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Coramandel Fertilizers Limited Vs. Income-tax Officer, Hyderabad and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberWrit Petition Nos. 1835 of 1978, 3439 of 1979 and 2611 of 1980
Judge
Reported in[1984]149ITR672(AP)
ActsIncome Tax Act, 1961 - Sections 80K and 197
AppellantCoramandel Fertilizers Limited
Respondentincome-tax Officer, Hyderabad and ors.
Appellant AdvocateE. Dastur, Adv.
Respondent AdvocateSrirama Rao, Adv.
Excerpt:
direct taxation - deduction - sections 80k and 197 of income tax act, 1961 - whether assessee-company is entitled to issuance of certificate under section 197 (3) to effect that tax need to be deducted at source from dividend - high court observed that petitioner-company is entitled to benefit of provisions of section 80j and profits and gains of petitioner-company are attributable to benefit accruing to it under section 80j - shareholders of petitioner-company are entitled to benefit of section 80k - therefore certificate under section 197 (3) should be issued to it in respect of each share - certificate under section 197 (3) depends upon whether assessee-company is entitled to benefit of section 80j and whether recipient of dividend is entitled to benefit of section 80k -..........which are entitled to the benefit of s. 80j of the act. that the petitioner-company is a company entitled to the benefit of s. 80j and that the profits and gains of the petitioner-company are attributable to the benefit accruing to it under s. 80j and, consequently, its shareholders are entitled to the benefit of s. 80k is not in dispute; the dispute is only on the quantum. therefore, a certificate under s. 197(3) should be issued to it in respect of each share. the certificate envisaged under s. 197(3) does not depend upon the total income of the shareholder being liable to income-tax, but depends upon whether the assessee-company is entitled to the benefit of s. 80j and whether the recipient of the dividend, i. e., the shareholder of the assessee-company, is entitled to the.....
Judgment:

Madhava Reddy, C.J.

1. The question that arises for consideration in these writ petitions is whether the assessee-company is entitled to the issuance of a certificate under s. 197(3) of the I.T. Act, 1961(hereinafter called 'the Act') to the effect that tax need not be deducted at source from the dividend. In W.P. No. 1835 of 1978, the certificate is claimed for the year 1977 by the 2nd petitioner and the other shareholders of the 1st petitioner-company. In W.P.No. 3439 of 1979 a similar certificate is claimed for the year 1978 by the 1st petitioner-company and another shareholder, 2nd petitioner therein, for himself and other shareholders similar placed. In W.P. No. 2611 of 1980, the assessee-company and yet another shareholder seek a similar certificate for the 2nd petitioner and for other shareholders similarly placed, for the year 1979.

2. It is stated by the petitioner-company that it is entitled to the benefit of the provisions of s. 80J of the Act. The first year of assessment for which the petitioner-company is entitled to the benefit of s. 80J was the assessment year 1969-70. It declared its first dividend for the calendar year 1972. Under s. 80J, the petitioner-company is entitled to deduction in respect of profits and gains from its newly established industrial undertakings for a total period of five years for which such deduction shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking began to manufacture or produce articles. The petitioner-company, though incorporate on October 16,1961, with the main object of manufacturing fertilizers by establishing a factory at Visakhapatnam, completed the erection of the factory somewhere in 1967-68 and began production. It declared its maiden dividend of Rs. 76,65,608 for the year 1972 at its annual general meeting held on May 21, 1973. The petitioner-company applied for a certificate under s. 197(3) of the Act to the effect that the said dividend was not chargeable to tax in the hands of the shareholders by virtue of s. 80K and, therefore, no tax was deductible. The Revenue took the stand that the petitioner-company has not actually obtained deduction under s. 80J and, therefore, the shareholders were not entitled to claim deduction under s. 80K. The petitioner-company, therefore, moved this court in W.P. Nos. 2279 and 2280 of 1973 for a writ of mandamus against the ITO to issue a certificate under s. 197(3). For the subsequent year also, the 1st petitioner declared a dividend which according to the petitioner company was wholly exempt from tax in the hands of its shareholders and it applied for a certificate under s. 197(3). the petitioner-company filed two more writ petitions, W.Ps. Nos. 4305 and 4306 of 1974. This court by its judgment dated September 18,1974, [1976] 102 ITR 535 allowed all these writ petitions and directed the ITO to issue a certificate under s. 197(3) as prayed for. The Revenue carried the matter in appeal to the Supreme Court. The Supreme Court, in its judgment in Union of India v. Coromandel Fertilizers Ltd. [1976] 103 ITR 533 dismissed the appeal and affirmed the decision of this court. It is the grievance of the petitioner that in spit of these writ petitions being allowed (by this court) in respect of the dividend declared by the petitioner-company for the years 1972 and 1973, the ITO did not issue the certificates. They were issued only after the decision of the Supreme Court in 1975. In spite of the above, for the succeeding years, i. e., 1974, 1975 and 1976, certificates have not been issued and hence the company was constrained to file these three writ petitions. He points out that the total deduction to which the petitioner-company is entitled under s. 80J as stated in paragraph 12 of the affidavit filed by the petitioner, amounts to Rs. 10,46,59,377 and the total dividend declared from the date of the declaration of the maiden dividend in 1972 up to and inclusive of 1976 is only Rs. 6,70,74,070. There is thus unavailed deduction of Rs. 3,75,85,307 to the credit of the petitioner-company and, hence, there can be no impediment in granting the certificate in respect of a dividend of Rs. 1,97,64,000 proposed by the petitioner-company for the year 1974. Some of the deductions claimed, while W.P. No. 1835 of 1978 was pending, were the subject-matter of appeal before the Tribunal and pursuant to the order of the Tribunal, the ITO later modified his order relating to the deduction under s. 80J. As per the revised calculation made by the ITO in accordance with the order of the Tribunal, the petitioner-company's entitlement to the deduction under s. 80(J) rose from Rs. 10,46,59,377 to Rs. 12,71,17,504. By another order dated November 11, 1981, the ITO amended the order and the company's entitlement under s. 80J for the five years rose further to Rs. 13,21,36,159, while the dividend declared for all these years was Rs. 6,52,00,089. The Revenue, however, does not accept these figures and has not acted upon them claiming that the judgment of this court declaring rules 19A(2) and 19A(3) as ultra vires is the subject-matter of an appeal to the Supreme Court and hence the order of the AAC or the Tribunal on the basis for which the deduction under s. 80J is worked out, cannot be the basis for allowing the benefit of s. 80K, and for a determination under s. 197(3). It is their further case that these profits are not wholly attributable to the deduction under s. 80J. In any event, it is pointed out by the learned counsel for the Revenue, Sri Srirama Rao, that even according to the assessee, if rule 19(A) is held to be intra vires the Act and the entitlement of the petitioner-company is calculated according to the said rule, the petitioner-company would not be entitled to a deduction of Rs. 13 crores odd as now claimed by it would be very much less. Hence, until the petitioner-company's entitlement to the deduction under s. 80J is finally determined the certificate under s. 197(3) cannot be directed to be issued.

3. Section 80K of the Act makes provision for deduction from the total income of a person in respect of dividends attributable to the profits and gains from new industrial undertakings or ships or hotel business. These deductions are to be made subject to any rules that may be made by the Board. Among others this deduction is to be of an amount equal to such part therefore as is attributable to the profits and gains derived by the company from an industrial undertaking on which no tax is payable by the company under this Act or in respect of which the company is entitled to a deduction under s. 80J of the Act for the assessment year commencing on April 1, 1968, or for any subsequent assessment year. The petitioner-company, is a company which is entitled to claim the benefit of s. 80J of the Act. In computing the total income of individual shareholders, if any dividend is earned by the shareholders and the assessee-company is entitled to the benefit of deduction under s. 80J of the Act, the Shareholder is entitled to deduction envisaged by s. 80K of the Act, Section 194 requires the principle officer of an Indian company declaring a dividend to deduct from the amount of such dividend income-tax at the rates in force before issuing a cheque, dividend warrant or before making any payment to the shareholder. But, if the ITO issues a certificate that the income of the shareholder will be less that the minimum liable to income-tax, then the dividend shall be paid without making such deduction. section 197(1) envisages issuance of a certificate for deduction at a lower rate or for no deduction of income-tax, as the case may be, on an application made by an assessee other than a company in this behalf. On production of such a certificate, the person responsible for paying the income deducts income-tax at source at the rates specified in such a certificate or deducts no tax at all, as the case may be. In the case of a company the principal officer of the company may make similar application if by reason of the provisions of s. 80K the whole or any portion of the dividend referred to in s. 194 will be deductible in computing the total income of the recipient before paying the dividend to the shareholder. On such determination by the ITO, no tax shall be deducted on such proportionate amount. The shareholders of the petitioner-company are entitled to such a certificate so long as the benefit of s. 80J is available to the petitioner-company. Sub-s. (3) of s. 197 of the Act lays down the step to be taken by the principal officer of a company in whose opinion the whole or any portion of the dividend referred to in s. 194 will be deductible in computing the total income of the receipt. That sub-section reads as follows :

'Where the principal officer of a company considers that, by reason of the provisions of section 80K, the whole or any portion of the dividend referred to in section 194 will be deductible in computing the total income of the recipient, he may, before paying the dividend to the shareholder or issuing any cheque or warrant in respect thereof, make an application to the Income-tax Officer to determine the appropriate proportion of the dividend to be deducted under the provisions of section 80K and on such determination by the Income-tax Officer no tax shall be deducted on such proportionate amount.'

4. It may be noticed that s. 194 requires that the principal officer of a company referred to therein which has made the prescribed arrangements for the declaration and payment of dividend within India shall before making any payment in cash or before issuing any cheque or warrant in respect of any dividend, deduct from the amount of such dividend income-tax at the rates in force. That provision itself makes an exception under the proviso in respect shareholders who may produce a certificate from the ITO in the prescribed manner that the total income of the shareholders will be less than the minimum liable to income-tax. Upon production of such a certificate the principal officer of a company may pay the dividend without deduction of income-tax envisaged by s. 194 of the Act. The purpose of s. 194 and the purpose of s. 197 of the Act is to enable the recipient of the dividends from a company in respect of shares held by him to receive it without deduction of tax if his total income is below the minimum liable to income-tax and in another case where the dividend is payable by a company which is entitled to the benefit of s. 80J and the recipient is entitled to the deduction in respect of the dividend attributable to the profits and gains from such new industrial undertakings which are entitled to the benefit of s. 80J of the Act. That the petitioner-company is a company entitled to the benefit of s. 80J and that the profits and gains of the petitioner-company are attributable to the benefit accruing to it under s. 80J and, consequently, its shareholders are entitled to the benefit of s. 80K is not in dispute; the dispute is only on the quantum. Therefore, a certificate under s. 197(3) should be issued to it in respect of each share. The certificate envisaged under s. 197(3) does not depend upon the total income of the shareholder being liable to income-tax, but depends upon whether the assessee-company is entitled to the benefit of s. 80J and whether the recipient of the dividend, i. e., the shareholder of the assessee-company, is entitled to the benefit of s. 80K and, therefore, it is not obliged to deduct tax at source and the dividend is payable to the shareholders without the deduction of tax and in order to enable the company to pay the dividend without deduction of the tax at source, a certificate may be issued under s. 197(3).

5. On the other hand, it is contended by Sri Rama Rao, the learned standing counsel for the Revenue, that the entitlement of the petitioner-company for the benefit of s. 80J is itself in dispute and is now the subject-matter of proceedings in this court and in the Supreme Court and as such the very basis of the petitioner's claim does not exist. Further, the petitioner-company is not entitled to the issuance of a certificate. Such an application can be made only by the shareholders under s. 197(1) of the Act and not by the petitioner.

6. It is true that a certificate under s. 197(1) can be issued only on an application made by an assessee in this behalf. The assessee-company is obliged to deduct the tax under s. 194 unless a certificate envisaged by s. 197(1) is produced as provided under s. 197(2). The petitioner-company may, under s. 197(3), before paying the dividend to the shareholders or issuing a cheque or a warrant in respect thereof, 'make an application' to the ITO to determine the appropriate proportion of the dividend to be deducted under the provisions of s. 80K and on such determination by the ITO no tax shall be deducted on such proportionate amount. All that the petitioner-company is entitled to it to file an application to determine the appropriate proportion of the dividend referred to in s. 194 deduction in computing the total income of the recipient having regard to the provisions of s. 80K. Upon such determination by the ITO, no tax shall be deducted on such proportionate amount. The appropriate proportion of the dividend that may be deducted under the provisions of s. 80K depends upon 'what are the profits and gains derived by the company which are attributable to the benefit which the company is entitled to under s. 80J for the assessment year commencing on 1st of April, 1968, or for any subsequent assessment year ?' After the final determination of the amount which the petitioner-company is entitled to claim by way of deduction under s. 80J in calculating the gross total income of an assessee, the income by way of dividends paid or deemed to have been paid by the company entitled to the benefit of s. 80J shall have to be deducted. Whether a certificate is issued under s. 197(1) at the instance of an assessee-shareholder of the petitioner-company for a determination under s. 197(3) at the instance of the officer of the company is done, the company is enable to deduct only the proportionate amount or not to make any deduction at all towards income-tax before paying the dividend or issuing the cheque or warrant. However, until such final determination by the appropriate authority, it cannot be postulated as to what extent the assessee-company is entitled to the benefit of s. 80J and to what extent the shareholders of the assessee-company are entitled to the benefit of s. 80K. In this case, what all the petitioner-company claims is a determination under s. 197(3). The certificate envisaged by s. 197(1) is a certificate issued upon the ITO being satisfied that the total income of the recipient either justifies the deduction of income-tax at any lower rate or no deduction of income-tax at all. On the other hand, the determination under s. 197(3) is having regard to the provisions of s. 80J read with s. 80K. In certain cases, having regard to the fact that the assessee-company is entitled to the benefit of s. 80J and the shareholder is also entitled to the benefit of s. 80K and having regard to the shareholder's other income, the shareholder is entitled to the issuance of a certificate under s. 197(1) and the company is entitled to a determination under s. 197(3) and no tax may be deductible. But that may not hold good in respect of every shareholder. The total income of an individual shareholder, notwithstanding the benefit to which the assessee-company is entitled under s. 80J and the shareholder under s. 80K, may be such that it is liable to tax and a certificate envisaged by the proviso to s. 194 or a certificate envisaged by s. 197(1) may not be issuable to such share holder. In our view, the petitioner-company cannot make an application under s. 197(1) for issue of a certificate to the shareholder that no tax is deductible from the dividend payable to its shareholders. It can only ask for a determination under sub-s. (3) of s. 197. Upon such an application, if the ITO determines that only a certain portion of the dividend is deductible, the assessee-company may deduct that portion of the tax at source from the dividend and if the ITO holds that the whole of the income from profits and gains is attributable to s. 80J and the shareholder is entitled to the benefit of s. 80K, no tax may be deducted from any dividend declared and paid by the company. The authority to make such a determination under s. 197(3) may be the same as the one under s. 197(1). But none the less the scope of enquiry under sub-s. (1) of s. 197 and the ambit of enquiry under sub-s. (3) of s. 197, in our view, are different. Even after the entitlement of the shareholder to the benefit of s. 80K, the total income of a shareholder may be liable to tax; in such an event, the certificate envisaged under s. 197(1) may not be issued. But, in the case of certain other shareholders, their income may be such that even after the inclusion of the entire dividend due to them, their income may not be above the exemption limit. In such a case, the determination under s. 197(3) itself would enable the company not to deduct the tax from the dividend. In so far as the petitioner-company is concerned, it would be perfectly justified in not deducting tax from the dividend declared by the company if the determination under s. 197(3) is in its favour. Such a determination serves the purpose of a certificate. We understand that the writ of mandamus prayed for by the petitioner-company is for a determination envisaged by s. 197(3) of the Act.

7. We may at this stage note that merely because a certificate was directed to be issued in the previous writ petitions in respect of dividend for 1972 and dividend for 1973, a direction to issue similar certificates for the subsequent years cannot automatically follow. That must depend upon the determination under s. 197(3), which involves an enquiry into and a finding on the three important question of fact :

(1) What is the entitlement of the petitioner-company in the relevant previous years to the deduction under section 80J

(2) How much profit and gain is attributable to such a deduction and

(3) What is the appropriate proportion of the dividend to be deducted under the provisions of section 80K

8. These facts cannot satisfactorily be determined on the material on record in this writ petition. It must necessarily have to be determined by the ITO after giving a fair opportunity to the petitioner-company. When such a determination is sought under s. 197(3) by the principal officer of the company, the ITO cannot refuse to make an enquiry under the plea that the question of vires of rule 19A is pending before the Supreme Court. The ITO is would to act according to the decision of this court which is binding on him and take it as the correct position of law until it is declared otherwise by the Supreme Court. The ITO, in our opinion, has failed to exercise the jurisdiction vested in him and has omitted to perform the statutory duty imposed upon him by law in not making an enquiry and determining the question arising under s. 197(3) on the application made by the principal officer of the petitioner-company. Although Mr. Dastur, the learned counsel for the assessee-company, canvassed and attempted to convince us of the basis of the balance-sheets and the profit and loss accounts of the petitioner-company, which have been filed with the registrar of Companies, that all the relevant facts for the issuance of the certificate are established, we are not persuaded to go into these questions of fact in these writ petitions. These are matters for the income-tax authorities to consider and determine and not for the court sitting in writ jurisdiction under article 226 to go into. We, therefore, refrain from expressing any opinion on the question of the specific amount of deduction to which the petitioner-company is entitled under s. 80J and how much of the profits and gains of the company are attributable to such entitlement, and vest the recipients of the dividend to the benefit of s. 80K, which questions are relevant for a determination under s. 197(3). This court is in no position to hold at this stage that no tax is deductible at the source by the petitioner. The petitioner-company is, however, entitled to a direction against the ITO to the effect that he shall, on the application of the principal officer of the company, ascertain all the facts relevant under s. 197(3) as discussed above and determine whether any tax at all is deductible from the dividend payable to the shareholders of the petitioner-company and if so, what proportion of the dividend is deductible towards tax and if no tax is deductible, determine accordingly and issue a copy thereof to the petitioner-company. These writ petitions are allowed to the extent indicated above with costs. Advocate's fee Rs. 500 in each.

9. A direction shall issue accordingly to the ITO to make a determination under s. 197(3) of the Act in the light of this judgment.


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