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Commissioner of Income-tax Vs. Travancore Minerals Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 77 of 1978
Judge
Reported in[1981]130ITR631(Ker)
ActsFinance Act, 1966
AppellantCommissioner of Income-tax
RespondentTravancore Minerals Ltd.
Appellant Advocate P.K. Ravindranatha Menon, Adv.
Respondent Advocate B.S. Krishnan and; V. Ramachandran, Advs.
Excerpt:
direct taxation - assessment - finance act, 1966 - whether tribunal justified in holding provisions relating to levy of additional tax under act of 1966 not attracted - applicability of provisions first schedule part i paragraph f (i) (b) read with explanation 1 for levy of additional tax of 7.5% restricted to cases where company earned taxable income during period relevant to assessment years 1964-65 and 1965-66 - no scope for levy of additional tax where company had no taxable income during such years but distributed amounts by way of dividends on equity shares - held, assessee-company not liable to be subjected to levy of additional tax for 1966-67. - - we fail to see how such tax can be levied against a company which had no taxable income at all and suffered a loss......on the ground that the distribution of dividend made by the assessee during the accounting year relevant to the said assessment year had been wrongly omitted to be subjected to tax as required under the finance acts, 1965 and 1966. on this basis, tax at the rate of 7 1/2% on the dividend distributed aggregating to rs. 2.5 lakhs was levied against the company under liquidation. the tax so levied amounted to rs. 18,750. 5. though the company took up the matter in appeal before the aac, that appeal was dismissed. thereafter, it carried the matter before the tribunal in second appeal. the tribunal held that levy of additional tax under paragraph f(i)(b) of part i of the first schedule of the finance act, 1966, would be warranted only if the dividend distributed by the.....
Judgment:

Balakrishna Eradi, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal, Cochin Bench (hereinafter called 'the Tribunal'), pursuant to the order passed by this court under Section 256(2) of the I.T. Act, 1961 (hereinafter called 'the Act'), in O.P. No. 5407 of 1975 filed by the Commissioner of Income-tax, Ernakulam. The question referred is :

'Whether, on the facts and in the circumstances of the case and in view of the provisions contained in the First Schedule, Part I, Paragraph F(I)(B) read with Explanation 1 and other relevant provisions of the Finance Act, 1966, the Income-tax Appellate Tribunal is correct in law in holding that the provisions relating to the levy of additional tax under the Finance Act, 1966, are not attracted ?'

2. The assessee is a public limited company in liquidation. The company was engaged in the business of exploitation of minerals in Kcrala. It declared for the first time a dividend in the year ended March 31, 1960, which was distributed in the accounting year March 31, 1961. Subsequently, dividend at the rate of 5% of the paid up capital were declared and distributed by the company in the accounting years ending March 31, 1962, March 31, 1964, and March 31, 1965. The business of the company was taken over by the Indian Rare Earths Ltd., with effect from January 27, 1965, and the assessee-cornpany thereafter went into voluntary liquidation. So the accounts of the company were made up for the year April 1, 1964, to January 27, 1965. It was during the said period that the dividend of 5% amounting to Rs. 2.50 lakhs was distributed by the company. The net result of the working of the company for the period relevant to the assessment year 1965-66 disclosed that the company had suffered a loss of Rs. 5,72,162. Hence, in the assessment made against the company for that year, there was no levy of income-tax against the company as there was no taxable income or profit.

3. For the assessment year 1966-67, the accounts were made up for the period January 27, 1965, to January 27, 1966. During the said period, the company had earned a taxable income consisting mainly of the interest received from various banks in which the compensation amount received from the Indian Rare Earths Ltd. had been deposited. The total income of the company for the assessment year 1966-67 was computed by the ITO at Rs. 2,00,370 and tax was levied on the said income.

4. Subsequently, the ITO acting in exercise of the power conferred under Section 148 of the Act, reopened the assessment made against the company for the year 1966-67, on the ground that the distribution of dividend made by the assessee during the accounting year relevant to the said assessment year had been wrongly omitted to be subjected to tax as required under the Finance Acts, 1965 and 1966. On this basis, tax at the rate of 7 1/2% on the dividend distributed aggregating to Rs. 2.5 lakhs was levied against the company under liquidation. The tax so levied amounted to Rs. 18,750.

5. Though the company took up the matter in appeal before the AAC, that appeal was dismissed. Thereafter, it carried the matter before the Tribunal in second appeal. The Tribunal held that levy of additional tax under Paragraph F(I)(B) of Part I of the First Schedule of the finance Act, 1966, would be warranted only if the dividend distributed by the assessee-company was in excess of 10% of the paid up capital, and since the facts of the case disclosed that the dividend distributed was only 5%, the provision for levy of additional tax was not attracted.

6. The department thereafter filed a miscellaneous petition before the Tribunal pointing out that the limit of 10% applied only to the dividendsdeclared during the previous year relevant to the assessment year 1966-67, and that it had no application to the declaration of dividends which had not suffered taxes in the assessment years 1964-65 and 1965-66. While rejecting the miscellaneous petition filed by the department, the Tribunal added another ground for supporting its earlier conclusion that the levy of additional tax was unwarranted in this case, the said ground being that such levy will be attracted only in cases where the company had earned an income liable to be taxed during the year relevant to the assessment year 1965-66, and a rebate had been allowed in respect of the amount distributed by the company by way of dividends. The Tribunal pointed out that for the assessment year 1965-66, there was no income to be taxed in the hands of the company and no rebate had also been allowed, and such being the position, Clause (a) in Explanation 1 appearing under the proviso to Paragraph F in the Finance Act, 1966, did not get attracted at all. It is the correctness of the said view taken by the Tribunal that really arises for consideration before us in this reference,

7. The Finance Act, 1966, introduced some substantial changes in the matter of levy of income-tax on companies. The object and purpose of the effectuation of such changes has been explained thus in paras. 27 and 28 of the memorandum explaining the provisions in the Finance Bill, 1966, published along with the Finance Bill, 1966--See [1966] 59 ITR 112:

'27. Simplification of the rate schedule of income-tax in the case of companies.--The mechanics of calculations of tax in the case of companies has been simplified by drafting the rate schedule of income-tax applicable to them on a basis which is altogether different from that adopted in the Finance Acts of 1965 and earlier years. Under the Finance Act of 1965, the gross rate of income-tax on the total income of every company was prescribed at 80 per cent. The final effective rate of tax was reached by calculating, at first, the amount of rebates on various items of income at specified percentages, varying with different classes of companies; reducing the amount of rebate so calculated by the amount of tax chargeable on the company with reference to the amount of its bonus issues or distributions of dividends to its equity shareholders during the relevant year; and, thereafter, deducting the balance of the rebate, if any, from the tax calculated on the total income of the company at the above-mentioned gross rate of tax of 80 per cent.

28. This round-about procedure of calculation of tax on companies has been avoided under the rate schedule of tax provided in the Bill by eliminating the provisions for rebates and reduction of such rebates, andstating, directly, the effective rates of tax applicable to the incomes of each class of company.'

8. The scheme of Paragraph F of Part I of the First Schedule to the Finance Act, 1966, is to.levy tax only at the rate of 45% of the total income or 55% of the total income in respect of domestic companies in which the public are substantially interested depending upon whether the total income does not exceed or exceeds Rs. 25,000 and to impose an additional tax at the rate of 7.5% on so much of the total income of the company as does not exceed 'the relevant amount of distributions of dividends by the company', The expression 'the relevant amount of distributions of dividends' has been defined in Expln. 1 Clause (a) of the said Explanation alone is relevant for the purpose of this case and that reads :.

'The amount of dividends, other than dividends on preference shares, declared or distributed by the company during the previous year relevant to the assessment year commencing on the 1st day of April, 1964, or the 1st day of April, 1965, with reference to which the amount of the rebate arrived at under the first proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1964 (V of 1964), or, as the case may be, the first proviso to Paragraph F of Part I of the First Schedule to the Finance Act, 1965 (X of 1965), is required to be reduced under the second proviso to the said Paragraph D or, as the case may be, the second proviso to the said Paragraph F, as diminished by so much of the amount of dividends aforesaid with reference to which the rebate referred to hereinabove' is reduced under the second proviso to the said Paragraph D or the second proviso to the said Paragraph F. '

9. To our mind, it appears clear that under the scheme of Paragraph F, the levy of additional tax is contemplated and warranted only where the company has during the accounting period relevant to the concerned assessment year earned a total income which is liable to be taxed, in which there has been a distribution of dividend. The additional tax at 7.5% is to be levied on so much of the total income as does not exceed the relevant amount of distributions of dividends by the company. We fail to see how such tax can be levied against a company which had no taxable income at all and suffered a loss. It was argued before us by the counsel for the department that even in cases where the computation of total income of a company has resulted in a loss it cannot be said that the company had no total income. We see no force in this argument. In a case where the company had suffered a loss, it is difficult to see how it can have any total income. Clause (B) of Paragraph (F)(I) authorises levy of additional tax only in cases where the company has earned taxable profit during the relevant year of account because the levy of the said tax is 'on so muchof the total income as does not exceed the relevant amount of distributions of dividends'.

10. Clause (a) of Expln. 1 also makes it clear that only such amount distributed by way of dividends is to be taken into account with reference to which a reduction of the rebate already allowed is required to be effected under the first proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1964, or the first proviso to Paragraph F of Part I of the First Schedule to the Finance Act, 1965, as the case may be. When we turn to Paragraph D of Part II of the First Schedule to the Finance Act, 1964, we find that under Clause (i) of the proviso to the said Paragraph the grant of a rebate is contemplated only where the company has earned profits liable to tax under the Act for the assessment year commencing on 1st April, 1964, Clause (i)(c)(A) of the second proviso enjoins that the amount of such rebate shall be reduced by a sum calculated at 7.5% of the amount distributed by way of dividends subject to the conditions mentioned in the said clause. The position under Paragraph F of Part I of the First Schedule to the Finance Act, 1965, is also substantially similar.

11. Thus, going by the definition of the expression 'the relevant amount of distributions of dividends' contained in Expln. 1, it is clear that for the purposes of Sub-clause (B) of Clause I of Paragraph F of the First Schedule to the Finance Act, 1966, only amounts distributed by way of dividends by companies which had earned income or profits liable to tax during the assessment years 1964-65 and 1965-66 is to be taken into account. From this, it necessarily follows that applicability of the provision contained in Sub-clause (B) for the levy of additional tax of 7.5% is restricted to cases where the company concerned had earned a taxable income during the period relevant to the assessment years 1964-65 and 1965-66, and there is no scope for the levy of such additional tax where the company had no taxable income at all during those years, but had, none the less, distributed amounts by way of dividends on equity shares.

12. The conclusion that emerges from the foregoing discussion is that the Tribunal was right in holding that the assessee-company was not liable to be subjected to the levy of additional tax for the year 1966-67. The question referred is, accordingly, answered in the affirmative, i.e., in favour of the assessee and against the department. There will be no direction regarding costs.

13. A copy of this judgment, under the seal of the court and the signature of the Registrar, will be forwarded to the Tribunal, as required by law.


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