RAJAGOPALAN J. - Since identical questions arose for determination in each of these applications, preferred under article 226 of the Constitution for the issue of writs of certiorari to set aside the orders of the Commissioner of Income-tax, they were heard together. We shall dispose of the petitions by a common order.
These petitions arose out of proceedings assessing the petitioners to super-tax for the assessment year 1956-57 under the terms of Part II-D of the First Schedule to the Finance Act of 1956. We shall set out the relevant facts in W.P. No. 167 of 1058 as fairly typical. The amounts involved in the other cases of course varied. The petitioner company in W.P. No. 167 of 1958 had a computed total income of Rs. 91,533 in the previous year relevant to the assessment year 1956-57. On that amount it was liable to pay super-tax at Re. 0-6-9 in the rupee, the rate prescribed in Part II-D. The standard rate of rebate permissible was 4 annas in the rupee under clause (ii) of the first proviso to Part II-D. That rebate was, however, liable to be reduced under the terms of the second proviso, if the dividends declared by the petitioner company were in excess of the statutory maxima. The total amount of the dividends declared by the petitioner company in the relevant year was Rs. 34,155. That that was in excess of the statutory maximum was never in dispute. Under the terms of the second proviso to Part II-D the Income-tax Officer reduced the rebate by Rs. 2,134-11-0. The petitioner applied to the Commissioner under section 33A to revise the order of the Income-tax Officer and grant the petitioner the full rebate of 4 annas in the rupee. The Commissioner rejected that application. It was the validity of the reduction in the rebate by Rs. 2,134-11-0, confirmed by the Commissioner, that the petitioner challenged in W.P. No. 167 of 1958.
To appreciate the contentions of the learned counsel for the petitioner it is necessary to refer to the scheme of taxation and the changes effected therein by the Finance Act of 1956.
Section 3 of the Income-tax Act is the charging provision for the levy of income-tax, and section 55 of the Income-tax Act is the charging provision for the levy of super-tax. Section 3 directs in effect that income-tax shall be payable on the total income of an assessee, if the Finance Act enacted that income-tax shall be charged for the year, and such tax shall be charged at the rates prescribed by the Finance Act. The relevant portion of section 55 runs :
'In addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year... an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by a Central Act.'
The concept of taxing excess dividends, that is, dividends declared by companies in excess of the prescribed statutory maximum, was brought in by legislation in 1948. Up to 1955 undisbursed profits of companies governed by section 23A were taxed on the basis of a national distribution as dividends to shareholders. That was changed in 1955, when provision was made to assess the companies direct on the basis of the undisbursed profits.
In the Finance Act of 1951 the levy of income-tax by companies was regulated by Part I-B and the levy of super-tax by Part II-D of the First Schedule to that Act. While clause (i) of the proviso to Part I-B allowed a rebate from the prescribed rate - 4 annas in the rupee plus a surcharge of 1/20th of that, clause (ii) provided for the levy of an additional income-tax on the total income of the assessee calculated at five annas in the rupee, less the prescribed deductions, on the excess dividends. Part II-D regulated the grant of rebates from the authorized rate of super-tax, Re. 0-6-9 in the rupee. There was no question of any additional levy of super-tax on excess dividends, nor was the quantum of the rebate correlated to the excess dividends. There was a change in the scheme underlying the computation of super-tax when the Finance Act of 1956 was enacted. Declarations of excess dividends attracted a diminution in the rebates from the authorized rate of super-tax, Re. 0-6-9 in the rupee. Still there was no direct levy of any additional super-tax on the total income of the assessee company or on the excess dividends declared by it. The pattern of Part I-B for the levy of income-tax was also changed in 1956. All the provisos to Part I-B in the 1951 Act were omitted, and provision was made only for the levy of income-tax with a surcharge on the total income of the companies. There was no longer a provision to subject the companies to any additional income-tax on the ground that they had declared excess dividends.
It is against this background that we have to consider the scope of Commissioner of Income-tax v. khatau Makanji Spinning and Weaving Co. Ltd., on which the learned counsel for the petitioners relied to sustain his plea that there was no legislative sanction to treat the excess dividends declared by a company as part of its total income as defined by the Income-tax Act.
What was in issue in Commissioner of Income-tax v. Khatau Makanji Spinning and Weaving Co. Ltd., was the validity of the levy of the additional income-tax under clause (ii) of the first proviso to Part I-B of the Finance Act of 1951. At page 194 of the report, their Lordships of the Supreme Court said :
'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 year. 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 is impossible 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.'
Consistent with the requirements of section 3 of the Income-tax Act the Finance Act of 1951 enacted the charge of the income-tax and also prescribed the rates at which that income-tax should be charged. Clause (ii) of the first proviso to Part I-B of the Finance Act of 1951 levied a charge of income-tax. It also prescribed the rate to enforce that charge. What was charged was the total income of the previous year of the assessee. Neither the charge nor the rate prescribed for that charge could operate on anything that was not part of the total income as defined by the Income-tax Act. What the Supreme Court pointed out was that the profits of the years antecedent to the previous year in question, out of which the excess dividends were paid or were deemed to have been paid, did not constitute part of the total income of the previous year, which alone was taxable in the relevant assessment year.
These principles cannot govern the application of the provisions of Part II-D, and we must remember we are now concerned with the application of the provisions of Part II-D of the 1956 Finance Act. Section 55 of the Income-tax Act differs from section 3 thereof, in that section 55 itself imposes the charge for the super-tax, leaving the rates to be prescribed by the annual Finance Acts. Thus it was not Part II-D of the 1956 Finance Act that levied the super-tax on the total income of an assessee; it prescribed the rates. The combined effect of section 55 of the Income-tax Act and Part II-D of First Schedule to the Finance Act of 1956 was that in the assessment year 1956-57 every company had to pay a super-tax of Re. 0-6-9 in the rupee on its total income of the previous year. That charge came into play, unless the assessee was entitled to any relief under the provisos to Part II-D. Under clause (ii) of the first proviso the rebate permissible was four annas in the rupee. But that was subject to reduction in any of the contingencies for which clause (i) of the second proviso provided. In the case of the petitioners clause (i-b) of the second proviso to Part II-D applied. Admittedly the dividends declared by the petitioners were in excess of the statutory maxima specified in clause (i-b) of the second proviso. Thus there was no levy as such of any super-tax on the excess dividends. Super-tax was levied only on the total income of the previous year of each of the petitioners. That levy, as we pointed out, was authorized by section 55 of the Income-tax Act, and the rate was authorized by Part II-D of the First Schedule to the Finance Act of 1956. It was within the competence of the Legislature to prescribe the limits within which relief from that levy could be given; in other words 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. The super-tax was levied on the petitioners on the authorized basis-their total in come of the previous year. The basis for the computation of the permissible rebate was not the total income; nor need it have been the basis. The learned counsel for the petitioners pointed out that in effect the petitioners were subjected to super-tax on the amounts disallowed. But that cannot cloud the issue. What was taxed was the total income of the assessee of previous year; there was no levy of tax on the excess dividends. Whether or not the excess dividends came out of the total income of previous year, the quantum of the dividends regulated the rebate and not the super-tax itself, either the charge or the rate. The fact that the position after the I956 Finance Act still remained the same as it was under the 195I Act, in that there was no alteration in the statutory concept of the total income of an assessee, and that no provision was made by statutory definition or fiction to treat all the sources from which excess dividends were paid as part of the assessable total income in the year of payment, did not affect the operation of the charging provision for the levy of the super-tax in the assessment year I956-57, which, as we have pointed out, was under section 55 of the Income-tax Act read with Part II-D of the First Schedule to the Finance Act of 1956.
The correctness of the arithmetical computation of the rebate in none of these cases was challenged. There was legislative sanction for the computation. None of the petitioners could claim any more by way of rebate than what was allowed by the Income-tax Officer.
The rule nisi in each of these cases is discharged and the petitions are dismissed. In the circumstances of the case, when the Commissioner declined what appears to have been a reasonable request to hold up the proceedings till the Supreme Court clarified the position, we think there should be no orders as to costs.