1. This is a reference at the instance of the assessee under s. 256(1) of the I.T. Act, 1961, and in the reference the following question has been referred to us :
'Whether deduction of tax on inter-corporate dividends in the hands of the assessee has been properly allowed under the provisions of section 85A of the Income-tax Act, 1961 ?'
2. The assessee is a private limited company and we are concerned in the reference with the assessment year 1965-66. The assessee derived income from business, dividend and capital gains. The question arose of the relief available to the assessee-company under s. 85A. Section 85A reads as follows :
'85A. Deduction of tax on inter-corporation dividends. - Where the total income of an assessee being a company included any income by way of dividends received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for any assessment year of so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of twenty-five per cent. thereof.....'
3. The total dividend income of the assessee was Rs. 6,35,408, out of which Rs. 16,836 represented dividends which were exempt from tax under s. 84 of the I.T. Act, 1961. While working out the relief under s. 85A, the ITO first determined the average rate of tax on the total income in the following manner :
Rs. Rs.Business income 9,46,980 Tax at 60% 5,68,188Dividend income 6,35,408 Tax at 60% 3,81,245Capital gains 2,63,134 Tax at 30% 78,940---------- ---- ---------18,45,522 10,28,373Less : rebate onDonations 19,000----------Balance tax 10,09,373Average tax 54.69%-----------
4. The ITO calculated the deduction available to the assessee under s. 85A at Rs. 1,83,654.02. The calculations were made on the basis of 29.69% of the total dividend income excluding the exempted dividends, i.e., 29.69% of Rs. 6,18,572. The figure of 29.69% was arrived at, being the difference between the average rate worked out on the total income and 25% stipulated by s. 85A.
5. The assessee was not satisfied with the manner in which the relief had been granted to it and, therefore, preferred an appeal to the AAC. The assessee drew the attention of the AAC to the legislative history of the provision and in particular to the aims and objects of the bill at the time when s. 85A was introduced in the I.T. Act. The aims and objects were indicated in the following words :
'Clause 22 seeks to insert a new section 85A in the Income-tax Act to secure that income from dividends received by one company from another Indian company or a company which had made the prescribed arrangements for the declaration or payment of dividends within India will bear income-tax at the rate of 25%. Further, in the case of a company which has not made the prescribed arrangement for the declaration and payment of dividends within India and which receives dividend from an Indian company in which the public are not substantially interested and which is wholly or mainly engaged in certain priority industries, the income from dividends will bear income-tax at the rate of 15%.'
6. It was submitted that s. 85A was required to be interpreted in such a manner as would be consistent with the declared aim and object of the provision and which would also be consistent with the previous position existing under s. 99(1)(iv). Such dividends were exempt from payment of super-tax and were liable to pay income-tax at the rate of 25% only.
7. According to the AAC, although the aims and objects above set out did support the interpretation which was canvassed for by the assessee, the statutory provision was quite clear. He found no ambiguity in the wording of the section and fully upheld the computation of the ITO.
8. The assessee carried the matter in further appeal to the Tribunal. Before the Tribunal, learned counsel for the assessee emphasised the wording of the section and in particular the following words 'average rate of income-tax on the income so included'. It was contended that it was the average rate of income-tax on the inter-corporate dividends so included in this case that should be the average rate to be considered and not the average rate on the total income as was calculated by the ITO. It was submitted that the average rate of tax on dividends for the assessee could be worked out at 58.65% after allowing for the tax exempted dividend of Rs. 16,836. The manner of this calculation is indicated at page 32 of the statement of case and is to be found in para. 3 of the judgment given by the Judicial Member of the Income-tax Appellate Tribunal. Before the Tribunal once again the aim and intention of the legislature was emphasised. The arguments advanced on behalf of the assessee did not find favour with the Tribunal. In the opinion of the Tribunal, the use of the words 'average rate of income-tax' cannot be with reference to dividend income since the entire dividend income was taxed in the hands of the company receiving the same at a uniform rate applicable in the case of that company. Accordingly, the Tribunal dismissed the appeal upholding the calculations made by the ITO which had been earlier confirmed by the AAC. It is from this decision of the Tribunal that the reference has been made to this High Court.
9. Learned counsel for the assessee first invited out attention to the statutory position which existed prior to the enactment of s. 85A. Before the introduction of s. 85A inter-corporate dividends (provided the necessary conditions were satisfied) were exempt from the levy of super-tax and this was brought about by the provisions contained in s. 99(1)(iv). By the Finance Act, 1965, the said provisions were omitted; this was in pursuance of the policy to abolish super-tax and introduce one composite income-tax. It is in consequence of this policy that s. 85A was introduced in the statute. Mr. Patil on behalf of the assessee emphasised that when s. 99(1)(iv) was in force on the statute book the assessee-company was liable to pay income-tax at the rate of 25% only on inter-corporate dividends received by it. In this connection, he emphasised the aims and objects, which we have earlier extract, and he further emphasised that in view of the previous legal position and the declared aims and objects, s. 85A was required to be construed in the manner in which counsel for the assessee desired it to be construed before the Tribunal. Mr. Joshi on behalf of the revenue submitted that there was no warrant for considering the average rate on inter-corporate dividends and he drew our attention to the definition of the terms 'average rate' to be found in s. 2(10) of the I.T. Act, 1961. Section 2 is the definition section for the purpose of the said Act and provides that the various definitions contained therein are to be applied unless the context otherwise requires. Under s. 2(10), 'average rate of income-tax' means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income. Now, the first question to be considered is whether there is anything special in the context of s. 85A which requires that this definition of average rate of income-tax is not to be applied to the section. According to Mr. Patil, since the words 'average rate of income-tax' in s. 85A are followed by the words 'on the income so included', the definition which requires the average rate to be calculated on the basis of the total income will be required to be ignored and averaging will have to be done on the income-tax on the inter-corporate dividend income only. In our opinion, this reading of the provision, viz., of s. 85A, is not proper. As has been observed by the Tribunal, prior to the introduction of s. 85A there was a complete provision for exemption from super-tax of such income, which meant only that such income was liable to income-tax only. Now, instead of providing for a charge of tax on such income at a reduced rate what s. 85A has provided for is a deduction. The question then is how that deduction is to be calculated This is a deduction from the income-tax which the assessee is liable to pay. The deduction which is available under the phraseology employed by the legislature is 'so much of the amount of income-tax' and for calculating the deductions at the average rate it is first required to be ascertained. After this average rate has been calculated it has to be applied to the income so included, i.e., the intercorporate dividend income and the deduction allowed by s. 85A is equivalent to the difference between this average rate and 25% on the inter-corporate dividend. Once the provisions of s. 85A are split up in this manner, then it will have to be conceded that the meaning of the statutory provision is plain and unambiguous. Mr. Patil submitted for our consideration an alternative plea, viz., that if the phraseology employed by s. 85A was not clear and could be regarded as equivocal, it was required to be given that interpretation which was favourable to the assessee and which would make available to the assessee the full relief on inter-corporate dividends as was available prior to the introduction of s. 85A. This certainly is a proper rule of interpretation. But the difficulty in applying such rule is that, in our opinion, bearing in mind the definition of 'average rate of income-tax' to be found in s. 2(10), there is no warrant for holding that the meaning is not clear or that the phraseology is ambiguous or equivocal.
10. In this view we are fortified by the observations to be found in the decision of the Calcutta High Court in ITO v. Raleigh Investment Co. Ltd. : 102ITR616(Cal) . It has been observed by a Division Bench of the Calcutta High Court while allowing the appeal from the decision of a single judge of that very court that s. 85A provided for a deduction from the general average rate applicable and did not prescribe any rate of tax for the dividend income. The relevant observations are to be found at page 620 of the report. It is perceived that the average rate which has been worked out is the average rate as defined in s. 2 on the total income and not some averaging done from the fixed flat rate on dividend income. This is in accordance with our view of the statutory provision also. If that is so, it will have to be held that the calculations made by the ITO were correct and the deduction has been properly allowed to the assessee as required by s. 85A.
11. Accordingly, the question referred to us is answered in the affirmative and in favour of the revenue.
12. The assessee will pay to the Commissioner the costs of this reference.