1. This reference also raises a question with regard to the payment of additional income-tax assessed on the basis of excess dividend paid by the assessee company. The facts of this reference are different from the facts of the two references which we have just decided : (I.T.R. 31 of 1954 and R.A. No. 56 of 1954). In this case the assessment years are 1949-50 and 1950-51, and the company had a total income with regard to each of these two years. In the first year the income was Rs. 3,423, and for the next year Rs. 3,312 and in the two years the company declared dividends in 1949-50 Rs. 46,084 and in 1950-51 Rs. 56,326 : and therefore according to the computation under the proviso to Part B of the Finance Act there was a declaration of excess dividend to the extent of Rs. 45,600 in the case of the assessment year 1949-50 and Rs. 53,360 in the assessment year 1950-51, and the taxing authorities wanted to impose an additional tax at the rate of five annas a rupee on both these amounts. The Tribunal upheld the contention of the assessee that they were not liable to this additional tax and the Commissioner has come on this reference.
2. The most important and salient fact which must be borne in mind in deciding this reference is that this company had no undistributed profits in the years preceding 1949-50 or 1950-51. What the company really did was that instead of taking these amounts to depreciation which was a permissible deduction under the Income-tax Act, it distributed the profits as dividends. The other important and significant fact is that neither of these two amounts of Rs. 45,600 or Rs. 54,360 was liable to any tax, because, as we have just pointed out, these amounts were permitted by the income-tax authorities as permissible deductions for the purpose of depreciation. In other words, what the company did was to pay dividends out of income which was not liable to tax, and the question is whether under these circumstances additional income-tax within the meaning of the proviso can be imposed upon the company.
3. When we turn to clause (ii) of the proviso to paragraph B of the First Schedule to the Finance Act of 1951, which deals with this additional income-tax, which, as we pointed out in the last references (I.T.R. No. 31 of 1954 and R.A. No. 56 of 1954), is really imposed by way of penalty, the additional income-tax, according to this clause (ii), is equal to the sum, if any, by which the aggregate amount of income-tax actually borne by such excess falls short of the amount calculated at the rate of five annas per rupee on the excess dividend. Therefore, the scheme is that the profits represented by the excess dividend, which, as we will presently point out, shall be deemed to be out of undistributed profits of prior years, were liable to tax, that they were in fact taxed, that they paid tax at a certain rate, and inasmuch as that rate fell short of five annas per rupee, the difference between the rate at which the tax was actually paid and the rate of five annas per rupee should now be paid by the assessee company by way of additional tax. This provision cannot possibly apply to the assessee company on the facts before us.
4. The Advocate-General wishes to say that the excess dividend was in fact paid out of profits which have borne no tax, and therefore they must pay the full amount of tax at the rate of five annas per rupee. Whatever validity this argument may have is destroyed when we turn to the mode of computing this additional tax as laid down in the Act itself; and the mode is that for the purposes of clause (ii) of the above proviso, the aggregate amount of income-tax actually borne by the excess dividend shall by determined as follows :
'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.'
5. Therefore, there is a legal fiction introduced, which fiction must be given effect to in computing the additional income-tax and this fiction cannot come into play if there are no undistributed profits of one or more years immediately preceding the previous year. The reasons for introducing this fiction was that certain profits in the past years bore less tax because the company did not pay any excess dividend and it conformed to the ceiling laid down by the Legislature, but when in subsequent years the company departed from the ceiling the Legislature asked the taxing authorities to assume that what was being paid as dividend was out of those profits which had been kept back or kept in reserve. But, as we have just pointed out, this fiction has no scope. It cannot have any play in a case where there are no post profits which were kept back or kept in reserve.
6. Therefore, in our opinion, the Tribunal was right when it came to the conclusion that the assessee company was not liable to pay any additional tax in the circumstances of this case.
7. The answer to question No. 1 will be in the affirmative and the answer to question No. 2 will be in the negative. The Commissioner to pay the costs.
8. Reference answered accordingly.