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Commissioner of Income-tax Vs. P.S.S. Investments (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 18 and 19 of 1966 (References Nos. 8 and 9 of 1966)
Judge
Reported in[1971]79ITR456(Mad)
ActsFinance Act, 1958
AppellantCommissioner of Income-tax
RespondentP.S.S. Investments (P.) Ltd.
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateN. Srinivasan and ;R. Venkataraman, Advs.
Cases ReferredGeorge Oakes Private Ltd. v. Commissioner of Income
Excerpt:
.....the earlier financeacts, a declaration of a dividend by the company was the base to work outthe quantum of rebate and other reliefs to which a company assessable tosuper-tax would be entitled to under the finance act, 1958, it is thedistribution of dividend that matters for purposes of considering thequantum of rebate to be granted and the principle on which rebates couldbe withheld as well. unless the finance act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment, the purpose of the act clearly fails .it isimpossible to say that the additional income-tax was properly laid upon the total income, because what was actually taxed was never a part of the total income..........is ordinarily entitled to, is when a company distributes to its shareholders during the previous year dividends in excess of 6 per cent. of its paid up capital, not being dividends payable at a fixed rate. in the explanation to paragraph d of part ii of the finance act, the expression 'paid-up capital' means the paid-up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on the 31st day of march, 1959.4. the argument of the revenue is that on a comparison of the text of theearlier finance acts with that of the finance act, 1958, a distinction witha difference has been made by the legislature in adopting the word'declared' in the earlier finance acts and 'distributed'.....
Judgment:

Ramaprasada Rao, J.

1. T.C. No. 19 of 1966 relates to the assessment year 1958-59, while T.C. No. 18 of 1966 relates to the assessment year1959-60. The assessee is a private limited company incorporated in India. The contentions raised in both the cases are identical and even so the questions referred to us for decision. The grievance of the assessee is against the withdrawal of certain rebates which, according to the company, it has earned under the Finance Acts of 1958 and 1959. The company declared a dividend of Rs. 99,000 in the previous year ending on December 31, 1957, relevant for the assessment year 1958-59, and a sum of Rs. 33,000 in the previous year ending December 31, 1958, relevant for the assessment year 1959-60. Its paid-up capital during the relevant years was Rs. 1,65,000. The Income-tax Officer was of the view that the dividends declared in each of the years were in excess of 6 per cent. of the paid-up capital of the company and he worked out the super-tax payable in accordance with the particular Schedule to the Finance Act, which we shall presently refer to, and withdrew the rebates to which the company laid a claim. On appeal it was contended that the dividends declared during the two years were out of the profits of the previous year ending December 31, 1956, and the percentage of rebate to be allowed and disallowed has to be worked on the basis of the nature and quantum of profits so earned out of which the dividends were declared and the mere accident of the date of distribution of the dividend alone ought not to weigh to consider the nature and quantum of entitlement of the assessee to rebate in accordance with the Finance Acts. The Appellate Assistant Commissioner accepted in principle the assessee's contention that the components of the dividend should be considered with reference to the profits of the previous year. He found on verification that the total income of the company in such assessment years was classifiable under different heads and sources, such as, capital gains not assessed to capital gains tax, capital gains assessed to tax and other income assessed to income-tax and super-tax. It is from such profits that dividends were declared by the company. An appeal by the department to the Appellate Tribunal against the decision of the Appellate Assistant Commissioner was unsuccessful. At the instance of the Commissioner of Income-tax, the following questions were referred to us to render our answers thereto:

T. C. No. 18 of 1966 :

'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that for computing the reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1959, the composition of profits of the year from which the dividend had been declared should be looked into '

2. Whether the Appellate Tribunal was right in law in holding that the paid-up capital of the assessee-company should be proportionately reduced for the purpose of reducing the rebate in corporation tax in the manner directed ?'

T.C.No. 19 of 1966:

'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that, for computing the reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1958, the composition of the profits of the year from which the dividend had been declared should be looked into ?

2. Whether the Appellate Tribunal was right in law in holding that the paid-up capital of the assessee-company should be proportionately reduced for the purpose of reducing the rebate in corporation tax in the manner directed ?'

2. Mr. Balasubrahmanyan for the revenue has taken us through the Finance Acts of 1949, 1951, 1955 and 1958, to bring out the distinction between distribution of dividends and declaration of dividends. His contention was that the dividends having been distributed during the accounting year relevant to the assessment year, it is that year alone which has to be taken into consideration for calculating the super-tax under the appropriate Finance Act. According to him, the fact that such profits are traceable to the profits earned during the year or years previous to the accounting year is not of significance and has to be ignored for the purpose of working out the quantum of rebate in such super-tax made available in the Finance Act. The word 'distribution' has a distinct meaning of its own and has an impact on the time at which it was done. So understood, the year of distribution, namely, the accounting year, is the only basis for the calculation of the rebate. Learned counsel for the assessee, contending contra, would say that it would be unreal if the year in which profits have been admittedly earned has to be ignored and reliance placed for calculation of rebate on the ministerial act of distribution. He sought to rest his case on the text of the Finance Act itself and on Papanasam Mills Co. (Private) Ltd. v. Commissioner of Income-tax, : [1961]43ITR53(Mad) (Mad.).

3. In addition to the income-tax charged for any year, a company, amongst others, is bound to pay a super-tax at the rate for that year as laid down by the relative Finance Act (Section 55 of the Indian Income-tax Act, 1922). Under the Finance Act of 1958, which has been referred to before us in connection with the cases under review, super-tax shall be charged at the rates specified in Part II of the First Schedule and, in the cases to which Paragraphs A, B and C of that part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge on unearned income, calculated in the manner provided therein. In Part II of the Finance Act, 1958, provision is made for such levy of super-tax to the case of a company other than those expressly mentioned in the said Part. The rates of super-tax are enumerated therein. Provision has been madefor the grant of a rebate in the matter of the levy of such super-tax and the reduction of the amount of rebate payable under the provisions thereto in certain contingencies. One such contingency envisaged, which would result in the withdrawal of a rebate to which a company is ordinarily entitled to, is when a company distributes to its shareholders during the previous year dividends in excess of 6 per cent. of its paid up capital, not being dividends payable at a fixed rate. In the Explanation to Paragraph D of Part II of the Finance Act, the expression 'paid-up capital' means the paid-up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on the 31st day of March, 1959.

4. The argument of the revenue is that on a comparison of the text of theearlier Finance Acts with that of the Finance Act, 1958, a distinction witha difference has been made by the legislature in adopting the word'declared' in the earlier Finance Acts and 'distributed' in the FinanceAct, 1938, which provides a key for the interpretation of the relative words.In effect, the argument proceeds that whereas under the earlier FinanceActs, a declaration of a dividend by the company was the base to work outthe quantum of rebate and other reliefs to which a company assessable tosuper-tax would be entitled to under the Finance Act, 1958, it is thedistribution of dividend that matters for purposes of considering thequantum of rebate to be granted and the principle on which rebates couldbe withheld as well. Reliance was sought to be placed on Commissioner ofIncome-tax v. Chennai Kaithari Corporation (Private) Ltd., See Appendix infra, p. 462. That was a casewhere interim dividends were declared by the company and such proportionate amount of dividends to each one of the shareholders were credited in the accounts of the company. The company kept its accounts according to the mercantile system. The contention that the declaration of suchinterim dividends and a nominal entry in the books of account in favour ofthe shareholders does not tantamount to distribution, was repelled by thecourt. The ratio turned on its peculiar facts. Apparently, the learnedjudges came to that conclusion because the company adopted the mercantilesystem and the entry as such operated as an admission of the liability of thecompany towards the shareholders. This decision, however, does not throwany light on the discussion before us. Papanasam Mills Co. (Private) Ltd. v.Commissioner of Income-tax, [1961] 48 I.T.R. 53, though not directly on the point, containsuseful observations made by the Supreme Court in Commissioner of Income-tax v. Khatau Makanji Spinning and Weaving Co. Ltd., : [1960]40ITR189(SC) Said the SupremeCourt in that decision, while considering the effect of the Finance Act,1951:

' By the first proviso (to Part I-B) a rebate of one anna per rupee is given to a company which pays dividends less than 9 annas in the rupee out of its profits. By the second proviso, the rebate disappears, and an additional income-tax has to be paid on dividends in excess of that limit, paid in the year. The Explanation says that ' the excess dividend shall be deemed to be out of the whole or such portion of the undistributed profits of one or more years immediately preceding the previous year as would be just sufficient to cover the amount of the excess dividend and as have not likewise been taken into account to cover an excess dividend of a preceding year '. This fiction, as we have already pointed out, provides only that the dividends shall be deemed to be out of the profits not of the previous year under assessment but of some other years. What the Finance Act fails to do is to make them 'total income', so as to take in the rate which is prescribed for the total income in the proviso. Unless the Finance Act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment, the purpose of the Act clearly fails ...... It isimpossible to say that the additional income-tax was properly laid upon the total income, because what was actually taxed was never a part of the total income of the previous year. '

5. The learned judges of the Madras High Court in that case expressed the view that it was competent for the legislature to prescribe the limits within which relief from the levy of super-tax could be given, and observed:

' .... it was open to the legislature to prescribe the basis for the grant of the rebate, and correlate the rebate to excess dividends, whether those dividends were paid out of the total income of the previous year or from any other source.'

6. Though considerable assistance cannot be derived even from the decision cited above, yet it appears to us that the basic principle involved in the grant and the withdrawal of rebate while levying super-tax on companies which are said to have paid a dividend over 6 per cent. of their paid-up capital, is that it is imperative to examine, verify and find as to what is the source from which dividends have been distributed during a particular accounting year. It is common knowledge that companies declare dividends, unless it be under extraordinary circumstances, only alter the end of the accounting year. It would therefore follow as a matter of course that such distribution of dividends made at a particular point of time cannot have any relevancy, bearing or impact on the assessment year as such, because such distribution is made from and out of the profits earned by the company in an earlier year, may be in the accounting year or even in the previous year or years thereto. Distribution follows declaration of dividends. Declaration is anterior at some point of time to the factum of distribution.

7. Declaration of dividends invariably is referable to a resolution of the general body or that of the board of directors in certain circumstances. Such a resolution invariably can only be made on the basis of profits earned during the year or years previous to the date of declaration. A fortiori, therefore, distribution, which is a later event and which necessarily has an impact on such profits, can only be of profits earned not in the year of assessment when distribution is made, but at some anterior point of time. As distribution springs from declaration, both cannot be read in pari mtaeria. But the words have to be understood naturally and their meaning attributed accordingly. If, therefore, ' distribution ' is thus to be understood as a ministerial act resulting from the indoor management of the company, can that be the sine qua non to decide the question of quantum of rebate to which the company would be entitled under a particular Finance Act If the year in which distribution is to be effected is considered for purposes of the Finance Act and for the determination of the quantum of rebate, then it would result in a notional implementation; of the benefit contemplated by the legislature to a company in the nature of a rebate and would not amount to a realistic approach of such a vital problem connected with the finances of the company. It may be that in any particular year when distribution of dividends have been made, the paid-up capital might have been reduced or increased, as the case may be. Is that paid-up capital going to be taken as the basis for working out the relative benefits or disadvantages to be enjoyed or suffered by a company We are of the view that it is neither the intention of the legislature, nor could it be said to be a reasonable inference of the provisions thereto. In fact, the Explanation to the Finance Act, 1958, which elucidates the term 'paid-up capital', gives the key to the interpretation of the word 'distribution'. ' Paid-up capital ' means the paid-up capital of the company on the first day of the previous year relevant for the assessment year ending on 31st March, 1959. It is, therefore, clear that the paid-up capital of the company daring the assessment year cannot be said, for purposes of Paragraph D of Part II of the First Schedule to the Finance Act, 1958, to be the paid-up capital of the year in which the profits arose and from which dividends were distributed during the assessment year. The Appellate Assistant Commissioner rightly found that the total income of the company for the year ending December 31, 1956, showed that it had various sources of income and it is from profits earned from such sources and after payment of taxes that the company declared dividends during the assessment year. He, therefore, rightly upheld the contention of the assessee that rebate can be withdrawn only on the dividends declared out of income assessed to tax. The Tribunal agreed with the Appellate Assistant Commissioner, and, in our view, rightly. The component parts of the profits out at which demands have been declared have to be lookedinto and it is impracticable to deny that any declaration of dividend in the previous year could be only out of the profits of the preceding year. As already stated, the ordinary understanding of dividends is that it is declared and distributed from and out of profits earned. It is, therefore, essential to see when such profits were earned and take that year in which profits accrued and from which dividends were declared, as the basic year for the computation of the quantum of rebate as provided in Paragraph D, Part II, of the Finance Act, 1958.

8. We, therefore, agree with the view expressed by the Tribunal. We are not called upon to work out the details and the quantum of rebate as attempted by the Tribunal. We answer both the questions in both the tax cases in the affirmative and against the department with costs. Counsel's fee Rs. 250.

9. Petitions (T.C.M.P. Nos. 73 and 74 of 1969) filed to review the above judgment on the ground that the petitioner had omitted to bring to the notice of the court the decision in George Oakes Private Ltd. v. Commissioner of Income-tax, : [1966]60ITR710(Mad) came up for orders before their Lordships the Chief Justice and Mr. Ramaprasada Rao on November 2.1, 1969, when the court passed the following order:

10. The point is whether the omission to bring to the notice of the court a particular authority having relevance can be basis for review. We are not satisfied that this is a proper ground for review. In fact that is the view we have taken in T.C.M.P. No. 66 of 1966. The petitions are dismissed.


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