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PETITIONER: SUNDARAM & COMPANY (P.) LTD.  MADURAI

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 25/04/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V.

CITATION:  1968 AIR  124            1967 SCR  (3) 798

ACT: Income-tax Act, 1922 (11 of 1922), ss. 34(1)(b),  66-Finance Act,   1956,  proviso  2,  Paragraph  D-Notice   to   reopen assessment on the ground of "excessive relief" but reduction of rebate on super tax on the ground "assessed at too low  a rate"-Duty to enquire whether proceedings validly initiated- "Rate"  in  s.  34(1) if means  fraction  of  total  income- Reference-Duty to decide all aspects of the question of  law referred  even  though not specifically  argued  before  the Tribunal.

HEADNOTE: The  Income-tax Officer issued a notice to the assessee  for reopening the assessment for the year 1956-57 on the  ground that "excessive relief" within the meaning of s. 34(1)(b) of the  Income-tax Act, 1922 had been granted to the  assessee. Rejecting the contention of the assessee that the income had not been the subject of "excessive relief" and therefore the proceedings were unauthorised and that the amount deemed  to have been distributed under orders under s. 23A could not be taken  into  consideration for the purpose of  reducing  the rebate of super-tax admissible under proviso 2 to  paragraph D  of the Finance Act, 1956, the Income-tax Officer  ordered that  the  rebate  of super-tax  granted  be  reduced.   The Appellate  Assistant Commissioner held that only a  part  of the  amount of dividend deemed to have been declared by  the assessee  could be taken into consideration  in  withdrawing the rebate of super-tax.  On appeal by the Commissioner, the Tribunal  held  that the case of the assessee did  not  fall within  any of the situations contemplated by s. 34(1)  (b), but   confirmed  the  order  of  the   Appellant   Assistant Commissioner.  On the question "whether the setting aside of the  assessment under s. 34(1) (b) was correct in  law"  the High  Court  was  of  the opinion  that  the  claim  of  the department to initiate proceedings under s. 34(1)(b) on  the ground  that  excessive  relief was  allowed  could  not  be sustained,  but held that the proceedings under the  section could be initiated on the ground that the income profits and gains  of the asses-see were " assessed at too low a  rate". The  High Court did not ’record its decision on the plea  of the  assessee  that  in a  proceeding  to  re-assess  income initiated  on  a  notice that income  had  been  subject  to

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"excessive  relief", the Income-tax Officer was  incompetent to re-assess income on the footing that income was  assessed at  too  low a rate.  In appeal to this Court  the  assessee contended that (i) the High Court was in error in  enlarging the scope of the enquiry and entering upon a question  never mooted  before  the  Tribunal and (ii) by  the  use  of  the expression "assessed at too low a rate" it was intended that the  jurisdiction of  the  Income-tax  Officer  would   be attracted  only when the wrong fraction had been applied  in the determination of super-tax and not when the  computation of tax depended on other factors. HELD  : (i) The case must be remanded to the High  Court  to determine whether the proceedings were validly initiated  on the notice issued against the asscssee. [807B]                             799 The scope of the enquiry arising out of the arguments before the Tribunal was not whether the assessment was proper, but, whether  the Income-tax Officer was in the circumstances  of the case competent to initiate the proceeding under s. 34(1) (b) of the Income-tax Act for bringing to tax the  excessive -rebate  granted to the assessee.  The question referred  to the High Court had to be reframed accordingly- The question, as  framed by the Tribunal, though defective, included  that enquiry.  The High Court was, therefore, bound to decide all aspects  of  that question and it was wrong  in  making  the assumption that because a particular aspect of the  question of  law  raised  was  not  specifically  argued  before  the Tribunal  the  High Court could not deal with  it.  [S02D-E; 806F-H; 807A-B] P.   S. Sutbramanyan, Income-tax Officer, Companies Circle I (1)  and  Anr. v. Simplex Mills Ltd. 48 I.T.R.  182  (S.C.), referred to. (ii) The High Court was right in holding that the rebate  of tax  and  the  reduction of  such  rebate  were  essentially matters  of  measure or Standards of rate.   The  expression rate  in s. 34(1) does not mean a fraction of total  income; it  is  often  used in the sense  of  standard  or  measure. Provided  the  tax  is computable by the  application  of  a prescribed standard or measure, though not directly  related to  taxable income, it may be said that the tax is  computed at  a certain rate.  The aim and object of the Finance  Act, 1956, is to prescribe the standard or measure of  income-tax or   super-tax,  and  an  assessee  escaping  some  of   its provisions  and  failing to pay the full measure of  tax  is "assessed at too low a rate". [806B-C]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2453 of 1966. Appeal  from the judgment and order dated August 9, 1963  of the Madras High Court in T.C. No. 152 of 1961. R.   Venkatram and R, Ganapathy Iyer, for the appellant. B.   Sen and R. N. Sachthey, for the respondent. The Judgment of the Court was delivered by Shah,  J. In Sundaram & Company  (Private)  Ltd.-hereinafter called  "the  Company"-the  public  are  not   substantially interested  within  the  meaning of S.  23A  of  the  Indian Income-tax  Act,  1922.  In dealing with the  assessment  of income  of the Company for the assessment years  1946-47  to 1951-52,  the  Income-tax Officer, Central  Circle,  Madras, passed orders under s. 23A of the Income-tax Act, 1922,  and directed that the total income of the Company as  determined in  the  years of assessment less tax payable be  deemed  to have  been  distributed  amongst  the  shareholders  of  the

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Company  as  on  the  relevant dates  of  the  General  Body Meetings.  The following table sets out the relevant details 800 Assessment     Amount of divi-         Date of order passed year.      dend deemed to             under s. 23A deeming            have been dec-                   dividend to have           been declared.           lared. 1946-47        46,563                    March 18,1952 1947-48        43,959                        - do- 1948-49        47,829                        - do- 1949-50        97,875                        - do- 1950-51        92,591                        - do- 1951-52        25,899                    March 30, 1955               3,54,716 On  July 7, 1955 the Company in a general  meeting  resolved that the amount of Rs. 3,54,716/- which was under the orders of the Income-tax Officer deemed to have been distributed as ;dividend amongst the shareholders pursuant to orders  under s. 23A of the Income-tax Act, be distributed as dividend  to the  shareholders,  and  in  pursuance  of  that  resolution proportionate  part of the dividend due to each  shareholder was credited to his account. The  Income-tax  Officer  completed the  assessment  of  the Company for the year 1956-57 and determined Rs.  5,69,396/as its  total  income.   The Income-tax  Officer  computed  the supertax payable by the Company under the Finance Act, 1956, at  the rate of six annas and nine pies in the rupee of  the total income and granted a rebate at the rate of four  annas in  the  rupee in accordance with the provisions of  Cl.   D proviso  (i)  (b)  &  (ii) ,of the  Schedule  to  that  Act. Sometime thereafter  the Income-tax Officer being  of  the opinion  that  excessive  relief had  been  granted  to  the Company  within the meaning of S. 34 (1) (b) of the  Income- tax  Act, issued a notice on January 31, 1959 for  reopening the assessment for the year 1956-57.  The Company filed  its return of income in compliance with the notice and contended that  the proceedings commenced by the,  Income-tax  Officer were unauthorised, because the income of the Company had not been the subject of "excessive relief" within the meaning of S.  34(1)(b),  and  that actual  distribution  of  dividends already  deemed to have been distributed in accordance  with the  orders  passed  under  s.’23A  cannot  be  taken   into consideration  for  the purpose of reducing  the  rebate  of super-tax  admissible under the proviso 2 to Paragraph D  of the Finance Act, 1956.  The Income-tax Officer rejected  the contentions and ordered that the rebate of super-tax to  the extent of Rs. 80,978/- be withdrawn. In  appeal  to the Appellate Assistant Commissioner  it  was held that in the circumstances of the case, assessment could be reopened under S. 34(1) (b) on the ground that the income had’  been made the subject of "excessive relief", but  only Rs. 77,600/and not the whole amount of Rs. 3,54,716/-  which was deemed to be distributed under orders under s. 23A could be taken into 801 consideration as dividend distributed by the Company  during the previous year relevant to the assessment year 1956-57. The  Commissioner of Income-tax appealed to  the  Income-tax Appellate Tribunal.  He, contended that in the circumstances of  the case the amount of Rs. 3,54,716/- was liable  to  be taken into consideration for the purpose of withdrawing  the rebate  of supertax admissible under the Finance Act,  1956. The Tribunal held that the case of the Company "did not fall within  any of the situations contemplated by  s.  34(1)(b)"

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and  the  Company’s  income  had not  been  the  subject  of excessive  relief  as  the rebate  of  super-tax  originally granted was out of the tax otherwise computable and not from the  assessed income.  But the Tribunal confirmed the  order of  the Appellate Assistant Commissioner directing that  Rs. 77,600/-  be  taken into account in  withdrawing  rebate  of super-tax. The Tribunal then referred three questions to the High Court of Judicature at Madras : "1. Whether the Tribunal was justified in disposing of  ’the appeal as it did.? 2. Whether the Tribunal was right in law in entertaining the assessee’s  contention relating to the applicability, of  s. 34(1) (b) under Rule 27 of the Appellate Tribunal Rules ? 3.   Whether the setting aside of ’the assessment under s. 3 4 (I ) (b) was correct in law ? " The High Court decided in favour of the Company on the first two  questions.  In considering the third question the  High Court  observed  that  the  plea of  the  Company  that  re- assessment proceedings under s. 34 (I) (b), on the ground of "excessive  relief  cannot be initiated, must  be  accepted. The  Court then proceeded to consider whether  allowance  of rebate  to  which  the assessee was not  entitled,  did  not amount  to assessing income at too low a rate, and  observed that  "there can be no question that the rebate of tax  rate and a reduction of such rebate is essentially the arithmetic of rate.  Reading however the provisions of the Finance Act, 1956,  as a whole in the perspective that its chief aim  and object is to prescribe the rate of income-tax and super-tax, it  seems  to  us  that an assessee  escaping  some  of  its provisions  and  failing to pay the full measure of  tax  is assessed  at  too low a rate".  The High  Court  accordingly held that proceedings under s. 34(1) (b) could be  initiated when  rebate in the payment of super-tax was -ranted to  the assessee without reducing it in the circumstances set out in the  second  proviso  to  Part  11  of  the  First  Schedule Paragraph D in the Finance Act, 1956, on the ground that the income,  profits and gains of the Company were  assessed  to tax 802 at  too  low  a rate.  The High  Court  answered  the  third question  in favour of the Commissioner.  Against the  order passed by the High Court on the third question, this  appeal is  preferred by the, Company.  The Commissioner of  Income- tax  has not challenged the correctness of the decisions  on Questions I & 2. We  are unable to agree with counsel for the  assessee  that the  first  question raised an enquiry not only  as  to  the correctness  of the procedure followed by the Tribunal,  but also  to the right of the Income-tax Officer to  initiate  a proceeding  under S. 34(1) (b) to bring to tax rebate  which was not reduced.  In terms, the first question relates to  a matter  of  procedure : and in the answer recorded  to  that question  it is not implied that the Income-tax Officer  had no power to initiate the proceeding under S. 3 4 ( 1 ) (b). The  third  question raised by the Tribunal  was  defective. The  true scope of the enquiry arising out of  the  argument before the Tribunal was not whether the order of  assessment was proper. but whether the proceeding for re-assessment was properly initiated under S. 34(1) (b).  That is how the High Court  also understood the question.  We therefore  re-frame the question as follows :               "Whether  the  Income-tax Officer was  in  the               circumstances   of  the  case   competent   to               initiate the proceeding under s. 34 (I) (b) of

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             the Indian Income-tax Act for bringing to  tax               the  excessive rebate granted to the  assessee               ?" Section 34(1) (b) of the Indian Income-tax Act, as it  stood at the relevant time, provided               "If-               (a)               (b)   notwithstanding  that there has been  no               omission or failure as mentioned in clause (a)               on  the part of the assessee,  the  Income-tax               Officer  has in consequence of information  in               his possession reason to believe that  income,               profit% or gains chargeable to income-tax have               escaped assessment for any year, or have  been               under-assessed, or assessed at too low a rate,               or  have  been made the subject  of  excessive               relief  under this Act or that excessive  loss               or depreciation has been computed,               he  may in cases falling under clause  (a)  at               any time and in cases falling under clause (b)               at  any time within four years of the  end  of               that  year, serve on the assessee, or, if  the               assessee  is  a  company,  on  the   principal               officer               803               thereof, a notice containing all or any of the               requirements which may be included in a notice               under  subsection  (2) of section 22  and  may               proceed  to  assess or reassess  such  income,               profits  or  gains or recompute  the  loss  or               depreciation allowance; and the provisions  of               this  Act  shall,  so far  as  may  be,  apply               accordingly  as  if the notice were  a  notice               issued under that sub-section It  was held by the High Court of Bombay in P. S.  Subraman- yan,  Income-tax Officer, Companies Circle I (1) Bombay  and Another  v. Simplex Mills Ltd.(1) that "the relief  referred to in s. 34(1) (b) of the Income-tax Act, 1922, can only  be such  relief as is granted to the assessee by reason of  his income, profits and (rains being chargeable to tax.  It  is, therefore, referable to the various kinds of relief afforded to  the  assessee under the Act in respect  of  his  income, profits and gains, such, for instance, as are granted  under ss.  15A, 15C, 49A, 49B, 49C, 49D and 60 of the  Act."  This Court  affirmed the judgment of the Bombay High Court in  P. S.  Subramanyan, Income-tax Officer, Companies Circle I  (1) and Another v. Simplex Mills Ltd. 2 In Simplex Mills(2) case advance  tax  paid by the assessee for the  assessment  year 1952-53  was  found refundable and  the  Income-tax  Officer allowed  interest  on the tax paid under s.  18A(5)  of  the Incometax Act, 1922, as it then stood.  The Act was  amended by the Income-tax (Amendment) Act, 1953, with  retrospective effect  from April 1, 1952, and it was found  that  interest allowed  to  the  Company  was  excessive.   The  Income-tax Officer then initiated a proceeding under s. 34 (1 ) (b)  to reassess the tax on the ground that income for that year had been  under-assessed  and  had  been  made  the  subject  of excessive relief.  The Bombay High Court rejected the  claim of  the  Income-tax Officer, and this Court  held  that  the original  assessment  could  not be reopened  under  s.  34, because  it could not be said either that there  was  under- assessment  of  the  income, or that  excessive  relief  was granted.   In  the light of that judgment,  the  High  Court opined  that  the  claim of the  Department  to  initiate  a proceeding  under s. 34(1) (b) on the -round that  excessive

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relief  was  allowed could not be sustained.  But  the  High Court  held  that  a proceeding for  reassessment  could  be initiated on the ground that income had been assessed at too low a rate.  Counsel for the Company contends that the  High Court was in error in proceeding to enlarge the scope of the enquiry  and  in entering upon a question  which  was  never mooted before the Tribunal. Section  2 of the Finance Act, 1956, provides insofar as  it is material, that : (1)  48 I.T.R. 980. (2) 48 1.T.R. 182 (S.  C.) 804 .lm15 "Subject to the provisions of sub-sections (2), (3), (4) and (5), for the year beginning on the 1st day of April, 1956,- (a)  income-tax  shall be charged at the rates specified  in Part I of the First Schedule......... (b)  rates  of super-tax shall, for the purposes of  section 55   of   the   Indian   Income-tax   Act,   1922   (XI   of 1922)           . . ., be those specified in Part 11 of  the First Schedule................. Part 11 of the First Schedule specifies the rates of  super- tax. Clause D provides :               "In the case of every company-               on     the    whole    of     total     income               Rate                                       Six annas and nine                                          pies in the rupee.               Provided that-               (i)               (ii)  a  rebate at the rate of four annas  per               rupee of the total income shall be allowed  in               the  case  of  any  company  which   satisfies               condition  (a), but not condition (b)  of  the               preceding clause; and               (iii)               Provided further that-               (i)   the   amount   of   the   rebate   under               clause (i) or clause (ii), as the case may be,               of  the preceding proviso shall be reduced  by               the  sum, if any, equal to the amount  or  the               aggregate of the amounts, as the case may  be,               computed as here-               under :-               (a)   on  the  amount  representing  the  face               value of any bonus shares or the amount of any               bonus  issued to its share-holders during  the               previous  year with a view to  increasing  the               paid-up capital, except to the extent to which               such  bonus shares or bonus have  been  issued               out of premiums received in cash on the  issue               of  its shares; and at the rate of  two  annas               per rupee.               805               (b)   in  addition, in the case of  a  Company               referred  to in clause (ii) of  the  preceding               proviso   which   has   distributed   to   its               shareholders  during the previous  year  divi-               dends in excess of six per cent of its paid-up               capital,  not  being dividends  payable  at  a               fixed rate-  on  that part of the said  divi-......at  the               rate  dends  which exceeds 6 per cent.      of  two

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             annas  but does not exceed 10 per                per               rupee.  cent. of the paid-up capital;  on  that  part of the said divi-      at  the               rate of’  dends  which  exceeds 10  per  cent     three               annas  of the paid-up capital;                   per               rupee. Paragraph-D read with s. 2(b) of the Finance Act, 1956 fixes the  rate of super-tax payable by Companies for the  purpose of  s. 55 of the Indian Income-tax Act.  From the  super-tax declared  payable, in certain conditions rebate is  granted, and  that rebate is also related to the total income of  the assessee.  By the second proviso, part of the rebate may  be withdrawn,  if the Company has in the previous  year  issued bonus shares or bonus or has distributed dividend in  excess of six per cent. of its paid-up capital.  The super-tax  and the rebate admissible are both related to the total  income, whereas the reduction of rebate is related to the face value of  the bonus shares or of the value of bonus or the  amount of dividends distributed.  Super-tax payable by a Company is therefore  determined  as a fraction of  the  total  income, reduced by a percentage of the value of the bonus shares  or bonus or dividends distributed. Counsel  for the Company contends that the  expression  "too low a rate" used in s. 34(1) (b) must, having regard to  the context in which the expression is used and in the scheme of the  Indian  Income-tax  Act,  be  regarded  merely  as  the fraction which determines tax liability of the assessee, but when  in  computing  super-tax  liability,  the   Income-tax Officer  has  after determining the amount by  applying  the fraction  to reduce the resultant by reference to  a  factor unrelated  to  total income, it cannot be said that  tax  is charged   at  a  certain  rate.   Counsel  says   that   the Legislature has not used the expression "assessed at too low an amount" but the expression used is "assessed at too low a rate"   therefore   says  counsel  for   the   Company   the jurisdiction  of  the Income-tax Officer will  be  attracted only when the wrong fraction 806 has been applied in the determination of super-tax, and  not when the computation of tax depends on other factors. We  are  unable to accept this contention.   The  assumption that  the  expression "rate" has been used in  s.  34(1)  as meaning -a fraction of total income is, in our judgment, not warranted.   By  the  use of the expression  "rate"  in  the context  in which it occurs, undoubtedly a relation  between the taxable income and the tax charged is intended, but  the relation  need  not  be  of the  nature  -of  proportion  or fraction.  The expression "rate"’ is often used in the sense of a standard or measure.  Provided the tax is computable by the application of a prescribed standard or measure,  though not directly related to taxable income, it may be called tax computed  at a certain rate.  We agree with the  High  Court that the rebate of tax and the reduction of such rebate  are essentially  matters of measure or standards of  rate.   The chief  aim  and  object  of the Finance  Act,  1956,  is  to prescribe  the standard or measure of income-tax and  super- tax  and  it  seems that an assessee escaping  some  of  its provisions,  and failing to pay the full measure -of tax  is assessed at too low a rate. But  the view we have taken is not sufficient to dispose  of the  appeal.  It may be recalled that the  question  arising

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out of the order of the Tribunal was about the competence of the Income-tax Officer, to initiate proceedings under S.  34 (I)  (b).   It  is true that it was not  argued  before  the Tribunal on behalf of the Company that on the notice  served by the Income-tax Officer proceedings for reassessment could only  be  initiated on the ground that income had  been  the subject  of excessive relief, and not on any  other  ground. But  the  Company  did contend that the  initiation  of  the reassessment proceeding was invalid, and the plea, that  the initiation was invalid because the notice was defective  was only  tin  aspect of the plea raised by  the  Company.   The question  is  -originally  raised by the  Tribunal,  and  as reframed by us, includes that enquiry. Counsel for the Company did argue before the High Court that in  a  proceeding to reassess income initiated on  a  notice that  income  has  been subject  to  excessive  relief,  the Income-tax Officer was incompetent to reassess income on the footing that income was assessed at too low a rate, but  the High Court did not record their decision on that plea : they merely  suggested  that it will be open to  the  Company  to raise  the  question when the matter is again taken  up  for consideration.   If however the question arising out of  the order  of the Tribunal was, as correctly pointed out by  the High  Court,  one  about  the  "validity  of  initiation  of proceeding under s. 34(1) (b)", the High Court was bound  to decide  all  aspects of that question  raised  before  them, before  recording an answer : if they did not, the  Tribunal would 807 be powerless to enter upon an enquiry of any other aspect of the question after answer to the question is recorded by the High,  Court.   We are unable to agree with  the  assumption made  by the High Court that because a particular aspect  of the  question  of  law raised was  not  specifically  argued before  the Tribunal, the High Court cannot deal  with  that aspect. We  are,  in the state of the record before  us,  unable  to record  an  answer  to the question, and the  case  must  be remanded  to  the  High  Court  to  determine  whether   the proceedings  were  validly initiated on  the  notice  issued against  the Company.  The notice which was served upon  the Company  is not included in the paper book prepared for  use in this Court.  The notice must of necessity be part of  the record  of the Income-tax Officer, even if it be not on  the record of the Tribunal.  It will be open to the High  Court, in determining the contention raised by the Company, to call for  a supplementary statement of the case relating  to  the form  and  contents of the notice and the  validity  thereof from the Tribunal.  After receiving the supplementary state- ment, if any, the High Court will proceed to dispose of  the third question in the light of the reasons set out by us  in this  judgment.. Costs of this appeal will be costs  in  the High Court. Y.P.                                     Appeal    remanded. SupCI/67-8 808