite the  decision of  the Gujarat  High Court  in  Addl. C.I.T. v. Cloth Traders Private Limited (supra) the assessee proceeded on the assumption, now found to be erroneous, that the Gujarat  High Court decision was wrong and the deduction permissible under  sub-section (1) of Section 80M was liable to be  calculated with  reference  to  the  full  amount  of dividend 807 received by  the assessee, the assessee can have only itself to blame. Knowing fully well that the Gujarat High Court had decided the question of interpretation of sub-section (1) of Section 80M  in favour  of the  Revenue  and  there  was  no decision of  this Court  taking a different view, no prudent assessee  could   have  proceeded   to  make  its  financial arrangements on  the basis  that the decision of the Gujarat High Court  was erroneous.  Moreover, we find, for reason we have already  discussed that  the decision  in Cloth Traders case is  manifestly wrong because it has failed to take into account a  very vital  factor, namely,  that  the  deduction required to  be made under sub-section (1) of Section 80M is not from the gross total income but from "such income by way of dividends".  There is  also  another  circumstance  which makes it  necessary for  us to  reconsider  and  review  the decision in  Cloth Traders  case and that is the decision in Cambay Electric SUPPLY Company’s case. The decision in Cloth Traders case  is inconsistent  with that  in Cambay Electric Supply Company’s case. Both cannot stand together. If one is correct, the  other must  logically be wrong and vice versa. It is  therefore necessary  to resolve  the conflict between these  two   decisions  and   harmonise  the  law  and  that necessitates an inquiry into the correctness of the decision in Cloth  Traders case.  It is  for this reason that we have reconsidered and reviewed the decision in Cloth Traders case and on  such reconsideration and review, we have come to the reconsideration that  the decision  in Cloth Traders case in erroneous and must be over-turned.      It  is   obvious  that,   ON  this   view,  it  becomes unnecessary  to  consider  the  question  of  constitutional validity of  the retrospective  operation of  Section  80AA. Section  80AA  in  its  retrospective  operation  is  merely declaratory of the law as it always was since 1st April 1968 and no complaint can validly be made against it.      We accordingly  dismiss the  writ petition  but, in the peculiar circumstances  of the  case, we  direct  that  each party shall bear and pay its own costs.      AMARENDRA NATH  SEN, J.  I  have  had  the  benefit  of reading the  judgment of  my learned brother Bhagwati, J. MY learned brother in his judgment has set out all the material facts and  circumstances of the case. He has referred to the relevant statutory provisions and to the legislative history of Section 80M of the Income-Tax Act. He has also considered the earlier decisions of various Courts including 808

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the decisions  of  this  Court  in  Cloth  Traders  Ltd.  v. Additional  Commissioner   of  Income   tax  and  in  Cambay Electrical Supply  Industrial Co.  Ltd  v.  Commissioner  of Income-Tax. He  has analysed  the provisions  of Section 80M and has  proceeded to  interpret the  same. As I am in broad agreement with  what have been stated by my learned brother, I do  not propose to reproduce the same. I, however, wish to make some observations of my own.      The authority  and jurisdiction  of a  larger Bench  of this Court  to over-ride  and over-rule  any decision  of  a smaller Bench  cannot be  questioned. I  am, however, of the opinion that  the decision  of  this  Court  on  any  fiscal legislation involving  the question of financial benefit and liability should  not normally be interfered with and should be interfered  with only in very rare cases. On the basis of the decision of this Court on any fiscal legislation and any matter involving  financial  arrangements  and  adjustments, parties are  entitled to arrange their financial affairs and in fact  they so  arrange and adjust their financial affairs on the  basis of the law laid down by this Court. Unsettling a position settled by the decision of this Court may lead to confusion  and  result  in  financial  instability,  causing serious prejudice not only to the parties concerned but also to the  economic growth  of the  country as  a whole.  If on interpretation of  any provision  in any  fiscal legislation two views may be reasonably possible, a larger Bench of this Court may  not interfere  with the  view taken  by a smaller Bench of this Court merely on the ground that the other view appears to  the larger  Bench to  be the better view and may commend  itself  to  the  larger  Bench.  If,  however,  the decision of the smaller Bench is erroneous, the larger Bench has necessarily  to interfere  with the  decision,  as  this Court will  not permit  a wrong  decision to operate as good law of the land.      On a  careful consideration  of all  the relevant facts and circumstances  of this  case and  the earlier  decisions which have  all been  noted in  the judgment  of my  learned brother, I  have no  hesitation in  coming to the conclusion that the  decision arrived  at by my learned brother for the reasons stated  by him in his judgment is sound and correct. My learned  brother has  properly analysed the provisions of Section 80M  and has  correctly construed the same, applying the well settled principles of construction, I agree 809 with my  learned brother  and the  reasons given  by him for coming to  the conclusion  that the  decision of  this Court Cloth Traders  Ltd. v. Additional Commissioner of Income Tax is erroneous.  In my  opinion, it  cannot be  said  that  in deciding the case of Cloth Traders Ltd. this Court had taken one of  two reasonably possible views. As my learned brother in  his   judgment  has   aptly  pointed  out  on  a  proper interpretation of  Section 80M  that the  view taken by this Court in Cloth Traders case is fallacious and wrong. I am in entire agreement with the interpretation of Section 80M made by my learned brother for reasons stated in his judgment.      It may  be noted  that as  soon as the decision of this Court in  Cloth Traders  case was  given, the  Parliament to clearly manifest the legislative intent and to indicate that the decision  did not  reflect the  true  intention  of  the Legislature  introduced   by  amendment  Section  80AA  with retrospective effect.  In view  of the proper interpretation of Section  80M in  the judgment  of my learned brother with which I  agree, it  cannot be said that Section 80AA has the effect of  imposing any fresh tax with retrospective effect. Section 80AA  is clearly  declaratory in  nature and  merely

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declares what  the correct  position  has  always  been.  No question of  imposition of  any fresh tax with retrospective effect falls  for consideration in this case. It may also be pointed out  that the  decision in Cloth Traders case cannot be said  to have  held the  field for  any length of time to cause any  serious prejudice to an assessee. The decision of the Gujarat High Court in Cloth Traders case which was upset by this  Court was  against the  assessee and the Parliament had intervened  as soon  as this Court reversed the decision of the Gujarat High Court in Cloth Traders case. This aspect has also been fully dealt with in the judgment of my learned brother.      With these  observations I  am in entire agreement with the judgment  of my  learned brother  and I  agree with  the order proposed by him. N.V.K.                                  Petition dismissed. 810