Ramachandra Iyer, C.J.
1. The question referred to us for decision arises in connection with proceedings under Section 23A of the Income-tax Act in relation to the assessment of the assessee, Sundaram and Company (Private), Ltd., for the year 1951-52. It runs:
Whether on the facts and in the circumstances of the case the provisions of Section 23A are applicable to the appellant-company having regard to the Second Proviso to Sub-section (1) of Section 23A.
The assessee is a private limited company consisting of three shareholders. Its paid up capital is Rs. 6,000. Even prior to the year of account in question, the company had accumulated reserves which after deducting dividends already declared amounted to Rs. 1,17,919 It is obvious that those reserves representing accumulation of past profits had exceeded its paid up capital.
2. For the assessment year 1951-52 the company was assessed to a total income of Rs. 1,35,954. After deducting income-tax and super-tax payable thereon a sum of Rs. 76,899 was available with the company for distribution as dividend to its shareholders. But the company had only declared a sum of Rs. 51,000 as dividend to be paid to the shareholders thus leaving a sum of Rs. 25,899 undistributed. To a notice issued by the Income-tax Officer on 28th May, 1954 calling upon the assessee to explain why the provisions of Section 23A should not be applied in regard to undistributed dividends, the company stated that as it had declared sixty per cent. of the available profits as dividends, Section 23A of the Act would have no application to it by virtue of the Second Proviso thereto. According to the assessee if a company had distributed not less than 55 per cent. of the assessable income (as reduced by the amount of income-tax and super-tax payable by the company) it could be asked to make a further declaration of another dividend only to make up a total of sixty per cent. whatever, the extent of its profits earned might be. This contention was overruled by the Income-tax Officer who directed the assessee company to distribute amongst its shareholders the sum of Rs. 25,899 as on 4th November, 1950. The order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal.
3. As the only contention raised on behalf of the assessee before us depends on the construction of Section 23A in force during the relevant period (assessment year) it will be convenient to refer to the relevant portion of that section:
Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the 6th month after its accounts for that previous year are laid before the company at its general meeting are less than sixty per cent. of the assessable income of the company of that previous year as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of the previous year as computed for income-tax purposes (and reduced by the amount of income-tax and super-tax payable by the company in respect thereof) shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of each shareholder for the purpose of assessing his total income. Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this sub-section exceed the paid up capital of the company together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words sixty per cent. the words one hundred per cent. were substituted.
Provided further that no order under this sub-section shall be made where the company has distributed not less than fifty-five per cent. of the assessable income of the company (as reduced by the amount of income-tax and super-tax payable by the company in respect thereof) unless the company on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice of a further distribution of its profits and gains so that the total distribution made is not less than sixty per cent. of the assessable income of the company of the previous year concerned (as reduced by the amount of income-tax and super-tax payable by the company in respect thereof).
4. There can be no doubt on a reading of the section, that the First Proviso to the section would apply to the case and the Income-tax Officer would be entitled to direct the company to distribute the entirety of the profits earned in the year less income-tax and super-tax payable. But it is contended that the Second Proviso would relieve the assessee of that obligation because it had already declared sixty per cent. of its profits as dividend. Reliance is placed in support of this argument on the presence of the word ' further ' in the Second Proviso which means according to the assessee, that Section 23A would cease to apply if there had been a declaration of dividend of not less than fifty-five per cent. of the assessable income except to the extent of making up the deficiency of sixty per cent. If that contention were to be accepted the company which has reserves representing accumulation of profits over and above its paid up capital, could be called upon to distribute the entirety of its profits under the section only, if it had failed to distribute fifty-five per cent. thereof; while the same company if it had distributed fifty-five per cent. of its profits could be absolved from distributing the remaining profits except to make up sixty per cent. This would mean that the Legislature discriminated between companies in the same position, having accumulated profits, namely (1) those that distributed dividends less than fifty-five per cent. of the profits and (2) those distributing more but not of the entire profits. That cannot : be correct, Section 23A is intended to strike at attempts to avoid super-tax payable by the shareholders by adopting the device of forming private companies and allowing profits to accumulate therein without declaring dividends. The contention of the assessee, if accepted, would mean that the shareholders can be allowed to avoid super-tax and accumulate their profits in the company by adopting the simple device of declaring fifty-five per cent. of the profits as dividends. Such a construction would lead to absurd if not discriminatory results. We will however see whether there is any warrant for this interpretation on the terms of the section. The effect of a Proviso ordinarily is to except out of a substantive part of the enactment or to qualify something enacted therein which but for the Proviso would be within it. Provisos 1 and 2 are therefore exceptions to what is contained in Section 23A (1). The rule is that a Proviso should be considered in relation to the principal matter to which it stands as a Proviso. On a reading of Section 23A(1), as a whole along with the Provisos it would be clear that what the Legislature intended to lay down was that ordinarily a company earning sufficient profits should distribute as dividend sixty per cent. at least of its assessable income. Where it had distributed not less than fifty-five per cent. there would be no obligation on its part to distribute even that sixty per cent; unless the Income-tax Officer calls upon it to distribute the other five per cent. as well. But if the company had accumulated reserves from and out of its past profits which exceeded its paid up capital, it was bound to distribute the entirety of the profits earned. That intention unfortunately has not been clearly expressed in the form in which the Provisos are enacted. The draftsman has obviously blundered in using the word 'further' in the Second Proviso. If one has regard to the object with which Section 23A was enacted, it would be evident that the Second Proviso was intended only as an exception to Sub-section (1) to which it relates and not to the First Proviso. The First Proviso in that case would govern both Sub-section (1) and the Second Proviso as well. That this is the true interpretation is apparent from the terms of the First Proviso itself which states that the section (main section and the Proviso) shall apply in the cases specified by it as if the word 100 per cent. were substituted for the word sixty per cent. That would mean that the Proviso was intended for the entire section, namely, Sub-section (1) read with the Second Proviso. A different construction would lead to absurdity and repugnance. In Craies on Statute Law (5th edition), it is stated at page 84,
The general rule ' said Willes, J., in Cristopherson v. Lotinga 35 L. J. C.P. 121 , is stated by Lord Wensleydale in these terms:To adhere to the ordinary meaning of the words used and to the grammatical construction, unless that is at variance with the intention of the Legislature to be collected from the statute itself or leads to any manifest absurdity or repugnance in which case the language may be varied or modified so as to avoid such inconvenience but no further. I certainly, continued Wills, J., subscribe to every word of the rule except the word absurdity unless that be considered as used therein the same sense as repugnance. That is to say something which would be absurd with reference to the other words of the statute as to amount to a repugnance.
The construction sought to be put upon the section by the assessee is certainly contrary to the object of the Legislature which enacted Section 23A for the purpose of striking at the evasion of super-tax by the shareholders of a company. The contention that the Second Proviso qualifies Sub-section (1) read with the First Proviso would?obviously be contrary to that object and would lead to a manifest absurdity amounting to repugnance to the provision contained in the section. A proviso is intended, as we said before, to operate in relation to the principal matter dealt with by the section. If the assessee's contention were to be accepted it would mean that notwithstanding the First Proviso the companies which had accumulated reserves and declared dividends over and above sixty per cent. would completely escape. That certainly amounts to putting an exception to the provisions contained in the First Proviso and not merely to the substantive section. The words used in the section are, in our opinion, capable of a construction which while giving full effect thereto will avoid such absurdity if we hold that the terms of the Second Proviso would apply only to the first sub-section dealing with the case generally and the First Proviso is intended to meet a special case where accumulation of past profits exceeded the paid up capital. We are therefore in agreement with the view taken by the department and the Tribunal in regard to the interpretation of the section and answer the question referred to us in the affirmative and against the assessee who will pay the costs of the department. Advocate's fee Rs. 250.