1. A rather important question arises on this reference with regard to the proper interpretation of the provisions contained in respect of additional Income-tax levied by the Indian Finance Act.
2. The year of assessment of the assessee company i3 1953-54 and the previous year ends on 30-6-1952, and the total income of the company was Rs. 5,26,681/-, and the dividends declared by this company in that year were Rs. 4,78,950/-. There-fore they exceeded by about Rs. 1,87,691/- the ceiling of dividend fixed by the Legislature, viz. 9 annas in the rupee, and the taxing authority levied a tax at the rate of 5 annas on this amount.
The levy was challenged by the assessee on various grounds and the question that has come up before us is whether Parliament has effectively made this levy looking to the provisions contained in the Act. This provision in the Finance Act came up for our consideration in two decisions. The first was in 'Elphinstone Spg. & Weaving Mills v. Commr. of Income-tax' : 28ITR811(Bom) (A). That was a case where the company that was sought to be taxed in respect of excess dividend declared by it had no total income at all in the previous year and we held that the provisions of the Act did not apply to a company which had no total income which could be taxed. In that case we considered the scheme of the relevant provisions of the Finance Act.
There was a subsequent decision reported in the same volume 'Commr. of Income-tax v. Jalgaon Electric Supply Co. Ltd.' (1955) 23 ITR 826 (B). That was a case where the assessee company had a total income, but it appeared from the record that the excess dividend it had declared was not from the accumulated profits of the earlier years, and we came to the conclusion that the tax could only be levied in respect of profits which had borne tax and which had been accumulated and not yet distributed.
3. The point that now arises for our consideration is a much wider point which we did not consider in either of those two cases because in the case before us the assessee company has a total Income and it is found as a fact that the excess dividend has been declared from undistributed profits of the earlier years.
But what has been urged by Mr. Palkhlwala is that even in a case like this the provisions in the Finance Act do not effectively provide for the levy of an additional tax. So what is now challenged is not the application of the relevant provisions of the Finance Act to any particular case, but the provisions are challenged as being totally ineffective in levying any additional tax at all.
It will be recalled, as pointed out by us in the earlier decisions, that the scheme of the provisions in the Finance Act with regard to the levy of this additional tax was to prevent the companies from distributing dividend above the ceiling fixed by the Legislature. If the company distributed less than the ceiling it was given a rebate. If it distributed dividend above the ceiling, then not only it did not get the rebate but it had to pay an additional tax.
The contention of Mr. Palkhiwala is that the Finance Act does not lay down any rate in relation to the total income at which this tax can be levied and in having failed to do so it has not effectively levied any charge on total income which would fall within the ambit of S. 3, Income-tax Act. It is not contested that in order that this particular provision in the Finance Act should be effective it must| come within the scope of S. 3, Income-tax Act, be cause what the Finance Act does is to effectuate as it were Section 3, Income-tax Act, and when we turn to Section 3, which is the charging section, it imposes a charge on the total income of the previous year of the assessee.
The rate at which this charge is to be imposed is not laid down in the Income-tax Act at all-and, as Section 3 provides, that charge has to be fixed; by the Central Act. It is because of this that in-come-tax is levied at different rates under the relevant Finance Act.
With regard to the additional tax on excess dividend, it is quite clear that, that tax is not levied with reference to any rate in relation to the total income of the assessee company, and the very short question that we have to consider and decide is whether it is open to Parliament, looking to the language of Section 3, to levy a tax upon an assessee at a rate which has no relation whatsoever to the total income.
4. It must be borne in mind as has often been said, that the Income-tax Act deals with tax on income and on nothing else. Therefore, in order that the charge should be a legal charge under Section 3, it must be a tax on the income of the assessee. If the charge is a tax on anything else, then it would | not be a proper or a valid charge.
Now, is it possible to have an effective charge on the income of an assessee when the rate at which the tax is to be paid is fixed with regard to factors extraneous to the total income and when the rate has no relationship with the total income? In order to understand the position it will be per-haps simpler and easier if one were to take one or two illustrations.
Parliament may say that an assessee shall pay tax in respect of his total income, which tax shall be ssessed at 50 per cent of the wealth of the wises-see, or Parliament may say that if the assessee's wealth is 5 lakhs or 10 lakhs he will pay tax at a particular rate in relation to his total Income. It will be immediately apparent that in the first case the rate has no relationship to the total income. The tax to be paid is determined by a factor entirely extraneous to the total income.
In the latter case, although the rate may fluctuate in relation to an extraneous factor, the rate itself is applied to the total income of the assessee. It is difficult to understand how in the first illustration the tax could be called a tax on income because the tax is paid in relation 'to the total wealth of the assessee and the consideration with regard to his total income is entirely irrelevant.
Whether his total income is a lakh or Rs. 10,0007-the tax he would pay would depend upon not what his income was but what his total wealth was. In the latter case, although the total wealth of the assessee would play an important part in determining what tax he would pay, still the tax would depend upon his total income. It would be more or less according to the total income which he earned In the previous year.
5. Now, the position under the provisions of the Finance Act with regard to the additional tax really falls under the first illustration. Conceivably, the total income of a company may be Rs. 5.000/-in the relevant year and the excess dividend which it might declare out of the accumulated profits of earlier years might be a very large amount and the result may be that the additional tax on tnis excess dividend may be even larger in amount than the whole of the total income of the assessee. Therefore, this additional tax has got to be paid by a company irrespective of what its total income may be.
The tax is not regulated by the total income, nor is the rate fixed in relation to the total income. It may be said, as was suggested by the Advocate General, that Section 3 gives freedom to the Legislature to fix any rate. So long as the charge is on the total income of the previous year, there is no limitation upon the power or the authority of Parliament to fix any rate it pleases. But there is a limitation upon the power of Parliament which is inherent in the nature of the tax which can be imposed under Section 3. If one understands the rate to mean merely the mode of computation of the tax 'in relation to the total income of the assessee, then undoubtedly the power of Parliament is unlimited.
But if 'rate' is understood to mean the fixing of the tax irrespective of the total income and unconnected with the total income, then in our opinion Parliament is clearly traveling outside the ambit of Section 3. It may well be asked, if that is the power of the legislature, why have any provision in the Income Tax Act with regard to the computation of total income? The Income-tax Act contains an elaborate machinery for ascertaining the total income of an assessee.
Various notional incomes have to be added to the total income, various deductions have to be made, and then the total income has to be arrived at. If Parliament has the power to fix tax at a rate which has no connection with the total income, then the machinery set up under the Income tax Act becomes entirely in fructuous. In our opinion, Section 3, prescribes the subject matter of the tax and the rate of that tax is to be prescribed by the ! Legislature.
But the rate must be such as to relate to the subject matter of the tax. If it does not relate to the subject matter of the tax, then the conclusion must be that Parliament is not taxing income but is taxing something else. Therefore in our opinion, a charge in respect of total income of the previous year of an assessee can only be effective if the rate has relationship to the total income or a part thereof.
As we have already pointed out, there is nothing to prevent the legislature form fixing the late and from permitting the rate to fluctuate' in relation to some outside factor, but the rate must be applied to the total income and the tax that an assessee has got to pay must be at a rate in respect of the total income.
6. It was also suggested by Mr. Palkhivala --- and perhaps it is not necessary to decide that -- that the rate under Section 3 must not exceed the total income to the assessee. In other words, it is not competent to Parliament to enact that an assessee shall pay more than 16 annas in the rupee on his total income. What is suggested is that the rate must be a proportion of the total income, not a proportion which exceeds the whole of it.
There is force in this argument because if Parliament were to enact that an assessee should pay more than 16 annas in the rupee on his total income, a part of the tax would be levied on something which would not be the income of the assessee, and it is pointed out rightly that in the case of this additional tax the rate fixed by the Legislature may result in the assessee having to pay tax which would exceed its total income. It is also pointed out that under Section 3 what can be taxed is only the total income of the previous year.
Parliament cannot charge the income of any prior years, and it is said that by this Act what is sought to be done is to tax the income which was already earned, by the company in previous years and which has already borne tax. Finally, it is urged that the only power that Parliament has is to fix the rate of a tax in the year of assessment and it is said that by levying this additional tax Parliament has attempted to alter the rate of tax which had been fixed by the earlier Finance Acts and at which rate the assessee had already paid tax, because if excess dividend is declared the result would be that on the profits earned in earlier years the company would be liable to pay tax at a higher rate than those profits were liable to pay under the relevant Finance Act.
7. The object of the Legislature in enacting this legislation is clear and it is laudable, but the Court has often to ask itself in taxing statutes whether the Legislature had misfired. The Legislature could have achieved this object by one of three methods. It could have treated the excess dividend declared by the company as a notional income and made it a part if the total income of the previous years. It could have provided for rectification of the assessment of the year in which these profits were charged at a lesser rate, and . we now find that Parliament has actually provided for this in the Finance Act, 1953. Or, finally, it could have provided for a penalty imposed upon a company which transgressed the direction of Parliament that it should not pay dividend beyond a particular ceiling, and as was pointed out in our judgment in (1955) 23 ITR 811 (A), the provision in the Finance Act is in the nature of a penalty: the transgressing company loses the rebate and has to pay tax at a higher rate.
But it is obvious that Parliament cannot impose penalty by resorting to Section 3 and purporting to charge the total income of an assessee to income-tax. The ambit of Section 3 is clear and the ambit is that the tax to be levied must be a tax on income and the power of Parliament is equally clear and that is to fix the rate at which income-tax is to be charged upon the total income of the previous year of the assessee.
In our opinion, the provision of the Finance Act travels beyond the ambit of Section 3, and if Parllament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend.
8. We will, therefore, proceed to answer the questions submitted to us. Question (1) was not pressed by Mr. Palkhivala and we need not answer it in our opinion questions (2), (3) and (4) should be reformulated and the one question that we are raising correctly brings out the controversy between the assessee and the Department, and the question is to the following effect:
'Whether additional income-tax has been legally charged under Clause (ii) of the proviso to para B of Part I of the Forest Schedule to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953 read with Section 3, Indian Income Tax Act?'
We answer the question in the negative. The Commissioner to pay the costs.
9. Reference answered in the negative.