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Jaipur Udyog Limited Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberIncome-tax Reference No. 28 of 1974
Judge
Reported in[1985]155ITR476(Raj)
ActsIndian Income Tax Act, 1922 - Sections 15C and 18(3F); Income Tax Act, 1961 - Sections 84, 85, 101, 101(2), 197(3), 201 and 201(1); Income Tax Rules, 1962 - Rule 20
AppellantJaipur Udyog Limited
RespondentCommissioner of Income-tax
Appellant Advocate K.K. Jain,; S.M. Mehta and; G.S. Bafna, Advs.
Respondent Advocate R.N. Surolia, Adv.
Excerpt:
- - under the proviso to section 194, it was permissible to pay the dividend without making any deduction in cases where the ito had given a certificate in writing in the prescribed manner that to the best of his belief, the total income of the shareholder would be less than the minimum liable to income-tax. section 201 prescribed the consequences of the failure to deduct the tax under section 194 of the act and it laid down that if the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under the act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. 5. in its appeals before the tribunal, the.....agrawal, j.1. in this reference made by the income-tax appellate tribunal, jaipur (hereinafter referred to as 'the tribunal'), relating to the assessment year 1962-63, the following questions have been referred to this court:'(i) whether, on the facts and in the circumstances of the case, the tribunal was justified in upholding the order of the income-tax officer under section 201(1) of the income-tax act, 1961 ? (ii) whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the letter of the income-tax officer dated july 28, 1962, is not a certificate as contemplated by sub-section (3) of section 197 of the income-tax act, 1961 ? (iii) whether the tribunal is right in holding that the company should not have acted on the basis of the letter.....
Judgment:

Agrawal, J.

1. In this reference made by the Income-tax Appellate Tribunal, Jaipur (hereinafter referred to as 'the Tribunal'), relating to the assessment year 1962-63, the following questions have been referred to this court:

'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Income-tax Officer under Section 201(1) of the Income-tax Act, 1961 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the letter of the Income-tax Officer dated July 28, 1962, is not a certificate as contemplated by Sub-section (3) of Section 197 of the Income-tax Act, 1961 ?

(iii) Whether the Tribunal is right in holding that the company should not have acted on the basis of the letter dated July 28, 1962, issued by the Income-tax Officer ?

(iv) Whether the Tribunal was right in holding that the facts and the law pertaining to assessment year 1962-63 were vitally and in essential respects different from those pertaining to assessment years 1960-61 and 1961-62 and, therefore, the ratio of the decision of their Lordships of the Rajasthan High Court in regard to assessment years 1960-61 and 1961-62 did not govern the application of law with regard to assessment year 1962-63 ?

(v) Whether the Tribunal was right in holding that notice under Section 156 of the Income-tax Act, 1961, could validly be issued for giving effect to the order under Section 201(1) of the Income-tax Act, 1961 ?

(vi) Whether, on the facts and in the circumstances of the case, the Income-tax Officer could pass the order under Section 201(1) of the Income-tax Act, 1961, even though he discharges the statutory duty cast upon him of issuing the statutory certificate under Section 197(3) of the Income-tax Act, 1961 ?

(vii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the order of the Income-tax Officer even though it was passed after a lapse of about 6 years from the date of the distribution of the dividends ?'

2. M/s. Jaipur Udyog Ltd. (hereinafter referred to as the 'assessee') owns a cement factory at Sawai Madhopur in Rajasthan. Out of the four plants of the said cement factory, the first two plants were set up before March 31, 1957, and the third and fourth plants were installed after March 31, 1957. Under Section 84 of the I.T. Act, 1961 (hereinafter referred to as the 'Act'), as it stood at the relevant time, exemption from income tax was granted in respect of profits and gains derived from an industrial undertaking or business referred to in the said section to the extent of 6% per annum on the capital employed in the undertaking. Under Section 85, the said exemption granted under Section 84 was applicable to the dividends paid out of the profits or gains on which income-tax was not payable under Section 84. Under Section 101 of the Act similar exemptions were permissible in respect of super-tax which was chargeable on the total income. Under Section 194 of the Act, the principal officer of the company was required to deduct from the amount of dividend declared to be paid, the income-tax and super-tax payable before making payment of the dividend. Under the proviso to Section 194, it was permissible to pay the dividend without making any deduction in cases where the ITO had given a certificate in writing in the prescribed manner that to the best of his belief, the total income of the shareholder would be less than the minimum liable to income-tax. In Section 197, provision was made for issuance of certificate by the ITO for deduction of income-tax or super-tax at any lower rates or for no deduction of income-tax or super-tax, as the case may be. Sub-section (3) of Section 197 laid down that where the principal officer of a company considered that by reason of the provisions of Sections 84 and 101, no tax would be payable by the recipient on the whole or any portion of the dividend referred to in Section 85 and Sub-section (2) of Section 101, he may, before paying the dividend to the shareholder or issuing any cheque or warrant in respect thereof, make an application to the ITO to determine the appropriate proportion of the dividend on which tax was not payable by the recipient under the provisions of Section 85 and Sub-section (2) of Section 101 and on such determination by the ITO, no tax was to be deducted on such proportionate amount. Section 201 prescribed the consequences of the failure to deduct the tax under Section 194 of the Act and it laid down that if the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under the Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax.

3. The assessee addressed a letter (annex. 'A') dated July 17, 1962, to the ITO, Income-tax-cum-Estate Duty Circle, Jaipur, wherein it mentioned that the third and fourth plants were installed after March 31, 1957, and under Sections 84 and 101 of the Act, the profits from these plants were exempted from income-tax and super-tax for a period of 5 years and that, therefore, the profits on the said plants were exempt from income-tax and super-tax for the assessment year 1962-63. In the said letter, it was also stated that the assessee intended to pay dividend to the shareholders for the accounting year ending March 31, 1262, and, therefore, they were filing this application under Section 197(3) of the Act with a request to determine the appropriate portion of the dividend on which tax was not payable by the recipients under the provisions of Sections 85 and 101 of the Act. In the said letter, it was also stated that the details of calculations in respect of capital employed in the third and fourth cement plants were being enclosed and that such capital worlds out to Rs. 2,86,79,760 and that the portion that was exempted for the year, i.e., assessment year 1962-63, worked out at 6% on the above figure, comes to Rs. 17,20,786 and that, therefore, the profits and gains for the accounting year ending March 31, 1962, were exempt from income-tax and super-tax. By the letter aforesaid, the ITO was requested to determine the proportionate portion of the profit exempt under Sections 84 and 101 in accordance with the provisions of Section 197(3) of the Act. Along with the said letter, the assessee enclosed a statement showing details of the capital employed under Sections 84 and 101 of the Act. In the said statement it was mentioned that the profit in the previous year relevant to the assessment year 1962-63 was Rs. 54,93,718. After receiving the said letter, the ITO discussed the matter with the authorised representative of the assessee and, thereafter, by letter (annex. 'B') dated July 28, 1962, the ITO informed the assessee that an amount of Rs. 17,08,440 out of the total profits of the company would be exempt from tax as per provisions of Sections 84 and 101. After receiving the said letter the assessee declared dividend in its annual general meeting which was held on September 25, 1962, and, thereafter, dividend certificates dated October 1, 1982, were sent to the shareholders. In the said dividend certificate, it was mentioned that on 85.6% of the dividend, no tax had been deducted as the corresponding amount of dividend had been paid out of profits and gains held to be exempt under Section 85 and Sub-section (2) of Section 101 of the Act read with Rule 20 of the I.T, Rules, 1962 (hereinafter referred to as 'the Rules'), and the tax was deducted on the remaining 14.4% of the dividend. In the certificate a reference was made to the letter dated July 28, 1962, sent by the ITO to the assessee whereby sum of Rs. 17,08,440 was determined as profits exempt from tax under Sections 85 and 101 of the Act for the assessment year 1962-63 and it was stated that in addition to the aforesaid sum, a sum of Rs. 2,79,038 was available out of the exempted profits for the years ended March 31, 1960, and March 31, 1961, as determined by the said ITO being the unexpired portion on which tax was not payable by the shareholder. After issuing the aforesaid dividend certificates, the assessee by letter (annexure 'D') dated October 13, 1962, sent a cheque for Rs. 87,859'94 to the ITO towards payment of the tax deducted at source from the dividend paid for the year ended March 31, 1962. The assessment of the assessee for the assessment year 1962-63 was made by the ITO, Central Circle II, Jaipur, by the assessment order (annex. 'E') dated March 30, 1967. In the said assessment order, the ITO determined the net income of the assessee at Rs. 4,38,049 out of which he held that the business income arising from plants Nos. 1 and 2 was Rs. 1,96,675 and the balance income of Rs. 2,41,374 was the business income which was entitled to rebate under Section 84 of the Act. After the aforesaid assessment order had been passed, the ITO, by his letter (annex. 'F') dated April 24, 1967, informed the assessee that the total profit exempt from tax within the meaning of Sections 84 and 101 of the Act for the year, i.e., assessment year 1962-63, had been determined at Rs. 2,41,734 only as against the amount of Rs. 17,08,440 and that in view of the aforesaid revised figure, the percentage of dividend which was exempt from tax under Sections 85 and 101(2) would come down and the assessee was requested to inform the shareholders accordingly and the assessee was also asked to deposit the balance of the tax less deducted by the assessee. In the said letter, it was also stated that the earlier letter dated July 28, 1962, which was on provisional basis may be treated as cancelled. On the basis of the said letter dated April 24, 1967, the assessee addressed the letter (annex. 'G') elated July 5, 1967, to all its shareholders whereby they were intimated that for the year ended March 31, 1962, the quantum of Rs. 2,41,374 qualifies for exemption from tax in the hands of the shareholders under Sections 85 and 101 of the Act. Thereafter, the ITO sent a letter (annex. 'H') dated October 10/11, 1968, to the assessee wherein it was mentioned that the assessee had knowingly worked out incorrect figures of the proportion of dividends qualifying for exemption and deducted tax short of requirement of Section 194 and that the action of the assessee in passing off the benefit of exemption which did not actually exist to the shareholders in respect of the dividend declared on September 25, 1962, was absolutely mala fide. By the letter aforesaid, the ITO asked the assessee to show cause as to why he should not proceed against the assessee under the provisions of Section 201 of the Act to recover from the assessee, the amount by which tax had been short deducted by it from dividends paid in respect of that year. The ITO thereafter passed the order (annex. 'I') dated January 30, 1969, under Section 201(1) of the Act wherein he held that the communication (annex. 8) dated July 28, 1962, issued by the ITO in reply to the assessee's application dated July 17, 1962, could not by any stretch of imagination be interpreted as a certificate issued under Section 197(3) of the Act and that in the absence of determination of the appropriate proportion by the ITO, the principal officer of the assessee company was obliged to deduct tax from the entire dividends and in not doing so and in determining 34'4% of dividend as exempt and acting on such determination, the assessee was acting mala fide. By the order aforesaid, the ITO held that the assessee shall be deemed to be an assessee in default within the meaning of Section 201(1) of the Act in respect of short deduction of tax and further held that such short deduction of tax was to the extent of Rs. 1,67,542. The ITO directed that demand notice be issued for the said amount. The assessee filed an appeal against the aforesaid order of the ITO dated April 30, 1969. During the pendency of this appeal, the ITO passed another order (annex. 'J') dated March 20, 1970, under Section 154 of the Act whereby rectification was made of the earlier order (annex. 'I') dated January 30, 1969, and it was held that the correct amount of short deduction was Rs. 5,22,278 instead of Rs. 1,67,542 determined earlier and that further demand of Rs. 3,54,735 be raised and demand notice be issued for the additional demand. The assessee filed another appeal against the aforesaid order dated March 20, 1970, The appeal of the assessee against the order dated January 30, 1969, was disposed of by the AAC, Central Circle, New Delhi, by order dated October 11, 1972, whereby the said appeal was dismissed. The appeal of the assessee against the order dated March 20, 1979, was also dismissed by the AAC, Central Circle, New Delhi, by order dated October 13, 1972. Feeling aggrieved by the aforesaid orders of the AAC, the assessee filed appeals before the Tribunal.

4. At this stage, it may be mentioned that in respect of assessment years 1960-61 and 1961-62 also, the assessee had paid dividends to the shareholders after having approached the ITO to determine the appropriate portion of the dividends on which income-tax and super-tax was not payable. In relation to those assessment years, recovery proceedings were taken against the assessee on the ground that the assessee had not deducted the full amount of tax which was deductible and the assessee was declared to be an assessee in default by the ITO in respect of the aforesaid short payment of tax on the dividends for the assessment years 1960-61 and 1961-62. The aforesaid orders by the ITO whereby the assessee was declared to be assessee in default in relation to the assessment years 1960-61 and 1961-62 were challenged by the assessee before this court in D.B. Civil Misc. Writ Nos. 759 and 760 of 1969 filed under arts. 226 and 227 of the Constitution of India. The said writ petitions were decided by a Division Bench of this court by order dated January 31, 1973, whereby the said writ petitions were allowed and the orders passed by the ITO declaring the assessee as an assessee in default were quashed. This court held that the communications that were addressed by the ITO to the assessee wherein the amount of profits which was exempt from tax was indicated were determination for the purpose of Section 18(3F) of the Indian I.T. Act, 1922 (similar to Section 197(3) of the Act). This court further held that merely because the ITO had made an erroneous determination under Section 18(3F) of the Indian I.T. Act, 1922, would not entitle the Department to take advantage of the default of its officer to impose liability on the assessee and that after the distribution of the dividend when the assessee was not in a position to fulfil its obligation under Section 18(3D) of the Indian I.T. Act, 1922, the earlier determination made under Section 18(3F) of the Indian. I.T. Act, 1922, could not be modified by the ITO.

5. In its appeals before the Tribunal, the assessee placed strong reliance on the aforesaid decision of this court.

6. The Tribunal disposed of the said appeals by order dated May 26; 1973, whereby both the appeals were dismissed. The Tribunal has observed that the entire Controversy revolves round the interpretation of the letter (annexure 'B') dated July 28, 1962, sent by the ITO to the assessee as to whether it could be said that it was a certificate under Section 197(3) as claimed by the assessee. The Tribunal was of the view that if it was held that the said letter was such a certificate, the action of the ITO in invoking the provisions of Section 201 of the Act would be improper, that if, on the other hand, the Tribunal took a contrary view, the action of the ITO would be quite in order. After examining the facts of the case and the law on the subject, the Tribunal held that the letter dated July 28, 1962, sent by the ITO could not be regarded as a certificate issued under Section 197(3) of the Act. In this connection, the Tribunal has observed that in view of the provisions contained in Sections 84 and 101 of the Act and Rule 20 of the rules, the ITO in order to issue a certificate under Section 197(3) of the Act, must first of all know whether there was any profit and gain of the company on which tax is not payable under Section 84 during the previous year and also whether there was such profit during the previous years preceding the previous year and that if there are no such profits, the application of Rule 20 would not arise. The Tribunal further held that the ITO should also have information with him about the aggregate of the amounts of dividends paid or deemed to be paid by the company in respect of the previous years preceding the previous year on which no tax was paid under Section 85 of the Act and that the ITO should also have known as to what was the amount of dividend paid as a result of declaration in the meeting held to consider the accounts of the company in respect of the previous year. According to the Tribunal, if this information was not available to the ITO or if he did not obtain the same by his own action, he would not be in a position to determine the appropriate proportion and to issue a certificate in terms of Section 197(3) read with Rule 20 and Sections 84, 85 and 101 of the Act. The Tribunal held that, in the present case, the order dated July 28, 1962, shows that the ITO neither applied his mind to the fact whether there was any profit and gain of the assessee during the previous year on which tax was not payable under Section 84 of the Act and, if so, how much, nor whether there was similar profit for previous years preceding the previous year in question and, if so, how much, nor to the aggregate of the amounts of dividends paid in the previous years preceding the previous year on which no tax was paid under Section 85/101. Nor did he care to ascertain the amount of dividends paid during the previous year. The Tribunal has observed that none of the essential ingredients on the basis of which alone could the ITO have been in a position to issue a certificate under Section 197(3) of the Act read with Rule 20 and which would form the numerator and the denominator of the fraction required to determine the appropriate proportion were either provided to him or were called for by him, and in the circumstances, the question of his applying his mind to such data did not arise and that the only thing to which he applied his mind and which he examined was 'the figures of assets and liabilities'. The Tribunal also held that at the time and on the date when the assessee applied to the ITO for determining the proportionate portion of the profit that was exempt from income-tax and super-tax, i.e., on July 17, 1962, the amount of dividend to be distributed for the previous year ending March 31, 1962, had not been decided upon and that the proper time for the assessee to apply to the ITO for a certificate under Section 197(3) of the Act was after it had declared dividend in the general body meeting and that the application dated July 17, 1962, submitted by the assessee was premature. The Tribunal, therefore, held that the letter of the ITO dated July 28, 1962, was not a certificate as contemplated under Section 197(3) of the Act and that neither the principal officer nor any other person properly instructed could have construed the said letter of the ITO as laying down the appropriate proportion of the dividend on which no tax was payable by the recipients under Section 85/101 of the Act, and the said letter could not absolve the principal officer of the company from his legal liability under Section 194 of the Act. The Tribunal distinguished the decision of this court given in relation to the assessment years 1960-61 and 1961-62.

7. Feeling aggrieved by the aforesaid decision of the Tribunal, the assessee moved an application before the Tribunal for referring the questions of law arising out the of the Tribunal to this court under Section 256(1) of the Act and thereupon the Tribunal has referred the questions mentioned above.

8. We have heard Shri K.K. Jain, the learned counsel for the assessee, and Shri R.N. Surolia, the learned counsel for the Revenue.

9. Shri Jain has assailed the order passed by the Tribunal and has submitted that the present case relating to the assessment year 1962-63 is not different from that relating to the earlier assessment years 1960-61 and 1961-62 and that the decision of this court dated June 30, 1973, in relation to the aforesaid assessment years fully governs the present case also and that the Tribunal has erred in not applying the aforesaid decision to the present case. According to Shri Jain, in view of the aforesaid decision of this court in relation to the assessment years 1960-61 and 1961-62, the letter (annex. 'B') dated July 28, 1962, must be held to be a certificate under Section 197(3) of the Act and once it is so held, the assessee cannot be held liable for short deduction of tax on the dividends paid by it to the shareholders in relation to the assessment year 1962-63, In this regard, Shri Jain has submitted that the differences pointed out by the Tribunal between the law and the facts applicable to the present case and the law and facts which were considered by this court while giving its decision dated January 31, 1973, are not of much significance and that the principles laid down by this court in its judgment dated January 31, 1973, are fully applicable to the present case. Shri Jain has also submitted that the notice of demand which was issued by the ITO under Section 201 of the Act was also invalid for the reason that it was issued in violation of the provisions of Section 231 of the Act which prescribes a period of one year for commencing recovery proceedings. According to Shri Jain, under Section 201 of the Act, the assessee has to be deemed to be an assessee in default in respect of the short deduction of tax on the date when the assessee failed to deduct the said tax while paying the dividends to the shareholders and failed to make the payment of tax and that both these events had taken place in the year 1962, and that the proceedings for recovery of the said shortfall could only be initiated within a period of one year and the notices of demand which were issued in the years 1969 and 1970 were, therefore, barred by Section 231 of the Act.

10. Shri Surolia has supported the order of the Tribunal and has submitted that the letter dated July 28, 1962, sent by the ITO to the assessee could not be regarded as a certificate under Section 197(3) of the Act. In this connection, Shri Surolia has submitted that the Tribunal has rightly distinguished the decision of this court in relation to the assessment years 1960-61 and 1961-62. Shri Surolia has also submitted that the question as to whether the demand notice was barred by Section 231 of the Act cannot be agitated inasmuch as it does not arise out of the order of the Tribunal and is not covered by the reference.

11. The principal question which needs to be determined in this case is as to whether the letter (annex, 'B') dated July 28, 1962, sent by the ITO to the assessee can be regarded as a certificate under Section 197(3) of the Act. Section 197(3) of the Act, as it stood at the relevant time, provided that:

'Where the principal officer of a company considers that, by reason of the provisions of Sections 84 and 101, no tax will be payable by the recipient on the whole or any portion of the dividend referred to in Section 85 and Sub-section (2) of Section 101, 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 on which tax is not payable by the recipient under the provisions of Sections 85 and 101; and on such determination by the Income-tax Officer no tax shall be deducted on such proportionate amount.'

12. The aforesaid provisions contained in Section 197(3) were in pari materia to Sub-section (3F) of Section 18 of the Indian I.T. Act, 1922.

13. The letter (annex. 'B') dated July 28, 1962, sent by the ITO to the assessee reads as under :

'Kindly refer to your application No. SWM/Sec./dated the July 17, 1962, on the subject cited above.

I have examined the figures of assets and liabilities and have discussed the points with your authorised representative, Shri Ganeshan.

I observe that an amount of Rs. 17,08,440 out of the total profits of the company will be exempt from the tax as per provisions of Sections 84 and 101,'

14. The subject as cited in the said letter was 'computation of portion of dividend paid by new industrial undertaking--determination thereof under Sections 85 and 101 of the I.T. Act, 1961--assessment year 1962-63 '.

15. It was sent in reply to the letter (annex. 'A') of the assessee dated July 17, 1962, which reads as under :

'We have installed four independent and separate cement plants. The first two plants were installed and worked before March 31,1957. The third and fourth plants were installed after March 31, 1957. These plants being separate industrial undertakings, the profits therefrom are exempt from income-tax under Section 84 of the Income-tax Act, 1961, and from super-tax under Section 101 of the Income-tax Act, 1961, but this exemption is available only for a period of five years. So the profits from the third and fourth cement plants are exempt from income-tax and super-tax for the optioned assessment year.

We intend paying the dividend to our shareholders for the accounting year ended March 31, 1962, relating to the assessment year under consideration. We are filing this application under Section 197(3) of the Income-tax Act, 1961, and request you to determine the appropriate portion of the dividend on which tax is not payable by the recipients under the provisions of Sections 85 and 101 of the Income-tax Act, 1961.

We are herewith enclosing details of calculations in respect of the capital employed in the third and fourth cement plants and such capital works out to Rs. 2,86,79,760. The portion that is exempt for this year, worked out at 6% on the above figure, comes to Rs. 17,20,786. The profits and gains for the accounting year ending March 31, 1962, are, therefore, exempt from income-tax and super-tax.

As we intend paying the dividend at an early date, we request you to kindly determine the proportionate portion of the profit exempt under Sections 84 and 101 in accordance with the provisions of Section 197(3) of the Income-tax Act. '

16. The aforesaid letter dated July 17, 1962, was accompanied by statement of capital employed under Sections 84 and 101 of the Act. In the said statement, the assessee had mentioned that the profit earned in the previous year was Rs. 54,93,718. It may be mentioned that in relation to the earlier assessment years 1960-61 and 1961-62, the assessee had followed the same practice. In respect of the assessment year 1960-61, the assessee had addressed a letter (annex. L-1) dated October 10, 1960, to the ITO indicating its desire to declare the dividend for the year ending March 31, 1960, and requesting the ITO to intimate appropriate portion of the dividends on which income-tax and super-tax was not payable so that deduction under Section 18(3D) of the Indian I.T. Act, 1922, could be made. In the said letter, the assessee had indicated the sum which, according to the assessee, was exempt from tax under Section 15C of the Indian I.T. Act, 1922, and the assessee had also mentioned the total profit for the year ended March 31, 1960. In reply to the aforesaid letter, the ITO by his letter (annex. L-3) dated November 10, 1960, had intimated to the assessee the amount which could be exempt from tax under Section 15C of the Indian I.T. Act, 1922. Similarly for the assessment year 1961-62, the assessee had addressed a letter (annex. L-2) dated September 5, 1961, to the ITO before declaring the dividends and the, ITO by his letter (annex, L-4) dated October 3/4, 1961, had intimated to the assessee the amount in respect of which exemption could be claimed under Section 15C of the Act.

17. Acting on the basis of the aforesaid letters of the ITO, the assessee had made deductions of tax while paying the dividends to the shareholders during the assessment years 1960-61 and 1961-62. Subsequently, the Department issued notices of demand to the assessee for the recovery of the balance amount of tax on the ground that the amount of dividend on which exemption from tax could be claimed was less than the amount mentioned in the letters to the ITO and the assessee was liable to pay the balance amount of tax. The aforesaid notices of demand were challenged by the assessee before this court by filing writ petitions under arts. 226 and 227 of the Constitution of India and the question which arose for the consideration before this court was whether the letters dated November 10, 1960, and October 3/4, 1961, could be construed as certificates issued by the ITO under Section 18(3F) of the Indian I.T. Act, 1922. It was argued on behalf of the Department that the said letters cannot be treated as such a certificate because the ITO could issue such a certificate only after finding out the assessable profits earned by the assessee and that while issuing the letters dated November 10, 1960, and October 3/4, 1961, the ITO did not determine the assessable profits or gains of the assessee. This court in its judgment (annnex. I-7) dated January 31, 1973, rejected the said contention urged on behalf of the Department and held that the letters issued by the ITO must be regarded as a determination by him as required under Section 18(3F) of the Indian I.T. Act, 1922, and that the assessee having acted upon those letters could not be held liable for the additional tax payable on the profits distributed as dividend to the shareholders. This court held that in issuing the said letters, the ITO fell into an error and did not understand the law, but the Department could not take advantage of the default of its officer to impose liability on the assessee and that it was not open to the ITO to modify his earlier order after the assessee had distributed the dividends and was not in a position to fulfil its obligation under Section 18(3D) of the Indian I.T. Act, 1922.

18. The main ground that has been given by the Tribunal for holding that the letter (annex. 'B') dated July 28, 1962, sent by the ITO to the assessee cannot be regarded as a certificate under Section 197(3) of the Act was that before issuing a certificate under Section 197(3) of the Act, it was necessary for the ITO to know whether there was any profit and gain of the company on which tax was not payable under Section 84 during the previous year and also whether there was such profit during the previous years preceding the previous year in question and that the ITO should also have information with him about the aggregate of the amounts of dividend paid or deemed to be paid by the assessee in respect of the previous years preceding the previous year on which no tax was paid under Section 85 of the Act and that he should also have known as to what was the amount paid as a result of declaration in the meeting held to consider the accounts of the company in respect of the previous year corresponding to the assessment year 1962-63, and that in the absence of the above information, the ITO could not be in a position to determine the appropriate proportion and to issue a certificate in terms of Section 197(3) of the Act. In this regard, it may be mentioned that merely because certain material was required to be placed before the ITO for the purpose of enabling him to grant a certificate and such material was not placed before him by the assessee and the said material was also not required to be produced before the ITO would not invalidate a certificate which otherwise satisfies the requirements of Section 197(3) of the Act. This is so because the determination made by the ITO under an error of law would not cease to be a determination on which the assessee can legitimately act and it is not open to the Department to hold the assessee liable for short deduction of tax made on the basis of such certificate. In this connection, we may refer to the earlier decision of this court dated January 31, 1973, in relation to the earlier assessment years 1960 61 and 1961-62. In that case, it was found that the letters issued by the ITO were certificates under Section 18(3F) of the Indian I.T. Act, 1922, and that at the time of issuing the said letter, the ITO was erroneously labouring under the impression that it was not necessary for him to determine the total taxable income of the company to find out the appropriate proportion under Section 18(3F) of the Indian I.T. Act, 1922. This court has also held that:

'Next question posed for our decision is whether the determination of the proportion by the Income-tax Officer which undoubtedly is erroneous in the eye of law, when acted upon by the company, would absolve the company of its obligations under Section 18(3D) or not. If we carefully examine the scheme of Section 18(3F) read with the provisions of Section 18(3F), then no room for doubt is left in our minds that as soon as the Income-tax Officer determines the appropriate proportion underSection 18(3F), the company or its principal officer acquires a right not to deduct income-tax and super-tax on that amount of dividend which is attributable to that part of the profits on which the tax is not payable under Section 15C(1).'

19. This court, after referring to the decision of the Bombay High Court in All India Groundnut Syndicate Ltd. v. CIT : [1954]25ITR90(Bom) wherein it has been laid down that (at p. 100) 'it is an elementary principle of law that no person, ......can put forward his own default indefence to a right asserted by the other party ', has further held that:

'In the present case also the Department is trying to take advantage of the default of its officer, who without understanding the correct position of law determined the proportion by finding out only one figure of exempted profits, and impliedly accepted the total profits as disclosed by the company to calculate the proportion for the purposes of Section 18(3F). The error committed by the ITO in this case is quite obvious and the Department cannot now be permitted to take shelter under this error of the Income-tax Officer to impose liability on the company.'

20. Here also all that can be said on the basis of the order of the Tribunalis that the ITO committed an error in sending the letter dated July 28,1962, without understanding the correct position of law. But in view ofthe decision of this court referred to above, that by itself would not enablethe Department to impose liability on the assessee who acted upon theaforesaid letter.

21. We are unable to agree with the reasons that have been given by the Tribunal for distinguishing the decision of this court dated January 31, 1973, in relation to the previous assessment years 1960-61 and 1961-62, and in holding that the said decision cannot be applicable in relation to the assessment year 1962-63. In this connection, the Tribunal has observed that the facts and the law pertaining to the assessment year 1962-63 are vitally and in essential respects different from the law and the facts pertaining to the assessment years 1960-61 and 1961-62. With regard to the law, the Tribunal has stated that the requisites for the determination of the proportionate dividend to which the provisions of Section 150(4) of the Indian I.T. Act, 1922, were applicable were altogether different from the provisions which governed the determination of the dividends exempt under Section 85 of the Act and that there was no provision corresponding to Rule 20 of the Rules under :the old Act. We have carefully perused the provisions of Sub-section (4) of Section 15C of the Indian I.T. Act, 1922, and Section 85 of the Act and we find that except for some minor differences the two provisions are substantially identical. In both the provisions, it was provided that the tax shall not be payable by the shareholder in respect of so muchof any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which tax is not payable. The only additional provision that was contained in Sub-section (4) of Section 15C of the Indian I.T. Act, 1922, was the explanation which laid down that 'the amount of dividend in respect of which the tax is not payable under this sub-section shall be computed in accordance with such rules as may be made in that behalf by the Central Board of Revenue'. There was no such explanation in Section 85 of the Act but the said section started with the words 'Subject to any rules that may be made by the Board in this behalf'. This would show that the computation was to be made in accordance with the rules to be made by the Board under both the provisions. The fact that in Rule 20 of the Rules certain provisions have been made for the purpose of computation does not mean that the decision of this court in relation to the Indian I.T. Act, 1922, would not be applicable to the present case. The provisions that have been made in Rule 20 of the Rules only prescribed the method of computation and violation of the said provisions would only affect the validity of the computation, but the said rule has no bearing on the principle of law laid down by this court that the Department cannot take advantage of an erroneous determination made by the ITO if it has been acted upon by the assessee.

22. As regards the facts, the first distinction that has been pointed out by the Tribunal is that in the earlier assessment years 1960-61 and 1961-62, the assessee had furnished both the required variables on the basis of which the fraction was to be worked out and that in its application to the ITO for the assessment year 1962-63, the assessee had not done the same. It is true that in the letters dated October 10, 1960, and September 5, 1961, relating to the assessment years 1960-61 and 1961-62, respectively, the assessee had indicated the total profit earned by it in the relevant previous year and in the letter dated July 17, 1962, relating to the assessment year 1962-63, the assessee did not mention the profit for the relevant previous year in the letter. But along with the said letter dated July 17, 1962, the assessee had submitted a statement of capital employed under Sections 84 and 101 of the Act and in the said statement, the assessee had indicated the profit earned in the previous year as Rs. 54,93,718. The Tribunal has observed that the aforesaid figure of profit mentioned in the computation of capital was shrouded inconspicuously in an elaborate calculation and was not designed to leave a direct impact of the same on the mind of the ITO in the same manner as when it was mentioned in the body of the application itself for the assessment years 1960-61 and 1961-62. We are unable to agree with the aforesaid view of the Tribunal because in the present case, the letter dated July 28, 1962, sent by the ITO to the assessee states that he had examined the figures of assets and, liabilities of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which tax is not payable. The only additional provision that was contained in Sub-section (4) of Section 15C of the Indian I.T. Act, 1922, was the explanation which laid down that 'the amount of dividend in respect of which the tax is not payable under this sub-section shall be computed in accordance with such rules as may be made in that behalf by the Central Board of Revenue'. There was no such explanation in Section 85 of the Act but the said section started with the words 'Subject to any rules that may be made by the Board in this behalf'. This would show that the computation was to be made in accordance with the rules to be made by the Board under both the provisions. The fact that in Rule 20 of the Rules certain provisions have been made for the purpose of computation does not mean that the decision of this court in relation to the Indian I.T. Act, 1922, would not be applicable to the present case. The provisions that have been made in Rule 20 of the Rules only prescribed the method of computation and violation of the said provisions would only affect the validity of the computation, but the said rule has no bearing on the principle of law laid down by this court that the Department cannot take advantage of an erroneous determination made by the ITO if it has been acted upon by the assessee.

23. As regards the facts, the first distinction that has been pointed out by the Tribunal is that in the earlier assessment years 1960-61 and 1961-62, the assessee had furnished both the required variables on the basis of which the fraction was to be worked out and that in its application to the ITO for the assessment year 1962-63, the assessee had not done the same. It is true that in the letters dated October 10, 1960, and September 5, 1961, relating to the assessment years 1960-61 and 1961-62, respectively, the assessee had indicated the total profit earned by it in the relevant previous year and in the letter dated July 17, 1962, relating to the assessment year 1962-63, the assessee did not mention the profit for the relevant previous year in the letter. But along with the said letter dated July 17, 1962, the assessee had submitted a statement of capital employed under Sections 84 and 101 of the Act and in the said statement, the assessee had indicated the profit earned in the previous year as Rs. 54,93,718. The Tribunal has observed that the aforesaid figure of profit mentioned in the computation of capital was shrouded inconspicuously in an elaborate calculation and was not designed to leave a direct impact of the same on the mind of the ITO in the same manner as when it was mentioned in the body of the application itself for the assessment years 196.0-61 and 1961-62. We are unable to agree with the aforesaid view of the Tribunal because in the present case, the letter dated July 28, 1962, sent by the ITO to the assessee states that he had examined the figures of assets and liabilities the Indian I.T. Act, 1922, but he did not make such intention explicit in his letter for assessment year 1962-63. The aforesaid distinction pointed out by the Tribunal is also of little consequence. In our opinion, the letter dated July 28, 1962, sent by the ITO to the assessee cannot be read in isolation. It has to be read along with the letter dated July 17, 1962 addressed by the assessee to the ITO, because the letter dated July 28, 1962, was sent by the ITO in reply to the letter of the assessee dated July 17, 1962, and express reference has been made to the said letter of the assessee dated July 17, 1962, in the letter of the ITO dated July 28, 1962. In its letter dated July 17, 1962, the assessee had clearly indicated that it was making the application under Section 197(3) of the Act and had requested the ITO to determine the proportionate portion of the profit exempt from tax under Sections 84 and 101 in accordance with the provisions of Section 197(3) of the Act. In reply to the same, the ITO in his letter dated July 28, 1962, had stated that an amount of Rs. 17,08,440 out of the total profits of the company will be exempt from tax as per the provisions of Sections 84 and 101 of the Act. It would thus appear that while writing the letter dated July 25, 1962, the ITO was fully aware of the prayer that was made by the assessee in its letter dated July 17, 1962, for issuing a certificate under Section 197(3) of the Act and in writing the letter dated July 28, 1962, the ITO was clearly acting under Section 197(3) of the Act.

24. Thus it would be clear that none of the reasons given by the Tribunal for drawing a distinction between the position in relation to the earlier assessment years 1960-61 and 1961-62 and the assessment year 1962-63, can be sustained and there is not much distinction between the position which prevailed in the earlier assessment years 1960-61 and 1961-62 and that in the assessment year 1962-63. The Tribunal was, therefore, not justified in holding that the decision of this court dated January 31, 1973, in relation to the assessment years 1960-61 and 1961-62 would not apply to the present case relating to the assessment year 1962-63.

25. The Tribunal has also laid stress on the fact that on July 28, 1962, no certificate under Section 197(3) could be issued because such certificate can only be issued after the dividend has been declared and in the present case, the assessee had not declared any dividend on July 28, 1962, and that the dividend was declared subsequently. In our opinion, this circumstance also has a bearing on the legality of the action of the ITO. It was open to the ITO to have refused to make a determination under Section 197(3) on the ground that such determination can only be made after the dividend has been declared. The ITO did not, however, adopt such a course. He proceeded to make the determination and the assessee acted upon the said determination. After the assessee had acted upon the said determination and had paid the dividends to the shareholders, it is not open to the Department to contend that the determination which was made by the ITO in his letter dated July 28, 1962, could, not be acted upon as it was invalid.

26. We are, therefore., of the opinion that the Tribunal was in error inholding that the letter (annex. 'B') dated July 28, 1962, addressed bythe ITO to the assessee was not a certificate under Section 197(3) of the Act. Inour opinion, the said letter of the ITO must be regarded as a certificateunder Section 197(3) of the Act inasmuch as by the said letter which was issued byITO in response to the letter of the assessee dated September 17, 1962, theITO had intimated that the amount of Rs. 17,08,440 out of the total profitsof the company will be exempt from tax as per the provisions of Sections 84 and101. The assessee was entitled to treat this letter of the ITO as a determination for the purpose of Section 197(3) of the Act and in doing so the assessee cannot be said to have acted in violation of the provisions of Section 194 ofthe Act so as to attract the liability under Section 201 of the Act. In this regard,we may mention that the Tribunal has also held that if the letter of theITO dated July 28, 1962, is held to be a certificate issued under Section 197(3)of the Act, the action of the ITO in invoking the provisions of Section 201 of theAct would be improper. Since we are of the opinion that the letter of theITO dated July 28, 1962, was a certificate under Section 197(3) of the Act, theaction taken by the ITO under Section 201 was improper and the orders passedby the AAC and the Tribunal upholding the said action of the ITO cannotbe sustained. Since we are of the opinion that the action of the ITO under Section 201 was improper, we do not consider it necessary to deal with the contention urged by Shri Jain with regard to the bar of limitation containedin Section 231 of the Act against the issuance of demand notice under Section 201 ofthe Act.

27. In the result, the reference is allowed and questions Nos. 1, 2, 3 and 4are answered in the negative, i.e., in favour of the assessee and against theRevenue. In view of the answers to questions Nos. 1 to 4, it is not necessary to. deal with questions Nos. 5, 6 and. 7 and they are. returnedunanswered.

28. In the facts and circumstances of the case, the parties are left to beartheir own costs.


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