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PETITIONER: THE COMMISSIONER OF INCOME-TAX,BOMBAY

       Vs.

RESPONDENT: THE JALGAON ELECTRICITY SUPPLY CO.,LTD.

DATE OF JUDGMENT: 04/05/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. KAPUR, J.L.

CITATION:  1960 AIR 1182  CITATOR INFO :  D          1961 SC 699  (8)  R          1968 SC 623  (27)

ACT: Additional   Income-tax-  If  could  be  levied  on   excess dividends,  when there are profits in the  preceding  years- Manner  of calculation of tax-Indian Finance Act,  1949  and 1950, Para.  B,of Part 1 of First Schedule.

HEADNOTE: After  making all allowances and deductions, the  income  of the  assesses  company was finally assessed  for  the  years 1949-50 881 and  1950-51 at Rs. 3,423 and Rs. 3,312  respectively.   The assesses  company had declared dividends of Rs.  46,024  and Rs. 56,326 for the above two years.  Though no profits  were brought  forward  from the previous  years,  the  income-tax officer  applied  the proviso to para.  B of Part 1  of  the Third and First Schedules of the Finance Act, 1949 and 195o, assessed  the difference in each year to additional  income- tax  and  charged income-tax at the rate of annas 5  in  the rupee on the amounts for the two assessment years.  The High Court held that though excess dividends were, in fact, paid, the  absence  of profits from previous  years  rendered  the Finance Act unworkable in this case. The question was if the second proviso to para.  B read with the explanation which sets out the manner of calculation  of the  tax  applied and whether it was the  intention  of  the Finance Act to levy the additional income-tax on the  excess dividends even if there were no profits brought forward from preceding year or years : Held,  that the second proviso to para.  B of Part 1 of  the first  schedule of the Finance Act, 1950, which  corresponds to  the  corresponding paragraph of the Finance  Act,  1949, introduces  a fiction which postulates that there should  be undistributed  profit  of  one  or  more  years  immediately preceding the previous year, that such undistributed profits should be sufficient to cover the amount of excess  dividend actually paid out in the year under assessment, and that the undistributed  profits should not have  been taken  likewise

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to cover an excess dividend of any other previous year.  The excess dividends have first to be connected with the profits of  the  preceding  years and then the tax  borne  on  those profits  has to be found out, and tax is then payable at  an enhanced rate and amounts to the difference between the  tax actually borne by the profits and that demandable under  the paragraph.  Where there are no profits of any preceding year or  years,  the  fiction  wholly fails  and  the  method  of calculation, equally so. Held,  further, that the income-tax law seeks to put in  the net  certain class of income, and can only  successfully  do so,  if it frames a provision appropriate to that  end.   If the law fails and the taxpayer cannot be brought within  its letter, no question of unjustness as such, arises.

JUDGMENT:  CIVIL APPELLATE JURISDICTION :Civil Appeal No. 477 of 1957.  Appeal from the judgment and order dated September 9,  1955,  of the Bombay High Court in Income-tax Reference No. 37/x of  1954.  K.   N. Rajagopal Sastri and D. Gupta, for the appellant.  N.   A. Palkhivala, B. K. B. Naidu and 1. N. Shroff. for the  respondent.  882  1960.  May 4. The Judgment of the Court was delivered by  HIDAYATULLAH,  J.-This appeal is with a certificate  granted  by  the  High  Court against its judgment  and  order  dated  September  9,  1955, in a reference under s.  66(1)  of  the  Indian  Income-tax  Act.   The  Tribunal  had  referred  the  following questions for the decision of the High Court:  " (1) Whether there was any excess dividend declared by  the  assessee Company ?  (2)  Whether   the  assessee  Company  is  liable   to   pay  additional income-tax in respect of the excess dividend paid  by the assessee Company ? "  The   High  Court  answered  the  first  question   in   the  affirmative   and   the  second,  in  the   negative.    The  Commissioner  of Income-tax, Bombay is the appellant  before  us, and the Jalgaon Electric Supply Co., Ltd. (the  assessee  Company) is the respondent.  The facts of the case are simple.  For the assessment  years  1949-50  and  1950-51,  the book  profits  of  the  assessee  Company  were  respectively  Rs. 1,22,469  and  Rs.  76,886.  After   adjustment  of  depreciation  allowance  and   other  deductions,  the income of the assessee Company was  finally  assessed  at  Rs.  3,423 and Rs.  3,312  respectively.   The  assessee  Company declared a dividend of Rs. 46,024  in  the  first  year  and  Rs. 56,326 in the  next.   The  Income-tax  Officer,  applying the Proviso to Para.  B of Part 1 of  the  Third and First Schedules of the Finance Acts, 1949 and 1950  respectively,  assessed  the  difference  in  each  year  to  additional income-tax, and charged income-tax at the rate of  5  annas in the rupee on the amounts for the two  assessment  years.  The assessee Company appealed first to the Appellate  Assistant  Commissioner  and then to the Tribunal.   In  the  Tribunal,  there  was a difference of  opinion  between  the  President and the Accountant Member, the former holding that  the assessee Company was not liable and the latter, that  it  was.   The  case was then referred to a  third  Member,  who  agreed with the President.  The main reason for the decision  of the majority was that there were no profits in the  years  Preceding  the previous year, and that, therefore, the  said  Paragraphs could not, on their terms, operate in

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883  the  circumstances.  The view of the minority was that  even  if  there were no profits, the intention of the Finance  Act  to  levy the additional income-tax on the  excess  dividends  was  perfectly  plain,  and that the  assessee  Company  was  liable.  It may be mentioned at this stage that the decision  of  the  Tribunal  turned entirely upon  the  fact  that  no  profits  were brought forward from the previous  years,  and  that,  therefore, the Paragraphs could not be applied.   The  High Court held that though excess dividends were, in  fact,  paid,  the absence of profits from previous  years  rendered  the  Finance  Act unworkable in this case.   It,  therefore,  accepted  the reasons given by the Tribunal, and upheld  its  decision.  Paragraph  B of Part 1 of the First Schedule of the  Finance  Act, 1950 corresponds to the corresponding Paragraph of  the  Finance Act, 1949.  It is, therefore, not necessary to refer  to  them  separately.   We shall confine  ourselves  to  the  Finance  Act,  1949.  It may also be pointed  out  that  the  circumstances of the two years are also on par, except  that  the   amounts  of  income  and  the  excess  dividends   are  different.  The paragraph reads as follows:  B.   In the case of every company-                                                     Rate   On the whole of total income......      Five annas in                                                  the rupee:  Provided  that in the case of an Indian Company---   (i)  where the total income, as reduced by seven  annas  in  the rupee and by the amount, if any, exempt from income-tax,  exceeds  the  amount of any dividends  (including  dividends  payable at a fixed rate) declared in respect of the whole or  part  of the previous year for the assessment for  the  year  ending  on  the 31st day of March,, 1950, and Do  order  has  been  made  under  sub-section (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 (i)  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  884  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.  For  the  purposes  of the  above  proviso,  the  expression  dividend’  shall have the meaning assigned to it  in  clause  (6A)   of  section  2  of  the  Income-tax  Act,   but   any  distribution  included in that expression, made  during  the  year ending on the 31st day of March, 1950, shall be  deemed  to be a dividend declared in respect of the whole or part of  the previous year.  For  the  purpose of clause (ii) of the above  proviso,  the  aggregate 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 profits 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,-

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(a)  if an order has been made under subjection (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  an-,  was  allowed   on   the  undistributed profits."  The  scheme  of  the  Finance  Act  in  relation  to  excess  dividends  and their chargeability to additional  income-tax  has  been  examined by us in Civil Appeal No.  427  of  1957  decided  today.   We are concerned in this  case  with  the.  application of the second Proviso  885  to the Paragraph, read with the explanations (not socalled),  which  set out the manner of calculation of the tax.  As  we  have  already pointed out in the other case, the  additional  income-tax  is payable if dividends in excess of  the  limit  fixed  by  the  legislature  are paid  in  any  year.   This  additional  income-tax takes note of such tax as might  have  been  paid  on the profits, albeit at a lower rate,  in  any  previous  assessment  year  and  gives  deduction  for  that  amount.  The additional income-tax is payable on the  excess  dividends  calculated at a different rate but  allowing  for  the  tax  already  paid.  For this  purpose,  the  aggregate  amount  of income-tax to be borne by the  -excess  dividends  has to be calculated in a particular manner.  This manner is  indicated in the Paragraph, and it begins by providing  that  the  excess dividend shall be deemed to be out of the  whole  or such portion of the undistributed profits of one or  more  years   preceding  the  previous  year  as  would  be   just  sufficient  to cover the amount of the excess  dividend  and  were  not  likewise taken into account to  cover  an  excess  dividend  of a previous year.  It is then provided that  the  excess dividends which are so deemed to be the undistributed  profits  of  each of the previous years shall be  deemed  to  have borne the tax.  The fictions which have been introduced postulate that there  should  be  undistributed  profits  of  one  or  more  years  immediately   preceding   the  previous  year,   that   such  undistributed  profits  should be sufficient  to  cover  the  amount of excess dividend actually paid out in the  previous  year  under assessment, and that the  undistributed  profits  should  not  have  been taken likewise to  cover  an  excess  dividend  of  any other previous year.  Where there  are  no  profits  of any preceding year or years, the fiction  wholly  fails and the method of calculation, equally so.  We do  not  agree with the argument of the Commissioner that the fiction  can  be  given effect to, even if the profits  of  preceding  years  do  not  exist.   The  argument  suggests  that   the  chargeability  of excess dividends to additional  income-tax  can  arise  under the terms of the Paragraph  even  in  such  circumstances.   But a plain reading of the Proviso  clearly  shows that the excess  115  886  dividends have first to be connected with the profits of the  preceding years and then the tax borne on those profits  has  to be found out, and the tax is payable at an enhanced  rate  and amounts to the difference between the tax actually borne  by  the profit,-, and that demandable under  the  Paragraph.  The High Court repelled the argument of the Commissioner  in  much  the  same way as we have done, and we  entirely  agree  with the, reasons given by it.  The  Accountant  Member, whose decision was in  a  minority,

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gave  two  reasons.  The first was that  "  the  explanation  provides  for  the  determination of the years  out  of  the  profits  of  which the excess dividend has come ",  and  the  second  was that " in order to escape the liability  imposed  by Cl. (ii), the company must prove that the excess dividend  has  borne  tax 5 annas in the rupee as it is only  in  that  event  that the additional tax payable will be nil ".  These  reasons  were  also put before us for acceptance.   We  are,  however,  unable to agree.  The fiction cannot  be  whittled  down  in  the  manner suggested in the  first  reason.   The  fiction  incorporates  within  itself  not  only  what   the  Accountant Member says but also a mode of calculation, which  is not a part of the fiction.  It is the mode of calculation  which cannot be given effect to, though we would go  further  and say that the fiction itself fails because no profits  of  preceding  years at all existed. The second reason given  by  the Accountant Member assumes the liability to pay tax,  and  that  is not permissible, because that is the fact in  issue  to  be decided.  That fact can only be decided if the  Para-  graph  can  be made applicable to the present case  and  not  otherwise.   We  cannot  start  with  the  assumption   that  additional income-tax on excess dividend has got to be paid,  whether the Paragraph applies or not.  That would be begging  the very question to be decided.  The  Commissioner also suggested numerous  modifications  of  the  language  to  give  effect to  the  intention  to  levy  additional income-tax on excess dividends, and pointed  out,  as  did  the Accountant Member, that it would be  unjust  to  allow  an escapement of tax, where there were no profits  of  preceding years to set off  887  against the excess dividends.  In our opinion, the  question  of  modification  of  the  language  cannot  arise  in   the  circumstances  of the case.  Our reasons have been given  in  Civil  Appeal No. 427 of 1957, decided to day, and  we  need  not go over the ground against There is also no question  of  unjustness involved.  The Income-tax law seeks to put in the  net  certain class of income, and can only  successfully  do  so, if it frame a provision appropriate to that end.  If the  law  fail  and the tax-payer cannot be  brought  within  its  letter  no  question  of unjustness as  such,  arises.   The  answers  given by the High Court to the two  questions  were  correct in the circumstances of the case.  In the result, the appeal fails, and will be dismissed  with costs.  Appeal dismissed.