GURTU, J. - These are two references under section 66(1) of the Indian Income-tax Act, 1922, made at the instance of the assessee Doctors X-Ray & Pathology Institute Ltd., Kanpur. The question propounded for our answer is as follows :
'Whether the income-tax authorities were justified in levying additional income-tax at five annas in the rupee on the sums of Rs. 2,295 and Rs. 4,276 under clause (ii) of the the proviso to section B of part 1 of Schedule 1 of the Indian Finance Act, 1951, in determining the income-tax payable by the company for the assessment years 1951-52 and 1952-53 ?'
The facts may be briefly stated. For the assessment year 1951-52 (the previous year being the calendar year 1950), the assessee company was found to incur a loss of Rs. 2,715 and was thus adjudged to be not liable to income-tax. In that year, the assessee company had made a profit of Rs. 5,584 but the depreciation allowance under the Indian Income-tax Act came to Rs. 8,299. This converted the profit into loss for income-tax purposes. In the same year the assessee company declared dividends amounting to Rs. 2,295. The Income-tax Officer treated this amount as excess dividend and levied additional income-tax purporting to act under paragraph B of part 1 of the First Schedule to the Indian Finance Act, 1951.
For the assessment year 1952-53 (the previous year being the calendar year 1951), the assessee company was found to have made a profit of Rs. 558 and was thus adjudged to be liable to income-tax on a that amount. In that year the assessee company had made profits amounting to Rs. 16,807 but after deducting depreciation allowance and the loss carried forward from the assessment year 1951-52 and the loss from business carried forward from the assessment year 1949-50 (this loss sum being Rs. 7,160), the total income stood reduced to a sum of Rs. 558 as already indicated. In this year the company declared as dividend of Rs. 4,590. The Income-tax Officer treated Rs. 4,276 out of this sum as excess dividend and levied an additional income-tax under paragraph B of part 1 of the First Schedule to the Indian Finance Act, 1952. The contention of the assessee that it was not liable to pay additional income-tax on the so called excess dividends was not accepted by the Tribunal and hence this reference.
We are concerned with the Finance Act, 1951 and paragraph B of the First Schedule reads :
'B In the case of every company -
On the whole of total income
For annas in the rupee
One twentieth of the rate specified in the perceding clumn:
Provided that in the case of a company which in respect of its profits liable to tax under the Income-tax Act, for the year ending on the 31st day of March, 1952, has made the prescribed arrangements for the declaration and payment within the territory of India excluding the state of Jammu and Kashmir, of the dividends payable out of such profits, and has deducted super-tax from the dividends in accordance with the provisions of sub-section (3D) or (3E) of section 18 of that Act -
(1) where the total income, as reduced by seven annas in the rupee and by the amount, if any exempt from income-tax exceeds the amount of any dividends (including dividends payable at a fixed rate) declared in respect of the whole or part of the previous year for the assessment for the year ending on the 31st day of March, 1952, and no order has been made under sub-section (1) of section 23A of the Income-tax Act, a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess;
(2) where the amount of dividends referred to in clause (i) above exceeds the total income as reduced by seven annas in the rupee and by the amount, if any, exempt from income-tax there shall be charge on the total income an additional income-tax equal to the sum, if any, by which the aggregate amount of income-tax actually borne by such excess (hereinafter referred to as the excess dividend) falls short of the amount calculated at the rate of five annas per rupee on the excess dividend.
For the purpose of the above proviso, the expression 'dividend' shall have the meaning assigned to it in clause (6A) of section 2 of the Income-tax Act, but any distribution included in that expression, made during the year ending on the 31st day of March, 1952, shall be deemed to be a dividend declared in respect of the whole or part of the previous year.
For the purpose of clause (ii) of the above proviso, the aggregate amount of income-tax actually borne by the excess dividend shall be determined as follows :
(i) the excess dividend shall be deemed to be out of the whole or such portion of the undistributed profits of one or more years immediately preceding the previous year as would be just sufficient to cover the amount of the excess dividend and as have not likewise been taken into account to cover an excess dividend of a preceding year;
(ii) such portion of the excess dividend as is deemed to be out of the undistributed profits of each of the said years shall be deemed to have borne tax, -
(a) if an order has been made under sub-section (1) of section 23A of the Income-tax Act, in respect of the undistributed profits of that year, at the rate of five annas in the rupee, and
(b) in respect of any other year, at the rate applicable to the total income of the company for that year reduced by the rate at which rebate, if any was allowed on the undistributed profits.'
It is not necessary to quote paragraph B of the First Schedule to the Finance Act 1952, because it is in similar terms.
It is contended that inasmuch as there was no total income made in the assessment year 1951-52 but there was a total loss or Rs. 2,715, the proviso to section B could not be applied. This argument is based upon the language of the proviso which has already been considered by their Lordships of the Supreme Court in Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. In that case the facts were similar as they are here with reference to the assessment year 1951-52. In considering the argument raised, that no additional income-tax could be charged on the dividends declared by the company as it had no total income in the year in question their Lordships of the Supreme Court observed as follows :
'The liability to tax is imposed not by the Finance Act but by the Indian Income-tax Act. Section 3 of the latter Act is the charging section, and it provides that the tax should be collected at such rate or rates on the total income as laid down in any Central Act. The Finance Act is an annual Act prescribing the rate or rates. We are concerned with the Finance Act, 1951. Section 2 of the Finance Act prescribes the rates of income-tax by its First Schedule and by the seventh sub-section of that section provides :
For the purposes of this section and of the rates of tax imposed thereby, the expression total income means total income as determined for the purposes of income-tax or super-tax as the case may be, in accordance with the provisions of the Income-tax Act...
It is thus clear from this that if there is no income, there is no question of applying a rate to the total income and no income-tax or super-tax can possibly result...
Now the difficulty arises in applying this proviso to paragraph B of the First Schedule (quoted above). Where there is a total income and there is a payment of dividend either more or less than the limit fixed, one can easily find the figures by which the total income as reduced exceeds or falls short of the dividends and the additional tax that has to be paid. But when the total income is a negative figure and no tax on the total income is levied, the words of the second part of the paragraph, total income, profits liable to tax, dividends payable out of such profits and an additional income-tax, cease to have the meaning they were intended to convey.'
Their Lordships of the Supreme Court held that the assessee company was not liable to pay additional tax on the excess dividend. Therefore the contention of the learned counsel for the assessee is correct, that the assessee company was not liable to pay any tax on the so called excess dividend declared in the year relevant to the assessment year 1951-52.
Moreover, in Commissioner of Income-tax v. Khatau Makanji Spinning and Weaving Co. Ltd. where the question arose whether the excess dividend declared out of the preceding years undistributed profits could be considered to be a part of the total income of the assessee in the year of distribution so as to made it liable to taxation under the Indian Income-tax Act their Lordships of the Supreme Court came to the conclusion that the excess dividend so declared could not be said to be a part of the total income of the year relative to the assessment year because they were declared and paid out of the undistributed profits of an earlier accounting year relative to an earlier assessment. They observed as follows :
'Even if one considers the dividends as having come out of the profits of preceding years, they do not become the income of the relevant previous year, and unless the Finance Act expressly laid down that it should be taxed as part of the total income the purpose is not achieved. Indeed, the Finance Act continues to say that the tax shall be on the total income, as defined in the Indian Income-tax Act and as determined under that Act. It is impossible to say that the additional income-tax was properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year.'
Their Lordships, therefore, held that additional income-tax could not be levied, assessed and recovered under the proviso to paragraph B of part 1 of the First Schedule to the Finance Act, 1953. It is to be noted that the Finance Act, 1953, is the same as the Finance Act, 1951, with some immaterial changes. Further in Commissioner of Income-tax v. Jalgaon Electric Supply Co. Ltd. their Lordships of the Supreme Court pointed out that the scheme of the Finance Act in relation to excess dividends postulates that there should be undistributed profits of one or more years immediately preceding the previous year and that such undistributed profits should be sufficient to cover the amount of excess dividend actually paid out in the previous year under assessment and that the undistributed profits should not have been taken likewise to cover an excess dividend of any other previous year. Their Lordships pointed out that where there were no profits of any preceding year or years the fiction introduced in paragraph B Part 1 of the First Schedule to the Finance Act wholly fails and the method of calculation equally so. In the case relating to the assessment year 1951-52 and 1952-53 referred to us there were no undistributed profits relative to the year preceding the previous year relative to the assessment years in question. It will thus be seen that from whatever angle the problem is looked at the question propounded must be answered against the Department and in the negative.
The assessee will have its costs which we assess at Rs. 300 (Rupees three hundred). One set of costs.
Question answered in the negative.