1. Before 1965, there were three banking companies in Trichirapalli. They were the Woraiyur Commercial Bank Ltd., the Palakkarai Bank Ltd. and the Tennur Bank Ltd. In 1965, the first two banks amalgamated with the third. The amalgamation involved the transfer of all assets and liabilities of the first two banks to the third bank. With such transfer, the two transferor-banks were wound up and dissolved. The transferee-bank continued its existence, with the transferred assets and liabilities along with its own, but it emerged under a new name, the Trichy United Bank. The merger took place on June 24, 1965. The present reference is concerned with income-tax assessments made on this transferee bank subsequent to the merger. Prior to the amalgamation, the three former banks were earning profits. But the profits were not distributed as dividends then and there. They were carried to reserves by each of the banks. Each bank was an independent income-tax assessee. The profits earned by each, but credited to reserves, was assessed to income-tax. The profits so assessed included assessments before April 1, 1960, that is to say, assessments up to the assessment year 1959-60.
2. Long after the merger of the three banks, the Trichy United Bank distributed dividends in the years 1968, 1969 and 1970. These dividends were distributed out of reserves. The bank claimed that in respect of these dividend distributions, it was entitled to relief under s. 236 of the I.T. Act, 1961. The claim was based on the footing that the dividends were distributed out of reserves and those reserves represented taxed profits up to March 31, 1960.
3. The ITO, apparently, did not dispute the position that the profits of the three old banks were being subjected to income-tax year after year and their assessed profits included profits up to March 31, 1960. The officer also did not dispute that before the merger of the banks in 1965, those assessed profits were not distributed as dividends by the respective banking companies. Apparently also, the officer did not dispute the fact that when the Trichy United Bank actually effected the distribution of dividends during the year 1968, 1969 and 1970, those distributions came out of the assessed profits of the three old banking companies. Nevertheless, the ITO held that the relief could not be claimed in respect of the taxed profits declared as dividends under the provisions of S. 236 of the Act, since according to the ITO, the company which distributed the dividends was entirely a new entity. He took the view that for relief under s. 236, the very company whose profits up to March 31, 1960, has been taxed must itself declare the dividends out of such taxed profits. On appeal, however, the AAC took a different view, and allowed the claim for relief under s. 236 in its entirety. On the Department's appeal against this order of the Assistant Commissioner, the Tribunal's decision was two-fold. To the extent that the distribution could be attributed to the taxed profits of the two transferor-banks, the Woraiyur Commercial Bank, and the Palakkarai Bank, the Tribunal held that relief under s. 236 was not available, since the dividend distribution was not effected by those banks, they having gone out of existence under the scheme of amalgamation which took place long prior to the distribution of dividends in 1965. However, to the extent that the distribution of dividends could be attributed to the taxed profits of Tennur Bank, the Tribunal held that the relief under s. 236 was available, since, according to the Tribunal, the distribution was effected only by the Tennur Bank and, none the less so, for the fact that the Tennur Bank was re-christened as the Trichy United Bank. The Tribunal, accordingly, directed that relief under s. 236 will have to be worked out.
4. The I.T. Department is aggrieved by this decision of the Tribunal. It has brought the present reference before this court on the following question of law :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the relief under section 236 of the Income-tax Act, 1961, in respect of the dividends declared by it out of the alleged profits of the Tennur Bank Ltd. assessed prior to April 1, 1960 ?'
5. The question, as framed, carries an element of doubt as to the source of distribution of dividends. For this articulated uncertainty in the question, we do not find any basis in the findings of the Tribunal. According to the frame of the question of law, the dividends are said to have been declared by Tennur Bank out of its 'alleged' profits. As we have earlier pointed out, neither in the order of the ITO nor in the subsequent appeal proceedings, has there ever been a doubt cast about the fund from out of which the dividends has been declared by the Trichy United Bank in the three years, 1968, 1969 and 1970. On the contrary, there is an indication in the order of the AAC to the effect that the taxed profits of the three banks, namely, Woraiyur Commercial Bank, Palakkarai Bank and Tennur Bank, up to, at any rate, March 31, 1960, were not distributed as dividends, but had been carried to reserve. In the case of the two amalgamating banks, the amounts credited to reserve in this manner were transferred to, and got merged with, the reserve of the Tennur Bank. These reserves were subsequently utilised by the Trichy United Bank to declare dividends. As respects the taxed profits of the Tennur Bank up to March 31, 1960, it was not the Department's case, at any time during the earlier proceedings, that those profits had been frittered away in some fashion and were not available for distribution during the years, 1968, 1969 and 1970. As in the case of the other two banks, so too in the case of Tennur Bank, the taxed profits up to March 31, 1960, were not distributed as dividends, but were credited to reserve, which reserve was carried year after year without being denuded in any fashion until the dividends were declared in 1968, 1969 and 1970. This is the plank on which the whole discussion about the applicability of s. 236 was held right through. We cannot, therefore, countenance the element of doubt thrown into the frame of the question by the use of the expression, 'alleged profits of the Tennur Bank Ltd.' while referring to the fund out of which dividends had been declared and relief had been granted by the Tribunal, under s. 236 of the Act.
6. The Department's contentions before us, as put forward by Mr. Jayaraman, their learned standing counsel, were two in number. In the first place, he urged that the Tribunal was in error in proceeding as though the dividends were declared in 1968, 1969 and 1970 by the very same bank which had earned those profits and that suffered tax thereon. Learned counsel submitted that with the merger of the three banks in the year 1965, the Tennur Bank also lost its identity.
7. This contention of the Department, however, cannot be accepted. Under the scheme of amalgamation, the details of which are part of the records in this case, only two banks went out of existence by liquidation, namely, Woraiyur Commercial Bank and Palakkarai Bank. Tennur Bank, not only did not go into liquidation, but continued to flourish, albeit under a new name. It would be seen that the amalgamation in this case really followed the terms of s. 44A of the Banking Regulation Act, 1949, read with s. 394 of the Companies Act, 1956. These provisions ordinarily contemplate a scheme of amalgamation by means of a transfer of assets and liabilities from one existing company to another existing company. It might be that company law does not frown against a scheme of amalgamation under which all existing companies which are proposed to be merged may go out of existence, without exception, bringing into being an entirely new corporate unit to which the existing assets and liabilities of all the liquidated companies get transferred. In this case, however, the scheme of amalgamation was by way of transfer of the undertaking of two existing banking companies to another existing banking company. The Woraiyur Commercial Bank and the Palakkarai Bank were the transferor companies and the amalgamation was effected by transferring all their assets and liabilities to the Tennur Bank. The Tennur Bank, which was the transferee-company, did not go out of existence. It remained the same, with its assets and liabilities considerably swelled by the augmentation of assets and liabilities, which stood transferred to it from the two transferor banks. Excepting for a change in the name from Tennur Bank to Trichy United Bank, which was also part of the terms of the merger, we cannot see any discontinuity, or change in identity, of the original banking company which had earned the profits and had suffered income-tax on those profits. It, therefore, follows that when those profits were subsequently distributed as dividends, the requirements of s. 236 were fulfilled.
8. Learned standing counsel submitted, as part of the same argument, that s. 236 contemplates that the taxed profits up to March 31, 1960, must be the profits of the very company which subsequently distributes those profits as dividends. Learned counsel emphasised the expression, 'pays any dividend wholly or partly out of its profits and gains actually charged to income-tax for any assessment year ending before the 1st April, 1960'. The emphasis given by the learned counsel to the expression, 'its profits', however, really fits in with the facts of this case, because the profits and gains of Tennur Bank, which had suffered tax prior to 1st April, 1960, can be regarded as the profits of the same bank even after its change of name into Tirchy United Bank. What has undergone a change is only the name of the bank, and not the ownership of the profits or the identity of the assessee which earned them. It must, therefore, be held that s. 236 of the Act applied to this case to the very letter.
9. Learned standing counsel then urged, and this was his second major submission, that the Tribunal was not right in directing relief under s. 236 to be worked out even on the footing that the distribution of dividends can, by some process, be related, or attributed, to the taxed profits of Tennur Bank. Learned counsel submitted that on the Tribunal's own finding in the course of their discussion of this question, it would be difficult, if not impossible, to attribute any part of the dividend distribution to the taxed profits of Tennur Bank. Learned counsel particularly referred to the following passage in the Tribunal's order : 'It cannot be said that Tirchy United Bank had kept the profits of the banks intact and separately and the same had been distributed as dividends.'
10. This passage, in the Tribunal's order, however, does not seem to us to run counter to their decision applying s. 236 to the taxed profits of Tennur Bank to the extent that dividends distributed in 1968, 1969 and 1970 are attributable to such profits. It may be that after the merger in 1965 there was only one bank with one set of assets and liabilities, including one reserve. Everything, after the merger, was an amalgam. The reserve in particular was the amalgam of the reserves of Tennur Bank as well as the reserves of the two other banks. Nevertheless, when the reserves came to be distributed, in the years 1968, 1969 and 1970, the inference must be that whatever taxed profits had gone into the amalgamated reserves must have been distributed as dividends, in which event one has only to see what the quantum of taxed profits of Tennur Bank was for the years up to April 1, 1960, so as to forge the link between dividend distribution and taxed profits. The figures relating to Tennur Bank's reserves and taxed profits are both known quantities. Hence, the application of s. 236 should present no problem, arithmetical or otherwise, for arriving at the quantum of relief. The observation of the Tribunal that the Trichy United Bank did not keep the profits of the three old banks separate, is quite in keeping with the scheme of amalgamation both in its letter and in its spirit. For no one would expect the respective reserves of the three banks to be kept distinct and separate even after the merger. This, however, does not mean that for the purposes of granting relief under s. 236, the taxed profits of Tennur Bank could not be traced in the general amalgamated reserve, and the distribution of dividends could not be attributed to those profits.
11. Learned counsel submitted that in the absence of the taxed profits of Tennur Bank being held intact and separately kept and directly appropriated or utilised during the years 1968, 1969 and 1970 for distribution of dividends, it could not be said that the dividends had been declared out of the profits and gains 'actually charged to income-tax' within the meaning of s. 236, for any assessment year ending before the 1st April, 1960. The point made out by the learned counsel was that when once the profits are carried to reserve, they lose their identity as profits and although by a process of tracing, dividends could be 'attributed' to the profits of any given year which had gone into the reserve, it cannot be said, in terms of the language of s. 236, that the distribution is made out of the profits and gains 'actually charged' to any year's income-tax.
12. There may be some point in this argument, if the section is sought to be construed and applied on its own words, literally without regard for corporate principles and practices, which have gained acceptance in matters of appropriation of the annual profits and distribution of dividends of companies. The profits of a company in a given year may, under the policy of appropriation, be resolved to be distributed straightaway as dividends, without further ado. However, the modern practice is not to do so, but to credit the profits to reserve first, and then declare dividends out of such reserves. In any event, where, with reference to any year's profits, no decision is taken to declare dividends, then such profits will be invariably carried to reserve. They will seldom be left high and dry in suspense, in a 'no man's land', as it were, on the liabilities side of the balance-sheet.
13. The Tribunal pointed out in its order, that the expression, 'actually' occurring in s. 236 should not be literally understood. Having regard to the theory and practice of appropriation of corporate profits, this view of the Tribunal is quite correct. Section 236 grants relief on taxed profits of a company subsequently distributed. The crux of the relief is the corporate act of dividend distribution. Hence, the provisions of the section cannot be understood out of context, and out of keeping with corporate principles and practices. The only requirement of the section is that what are distributed as dividends must be profits prior to April 1, 1960. The expression 'actually' occurring in s. 236 only rules out non-distribution of taxed profits. It does not rule out of the process of tracing, or of attribution of the profits (which subsequently get distributed as dividends) to that of accumulated reserves.
14. Having regard to the consideration which we have set out in the foregoing paragraphs, the question which we have set out earlier must be answered in favour of the assessee and against the Department. We answer that question accordingly, and uphold the decision of the Tribunal.
15. One other controversy which has been referred to us is whether an appeal lies from an order passed by the ITO under s. 236. Before the Tribunal, the Department questioned the competence of the appeal filed by the assessee, that is, the Trichy United Bank, against the ITO's order declining to grant relief under s. 236. Reference was made to s. 237 which is the provision relating to refunds generally. This section provides that where an assessee satisfies the ITO that the tax paid by him for any assessment year exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of the excess. If the ITO does not grant the application of the assessee under this section or does not grant the entire refund asked for by the assessee, the assessee has a remedy by way of appeal under s. 246(n) of the Act. That provision expressly refers to an order under s. 237 as an appealable order. It was urged for the Department that s. 246 does not refer to an order under s. 236 as an appealable order. According to the Department's way of thinking, a claim for relief, which is refused in whole or in part under s. 236 of the Act, cannot be brought within the ambit of s. 237.
16. It was urged before the Tribunal that s. 236 is concerned with tax relief and not with refund of tax overpaid and, hence, although s. 236 speaks of a refund as a means of granting tax relief, that refund is only a refund in a manner of speaking and cannot be brought within the generality of refunds governed by s. 237. On the basis of this reasoning, it was urged, the right of appeal expressly provided for under s. 246(n) against refusal to grant, in whole or in part, a tax refund strictly so called, cannot be extended to any adverse order under s. 236. It was urged that s. 236 was a complete code on the subject of relief in respect of dividend paid out of past taxed profits, and, in the absence of any special provision for appealability against orders passed under that section, recourse cannot be had to the general provisions in s. 237 read with s. 246(n).
17. The Tribunal rejected these contentions and held that an appeal lay from an order of the ITO denying either in whole or in part a claim for refund under s. 236. Against this decision of the Tribunal, the following questions of law have been referred to us :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the appeal is maintainable in law in the assessee's case and
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that section 237 is a general provision which would also cover cases arising under section 236 and, therefore, the appeal was competent ?'
18. Before us, the argument on behalf of the Department on the subject of competence of the appeal was addressed on the same lines as had been urged before the Tribunal. It was submitted that s. 236 must be regarded as such a special provision that it was not susceptible to inclusion within the ambit of the general provision contained in s. 237. It was submitted that while s. 237 related to refund in the sense of overpayment of tax, s. 236 was in the nature of a tax relief which was granted to an assessee in the shape of a refund.
19. The Department's counsel said that in the very nature of things, the relief under s. 236 must, per force, take the form of a refund, considering that the very rationale for relief is earlier payment of taxes on profits subsequently distributed as dividends.
20. We cannot discover any distinction with a difference, in substance, between a refund under s. 236 and refunds contemplated by s. 237. Section 237 speaks of an assessee being entitled to a refund where the tax paid by him exceeds the tax with which he is properly chargeable. An assessee is entitled to refund under s. 236 only in this sense and in no other. Although the marginal note to s. 236 gives the name 'relief' to the process of adjustment of a company's liability, the text of the provision really does not differ, in any way, from any other refund under the Act. A refund, in essence, implies and postulates some amount of tax which has already been paid to the Department which has got to be returned, either under a further adjustment of tax liability by the assessing authority or on the basis of a subsequent proceeding by an appellate or other authority. It is simply a repayment of amount overpaid under whatever mode or set of circumstances the overpayment is recognised by the statute and ascertained for purposes of repayment to the assessee. We are, therefore, of the view that notwithstanding the form of relief under s. 236, since it is refund of tax already paid, subject to certain calculations, it must be brought within the general provisions of s. 237. We further hold that once it is shown that a refund under s. 236 does not differ in kind from any other refund which could be brought under s. 237, an order refusing refund or withholding part of a refund must necessarily become appealable under s. 246(n) of the Act.
21. This conclusion of ours may be supported by a reference to the legislative history of the provision as well. In the present I.T. Act, 1961, it so happens that the relief to a company in respect of dividends paid out of its past taxed profits is confined to a separate chapter, namely, Chap. XVIII, while the comparable provisions in s. 49BB of the Indian I.T. Act, 1922, occurred in Chap. VII of that Act relating to refunds generally. This legislative history shows that there is no reason why we should regard the relief under s. 236 as any the less a refund merely for the reason that in the present Act it has been incorporated under a separate chapter-heading. Modern legislative enactments follow the fancy of statutory draftsman in the matter of functional grouping of statutory provisions. A repealing and re-enacting statute, and even a consolidating and Amending Act, never, for the most part, only in regrouping pre-existing provisions under different patterns (sic). This process of restructuring the sections, however, cannot blind us to the real substance of the provisions, both before and after the recodification. We, therefore, hold that the order under s. 236 of the Act to the extent that it goes against the assessee-company, is an appealable order.
22. Learned counsel for the Deparment submitted that s. 236 contemplated a self-acting procedure for granting refund and it did not envisage that there must be an application by the assessee-company for the grant of a refund. This is quite true; there is no procedure for an application for relief under s. 236. But we cannot see the point of the argument, based on this omission. For, even in the absence of an application, the ITO is bound to go into the question and grant the relief to which the assessee is entitled under s. 236. Because s. 236 does not provide for a refund application, it does not mean that where one is filed it must be rejected as not maintainable. For what the ITO has power to grant suo motu he ought to grant on the assessee's application, even if the Act does not provide for such an application. The order passed by ITO in this case was in fact an order passed by way of disposal of an application by the assessee on January 18, 1974. Since the order refused the relief asked for, it must, in our judgment, be considered as one passed under s. 237 of the Act, in which event, an appeal against that order is perfectly maintainable.
23. Of the two questions both of which raise the issue of maintainability, we think that the second question need not be gone into separately, since it only raises a point of argument. For reasons which we have earlier set out, our answer to the pertinent question as to the competence of the appeal is in favour of the assessee and against the Department.
24. In the result, our answer to all the three questions referred to us by the Tribunal is in favour of the assessee. The Department will pay the costs of the assessee. Counsel's fee Rs. 500, one set.