D.K. Kapur, J.
1. These references (Nos. 39 and 40 of 1977 and 56 of 1983) under section 256(1) of the Income-tax Act, 1961, are at the instance of the Commissioner of Income-tax, Delhi. The common point in these references is concerned with the manner in which a deduction has to be made under section 80K of the Income-tax Act, 1961. The question is differently framed in the case of M/s. C. P. Modi & Sons and M/s. O. P. Modi & Sons from that in Seth Vinay Kumar Modi's case, but the facts of the three cases are common. The assessment year in all the three cases is 1969-70.
2. There are two companies, M/s. Modi Industries Ltd. and M/s. Modi Spinning and Weaving Mills Co. Ltd. In the case of each of these companies, a provisional certificate was granted by the Income-tax Officer indicating how much of the dividend was to be distributed without deduction of tax in each case. The certificate stated in the case of M/s. Modi Industries Ltd., that no amount of tax should be deducted under section 197(3) of the Income-tax Act, 1961; in the case of M/s. Modi Spinning and Weaving Mills Co. Ltd., the provisional certificate stated that 50% of the dividend should be distributed without deducting income-tax. After the assessments of these two companies were completed, the Income-tax Officer sent letters to the two companies indicating the deduction to be allowed under section 80K. In the case of M/s. Modi Industries Ltd., 21.4% of the dividend was to be paid free of tax and in the case of M/s. Modi Spinning and Weaving Mills Co. Ltd., no percentage of the dividend was to be paid free of tax. On the basis of these letters, the Income-tax Officer issued notices to the assesseds on the ground that it had come to his knowledge that income had escaped assessment.
3. The same notice was issued in the case of all the three assesseds. As a result of reassessment proceedings, the Income-tax Officer sought to tax dividend which had escaped tax on account of the provisional certificates granted to the companies. An appeal was taken to the Appellate Assistant Commissioner, who held that action could not be taken under section 147(b). This conclusion was based on the view that the Income-tax Officer could not amend the determination made under rule 20 of the Income-tax Rules, 1962. The Tribunal affirmed this view in appeal by the Department. The view of the Tribunal was based on an elaborate examination of the scheme of the Rules framed under the Income-tax Act relating to exemptions to be granted under section 80K. It was held that once the deduction had been allowed under section 80K, it could not be amended. It was further held that no consequential amendment could be made in the assessment of the individual after the finalisation of the assessments of the companies.
4. The view of the Tribunal has been challenged by way of these references. An elaborate argument was advanced before us as to how section 80K and section 80J were to be reconciled. According to Mr. Wazir Singh for the Department, a provisional certificate is issued at the time dividend is paid to the shareholders indicating how much tax is to be deducted from the dividends to be paid to the shareholders. This is a provisional estimate of the benefits which the company is to get under section 80J. When the assessment of the company is completed, then the actual amount which the company is to get is worked out and that is the stage when the assessments of the shareholders have to be reopened and rectified in accordance with the actual benefits that the shareholders have to get under section 80K. Mr. Vaish for the assesseds urged that this is not at all the way in which the Act is to be operated. He stated that each shareholder gets his dividend after the same is declared by the company and the certificate is to indicate how much tax has been deducted at the source. That certificate also indicates how much of the dividend is exempt under section 80K. On the basis of the certificate, the shareholder gets his benefit by way of enjoying a tax-free dividend. In other words, the tax-free portion of the income enjoyed by the company under section 80J is transmitted to the shareholder under section 80K. Mr. Vaish indicated that rule 20 of the Income-tax Rules gives an elaborate mechanism for working out the actual benefits to be enjoyed by the shareholders. This benefit is not exactly the same as that enjoyed by the company. If some extra benefit is given in one year, it has to be compensated in some other years and if some lesser benefit is given in one year, some additional exemption is to be given in the following year. The reason for this is that the shareholders are taxed before the company and, in any event, it is not possible to get such a large number of assessments going on at the same time. This proceeding cannot be treated as a parallel proceeding.
5. To illustrate this point of Mr. Vaish, it is only necessary to say that there is considerable practical validity in what he submits. Some examples can illustrate this point. Suppose the provisional assessment shows that 50% of the dividend is exempt, then the shareholders will get only 50% of the dividend as exempt from tax and will pay tax on the remaining 50% after getting credit for the amount of tax deducted at source by the company. It may happen that by the time the company is finally assessed, the exempted portion may go up to 75% or even more, or it may happen that the exempted portion may become 25% only. This is because the provisional estimate made by the Income-tax Officer is only an estimate which is liable to change when the final assessment is made. Mr. Vaish submits that if the exemption is increased, then credit for the same has to be given in some other year. It cannot be given in the same year because the shareholder's assessment has been completed (normally) much earlier. Similarly, if the exemption is decreased, then though the shareholder would have got a greater exemption in that year, by operation of rule 20, he will get a reduced exemption in some subsequent year. In other words, the shareholder's exemption has to he adjusted in the subsequent years and not in the same year.
6. The sum and substance of Mr. Vaish's argument is that any way, rule 20 is to be worked out for the purpose of computing the deduction under section 80K.
7. It is now necessary to set out rule 20 which is quite a complex rule. It runs as follows :
'20. Computation of portion of dividend attributable to profits and gains from new industrial undertakings or ships or hotel business. - (1) The amount of the dividend paid or deemed to be paid by a company in respect of any previous year (hereinafter referred to as the 'relevant previous year') for which a deduction is allowable under section 80K, shall be determined in accordance with sub-rules (2) to (5).
(2) The aggregate of that part of the profits and gains of the company of the relevant previous year and of the previous years preceding the relevant previous year, on which no tax was payable by it under section 84 of the Act or under sub-section (1) of section 15C of the Indian Income-tax Act, 1922 (XI of 1922), or, as the case may be, in respect of which a deduction is allowable under section 80J of the Act, shall first be ascertained.
(3) From the amount ascertained as in sub-rule (2), there shall be deducted the aggregate of the amounts of dividends, paid or deemed to be paid by the company in respect of the said preceding previous years, on which tax was not payable under section 85 of the Act or under sub-section (4) of section 15C of the Indian Income-tax Act, 1922 (XI of 1922), or, as the case may be, in respect of which a deduction is allowable under section 80K.
(4) The dividend paid or deemed to have been paid by the company in respect of the relevant previous year shall be regarded as having been paid out of its funds in the following order, namely : -
(i) first, out of, and to the extent of, the resultant sum determined as in sub-rule (3); and
(ii) then, out of the remaining funds.
(5) The part of the dividend which is regarded as having been paid out of the sum mentioned in clause (i) of sub-rule (4) shall be the amount for which a deduction is allowable under section 80K and in the certificate to be given under sub-rule(4) of rule 31, this part shall specifically be indicated.
Explanationn. - The entire amount of dividends paid as a result of declaration in a meeting held to consider the accounts of the company in respect of any previous year shall constitute dividends paid in respect of that previous year.'
8. It will be seen that this rule is quite complex in its operation. The amount which is to be granted to a shareholder as exempted dividend is not exactly the same as the amount enjoyed by the company in that year. It is based on the sum total of the exemptions enjoyed by the company in several years and on the amount already granted to the shareholder and what remains to be granted to the shareholder.
9. The scheme of the Act is, thereforee, to decline the assessment of the company under section 80J from the assessment of the shareholders under section 80K, but the two things are made interdependent on each other by the wording of rule 20. Of course, one can understand a number of practical difficulties in working out the rule.
10. In fact, this point has become academic in this particular case because of some figures brought to our notice by Mr. Vaish. What happened was that the exemptions to be granted under section 84/80J to M/s. Modi Spinning and Weaving Co. Ltd. and M/s. Modi Industries Ltd., for the period 1961-62 to 1970-71, kept on varying from time to time. For instance, in the case of M/s. Modi Spinning and Weaving Co. Ltd., the company had claimed Rs. 54,63,625 as being exempt. This figure, as a result of assessment, was adjudged to be reduced to Rs. 34,14,788, i.e., this is the total for the ten years. But after the appeals of the company had been heard and disposed of, the amount rose to Rs. 75,18,316, which was even more than what was claimed by the assessed. On the other hand, the shareholders got only an amount of Rs. 29,11,967. It is too much to give the whole history of how the amounts kept on varying, but it shows the difficulty of operating section 80J as far as its link with section 80K is concerned.
11. Turning to the case of M/s. Modi Industries Ltd., the amount as per the company was Rs. 47,84,908 for nine years. But, after the assessment orders, it became Rs. 16,12,132. After appeals, it became Rs. 52,19,350, which is approximately the same as claimed by the assessed. The shareholders received only Rs. 24,85,199, which means that 50% exemption has been received by the shareholders out of the amount really due.
12. In this background, it becomes difficult to understand how section 80K can be worked out in the case of shareholders. The only way is that adjustment has to be given in some subsequent years, otherwise they will be paying tax on their exempted dividend all the time.
13. We asked learned counsel for the Department to check up whether the statement of Mr. Vaish that there had been no underestimate in the provisional certificate was correct because as a result of the appeals by the two companies, the relief under section 80J as originally recorded was restored. In spite of the grant of time, Mr. Wazir Singh was unable to show that the figures shown to us were wrong. We thus take it for granted that the exemptions already granted to the assesseds in the present case were correct, though they became incorrect after the assessment order was passed. However, on account of the appeals by the dividend paying companies involved, the estimates became correct or even became underestimates. In the circumstances, it seems that no amount was to be deducted from the portion of the dividend already granted as exempt.
14. It is now necessary as an elaboration to point out exactly how this provision works. Under section 80J, a company is granted an exemption from paying tax on a particular portion of its profits. As the final figures of exemption cannot be arrived at without completing the assessment, a provisional figure is indicated to the companies concerned by the Income-tax Officer. This provisional amount is indicated in the dividend certificate issued to the shareholders. The shareholder at the time of his assessment produces the certificate of the company and is able to get a portion of the dividend as declared by the certificate to be free from tax also declared as free from tax in his own assessment. At a later date, when the assessment of the company is completed, the exempted portion may be reduced or increased dependent on the calculation made under section 80J which itself is quite elaborate. In such a case, it may well be said that the shareholder has got excessive exemption or he may have got a very much reduced exemption. The question will then arise as to how the shareholder is to give back this extra exemption or to get the short exemption. It can also happen that in further appeal or appeals which may go right up to the Supreme Court, the amount actually allowed under section 80J may go up or may go down in the case of the company. Every successive appeal of the company may lead to a change in the quantification of the exemption under section 80J. As there may be hundreds and thousands of shareholders of a company, it will be too much to expect that every time the company wins or fails in an appeal, the shareholder's assessment has also to be amended. In order to prevent such a heavy load on the Income-tax Department, the provisions of rule 20 have been so framed as to allow the exemption to be given to the shareholders at a date later than that enjoyed by the company. As shown in the final chart produced before us, the actual exemptions enjoyed by the shareholders are far less than what they should have got in the case of both the companies. This is due to the great difficulty in working out the manner in which the benefit of section 80J is to be passed on to the shareholders. We are, thereforee, inclined to agree with the view propounded by Mr. Vaish. If not for anything else, as a matter of convenience, this is the only way in which the shareholders can get the benefit of increased exemption or lose the benefit of extra exemption which may be granted to them in any particular year. Eventually, all the benefit enjoyed by a company is to be passed on to the shareholders.
15. We note that the exemption under section 80K is no longer allowed to the shareholders. Probably the reason why the same has been withdrawn is because it is extremely complex to work out the way in which the exemption is to be passed on to the shareholders.
16. It may here be useful to quote what the Income-tax Appellate Tribunal has stated about the adjustment made under rule 20 for these companies in past years :
'11. It may be argued that since the alteration in the shareholders' assessments are only consequential to the assessments of the companies, the Revenue may not be without a remedy if the computation made in the certificate under section 197(3) read with rule 20 is wrong. We have already pointed out that if there is a mistake apparent, it can be rectified under section 154. In other cases, the excess relief allowed in one assessment year can be adjusted in the subsequent years while doing aggregation under rule 20. In fact, this has been the practice followed by the Revenue throughout from the assessment years 1961-62 to 1968-69. Even in respect of the assessment year under appeal, i.e., 1969-70, adjustment in regard to the excess relief allowed to the assessed as a shareholder has been made by the Income-tax Officer in the assessment year 1970-71, vide order dated 2-4-1975. thereforee, there is no loss of revenue in working the provisions according to the declared intention of the Legislature referred to above.'
17. This quotation shows that the Tribunal had applied its mind to the various figures of the companies in the past years showing that no extra amount was allowed to the shareholders and if any had been allowed, they were subject to adjustment in the manner set out in rule 20.
18. In the circumstances, we would answer the question referred to us in the affirmative to hold that this was not a case for reassessing the income but was a case for applying rule 20 and, in any case, the figures eventually determined under section 80J as being available for deduction to the companies showed that there had been no excess payment of extra exemptions under section 80K to the shareholders in the present cases. We will allow the parties to bear their own costs in view of the fact that this case is really a kind of test case to determine how section 80K is to be applied.