http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: RAJPUTANA AGENCIES LTD.

       Vs.

RESPONDENT: COMMISSIONER OF I. T., BOMBAY

DATE OF JUDGMENT: 09/10/1958

BENCH: GAJENDRAGADKAR, P.B. BENCH: GAJENDRAGADKAR, P.B. AIYYAR, T.L. VENKATARAMA SARKAR, A.K.

CITATION:  1959 AIR  265            1959 SCR  Supl. (1) 142  CITATOR INFO :  D          1960 SC1016  (18)  D          1966 SC 279  (4)

ACT:        Income-tax-Assessment of company-Declaration of dividend  in        excess of statutory limit-Additional income-tax-Computation"        Rate  applicable  to  the total income  of  the  company  ",        Meaning of --Indian Finance Act, 1951, First Schedule  Para.        B, proviso (ii), explanation (ii)(b).

HEADNOTE: The  assessee, a private limited company in Saurashtra,  was assessed  for the assessment year 1952-53 on a total  income of Rs. 26,385.  It was assessable at the rate of four  annas per rupee but in view of the provisions of the Part B States (Taxation Concession) Order, 1950, it was actually  assessed at  the  rate of sixteen pies per rupee.  The  assessee  had declared dividend of Rs. 30,000 out of which Rs. 15,159  was found  to be excess dividend.  On this excess  dividend  the assessee  was  liable to pay additional income-tax  and  the dispute  was  regarding  the rate at which  tax  was  to  be computed.   Clause (ii) of the proviso to para.  B of  Part. I  of  the First Schedule to the Finance  Act,  1951,  which applied to the case, provided that the additional income-tax was to be equal to the sum by which the aggregate amount  of income-tax actually borne by the excess amount fell short of the amount Calculated at the rate of five annas per rupee on the  excess  dividend.  Sub-clause (b) of cl.  (ii)  to  the second explanation to proviso to para.  B provided that  the aggregate amount of income-tax actually borne by the  excess dividend was to be determined at the rate applicable to  the total  income of the company.  The assessee  contended  that the words ’at the rate applicable to the total income of the company’  meant the rate prescribed by para. 8 of  the  Act, i.e.  four annas per rupee, and not the rate as  reduced  by the  Order at which the income-tax had actually and in  fact been  levied  and  that consequently it was  liable  to  pay additional income-tax on the excess dividend at the rate  of one anna per rupee only. Held,  that  the expression ’rate applicable  to  the  total income of -the company’ meant the rate actually applied  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

that the assessee was rightly charged at the rate of  forty- four  pies  per rupee being the rate by which  the  rate  at which  the assessee was actually assessed fell short of  the rate  of five annas per rupee.  The clause referred  to  the specific  or  definite  rate which  -was  determined  to  be applicable  to  the taxable income of the company  for  that specific year and not to the rate prescribed by the Act  for the  relevant  year  generally in reference  to  incomes  of companies. 143 Elphinstone  Spinning and Weaving Mills Co. Ltd. v.  Commis- sioner of Income-tax, Bombay City, [1955] 28 I.T.R. 81, con- sidered.

JUDGMENT: CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 91 of 1957. Appeal from the judgment and order dated March 29, 1956,  of the Saurashtra High Court at Rajkot in Civil Reference No. I of 1955. Shankarlal G. Bajaj and P. C. Aggarwal, for the appellant. K.   N.  Rajagopala Sastri, R. H. Dhebar and D.  Gupta,  for the respondent. 1958.  October 9. The Judgment of the Court was delivered by GAJENDRAGADKAR,  J.-This appeal arises from  the  assessment proceedings taken against the appellant, Rajputana  Agencies Ltd., Lavanpur, for its income for the assessment year 1952- 53,  the accounting period being the  corresponding  Marwadi Year  ending in October, 1951.  The appellant is a’  private limited company and it was assessed to income-tax and super- tax  by  the Income-tax Officer, Morvi Circle, Morvi,  on  a total  income  of Rs. 26,385.  The  appellant  had  declared dividend  of Rs. 30,000.  The Income-tax Officer  held  that out  of the said amount of dividend, Rs. 15,159  was  excess dividend.   On this basis the Income-tax Officer  determined the  additional income-tax payable by the appellant  at  the rate  of  forty-four  pies in a rupee  on  the  said  excess dividend.    The  additional  income-tax  payable   by   the appellant  in  that behalf was computed at  Rs.  3,473-15-0. This order was passed on November 25, 1952. The appellant filed an appeal against this order before  the Appellate  Assistant Commissioner of Income-tax  at  Rajkot. The appellate authority determined the additional income-tax payable  by  the appellant at Rs. 2,084-12-0 on  August  29, 1953.  An appeal was preferred by the appellant against  the appellate  order before the Income-tax  Appellate  Tribunal, Bombay, but the appellate tribunal confirmed the order under appeal on November 27, 1954.  The 144 appellant  then moved the appellate tribunal under s.  66(1) of  the  Income-tax Act and the appellate tribunal,  by  its order  passed on April 25, 1955, referred two  questions  to the  High  Court  at Saurashtra for  its  opinion.   In  the present  appeal,  we are concerned with ,the second  of  the said two questions.  This question as framed by the tribunal was: Whether the expression " at the rate applicable to  the total income of the company " as appearing in sub-cl. (b) of el. (ii) to the second explanation to proviso to paragraph B of  Part I of the First Schedule to the Indian Finance  Act, 1952,  means the rate at which a company’s total  income  is actually  assessed or the rate prescribed by the  respective Finance  Act  without taking into consideration  the  rebate allowed  in  the  respective years in  accordance  with  the provisions  of the Part ’ B ’ States (Taxation  Concessions)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

Order,  1950 (hereinafter called the Order).  Section  2  of the Finance Act, 1952, provides that the provisions of s.  2 of,  and the First Schedule to the Finance Act, 1951,  shall apply  in  relation  to income-tax  and  super-tax  for  the financial  year  1952-53 as they apply in  relation  to  the income-tax and super-tax for the financial year 1951-52 with the  modification  that,  in the  said  provisions  for  the figures 1950, 1951 and 1952 wherever they occur, the figures 1951, 1952 and 1953 shall be respectively substituted ;  and so  in  the present case we are really  concerned  with  the material provisions of the Finance Act, 1951 (herein.  after called the Act). By its judgment delivered on March 29, 1956, the High  Court answered  this question against the appellant and held  that the expression " at the rate applicable to the total  income of the company " means the rate at which the company’s total income is actually assessed.  The appellant then applied for and  obtained a certificate from the High Court  under  Art. 133(1)(c)  of  the Constitution read with s. 66A(2)  of  the Income-tax Act that the case is a fit one for appeal to this Court.  It is with this certificate that the present  appeal has been brought to this Court; and the only point which  it raises  for our decision relates to the construction of  the expression " at the rate applicable 145 to  the  total  income of the company  "  appearing  in  the relevant provision of the Act.  The  appellant  does  not  dispute  its  liability  to  pay additional  income-tax  under  cl. (ii) of  the  proviso  to paragraph B of Part I of the First Schedule to the Act.  The dispute  between  the parties is in regard to  the  rate  at which  the additional income-tax has to be charged.   I  The appellant  has  paid income-tax on its total income  in  the relevant  assessment year at the rate of sixteen pies  in  a rupee in accordance with the computation prescribed by para. 6  of  the Order; and it is urged on its  behalf,  that  the rebate  to which it is entitled under the provisions of  the said  Order is irrelevant in determining the rate  at  which the  additional income-tax can be computed against  it.   On the other hand, the respondent contends that the  additional income-tax  has  to  be computed at the rate  at  which  the appellant’s  income  has been actually assessed and  so  the rebate granted to the appellant under the said Order must be taken  into  account  in determining the said  rate  of  the additional tax. It  would  be  relevant,  at this stage,  to  refer  to  the provisions  of  the  Order under  which  the  appellant  has admittedly  obtained  rebate as a company  carrying  on  its business   in  Saurashtra.   By  the  Order,   the   Central Government  made exemptions, reductions in the rate  of  tax and modifications specified in the Order in exercise of  the powers  conferred  by s. 60A of the  Income-tax  Act.   This Order applied to Part ’B’ states which included all Part ’B’ States other than the State of Jammu and Kashmir.  Paragraph 5  of  the  Order  deals with  income  of  a  previous  year chargeable  in the Part ’B’ States in  1949-50.   Sub-clause (3)  of  paragraph 5 shows that the  State  assessment  year 1949-50  means  the assessment year which commences  on  any date  between April 1, 1949 and December 31, 1949.   We  are not  concerned  with  the  provisions  of  this   paragraph. Paragraph 6(iii) applies to the present case.  The effect of para. 6(1), (ii) and (iii) is that in respect of so much  of the  income, profits and gains included in the total  income as accrue or arise in any State other 19

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

146    than  the States of Patiala and East-Punjab States  Union and Travancore-Cochin (i)  the  tax  shall be computed (a) at the Indian  rate  of tax;  and (b) at the State rate of tax in force  immediately before the appointed day; (ii) where the amount of tax computed under subclause (a) of clause,  (1) is less than or is equal to the amount  of  tax computed under sub-clause (b) of clause (1)  the  amount  of the first mentioned tax shall be the tax     payable; (iii)  where the amount of tax computed under subclause  (a) of clause (1) exceeds the tax computed. under sub-clause (b) of clause (1), the excess shall be allowed as a rebate  from the  first  mentioned  tax  and  the  amount  of  the  first mentioned tax as so reduced shall be the tax payable. Thus under el. (iii) the amount of income-tax levied against the appellant is not the amount computed at the Indian rate; it represents the difference between the amounts  calculated at  the Indian rate of tax and that calculated at the  State rate of tax.  The excess of the first amount over the second is allowed as a rebate.  In other words, the Indian rate  of tax  prescribed by the relevant provisions of the  Act  does not  by  itself determine the amount of tax payable  by  the appellant for the relevant year. It  is  well  known that when different Part ’  B  ’  States merged with the adjoining States or Provinces and were  made taxable territories under the Income-tax Act, the  operation of  the  Indian  rate of tax was introduced  by  phases  and rebates  on a graduated scale were allowed to the  assessees under  the  provisions of this Order.  As  we  have  already mentioned,  it  is  common ground  that  the  appellant  was entitled  to and has obtained rebate under sub-cl. (iii)  of paragraph  6 of ’the Order, with the result that  his  total income  has been taxed to income-tax at the rate of  sixteen pies  in  a rupee.  The point for determination  is  whether this rebate is relevant in determining the rate at which the additional   income-tax  has  to’  be  levied  against   the appellant under the relevant provisions of the Act. 147 Let  us  now consider the relevant provisions  of  the  Act. Section  3  of  the Income-tax Act  which  is  the  charging section  provides that " where any Central Act  enacts  that income-tax  shall  be charged for any year at  any  rate  or rates, tax at that rate or those rates shall be charged  for that year in accordance with, and subject to the  provisions of, this Act in respect of the total income of the  previous year  of  the’  assessee ". Thus,  when  levying  income-tax against the total income of the assessee, the rate at  which the  tax has to be levied is prescribed by the Act  for  the relevant year.  Section 2 of the Act provides that,  subject to  the provisions of sub-ss. (3), (4) and  (5),  income-tax shall  be charged at the rates specified in Part I  -of  the First  Schedule;  and  sub-s. (7) provides that  "  for  the purpose  of  this section, and of the rates of  tax  imposed thereby, the expression " total income " means total  income as  determined for the purposes of income-tax or  super-tax, as the case may be, in accordance with the provisions of the Act  ". So we must turn to the First Schedule to the Act  to find  the  rate  at which the  appellant  can  be  assessed. Paragraph B of the said Schedule deals with companies and it provides that, in the case of every company, on the whole of total  income the tax is leviable at the rate of four  annas in the rupee.  There is a proviso to this paragraph and  the clause  which  calls  for our construction  in  the  present appeal  occurs  in  the  explanation to  el.  (ii)  of  this

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

proviso.   This  proviso deals with the case  of  a  company which in respect of its profits liable to tax under the  Act for  the relevant year has made the prescribed  arrangements for  the  declaration and payment within  the  territory  of India  excluding  the  State of Jammu  and  Kashmir  of  the dividends  payable out of such profits and has deducted  the super-tax   from  the  dividends  in  accordance  with   the provisions of  sub-s. (3D) or (3E) of s. 18 of that Act; and in that connection, it provides: (1)  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 148 in  respect of the whole or, part of the previous  year  for the assessment for the year ending on the 31st day of March, 1951,  and  no order has been made under subsection  (1)  of section  23A  of  the Income-tax Act,,  a  rebate  shall  be allowed, at  the rate of one anna per rupee on the amount of such excess (ii) where  the  amount of dividends referred to  in  clause (1i)  above  exceeds the total income as  reduced  by  seven annas  in the rupee and by the amount, if, any, exempt  from income-tax,  there shall be charged on the total  income  an additional income-tax equal to the sum, if any, by which the aggregate amount of income-tax actually borne by such excess (hereinafter  referred to as " the excess dividend ")  falls short of the amount calculated at the rate of five annas per rupee on the excess dividend. It would thus be seen that the object of the legislature  in enacting  this proviso is to encourage companies  to  plough back  some  of  their  profits  into  the  industry  not  to distribute unduly large portions of their. profits to  their shareholders  by  declaring unreasonably high  or  excessive dividends.   In order to give effect to this  intention  the legislature  has offered an inducement to the  companies  by giving  them  a  certain  rebate.  If  a  company  does  not distribute as dividends more than roughly nine annas of  its profits which is specified as distributable, then the rebate of  one anna is given to the company to the extent that  the dividend  paid  by  it  was  less  than  the   distributable dividend.   If the company pays more than the  distributable amount  of  dividend then it was not entitled to  claim  any rebate;  but, on the contrary, it becomes liable to  pay  an additional  income-tax  as  provided  in  cl.  (ii)  of  the proviso.   In other words, the intention of the  legislature appears to be that companies should no doubt declare reason- able  dividend and thereby invite the investment of  capital in  business;  but  they should  not  declare  an  excessive dividend  and should plough back part of their profits  into the industry.  It is with this object that the provision for rebate  has  been  made.   It would  be  noticed  that,,  in addition  to the rebate received by the appellant under  the relevant provisions of the                   149 Order,  it  would have been entitled to receive  the  rebate under el. (1) of the proviso to paragraph B if the  dividend declared by it had not exceeded the specified  distributable amount.  In fact the dividend declared by the appellant  has exceeded  the said amount and the appellant has thus  become liable to pay additional income-tax in respect of the excess dividend under cl, (ii) of the proviso to paragraph B. Under this  clause, " the appellant shall be charged on the  total income an additional income-tax equal to the sum, if any, by which  the aggregate amount of income-tax actually borne  by

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

such  excess  (hereinafter  referred  to  as  "  the  excess dividend ") falls short of the amount calculated at the rate of  five  annas  per rupee on the excess  dividend  ".  This provision  raises the problem of determining  the  aggregate amount of income-tax actually borne by the excess  dividend; and  it  is  to help the solution of this  problem  that  an explanation  has been added which says, inter alia,  that  " for the purposes of cl. (ii) of the above proviso the aggre- gate  amount  of  income tax actually borne  by  the  excess dividend shall be determined as follows: (i)  the  excess dividend shall be deemed to be out  of  the whole  or such portion of the undistributed profit,% of  one or  more  years immediately preceding the previous  year  as would  be just sufficient to cover the amount of the  excess dividend and as have not likewise been taken into account to cover an excess dividend of a preceding year; (ii) such portion of the excess dividend as is deemed to  be out  of the undistributed profits of each of the said  years shall  be deemed to have borne tax(a) if an order  has  been made under sub-section (1) of section 23A of the  Income-tax Act,  in respect of the undistributed profits of that  year, at the rate of five annas in the rupee, and (b)  in respect of any other year, at the rate applicable to the total income of the company for that year reduced by the rate   at  which  rebate,  if  any,  was  allowed   on   the undistributed profits." Clause (1). explains what shall be deemed to be the 150 excess  dividend and how it, should be ascertained.   Clause (ii) lays down how the portion of the excess dividend as  is deemed to be out of the undistributed profits of each of the years  mentioned in cl. (ii) of the proviso shall be  deemed to have borne tax.  Sub. clause (a) of cl. (ii) is concerned with cases where an order has been made under s. 23A (1)  in respect  of  the undistributed profits of that year  at  the rate  of five annas in a rupee.  We are not  concerned  with this clause in the present appeal.  It is sub-cl. (b) of el. (ii)  of the explanation to the proviso to paragraph B  that falls for consideration in the present appeal. The  appellant’s case is that the expression " at  the  rate applicable  to the total income " means the rate  prescribed by paragraph B of the Act and not the rate at which  income- tax  has actually and in fact been levied.  This  contention has been rejected by the High Court and the appellant  urges that the High Court was in error in rejecting its case.  The argument  is that the words " at the rate applicable to  the total income of the company " must be strictly and literally construed  and  reliance  is placed on  the  principle  that fiscal  statutes must be strictly construed.  On  the  other hand,  as  observed  by Maxwell "  the  tendency  of  modern decisions  upon  the  whole  is  to  narrow  materially  the difference  between what is called a strict  and  beneficial construction  (1) ". Now the words " the rate  applicable  " may  mean either the rate prescribed by paragraph B  or  the rate actually applied in the light of the relevant statutory provisions.    "Applicable",   according   to   its    plain grammatical  meaning,  means  capable of  being  applied  or appropriate;   and  appropriateness  of  the  rate  can   be determined only after considering all the relevant statutory provisions.   In this sense it would mean the rate  actually applied.   In the present case, if sub-cl. (b) is read as  a whole, and all the material words used are given their plain grammatical  meaning,  its  construction  would  present  no serious  difficulty.   When the clause refers  to  the  rate applicable,  it is necessary to remember that it  refers  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

the rate applicable to- the total income of the company  for (1)  Maxwell on " Interpretation of Statutes ", 10th Ed.  p. 284. 151 that year. In other words, the clause clearly refers to  the specific  or  definite  rate  which  is  determined  to   be applicable  to  the taxable income of the  company  for  the specific year; and it is not the rate prescribed by the  Act for  the relevant year generally in reference to incomes  of companies.    The  result  is  that,  for  determining   the aggregate amount of income-tax actually borne by the  excess dividend, the department must take into account the rate  at which the income of the company for the specific year has in fact been applied or levied. Besides, in construing the words "I the rate applicable " we must  bear in mind the context in which they are used.   The context  shows that the said words are intended  to  explain what  should. be taken to be " the tax actually borne ".  If the  legislation  had intended that the tax  actually  borne should in all, cases be determined merely by the application of  the  rate  prescribed  for  companies  in  general,  the explanation  given by the material clause would  really  not have  been  necessary.   That is why  in  our  opinion,  the context justifies the construction which we are inclined  to place on the words " the rate applicable ". The same position is made clear by the further provision  in sub-cl. (b) itself which requires that the relevant rate has to  be reduced by the rate at which the rebate, if any,  has been allowed on the undistributed profits; which means that, for determining the rate in sub-cl. (b), it is necessary  to take into account the rebate which may have been allowed  to the company under el. (1) of the proviso to paragraph B,  so that  in such a case the rate applicable cannot be the  rate prescribed in paragraph B of the Act; it must be the rate so prescribed reduced by the rate at which the rebate has been granted under cl. (1) of the proviso to paragraph B.  It  is thus clear that the words " rate applicable  in  such  cases mean  the  rate  determined after deducting  from  the  rate prescribed by paragraph B the rate of rebate allowed by  el. (1)  of  the proviso to the said paragraph.   Therefore,  at least  in  these  cases, the material words  mean  the  rate actually  applied.  If that be the true position,  the  rate applicable must in 152 all  cases mean the rate actually applied.  The  same  words cannot have two different meaning,% in the same clause. Incidentally we may point out that the provision of the  Act in regard to the payment of additional income-tax appears to be  intended to impose a penalty for distributing  dividends beyond  the  distributable.limit mentioned by  the  statute. The  method  prescribed for determining the amount  of  this additional income-tax is this.  Calculate the amount at  the rate  of  five annas per rupee on the  excess  dividend  and deduct from the amount so determined the aggregate amount of income-tax  actually  borne  by such  excess  dividend;  the balance  is  the amount of  additional  income-tax  leviable against  the  company.  In adopting this method,  if  rebate admissible under cl. (1) of the proviso to para. graph B has to be deducted from the rate prescribed, it is difficult  to understand  why a rebate granted under paragraph  6(iii)  of the  Order should not likewise be deducted.  We  accordingly hold that the rate applicable in sub-cl. (b) of cl. (ii)  of the  explanation  read  with  cl. (ii)  of  the  proviso  to paragraph  B  of  Schedule  I of the  Act  means  the,  rate actually applied in a given case.  On, this construction the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

rate at which the appellant is liable to pay the  additional income-tax would be the difference between the rate of  five annas  and the rate of sixteen pies in a rupee at which  the appellant has in fact paid income-tax in the relevant  year. That is to say, the additional income-tax is leviable at the rate of forty-four pies in a rupee. In  its judgment, the High Court of Saurashtra has  referred with  approval to the decision of the Bombay High  Court  in Elphinstone   Spinning  and  Weaving  Mills  Co.,  Ltd.   v. Commissioner  of Income-tax, Bombay City(1).  In this  case, Chagla  C. J. and Tendolkar J. have held that if  a  company has no taxable income at all for the assessment year 1951-52 and in that year it pays dividends out of the profits earned in the preceding year or years, additional income-tax cannot be  levied on the company by reason of the fact that it  has paid an excess dividend within the meaning of that [1955] 28 I.T.R. 811. 153 expression  in, the proviso to paragraph B of Part I of  the Act.  We are not concerned with this aspect of the matter in the  present appeal.  However, in dealing with the  question raised  before  them, the learned judges  have  incidentally construed  the relevant words " rate applicable" as  meaning the rate actually applied; and their observations do support the  view taken by the Saurashtra High Court in the  present case. The result is the appeal fails and is dismissed with costs.                               Appeal dismissed.