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Hoechst Dyes and Chemicals Ltd. Vs. K.N. Anantharama Ayyar, Commr. of I.T., Bombay City-v, Bombay and Others - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberMiscellaneous Petition No. 2241 of 1979, Income-tax Application No. 64 of 1983
Judge
Reported in(1985)46CTR(Bom)173; [1985]151ITR713(Bom)
ActsIncome Tax Act, 1961 - Sections 104, 105, 106, 107, 107A, 109, 143, 144, 256(2), 263 and 264
AppellantHoechst Dyes and Chemicals Ltd.; Commissioner of Income-tax, Bombay City-v, Bombay
RespondentK.N. Anantharama Ayyar, Commr. of I.T., Bombay City-v, Bombay and Others; Hoechst Dyes and Chemicals
Excerpt:
.....of the distributable income of the company of that previous year. (iii)(3), where the gross total income consists of any income from manufacturing activities, in relation to the profits and gains attributable to such business, no dividend is required to be declared, while in relation to the remaining part of the gross total income, a company, like the petitioner company, is required to declare 90% of such remaining income as dividend. 23a(1), where the ito is satisfied that in respect of any previous year profits and gains distributed as dividends by any company are less than the statutory percentage of the total income of the company of that previous year as reduced in the manner provided therein, then the company will be liable to pay super-tax in the manner to be calculated as..........on trading activities. for the assessment year 1972-73, the petitioners were assessed on a gross total income of rs. 1,13,40,162. the distributable income was worked out at rs. 29,56,751. out of this distributable income, the income which could be allocated to manufacturing activities was 37% of the distributable income and this was worked out at rs. 10,93,996. the balance income of rs. 18,62,755 was allocated to the trading activities of the petitioners.2. under chapter xi of the i.t. act, 1961, in respect of companies in which the public is not substantially interested and their subsidiaries, a provision is made prescribing that a statutory percentage of their income should be distributed as dividend. under s. 104 of the i.t. act, 1961, as then in force (which forms a part of chapter.....
Judgment:

Sujata Manohar, J.

1. The petitioners are a public limited company incorporated under the Companies Act, 1956, and carry on the business of manufacturing various petrochemical products and dyes. The petitioners also carry on trading activities. For the assessment year 1972-73, the petitioners were assessed on a gross total income of Rs. 1,13,40,162. The distributable income was worked out at Rs. 29,56,751. Out of this distributable income, the income which could be allocated to manufacturing activities was 37% of the distributable income and this was worked out at Rs. 10,93,996. The balance income of Rs. 18,62,755 was allocated to the trading activities of the petitioners.

2. Under Chapter XI of the I.T. Act, 1961, in respect of companies in which the public is not substantially interested and their subsidiaries, a provision is made prescribing that a statutory percentage of their income should be distributed as dividend. Under s. 104 of the I.T. Act, 1961, as then in force (which forms a part of Chapter XI), income-tax is levied on such a company in the manner and at the rates prescribed in that section when such a company does not declare a dividend as prescribed or which declares a dividend which is less than the statutory percentage. Section 104, sub-s. (1), as then in force, was as follows :

'104. (1) Subject to the provisions of this section and of sections 105, 106, 107 and 107A, where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, part from the sum determined as payable by it on the basis of the assessment under section 143 or section 144, be liable to pay income-tax at the rate of -

(a) fifty per cent. in the case of an investment company,

(b) thirty-seven per cent., in the case of a trading company, and

(c) twenty-five per cent., in the case of any other company,

on the distributable income as reduced by the amount of dividends actually distributed, if any, within the said period of twelve months.

(2)....'

Section 109 of the Income-tax Act, 1961, defines, inter alia, what is meant by statutory percentage. Section 109(iii)(3), at the relevant time, was as follows :

'109. (iii) 'statutory percentage' means - .....

(3) in the case of an Indian company, not being an Indian company which falls under the provisions of clause (a) of sub-section (4) of section 104, a part only of whose gross total income consists of profits and gains attributable to the business of construction of ships or of manufacture of processing of goods or of mining or of generation or distribution of electricity or of any other form of power -

(a) in relation to the profits and gains attributable to such business.......Nil.

(b) in relation to the remaining part of its gross total income -

(1) if it is an investment company or a company which satisfies the

conditions specified in sub-clause (4)(a) of this clause ... 90%

(2) in any other case ... ... ... 60%

4. Explanation. - The provisions of this Chapter shall, in relation to the remaining part of the gross total income aforesaid, apply as if such part were the gross total income of the company; and, for the purpose of section 104, the amount of dividends actually distributed shall be deemed to be such proportion thereof as the part aforesaid bears to the gross total income of the company.'

5. In view of these provisions of s. 109 sub-s. (iii)(3) which were applicable to the petitioner company, it was not liable to declare any dividend in respect of the income arising out of its manufacturing activities. In respect of its remaining income, it was liable to declare a dividend at the rate of 90% because, admittedly, it was a company which satisfied the conditions specified in sub-clause (4)(a) of s. 109(iii). Since the distributable income of the company allocated to its trading activities for the relevant assessment year was Rs. 18,62,755, it was liable to declare a dividend amounting to 90% of this income, that is to say, amounting to Rs. 16,76,479. The company, at its annual general meeting held on December 22, 1972, declared a dividend of Rs. 17 lakhs in respect of the said year.

6. Prior to the annual general meeting some time in June 1972, the company had made an application under s. 107A of the I.T. Act, 1961, to the Central Board of Direct Taxes for a reduction in the percentage of declarable dividend for various reasons with which we are not concerned. At the time of the annual general meeting, the company had not received any answer from the Central Board of Direct Taxes in respect of this application. It is the case of the company that the annual general meeting could not be postponed beyond December 22, 1972, and a dividend of Rs. 17 lakhs was declared. Thereafter, in February, 1973, the Central Board of Direct Taxes permitted the company to declare a dividend of 72% of its distributable income in respect of its trading activities.

7. In the proceedings before the ITO for the assessment year 1972-73, the ITO held that the company had declared less than the statutory percentage of dividend. In order to ascertain whether the company had complied with the provisions relating to declaration of statutory percentage of dividend, the ITO resorted to the Explanation to s. 109(iii)(3). He took the view that the declared dividend of Rs. 17 lakhs should be apportioned between the company's income from manufacturing and non-manufacturing activities in the same proportion in which the total income of the company was divided between its manufacturing and non-manufacturing activities. Since the ratio of income from manufacturing activities to trading activities was 37 : 63, the divided was also required to be dividend in the ratio of 37 : 63. Only 63% of Rs. 17 lakhs, that is to say, Rs. 10,71,000, was attributable to the income from trading activities. The ITO further held that in view of the order of the Central Board of Direct Taxes, the company was liable to declare a dividend at the rate of 72% of its distributable income relating to its trading activities. Since the distributable income from trading activity was Rs. 18,62,755, the statutory dividend required to be declared worked out at Rs. 13,41,183. According to the ITO, there was, therefore, a shortfall in the declaration of dividend amounting to Rs. 13,41,183 less Rs. 10,71,000, that is to say, Rs. 2,70,183. He, accordingly, levied income-tax under the provisions of s. 104 of the I.T. Act. He calculated this tax on the basis that the total distributable income was Rs. 29,56,751. He reduced this income to 72% in view of the order of the Central Board of Direct Taxes. This came to Rs. 21,28,860. He deducted the declared dividend of Rs. 17 lakhs from this amount and arrived at a shortfall of Rs. 4,28,860. He levied tax at 37% on this shortfall, amounting to Rs. 1,58,678.

8. The Commissioner of Income-tax revised the order of the ITO under s. 263 of the I.T. Act, 1961, on the ground that the computation of income-tax under s. 104 by the ITO was not correct. He computed the income-tax payable under s. 104 as follows : He took the distributable income as Rs. 29,56,761. He deducted from this income the declared dividend of Rs. 17 lakhs and arrived at the figure of Rs. 12,56,751. He levied income-tax at the rate of 37% on this amount of Rs. 12,56,751, which tax amounted to Rs. 4,64,998. He directed the ITO to amend his order accordingly.

9. The petitioners made an application under s. 264 of the I.T. Act, 1961, before the Commissioner of Income-tax on the ground that no income-tax under s. 104 of the I.T. Act, 1961, was leviable, as there was no shortfall in the declaration of dividend by the company. The Commissioner held that the computation of additional tax made by the ITO under s. 104 was erroneous and that he had already modified the same by a separate order passed by him under s. 263 of the I.T. Act, 1961. He rejected the contention of the petitioners that no tax was leviable under s. 104 of the I.T. Act, and he rejected the petition. The present miscellaneous petition has been filed in respect of the order of the Commissioner under s. 264 of the I.T. Act and the earlier order.

10. In respect of the order passed by the Commissioner under s. 263 of the I.T. Act, 1961, the petitioners went in appeal before the Tribunal. The Tribunal held that the Commissioner had no jurisdiction to make an order under s. 263 of the I.T. Act, because no prejudice had been caused to the Revenue by reason of the order of the ITO. The Tribunal held that there had been no shortfall in the declaration of dividend and, hence, the petitioners were not liable to pay any additional income-tax under s. 104. The ITO, however, had levied an additional income-tax. The order of the ITO, therefore, could not be said to be prejudicial to the Revenue, and it was not open to the Commissioner to revise that order under s. 263. In respect of the order of the Tribunal, the Department sought to raise two questions for being referred to this court under s. 256(1) of the I.T. Act. This application of the Department was rejected by the Tribunal. Hence, the Department has made an application under s. 256(2) of the I.T. Act, 1961, which is also before us. It requires the Tribunal to raise the following two questions :

'(a) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the order passed by the Income-tax Officer under section 104 of the Income-tax Act, 1961, was not prejudicial to the interests of the Revenue and, therefore, the Commissioner of Income-tax has no jurisdiction to pass an order under section 263 of the Income-tax Act, 1961, for the assessment year 1972-73 ?

(b) Whether, on the facts and in the circumstances of the case and in law, when the Income-tax Officer with the provisions of section 104 of the Income-tax Act, 1961, should have applied for the assessment year 1972-73 an additional tax at 37% (sic) should have been charged on the distributable income as reduced by the amount of dividend actually distributed within the period of 12 months instead of 37% of the difference between the distributable income reduced by the statutory percentage and the amount of dividend actually distributed within 12 months immediately following the expiry of the previous year of the 1972-93 assessment, so that the order of the Income-tax Officer under section 104 was erroneous, in so far as it was prejudicial to the interests of the Revenue ?'

11. Section 104 of the I.T. Act, 1961, comes into operation in a case where the ITO is satisfied that in respect of any previous year the dividend distributed is less than the prescribed statutory percentage of the distributable income of the company of that previous year. If the dividend declared is less, then the company becomes liable to pay income-tax as provided in that section. The terms 'distributable income' and 'statutory percentage' are both defined in s. 109 of the said Act. Under s. 109, cl. (i), distributable income is the gross total income of a company, as reduced in the manner specified in that sub-section. We need not go into the details of this sub-section. Under s. 109, cl. (iii)(3), the 'statutory percentage' is defined to mean the percentage as prescribed in that sub-section. Under cl. (iii)(3), where the gross total income consists of any income from manufacturing activities, in relation to the profits and gains attributable to such business, no dividend is required to be declared, while in relation to the remaining part of the gross total income, a company, like the petitioner company, is required to declare 90% of such remaining income as dividend.

12. On a plain reading of these two sections - ss. 104 and 109 - therefore, where a company's gross total income is derived from manufacturing activities as also from non-manufacturing activities, the income is required to be allocated in the first place between income arising from manufacturing activities and income arising from non-manufacturing activities. In respect of income from manufacturing activities, no dividend needs to be declared. In the case of income from non-manufacturing activities, a dividend at the rate of 90% of such income from non-manufacturing activities is required to be declared.

13. In the present case, therefore, in respect of the income of Rs. 10,93,996 which is from manufacturing activities, no dividend is required to be declared, while in respect of the income of Rs. 18,62,755, which is the income from non-manufacturing activities, 90% of this amount, amounting to Rs. 16,76,480, is the minimum required to be declared as dividend. In this view of the matter, a declaration of dividend at Rs. 17 lakhs cannot be considered as a declaration of less than the statutory percentage of dividend.

14. Does the Explanation to clause (iii)(3) of s. 109 make any difference to this position The Explanation applies only to a case where a company has a composite income consisting, inter alia, of income from manufacturing activities and other income. In such a situation, the Explanation provides that the provision of Chapter XI (which includes s. 104 relating to the declaration of statutory dividend) will apply to the remaining part of the gross total income, that is to say, gross total income less income attributable to manufacturing activities as if such remaining part were the gross total income of the company. In other words, in the present case, the provisions of Chapter XI will apply only in respect of the income of Rs. 18,62,755 as if that were the total income of the company.

15. The second part of Explanation provides that for the purpose of s. 104, the amount of dividends actually distributed shall be deemed to be such proportion thereof as the remaining gross total income bears to the gross total income of the company. This part of the Explanation deals with the application of s. 104. It, therefore, comes into operation in the case of a company which declared less than the statutory percentage of dividend. Under s. 104, in such a case, the ITO is required to levy income-tax (at the rates specified in that section) on the distributable income as reduced by the amount of dividends actually distributed. In view of the Explanation to cl. (iii)(3) of s. 109, the 'distributable income' will have to be determined on the assumption that the remaining gross income, after deduction of income from manufacturing activities, was the gross total income of the company. Secondly, the Explanation provides that the dividend 'actually distributed' is deemed to be such proportion of the dividend in fact distributed as the remaining gross total income bears to the total income of the company.

16. Thus, for imposing income-tax under s. 104 in the case of a company having a composite income, the ITO will have determine the 'distributable income' as reduced by the amount of dividends 'actually distributed' in the light of the Explanation to sub-clause (3) of cl. (iii) of s. 109. The Explanation, therefore, has relevance to the determination of income-tax payable under s. 104. It has no relevance to the determination of the statutory dividend required to be declared.

17. In the present case, s. 104 does not come into operation at all because the company has not in fact declared less than the statutory dividend.

18. Mr. Dastur, learned counsel for the petitioners, drew our attention to a decision of the Supreme Court in the case of CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. : [1975]101ITR764(SC) . The Supreme Court in that case was concerned with a company having a composite income. There was no dispute that the company had declared less than the statutory dividend. The dispute before the Supreme Court related to the apportionment of the dividend actually declared by the company between the two different heads of income and the manner of calculation of tax. Section 23A of the Indian I.T. Act, 1922, contained the relevant provisions applicable in that case. The provisions of s. 23A are somewhat similar to the combined provisions of ss. 104 and 109 of the I.T. Act, 1961. Under s. 23A(1), where the ITO is satisfied that in respect of any previous year profits and gains distributed as dividends by any company are less than the statutory percentage of the total income of the company of that previous year as reduced in the manner provided therein, then the company will be liable to pay super-tax in the manner to be calculated as stated in the said section. Explanation 2 to s. 23A defines the 'statutory percentage' and it goes on to say, 'the said percentage being applied separately with reference to the amounts of profits and gains attributable to the two parts of the company's business aforesaid as if the said amounts were respectively the total income of the company in relation to each of its parts, the amount of dividends and taxes also being similarly apportioned, for the purposes of sub-section (1)......'

19. The Supreme Court interpreted the provisions of s. 23A and came to the conclusion that the question of apportionment in the manner prescribed in the Explanation 2 to s. 23A would arise only if the profits and gains distributed as dividends are less than the prescribed statutory percentage.

20. In the case before the Supreme Court, however, there was no dispute that the dividend declared by the assessee-company was less than the statutory dividend. The Supreme Court had to determine how super-tax was to be calculated in the light of the Explanation 2 to s. 23A. In this connection, the Supreme Court observed (p. 772) :

'Where a company has a composite business as for example, industrial and non-industrial business, the first step is to ascertain the distributable profits of the two parts separately. For the purpose of finding out the minimum dividend that the company ought to have distributed, the proper statutory percentage as prescribed by Explanation 2 has to be applied separately to the distributable profits of two parts as if the respective profits are the total income of the company in relation to each part of its business. The composite dividend distributed by the company has then to be apportioned between the two parts in the same ratio as the respective profits of the two parts bears to the total profits of the company.'

21. Mr. R. J. Joshi, learned counsel for the respondents, strongly relied upon this passage of the Supreme Court and submitted that even to determine whether the company has declared the requisite amount of dividend, apportionment of the dividend must be made as provided in the Explanation 2 of s. 23A of the Indian I.T. Act, 1922. This submission cannot be accepted. Since, admittedly, the assessee-company (in the above case) had declared less than the statutory percentage of dividend, the question of apportionment of dividend directly arose and the observations referred to such apportionment for the purpose of determining the liability to pay super-tax.

22. The ratio of this judgment applies to the interpretation of ss. 104 and 109 of the I.T. Act, 1961, also since these sections contain provisions similar to s. 23A of the Indian I.T. Act, 1922. Moreover, the language of the Explanation to sub-clause (3) of cl. (iii) of s. 109 is clearer than Explanation 2 of s. 23A. The Explanation to sub-cl. (3) in terms states that apportionment of dividend has to be made only for the purpose of s. 104. It, therefore, comes into play when there is a shortfall in the declared dividend. It does not come into operation for determining whether statutory the percentage of dividend has been declared or not.

23. In our view, the ITO as well as the Commissioner were clearly wrong in applying the provisions of the Explanation in order to determine whether the company had declared statutory dividend or not. Their orders are liable to be set aside.

24. In view of this interpretation that we have put on the provisions of ss. 104 and 109 of the I.T. Act, 1961, it is not necessary to go into the other ground urged in the petition for challenging the orders of the ITO and the Commissioner.

25. The petitioners have paid a sum of Rs. 4,64,998 as tax under s. 104 of the I.T. Act, 1961, pursuant to the decision of the Commissioner. In view of our findings, no such tax under s. 104 was payable by the petitioners for the relevant assessment year.

26. The order of the Commissioner under s. 263 of the I.T. Act, 1961, being exhibit 'F' to the petition, has already been set aside by the Tribunal and, hence, no relief needs to be given in respect of the order exhibit 'F'. Accordingly, the order of the ITO (exhibit 'D') and the order of the Commissioner under s. 264 of the I.T. Act, 1961, being exhibit 'G' to the petition, are set aside and the respondents are directed to refund to the petitioner forthwith the said sum of Rs. 4,64,998 paid by the petitioner as tax under s. 104 of the I.T. Act, 1961. The rule is made absolute, accordingly.

27. The respondents will pay to the petitioners costs of the reference.

28. For the reasons which are set out above, we find that there is no merit in the Income-tax Application No. 64 of 1983.

29. The rule is, accordingly, discharged with costs.


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