1. The two references are connected, the one under Section 66(1) and the other under Section 66(2) of the Indian Income-tax Act,1922. The two questions are :
' (1) Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that the assessce-company was not liable to the additional super-tax under Section 23A in respect of the asscssee's industrial profits for the assessment year 1957-58 ;
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that additional super-tax is not leviable under Section 23A of the Act, in respect of any portion of the profits of the assessce-company for the assessment year 1957-58 ?'
3. The matter relates to the assessment year 1957-58. The assessee is a private limited company, whose assessment for that year was computed ona total income of Rs. 37,95,774. Out of this income, it is common ground that Rs. 3,36,504 was available for distribution in respect of industrial profits and Rs. 14,05,310 in respect of non-industrial profits. Actually, a sum of Rs. 4,20,640 was only distributed as dividends. The profits left out and still available for distribution but not distributed amounted to Rs. 13,21,174. The statutory minimum of distribution for industrial profits at 45 per cent. of Rs. 3,36,504 would be Rs. 1,51,426 and for non-industrial profits at 60 per cent. of Rs. 14,05,310 would be Rs. 8,43,186. The Income-tax Officer apportioned the total dividends distributed as between the two categories of distributable profits at Rs. 81,264 and Rs. 3,39,376, respectively, and levied additional super-tax under Section 23A. The Tribunal did not agree with that view of distribution but considered that out of the dividends distributed it should be taken that a sum of Rs. 1,51,426 had been distributed as dividends equal to the statutory percentage of 45 per cent. of Rs. 3,36,504. It is out of this order of the Tribunal the two questions have been raised.
4. We are of the view that the Tribunal is correct. As to the second question, the submission for the revenue is that the last part of Explanation 2 to Section 23A should be understood as requiring apportionment of the total dividends in the same proportion as the ratio between the industrial and non-industrial profits. This interpretation is sought to be supported by reference to the words in the Explanation ' also being similarly apportioned '. In our view, that is not the implication of this phraseology.
5. What Section 23A does is to levy an additional super-tax on the undistributed balance of the total income of the previous year, which is determined by reference to the statutory percentage of the dividends required by the first part of Section 23A(1) to be distributed. Where the business of an assessee is a composite one, as industrial and non-industrial, the statutory percentage under the Explanation varies, namely, 45 per cent. of the total income as ascertained under Section 23A(1) is required to be distributed and, in the other case, the percentage is 60 per cent. Then comes the following in Explanation 2 :
'.... the said percentages being applied separately with reference to the amounts of profits and gains attributable to the two parts of the company's business aforesaid, as if the said amounts were respectively the total income of the company in relation to each of its parts, the amount of dividends and taxes also being similarly apportioned, for the purposes of Sub-section (1). ' In view of this, for the purpose of applying the percentage, the amount of profits and gains attributable to each segment of the business should be taken separately and treated as the total income of the company. In the same way, dividends paid by the company should also be allocated. Beyond stating that, the Explanation does not prescribe any ratio in which such dividends should be allocated or apportioned. Once the profits referable tothe industry are ascertained less the taxes, the dividends required to be distributed by Section 23A(1) are ascertainable. There is nothing in Explanation 2 to prevent the apportionment of the dividends paid out by the company for the assessment year in such a way that the distribution is in accordance with the requirements of Section 23A(I) in respect of the one or other segment of the business. And, if thereafter the balance distributed as dividends falls short of the appropriate statutory percentage, the profits attributed to non-industrial source would attract additional super-tax at the rate prescribed for it. In any case, we see no justification in the Explanation to apportion the dividends in proportion to the ratio which the industrial profits bear to non-industrial profits. If that were the intention of the legislature, that is not effectuated by merely using the phraseology ' also being similarly apportioned '. It should have further stated ' also being similarly apportioned in proportion to the ratio which the industrial profits bear to the non-industrial profits '.
6. Further, if we accept the revenue's interpretation of the Explanation, it may lead to strange results, as we shall presently illustrate. Supposing after deduction of taxes on the total income, there is a sum of Rs. 1,00,000 available as distributable profits, of which 30 per cent. represents the industrial profits and the balance the non-industrial profits, 45 per cent. of the industrial profits would be Rs. 13,500 and 60 per cent. of the non-industrial profits would be Rs. 42,000. It would be easy to arrive at this position by an assessee. Having done that, he may distribute Rs. 55,500 as total dividends. We fail to see why this is not in compliance with the requirements of Section 23A(1) read with Explanation 2. If the revenue's interpretation of Explanation 2 is adopted, the result will be this :
(a) Industrial profit : 55,500 X------- = 16,650
(b) Non-industrial profit : 55,500 X--------- = 38,850
7. That is not the result, which, in our view, the Explanation visualises or calls for. As we said, the language employed by the Explanation is not adequate to bring about that consequence. We are of opinion, therefore, that in the instant case the Tribunal was right in thinking that out of the total dividends distributed by the assessee, the amount required as per the statutory percentage for industrial profits has been distributed in full, so that no additional super-tax would be leviable on the industrial profits.
8. On the other question, the contention for the revenue is that the additional super-tax under Section 23A(1) being a single concept and as it is charged to the undistributed balance of the total income of the previousyear as a whole, it should follow that, since the required percentage of dividends for the non-industrial profits has not been distributed, the penal effect of Section 23A(1) is attracted. On this basis, according to the revenue, the additional super-tax on Rs. 13,21,174 at 37 per cent. would amount to Rs. 4,88,834.38. The fallacy in the contention of the revenue, as it appears to us, is that, although two different percentages are applied to different segments of the total income on the basis that each of them is referable to a distinct source of the business, for purposes of charging additional super-tax both should be taken as one whole, which is not what Section 23A read with Explanation 2 contemplates or necessarily requires. It is no doubt true that the Explanation is intended for the purpose of prescribing different percentages for different categories of business. But it does not stop there ; it goes further and says that for purposes of applying different percentages the amount of profit under each category of the business should be taken separately as if the same were the total income of the company. In our view, the fiction necessarily enters into the application of Section 23A(1). That is to say, when the amount of profits available for distribution relates to industry, that should be taken as the total income of the company and after applying the statutory percentage, the balance will have to be ascertained to see whether any part of it is still to be distributed as required by Section 23A(1) and, likewise, in respect of the amount of profit attributable to non-industrial business. Where the percentages to be applied are different to different categories of income as prescribed by Explanation 2, the total profits of the business from its different categories cannot be clubbed together for deriving the undistributed balance of the total income of the previous year so as to apply the penal effect.
9. The two questions are answered against the revenue with costs. Counsel's fee Rs. 250.