S.K. Desai, J.
1. In this reference we are concerned with the assessment of M/s. Swastik Oil Mills Ltd., Bombay (hereinafter referred to as 'the assessee'). The present respondent is the successor in law of the assessee. The assessee was carrying on the business of manufacturing and selling refined groundnut oil, hair oil, soap, detergent, etc. The relevant assessment year involved in this reference is 1961-62. The question which arose for determination before the revenue authorities was whether the assessee was entitled in that year to a relief under s. 49BB of the Indian I.T. Act, 1922, on the dividend of Rs. 1,82,250 declared by it for the financial year ended March 31, 1960. The relief claimed was on the footing the said dividend was wholly declared out of the profits already charged to income-tax before April 1, 1960.
2. During the year under consideration, the assessee paid a dividend at Rs. 6 per share aggregating to Rs. 1,82,250. The provision for the payment of dividend was made in the company's accounts for the year ended March 31, 1960. As per this account to be found along with the balance-sheet, the total profits were shown at Rs. 19,52,096. After making several appropriations, as will be indicated hereafter, the available balance was shown as 'nil'. In view of these appropriations and the nil balance, no provision was made for taxes on income and it was expressly mentioned that the dividend of Rs. 6 per share would be paid from the serve fund accumulated from the profits of the years prior to 1959-60. That this in fact was being done is also apparent from Sch. 'A' to the balance-sheet which shows a reduction in the reserve fund from Rs. 8,48,437 to Rs. 6,66,187, the difference being the transfer to profit and loss account of Rs. 1,82,250, for purposes of payment of dividend.
3. It may be mentioned that during the assessment under appeal, i.e., 1961-62, there was a change in law. Prior to this year, under s. 49B the income-tax paid by the company on its profits was deemed to be paid by the company on behalf of its shareholders and the shareholders were given credit in their assessments in respect of income-tax so deemed to have been paid by the company on the profits out of which the dividend was paid. For the assessment year 1960-61, this system was changed and the old s. 49B deleted. As a consequence no credit was given to the shareholders in respect of income-tax paid by the company on its own profits. This change, however, created an anomalous situation in respect of those cases where a company earned profits in an assessment year prior to 1960-61, but declared dividends out of the same after the introduction of the new scheme and deletion of s. 49B. In such a case, the company has been taxed at a higher rate at the time when the profits were earned, but since the dividends were declared after s. 49B. stood deleted, the shareholders received no credit for the tax paid by the company when their assessments were made. In order to give some relief in respect of such cases, s. 49BB was introduced under which the shareholders got no credit for the tax payable by the company but the company was given relief to the extent of 10% of the dividends paid out of the profits actually charged to tax in the assessment year 1960-61 or in the earlier years. It is in accordance with these statutory provisions that the assessee-company made a claim for relief submitting that its profits in the assessment year 1960-61 (which was the year pertaining to which the dividend was declared) were nil and that the said dividend of Rs. 1,82,250 was paid out of the profits actually charged to income-tax at a higher rate in the preceding assessment year. The ITO in considering whether credit under s. 49BB was allowable, considered whether the company had distributable income for the assessment year 1960-61, has to be worked out by Expln. II to s. 49BB and his working, to be found in the portion of the order reproduced at pages 17 and 18 of the paper book, the distributable income worked out to Rs. 13,58,908. In this view, the dividend of Rs. 1,82,250 is deemed to have come out of this distributable income (obviously in accordance with Expln. I to s. 49BB); therefore, in the opinion of the ITO the company was not entitled to any credit under s. 49BB. It may be mentioned that in adding Rs. 13,58,908 to the assessed income which was nil, and regarding the resultant figure as the distributable income, the ITO had ignored the provision of Rs. 11,77,364, made by the company for this year to its machinery and building replacement fund, being part of the initial and additional depreciation of the earlier years hitherto not provided. When the matter was carried in appeal to the AAC, he was of the opinion that the ITO was not justified in ignoring this provision in the profit and loss account. In this view, this had to be taken into account and if this was done, the distributable income as calculated in accordance with the Explanation to s. 49BB would amount to Rs. 1,81,644. The result was that dividend to the extent of Rs. 706 was not covered in the view of the AAC by the distributable income of 1960-61, and that would be the amount of dividend on which the company was entitled to relief under s. 49BB. This was on the further footing that the ITO was required to ascertain that this was paid out of income subject to tax in the earlier year. A number of further submissions made by the company in its appeal before the AAC were not accepted by the AAC. The matter was thereafter carried before the Tribunal by the assessee, the department having accepted the conclusions and findings of the AAC. Before the Tribunal, it was submitted that the provisions of the Explanation to s. 49BB were applicable only in a case where the assessee had a total income in the previous year and as in this case there was no total income in the previous year, there was no question of the application of the said Explanations. This submission made by counsel on behalf of the company was not accepted by the Tribunal. A number of authorities were cited at the Bar in support of this submission but they were held as not applicable to the provision under consideration, namely, s. 49BB.
4. It was submitted further by counsel appearing on behalf of the assessee-company before the Tribunal that the unabsorbed depreciation as per the record was more than the unabsorbed depreciation as per the books of account of the assessee and that it was accordingly clear that whatever allowance in respect of depreciation was allowed by the department for the purposes of assessment was actually debited by the assessee to the profit and loss account in the earlier years and as such there was no allowance allowed by the department for the purposes of income-tax which was not debited by the assessee to its profit and loss account. Accordingly, it was submitted that the application of Expln. II was unwarranted. As an aspect of this very argument it was submitted that the context in which s. 49BB was enacted would clearly go to show that the reference to the profit and loss account is not to the profit and loss account of the previous year only but to the profit and loss account of all the earlier years. It was urged that if this view is accepted, the assessee would be able to satisfy the department that the allowances admitted by the department for the purpose of assessment were less than what was provided for by the assessee in its profit and loss account.
5. On the other hand, the departmental representative submitted before the Tribunal that on a true construction of s. 49BB and the Explanation thereto, one had to look at the assessment and profit and loss account only for the previous year, i.e., one single year, and the position of accounts or assessment of any earlier years would have no bearing on the calculation of distributable income for the assessment year in question. The Tribunal then considered the statutory provisions and observed :
'However, we are of the opinion that in section 49BB the reference to 'profit and loss account' is not only reference to profit and loss account of the previous year but reference to the profit and loss account of the earlier years and that the total allowance debited to the profit and loss account of the assessee right from the inception of the company being in excess of the actual allowances made in computing the taxable profits and the relief as claimed should be given to the assessee.'
6. This was because according to the Tribunal the provisions of Explns. I and II are merely illustrative and would not take away or detract from the generality of the provisions enacted in s. 49BB. The Tribunal, accordingly, directed the ITO to check the figures given by the assessee and find out whether the same were correct. He was further directed that if what had been urged was correct, necessary relief should be given to the assessee. It may be mentioned that subsequently there as a miscellaneous application at the instance of the department for correction, inter alia, of the operative order, but the same was rejected as misconceived.
7. The Tribunal has referred to following question of law to us :
'Whether, on the facts and in the circumstances of this case, it could be held that the assessee was entitled to relief under section 49BB of the Indian Income-tax Act, 1922, and if so, to what extent ?'
8. If the order of the Tribunal is properly perused, it would be found that the Tribunal has accepted the assessee's contention that for the purpose of considering the calculation of distributable income for Expln. II total disallowances debited to the profit and loss account of the assessee right from the inception of the company and the actual allowances accepted by the department should be considered and not those for the assessment year 1960-61 only. According to the assessee, the total amount of such allowances, i.e., depreciation and development rebate allowed and set off against profits in the assessments up to 1960-61 aggregated to Rs. 54,74,722, whereas the aggregate amount debited in the profit and loss accounts up to 1960-61 was Rs. 55,65,555. In other words, there was an excess and not a shortfall which would be added to the assessed income. Thus, according to the assessee, Expln. II would not operate to inflate the distributable income. It is clear that the Tribunal approved of this approach and it is on this footing it has indicated that the assessee would be entitled to relief under s. 49BB after the ITO checked the figures submitted by the assessee.
9. The Commissioner in this reference has challenged the correctness of the approach of the Tribunal. On the other hand, the learned counsel for the assessee has submitted that the Explanation was not available to the department to cut down the scope of the relief granted by s. 49BB(1) and (2). He has submitted in the further alternative that in any case the facts of the present case did not warrant the application of the Explanations in view of the clear factual position that there was no income for the relevant year from which the dividend could have been declared. Finally, he has justified the direction of the Tribunal to give relief to the assessee on the footing that the Tribunal was right in holding that what was required to be considered are not the assessment and provision for one year but for all the years right from the inception of the company up to the previous year. All these aspects will arise and will be required to be gone into in this reference as the entitlement of the assessee to the relief under s. 49BB would depend upon the proper interpretation to be put on its provisions.
10. Section 49BB has two sub-sections and there are two Explanations. It read as follows :
'49BB. Relief to company in respect of dividend paid out of past taxed profits. - (1) Where in respect of any previous year relevant to the assessment year commencing after March 31, 1960, an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, pays any dividend wholly or partly out of its profits and gains actually charged to income-tax for any assessment year ending before April 1, 1960, and deducts tax therefrom in accordance with the provisions of section 18, credit shall be given to the company against the income-tax, if any, payable by it on the profits and gains of the previous year during which the dividend is paid, of a sum calculated in accordance with the provisions of sub-section (2), and were the amount of credit so calculated exceeds the income-tax payable by the company as aforesaid, the excess shall refunded.
(2) The amount of income-tax to be given as credit under sub-section (1) shall be a sum equal to ten per cent. of so much of the dividends referred to in sub-section (1) as per paid out of the profits and gains actually charged to income-tax for any assessment year ending before April 1, 1960.
Explanation I. - For the purposes of this section, the aggregate of the dividends declared by a company in respect of any previous year shall be deemed first to have come out of the distributable income of that previous year and the balance, if any, out of the undistributed part of the distributable income of one or more previous years immediately preceding that previous year as would be just sufficient to cover the amount of such balance and as has not likewise been taken into account for covering such balance of any other previous year.
Explanation II. - The 'distributable income' of any previous year shall mean the total income assessed for that year as reduced by -
(i) the amount of income-tax and super-tax payable by the company in respect of the said total income;
(ii) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income;
(iii) the amount paid to any charitable institution or fund to the extent to which it is exempt from tax under section 15B; and
(iv) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 (X of 1949),
and as increased by -
(a) any profits and gains or receipts of the company not included in its total income; and
(b) any amount attributable to any allowance made in computing the profits and gains of the company for purposes of assessment, which the company has not taken into in its profit and loss account.'
11. Before interpreting the provisions it may be stated that it appears to be an admitted position that the dividends which were approved at the 29th annual general meeting of the assessee-company held on November 24, 1960, and paid to its shareholders thereafter could not in fact have been paid from the available income of the assessee-company for the financial year ending March 31, 1960. Mr.Kolah on behalf of the assessee drew our attention to the following statements appearing in the directors' report along with profit and loss account for 1959-60 :
'Your directors are glad to report that the working of the company has been satisfactory. The profits of the year after meeting all charges subject to depreciation for the year and managing agents' commissions are determined at Rs. 19,52,096 compared to Rs. 15,95,187 in the previous period of 15 months. Your directors have made the following appropriations : Rs. Rs.Profits as per profit & loss account 19,52,096Appropriations therefrom:To depreciation for the year 3,01,492To agent's commission 1,67,169To development rebate reserveFor the year 1,19,083For the earlier years 1,86,988To machinery & buildingreplacement fund (being part of theinitial and additional depreciationof earlier years hitherto notprovided) 11,77,364 19,52,096---------Balance NIL---------
12. No provision has been made for taxes on income as the company does not anticipate tax liability on account of the unabsorbed depreciation of earlier years which will be claimed against the profits of the year.
13. Your directors recommended payment of dividend of Rs. 6 per share subject to tax. For this purpose, your directors have transferred to the appropriation account of sum of Rs. 1,82,250 from the reserve fund accumulated from the profits of the year prior to 1959-60.
14. With a view to facilitate claiming tax benefit permissible to the company under section 49BB of the Indian-tax Act on payment of dividend from the taxed profits of the years prior to the year 1959-60, your directors have marked various reserves as either A or B indicating respectively reserves created out of taxed profits or untaxed profits. Your directors have also grouped together reserves represented by machinery replacement fund, building replacement fund and repairs and renovation account, as the purpose for which these reserves were created has ceased to exist. The consolidated reserves have now been shown under the heading 'Machinery and Building Replacement Fund' and having been created out of the untaxed profits, this fund is also marked 'B '.'
15. Mr. Joshi appearing on behalf of the Commissioner has not disputed that as a matter of fact the dividend amount of Rs. 1,82,250 was paid from the reserve fund which must have been created from earlier accumulated profits, but his submission was was not entitled to relief under s. 49BB by reason of the deeming provisions contained in Expln. I to s. 49BB read together with Expln. II thereof. Before going to these provisions, it may be mentioned further that there is no dispute that in the income-tax assessment for his year, i.e., assessment year 1960-61, the assessee was allowed depreciation and development rebate in the aggregate figure of Rs. 19,66,471. It may be mentioned further that out of the aggregate depreciation allowed, viz., Rs. 18,68,737, Rs. 3,01,492 was depreciation for the year and balance of the depreciation allowed was part of the unabsorbed depreciation of earlier years which had been carried forward. It may be further mentioned that after such provision unabsorbed depreciation of the assessment year 1958-59 amounting to Rs. 3,37,533 was allowed to be carried forward in this assessment year. It was on these figures that the AAC by his order held that the aggregate amount of depreciation and development rebate provided in the balance-sheet came to Rs. 17,84,927 made up of depreciation for the year Rs. 3,01,492, development rebate reserve for the year Rs. 1,19,083, development rebate reserve for the earlier years Rs. 1,86,888 and machinery and building replacement fund (being part of the initial and additional depreciation of earlier years not provided) Rs. 11,77,364. As the allowance made in the assessment came to Rs. 19,66,471 he held that there was a difference of Rs. 1,81,644 which was required to be added for the purposes of computation of distributable income of the assessee for the year 1960-61 in accordance with the provisions of Expln. II to s. 49BB. It was held further that if the distributable income for the said previous years was in accordance with Expln. II calculated at Rs. 1,81,644 then by reason of Expln. I, the dividend declared shall be deemed to have first come out of this distributable income (to the extent thereof) and only the balance amount, viz., Rs. 706, may be deemed to have come out of the undistributed part of the distributable income for the earlier years which would mean that the assessee would be entitled to relief only in respect of this portion of the dividend. It is in connection with this application of the Explanation that the matter has been referred to the High Court for its opinion in this reference.
16. On behalf of the assessee, three principal submissions were advanced for our consideration. It was submitted in the first place that the case of the assessee falls squarely within sub-ss. (1) and (2) of s. 49BB and the scope of the relief to which the assessee was entitled by these provisions could not be said to be cut down or taken away by reason of the application of the Explanation in the manner in which it was done. As an aspect of this very argument it was urged that these were designated as Explanations and if the provisions of the two sub-sections and the application thereof to the actual facts of the case were quite clear and did not require or need any explanation, there would be no warrant or justification for resorting to the same. This approach, in our opinion, is not warranted by the statutory provisions under consideration. Section 49BB, i.e., both the sub-sections together with the two Explanations, represent an integrated statutory provision for granting and calculating certain relief under the peculiar situation which had arisen in that year by reason of the change in law and deletion of s. 49B. It is impossible to hold that the statutory provision contained in the Explanations cannot be read to detract from or take away or circumscribe the relief granted by the two sub-sections or to accept the argument that if the sub-sections and the application thereof were clear, there was no cause to refer to any explanatory provisions.
17. In its order, the Tribunal itself has clearly realised the nature of this integrated scheme. The basis for the relief is indicated in sub-s. (1) of s. 49BB. The extent of the relief is provided for in sub-s. (2) of s. 49BB. However, Expln. I introduces a legal fiction or a deeming provision which has to be applied to all claims made for relief under s. 49BB and for the purpose of applying the legal fiction contained in Expln. I a method of calculation of distributable income is provided for in Expln. II. The result of this integrated scheme may result in an assessee who has paid dividends out of profits taxed previously at higher rates, being unable to claim relief even to the limited extent as provided by s. 49BB(2); but such considerations are not relevant inasmuch as it must be held that the relief had been granted by Parliament only to such assessees who qualify and satisfy all the requirements of s. 49BB including the Explanations. As a matter of fact, the deeming provisions in Expln. I and the method of calculation of distributable income in Expln. II have been provided for to obviate difficulties in calculations and choosing between the alternative contentions as are indicated by the Tribunal in its order. It is, therefore, not possible to accept the first submission advanced on behalf of the assessee that if its case fell squarely within the two sub-sections of s. 49BB, there was no warrant for considering the Explanation further. Similarly, the second argument also advanced for our acceptance, viz., that in the case of an assessee whose income admittedly for the year under consideration, i.e., assessment year 1960-61, was nil, there could not be a national higher distributable income from which the dividends could have been deemed to have been distributed. This, in our opinion, is begging the question. The fiction enacted by Expln. I and the method of calculation provided in Expln. II are in sense artificialities which may create a situation which may not exist in fact. But this is the very nature and object of a legal fiction. A state of affairs which does not exist in actual reality is deemed to exist by operation of such legal provision. Expln. I read together with Expln. II would bring about such a situation in the case of assessee who would be deemed in law to have some distributable income which would disentitle them to the full relief which would otherwise be available to them, the fiction being that they have distributed dividends out of distributable income (which in actual fact is non-existent in the previous year) and to that extent be deemed to have not distributed the same out of income previously taxed at higher rates.
18. This brings us to a consideration of the third and final aspect of the matter which seems to have found favour with the Tribunal. In considering the provisions of Expln. II the Tribunal held that the words 'any amount attributable to any allowance made in computing the profits and gains of the company for purposes of assessment which the company has not taken into account in its profit and loss amount 'should be read in a manner not restricted to the allowance made in the assessment and taken into the account in its profit and loss account for the previous year, but for all the years of the company right from its inception up to the previous year'. This interpretation appealed to the Tribunal and the reason for it was quite obvious. If the allowance in the assessment and the provision in the balance-sheet for one year, i.e., assessment year 1960-61, alone were considered, then there was notional or fictional distributable income for the year since the allowance by way of depreciation and development rebate in the assessment was more than provided for in the balance-sheet. This would result in the assessee-company losing relief under s. 49BB to the extent of such fictional distributable income. On the other hand, it was contended before the Tribunal that if such allowance and provision is considered right from the inception of the company, there would be no excess allowance in the assessments but rather an excess provision in the balance-sheets which would not result in any increase in the notional or fictional distributable income. To give this interpretation, it may result in the present assessee's case being fairly and equitably considered, but would, in our opinion, render the statutory scheme under consideration totally unworkable. Under Expln. I a deeming provision is enacted under which the dividends declared are deemed to have come our of the distributable income of the previous year. It is the distributable income of that previous year which is required to be considered and the computation of that distributable income, i.e., distributable income of that previous year which is provided for in Expln. II. In our opinion, the reductions and the increases postulated by Expln. II pertain only to the previous year which is made clear by the opening words of Expln. II itself and when properly understood in this context and read in conjunction with the opening words of Expln. II, it would be quite clear that the calculations of increase provided for in (b) which we have extracted earlier are to be made with reference to the allowance given in the assessment and the provision made in the balance-sheet for that previous year only. If read in the manner approved by the Tribunal, Expln. II would complicate the calculation of distributable income instead of simplifying it.
19. It was also urged by Mr.Kolah that Expln. I and the legal fiction incorporated therein would come into play only if dividends were partly declared out of profits and gains charged to income-tax for any assessment year ending before April 1, 1960, and partly out of earlier taxed profits which part was not eligible for relief. For the purpose of such a limited application of Expln. I he sought reliance on the phraseology employed therein, viz., the aggregate of the dividends declared. It was also submitted that there would be reason for applying the Explanation only in cases where the actual position was not clear and the company has declared a dividend without specifying whether it was declared out of profits previously taxed at high rates or out of profits earned during the previous year taxed. We do not find these as proper reasons to restrict the application of the Explanations to either of such suggested cases. In our view, Expln. I would apply to all cases. It is a legal fiction enacted to be made applicable in all circumstances in which relief under s. 49BB is claimed. In our view, there is no warrant for any restricted application of the provisions in the manner suggested by counsel for the assessee.
20. As indicated earlier, on the facts there is not much dispute. It appears to be the admitted position that the dividend was declared and paid out of the profits earned during the earlier years inasmuch as there was no available income for distribution during the year 1960-61. It also appears to be the agreed position that there is a difference between the amount allowed in the assessment for 1960-61 by way of depreciation and development rebate and that provided for in the balance-sheet for the year. It is the difference and the short provision in the balance-sheet, which, in our opinion, brings in its wake the Expln. II and inasmuch as by reason thereof a distributable income is discovered to the extent of Rs. 1,81,644, to that extent the dividend paid would be deemed to be paid out of such fictional distributable income and only the balance of Rs. 706 would qualify for relief under s. 49BB. This may be deemed to be the answer to the question referred to us.
21. The matter was res integra and in the special circumstances of the case the parties are directed to bear their own costs.