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Rajasthan Financial Corporation Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 12 of 1972
Judge
Reported in[1987]163ITR278(Raj)
ActsFinance Act, 1964; Finance Act, 1965; Companies Act, 1956 - Sections 85; Income Tax Act, 1961 - Sections 2(17), 2(26) and 154
AppellantRajasthan Financial Corporation
RespondentCommissioner of Income-tax
Appellant Advocate B.P. Agrawal, Adv.
Respondent Advocate R.N. Surolia, Adv.
Cases ReferredNational Rayon Corporation Ltd. v. G. R. Bahmani
Excerpt:
.....clearly room for controversy on the question as to whether shares in question have attributes of preference shares and in such a case, the provisions of section 154 could not be invoked. the tribunal held that having regard to the terms under which the shares were issued, there was no room for contending that the shares were in any sense preference shares according to the criteria laid down in the companies act, 1956, or according to the criteria which were judicially accepted earlier as distinguishing preference shares from other shares and, therefore, the appellate assistant commissioner was quite right in taking the view that the income-tax officer had clearly committed a mistake in not taking into account the dividend on these shares and reducing the rebate to which the assessee..........tribunal was right in law in holding that the shares of the assessee corporation were not preference shares ?2. whether, on the facts and in the circumstances of the case, the appellate tribunal was right in holding that the mistakes in the original assessments in not reducing the rebates on super-tax for the assessment year 1964-65 and income-tax for the assessment year 1965-66, with reference to the dividends declared by the assessee, were mistakes apparent from the records within the meaning of section 154 of the income-tax act ?2. these questions relate to the assessment years 1964-65 and 1965-66.3. in the finance act, 1964, provision was made with regard to imposition of super-tax at the rate of 55% on every company other than the life insurance corporation of india in.....
Judgment:

Agrawal, J.

1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as 'the Tribunal'), by its order dated February 19, 1972, passed under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), has referred the following questions arising out of the order of the Tribunal dated June 1, 1970, in Income-tax Appeals Nos. 666 and 667 of 1968-69, for the opinion of this court:

'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the shares of the assessee corporation were not preference shares ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the mistakes in the original assessments in not reducing the rebates on super-tax for the assessment year 1964-65 and income-tax for the assessment year 1965-66, with reference to the dividends declared by the assessee, were mistakes apparent from the records within the meaning of Section 154 of the Income-tax Act ?

2. These questions relate to the assessment years 1964-65 and 1965-66.

3. In the Finance Act, 1964, provision was made with regard to imposition of super-tax at the rate of 55% on every company other than the Life Insurance Corporation of India in Paragraph D of Part II of the First Schedule to the said Act. Under the proviso appended to Paragraph D aforesaid, a rebate at the rate of 37.5% was to be allowed in the case of any company, as referred to in Section 108 of the Income-tax Act, to the total income exceeding Rs. 25,000. There was, however, a further proviso whereunder it was provided that in the case of a company referred to in Section 108 of the Act, which has declared or distributed to its shareholders during the previous year any dividends other than dividends on preference shares, the amount of rebate would be reduced by 7.5% on the whole amount of the dividends other than dividends on preference shares. In other words, the rebate that was allowed was to be reduced by 7.5% on the dividend other than dividend on preference shares. In the Finance Act, 1965, First Schedule, Part I. Paragraph F, income-tax at the rate of 80% was prescribed on the whole of the total income of every company other than Life Insurance Corporation of India. Under the proviso in the said paragraph, rebate was given in respect of income of the company as is referred to in Section 108 of the Income-tax Act. There was, however, a further proviso for the reduction of the amount of rebate by 7.5% in case of a company, as is referred to in Section 108 of the Act, which has declared or distributed to shareholders during the previous year any dividend other than dividend on preference shares and the said reduction in the rebate at the rate of 7.5% was to be made on the whole amount of the dividend other than dividend on preference shares.

4. The Rajasthan Financial Corporation (hereinafter referred to as 'the assessee') is a State Financial Corporation established by the Government of Rajasthan under the provisions of the State Financial Corporations Act, 1951, (hereinafter referred to as 'the Financial Corporations Act'). It was established in the year 1955, by a notification issued by the State Government under Section 3 of the Financial Corporations Act, with an authorised capital of Rs. 2,00,00,000 divided in 2,00,000 shares of Rs. 100 each. The subscribed and paid up capital of the assessee is Rs. 1,00,00,000 divided into 1,00,000 shares of Rs. 100 each. The assessee has been established for advancing and granting loans to industries in the State of Rajasthan. In the previous years relating to the assessment years 1964-65 and 1965-66, the assessee had declared dividend of Rs. 3,50,000 at the rate of 3 1/2% on its shares. For the assessment year 1964-65, the assessee had submitted a return declaring a total income of Rs. 5,39,757. The Income-tax Officer assessed the income of the assessee at Rs. 5,58,237 for that assessment year. In respect of the assessment year 1965-66, the assessee had submitted a return declaring a total income of Rs. 6,14,120. The Income-tax Officer assessed the income of the assessee at Rs. 6,20,342 for the said year.

5. After the aforesaid assessment orders had been passed, the Income-tax Officer initiated proceedings under Section 154 of the Act for the rectification of the assessment orders and passed orders dated December 14, 1966, whereby the Income-tax Officer held that the assessee was liable to tax at the rate of 7.5% on the dividend declared by it in both the assessment years in view of the provisions contained in the Finance Act, 1964, and the Finance Act, 1965. The Income-tax Officer by his order aforesaid rectified the assessment orders for the assessment years 1964-65 and 1965-66 accordingly. The assessee filed appeals against the aforesaid orders dated December 14, 1966, passed by the Income-tax Officer and the said appeals were disposed of by the Appellate Assistant Commissioner by a common order dated July 31, 1968. Before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that the shares of the assessee were in the nature of preference shares and the dividend which was declared by the assessee during the assessment years 1964-65 and 1965-66 was dividend on preference shares and tax was not payable on the said dividends. It was also submitted on behalf of the assessee that the provisions of Section 154 of the Act could not be invoked in the matter of imposition of tax on the dividends declared by the assessee inasmuch as the error in the assessment orders could not be said to be an error apparent on the face of the record. The Appellate Assistant Commissioner held that the expression 'preference shares' presupposes existence of at least two categories of shares which is not the case here and that from the provisions of the Financial Corporations Act, it was not possible to infer that the shares of the assessee enjoy any preference for payment of dividends, or repayment of capital over other shares, and the liability for payment of excess dividend tax was clearly attracted. The Appellate Assistant Commissioner was, however, of the view that the provisions of Section 154 ) cannot be invoked where the proposed action involves any controversy or debatable point of law and that there was clearly room for controversy on the question as to whether shares in question have attributes of preference shares and in such a case, the provisions of Section 154 could not be invoked. The Appellate Assistant Commissioner, therefore, cancelled the order dated December 14, 1966, passed by the Income-tax Officer under Section 154 of the Act. The Department went in appeal before the Tribunal against the aforesaid order passed by the Appellate Assistant Commissioner and the Tribunal by its order dated June 1, 1970, allowed the said appeal of the Department. The Tribunal held that having regard to the terms under which the shares were issued, there was no room for contending that the shares were in any sense preference shares according to the criteria laid down in the Companies Act, 1956, or according to the criteria which were judicially accepted earlier as distinguishing preference shares from other shares and, therefore, the Appellate Assistant Commissioner was quite right in taking the view that the Income-tax Officer had clearly committed a mistake in not taking into account the dividend on these shares and reducing the rebate to which the assessee was entitled. The Tribunal, however, disagreed with the Appellate Assistant Commissioner that the said mistake was not apparent from the record. According to the Tribunal, there was no room for argument that the shares of the assessee were really preference shares. The Tribunal, therefore, held that the Income-tax Officer was quite competent to rectify the mistake in regard to the dividends declared and reduce the rebate to which the assessee was entitled. The Tribunal, therefore, upheld the order of the Income-tax Officer passed under Section 154 of the Act.

6. Feeling aggrieved by the aforesaid order passed by the Tribunal, the assessee moved the Tribunal for referring to this court the questions of law arising out of the order of the Tribunal and the Tribunal had referred the questions mentioned above to this court for its opinion.

7. Shri B. P. Agrawal, the learned counsel for the assessee, has submitted that the shares of the assessee were in the nature of preference shares and the dividend that was paid by the assessee on its shares for the previous years relevant to the assessment years 1964-65 and 1965-66, being dividend on preference shares, had rightly been taken into consideration for granting rebate and that the Income-tax Officer was not justified in reducing the said rebate by 7 1/2% on the ground that the said dividend was not paid on preference shares. The aforesaid contention of Shri Agrawal necessitates the interpretation of the expression 'preference shares' as contained in the Finance Act, 1964, and the Finance Act, 1965. The submission of Shri Agrawal was that the expression 'preference shares' in the Finance Act, 1964, and the Finance Act, 1965, must be given its natural meaning and should not be construed in the sense in which it is used in company law. In our opinion, there is no merit in this contention. The. expression 'preference shares' has not been defined in the said Finance Acts. Nor. is it defined in the Income-tax Act. The provisions of the Finance Act, 1964, and the Finance Act, 1965, provide for rebate to a company and the term 'company' is defined in Section 2(17) of the Income-tax Act. The aforesaid definition of 'company' as contained in Section 2(17) of the Act refers to an Indian company and the expression 'Indian company' has been defined in Section 2(26) to mean a company formed and registered under the Companies Act, 1956, and includes a company formed and registered under any law relating to companies formerly in force in any part of India. The aforesaid definitions of the expressions 'company' and 'Indian company' show that the provisions in the Finance Act, 1964, and the Finance Act, 1965, relating to rebates were mainly in relation to companies formed and registered under the Companies Act, 1956, and companies formed and registered under any law relating to companies formerly in force in any part of India. Since the Legislature was dealing with companies formed and registered under the law dealing with companies, it must be held that in using the expression 'preference shares' in the Finance Acts of 1964 and 1965, Parliament intended to use it in the sense in which it is generally understood in company law. We are, therefore, unable to accept the contention of Shri B. P. Agrawal that the provisions of the Companies Act, 1956, cannot be invoked for the purpose of construing the expression 'preference shares' as contained in the Finance Act, 1964, and the Finance Act, 1965.

8. The next contention urged by Shri Agrawal was that even if the expression 'preference shares' as contained in the Finance Act, 1964, and the Finance Act, 1965, is construed with reference to the provisions contained in Companies Act, 1956, the shares of the assessee were in the nature of 'preference shares' and the dividend paid on the said shares was dividend paid on preference shares and was, therefore, entitled to rebate under the Finance Act, 1964, and the Finance Act, 1965. In order to appreciate the aforesaid contention of Shri Agrawal, it will be necessary to consider the provisions contained in the Companies Act, 1956, with regard to preference shares. The relevant provisions in this regard are contained in Section 85 of the Companies Act, 1956, which reads as under :

'85. (1) 'Preference share capital' means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely :--

(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax ; and

(b) that as respects capital, it carries or will carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely:--

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding-up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Explanation.--Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:--

(i) that, as respects dividends, in addition to the preferential right to the amount specified in Clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid ;

(ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in Clause (b), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

(2) 'Equity share capital' means, with reference to any such company, all share capital which is not preference share capital.

(3) The expressions 'preference share' and 'equity share' shall be construed accordingly.'

9. A perusal of the aforesaid provisions shows that a preference share, as commonly understood in company law, must have two attributes, viz., (i) as respects dividends, it must carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate ; (ii) as respects capital, it must carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up.

10. The submission of Shri Agrawal was that in the case of the shares of the assessee, both these attributes are present and, therefore, the shares of the assessee must be regarded as preference shares. In support of his aforesaid submission, Shri Agrawal has invited our attention to Section 6 of the Financial Corporations Act. Sub-section (1) of Section 6 lays down that the shares of the Financial Corporations shall be guaranteed by the State Government as to tfie repayment of principal and the payment of annual dividend at such minimum rate as the State Government may, with the approval of the Central Government, fix by notification published in the Official Gazette at the time of issuing the shares. In this regard, Shri Agrawal has invited our attention to the notification dated January 17, 1955, issued by the Government of Rajasthan in exercise of the powers conferred on it by Sub-section (1) of Section 6 of the Financial Corporations Act whereby the State Government has fixed 3 1/2% as the minimum rate of annual dividend, the payment of which is guaranteed by the State Government on the shares of the assessee. Shri Agrawal has also invited our attention to Sub-section (3) of Section 35 of the Financial Corporations Act wherein it has been laid down that no dividend paid under Section 35 shall under any circumstances exceed the rate of 5 % per annum. Shri Agrawal has contended that the provisions contained in Sections 6 and 35 of the Financial Corporations Act show that the shares of the assessee, as respects dividend, carry a right to be paid an amount calculated at a fixed rate and as respects capital, the said shares carry a right to be paid the principal amount and, therefore, the shares of the assessee are preference shares as the said term is understood in company law.

11. We have given our careful consideration to the aforesaid submission of Shri Agrawal but we are unable to agree with it. The expression 'preference share' implies that such a share is to have preference over other share or shares. In other words, it postulates the existence of at least two types of shares out of which one type of shares is to be treated as preference shares and such shares must have some preferential right over the other type of shares. Section 85 of the Companies Act, 1956, also Calks of preferential rights in the matter of payment of dividend as well as repayment of capital. A preferential right necessarily implies preference over somebody. In cases where the capital consists of one class of shares only, all the shares enjoy equal rights. No share can claim any preferential right over other shares. Such shares cannot, therefore, be regarded as preference shares. In taking the aforesaid view, we find ourselves fortified by the decision of the Patna High Court in Bihar State Financial Corporation v. CIT : [1976]102ITR517(Patna) . In the said case, the Patna High Court was required to deal with the same issue which arises for consideration in this case, namely, whether the dividend paid on the shares of the Bihar State Financial Corporation established under the Financial Corporations Act, was entitled to rebate under the Finance Act, 1964, and the Finance Act, 1965, on the ground that the said shares were preference shares. The Patna High Court, after considering the provisions of the Financial Corporations Act as well as Section 85 of the Companies Act, 1956, held that the shares of the Bihar State Financial Corporation did not fall within the category of preference shares. In this regard, the High Court has observed as under (p. 523 and 524) :

'Both under the Indian law and the English law it is well settled that it is not necessary that equal rights and privileges should be attached to all shares, some may be preferential either as to capital or as to dividend or as to both and where a preferential dividend of a specified amount is attached to shares, the holders of such shares are limited to these fixed dividends and not entitled to participate in profits to any greater extent. It would be seen, therefore, that there must be at least two classes of dividends governing two such classes of shares in which one class is given a preferential treatment over the other and the rate of dividends, once being fixed to be preferentially paid to such a class of shareholders, those shareholders are not entitled to participate in the profits to any extent more than that which is fixed. In the instant cases, it will be noticed that there is only one class of shares. Therefore, there is no question of preferential treatment of one class of shareholders over any other class either in the matter of payment of dividends or in the matter of fixed dividends to be so preferentially paid. All the shareholders are of one class, each one being entitled to a minimum dividend at the rate of 3%% guaranteed by the State Government and this minimum is subject to fluctuation, depending upon the actual profits of the Corporation, up to a maximum of 5 per cent. If the rate of dividend is liable to fluctuation between two limits so that in one particular year, a shareholder gets at the minimum rate of 3 1/2 %, at the same time being entitled to participate in the profits to a greater extent up to a limit of 5 per cent. depending upon the contingencies set forth in Section 35(2) of the Corporations Act, it cannot be said that it is a fixed rate of dividend to which the shareholders are entitled. 'Fixed' in common parlance or even in legal language must always mean 'unalterable' or 'invariable'. Even with regard to capital, there is no preferential right given to any shareholder vis-a-vis the other shareholders. All are equally entitled to the repayment in accordance with the provisions of the Corporation Act as per guarantee of the State Government. Treating both the Clauses (a) and (b) of Section 85(1) even disjunctively, therefore, it would be found that the shares of the Corporation cannot fall within the category of preference shares.'

12. Shri B. P. Agrawal has placed reliance on the decision of the Madhya Pradesh High Court in Madhya Pradesh Financial Corporation v. CIT : [1981]132ITR884(MP) . In that case also, the question that arose for consideration was whether rebate could be claimed under the Finance Act, 1964, and the Finance Act, 1965, on the dividend paid on the shares of the Madhya Pradesh Financial Corporation which was established under the State Financial Corporations Act. We have perused the said decision but we find that in that case no argument was raised that the dividend paid by the Madhya Pradesh Financial Corporation which was a Corporation established under the State Financial Corporations Act, was a dividend on preference shares and could be taken into consideration for grant of rebate under the provisions of the Finance Act, 1964, and the Finance Act, 1965. In that case, the learned judges have proceeded on the basis that there was no provision in the Finance Act, 1964, providing for levying of tax on the dividend distributed by a company. The aforesaid decision thus does not lend any assistance to the contention of Shri Agrawal. In our opinion, therefore, it must be held that the shares of the assessee cannot be regarded as preference shares and the Tribunal was right in law in holding that the shares of the assessee are not preference shares.

13. The next question which arises for consideration is as to whether the mistake in the original assessment made by the Income-tax Officer in not reducing the rebate on super-tax for the assessment year 1964-65 and on income-tax for the assessment year 1965-66 with reference to the dividend declared by the assessee, was a mistake apparent from the record within the meaning of Section 154 of the Act. In this connection, it may be observed that the provisions of Section 154 of the Act are in pari materia to Section 35 of the Indian Income-tax Act, 1922. In Maharana Mills (Private) Ltd. v. ITO : [1959]36ITR350(SC) the Supreme Court while considering the provisions of Section 35 of the Indian Income-tax Act, 1922, has laid down (p. 358) :

'The power under Section 35 is no doubt limited to rectification of mistakes which are apparent from the record. A mistake contemplated by this Section is not one which is to be discovered as a result of an argument but it is open to the Income-tax Officer to examine the record including the evidence and if he discovers any mistake, he is entitled to rectify the error provided that if the resuit is enhancement of assessment or reducing the refund, then notice has to be given to the assessee and he should be allowed a reasonable opportunity of being heard.'

14. In T. S. Balaram, ITO v. Volkart Brothers : [1971]82ITR50(SC) the provisions of Section 154 of the Act were construed and it has been laid down that the test for determination as to whether the mistake to be rectified is a mistake apparent from the record, is the same test which is applied by courts while exercising jurisdiction under Article 226 of the Constitution and it has been observed (p. 53) :

'A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan v. Mallikarjun Bhavanappa Tirumale : [1960]1SCR890 this court while spelling out the scope of the power of a High Court under Article 226 of the Constitution ruled that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record--see Sidhram appa Andannappa Manvi v. CIT : [1952]21ITR333(Bom) .'

15. To the same effect is the law laid down by the Bombay High Court in National Rayon Corporation Ltd. v. G. R. Bahmani, ITO : [1965]56ITR114(Bom) . In that case, it has been observed that a mistake which may form the subject-matter of rectification under Section 35 of the Indian Income-tax Act, 1922, need not be a clerical or arithmetical mistake and that it may be a mistake of fact as well as a mistake of law but in order that it becomes a mistake apparent from the record, it must be a glaring, obvious or self-evident mistake and that a mistake which has to be discovered by a long drawn process of reasoning or examining arguments on points where there may conceivably be two opinions, cannot be said to be a mistake or error which is apparent from the record.

16. In the present case, the question is whether the mistake in the original assessment orders in not reducing the rebate on the dividends paid by the assessee on its shares on the ground that the said dividend was not a dividend paid on preference shares, can be regarded as a mistake apparent from the record. The Appellate Assistant Commissioner was of the view that the said mistake was not a mistake apparent from the record for the reason that there was clearly room for controversy on the question as to whether the shares of the assessee have attributes of preference shares. The Tribunal disagreed with the Appellate Assistant Commissioner and held that there is no room for argument that the shares of the assessee are really preference shares. We are inclined to agree with the Appellate Assistant Commissioner and to hold that the mistake in the original assessment orders cannot be said to be a mistake apparent from the record so as to justify the exercise of the power of rectification under Section 154 of the Act. As to whether the shares of the assessee can be regarded as preference shares so as to entitle the assessee to rebate under the provisions of the Finance Act, 1964, and the Finance Act, 1965, involves the interpretation of the provisions of the Financial Corporations Act, in the light of the provisions contained in Section 85 of the Companies Act, 1956. The said question was indeed a debatable question and in the light of the test referred to above, it cannot be said that there conceivably could not be two opinions on this matter. In our opinion, therefore, the Tribunal was not right in holding that the mistake in the original assessment in not reducing the rebate on super-tax for the assessment year 1964-65 and income-tax for the assessment year 1965, 66 with reference to the dividends declared by the assessee were mistakes apparent from the record within the meaning of Section 154 of the Act.

17. In the result, question No. 1 is answered in the affirmative, i.e., against the assessee and in favour of the Department and question No. 2 is answered in the negative, i.e., in favour of the assessee and against the Department The parties are left to bear their own costs.


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