JAGADISAN J. - The Income-tax Appellate Tribunal has referred the following question to this court for decision under section 66(1) of the Income-tax Act :
'Whether on the facts and in the circumstances of the case the dividend received by the applicant from the Indian Bank Ltd. and the Indian Overseas Bank Ltd. during the previous year for 1950-51 and from the Indian Overseas Bank Ltd. for the previous year for 1951-52 and 1952-53 should be grossed up and given tax credit at the rates prescribed in the respective Finance Acts or at lower rates arrived at by deducting the relief under section 49D ?'
The assessee is a banking company now under liquidation. It held shares in the Indian Bank Ltd. and the Indian Overseas Bank Ltd. These banks will, hereinafter, be referred to as the 'companies'. In respect of these shares, the assessee received dividends between 1st April, 1949, and 31st December, 1949. The Income-tax Officer grossed up the income from the dividends on the basis of certificates given in the dividend warrants issued by the companies. It was discovered later that the certificate given in some of the warrants was incorrect and that the assessee had received excess relief from taxation. Consequently, proceedings were started by the Income-tax Officer under section 34 of the Act. Both these companies conducted banking business inside the taxable territories and also beyond them. In respect of the income of the companies earned outside the taxable territories, tax was attracted in accordance with the law of the place where the income was earned. There is no dispute that the companies were entitled to relief from double taxation in accordance with the provisions of the Indian Income-tax Act. It is also common ground that even in regard to the income earned outside the taxable territories, part of it did not suffer tax as the income earned was either exempt from taxation or was not taxable for other reasons. The following tabular statement gives the particulars of the dividend income of the assessee from its holding of the shares of the companies.
STATEMENT EXPLAINING THE COMPUTATION MADE BY THE INCOME-TAX OFFICER
Name of the Company
Actual dividend received
Dividend to be increased under s. 16
Dividend not to be increased
Dividend in Column 4 increased at 60 pies to
Difference columns 6 and 4 to be credited under s. 18(5)
Dividend included in total income of the assessee column5+cloumn6
Actual tax credit given by Income-tax Officer applying s. 49-C.
Indian Bank Ltd.
Indian Overseas Bank Ltd.
The assessee claimed that credit should be given to it under section 18(5) of the Act read with section 49B for the amount by which the income was grossed up under section 16(2). The Income-tax Officer held that the provisions of section 49C were attracted and reduced the relief of the assessee by taking into account the double taxation relief to which the companies were entitled under section 49D. The view which the Income-tax Officer took was that in grossing up the dividend income of the assessee, having regard to the provisions of section 16(2) and section 18(5), the relief which the companies themselves obtained by way of double taxation relief under sections 49C and 49D should also be taken into account in the computation. On appeal by the assessee, the Appellate Assistant Commissioner agreed with the assessee that the relief granted to the companies under section 49D of the Act was not covered by the provisions of section 49C but he however held that the relief under section 49D availed of by the companies should be deducted from the tax payable by the companies and that under section 16(2) the dividend had to be increased at the income-tax rate applicable to companies in question and not the general company rate. He recorded his conclusion thus :
'Where the companies are entitled to section 49D relief the rate applicable will be the general rate minus the rate at which relief is admissible to the companies under section 49D. In the circumstances, the increase made to the dividend would be given rebate under section 18(5).'
There was a further appeal by the assessee to the Income-tax Appellate Tribunal. The order of the Appellate Assistant Commissioner was confirmed and the assessees contention was negatived in these terms :
'If the two companies got relief under section 49D then, that portion of the profit would be distributed by them to their shareholders one of whom is the assessee. If the claimed by the assessee, the relief so got by the companies were not taken into account in fixing the rate applicable to the income of the company for the purpose of grossing up the assessees income from dividends and the rates mentioned in the relevant Finance Act were applied without any deduction, as has been done, the assessee would, in its assessment proceedings, have got credit for more tax as having been paid on its behalf by the company while sharing in the relief got by the company under section 49D in the due time as a shareholder, when dividend payments are made by the company. This certainly could not have been the intention of the legislature. If the grossing up was done by applying the rate fixed by the Finance Act, and subtracting therefrom the relief secured by the company under section 49D, the assessee would get relief on the basis of a lower rate of tax which means it would pay more on its income, but when the company distributes the relief secured by it under section 49D as dividend, it would be reimbursed to that extent.'
The question which is now raised before us challenges the correctness of the decision of the department and the Appellate Tribunal against the assessee in the matter of grossing up of its dividend income. We shall first advert to the relevant provisions of the statute. Section 3 is the charging section. The income-tax is charged at the rate fixed by the Finance Act of each year. Section 68B provides that if on the 1st April of any year, a new Finance Act is not passed, the Finance Act in force in the preceding year on the provisions of the proper Act as contained in the Finance Bill, whichever is more favourable to the assessee, shall apply till the Bill is placed on the statute book. The Judicial Committee has observed in Maharajah of Pithapuram v. Commissioner of Income-tax, that the Income-tax Act has no operative force except in so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by the Finance Act. The Finance Act is thus a necessary complementary legislation forming the very soul of the income-tax law. Section 3 of the Income-tax Act gives the key to interpret the words 'rate of tax' occurring in various sections of the statute. The Income-tax Act has no provision regarding the rates of levy, it only prescribes the machinery of assessment, the subject of taxation, the mode of collection of the imposed levy and remedies of assessee to resist improper and illegal assessments. The Finance Act and the Income-tax Act are indeed inseparables and the one is incapable of any independent or isolated existence from the other.
Section 16(2) of the Act, as it stood before the 1st April, 1960, reads :
'For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company (without taking into account any rebate allowed or additional income-tax charged) for the financial year in which the dividend is paid, credited or distributed,...... were deducted therefrom, be equal to the amount of the dividend :
Provided that when the sum out of which the dividend has been paid, credited or distributed or deemed to have been paid, credited or distributed includes -
(i) any profits and gains of the company not included in its total income, or
(ii) any income of the company on which income-tax was not payable, or....
The increase to be made under this section shall be calculated only upon such proportion of the dividend as the said sum after deduction of the inclusions enumerated above bears to the whole of that sum.'
The words occurring in section 16(2) 'of the company without taking into account any rebate allowed or additional tax charged' were substituted by section 8 of the Indian Finance Act, 1948, for the original words 'of a company'. The reasons for this amendment in 1948 seems to be that while the Finance Act of 1947 levied a flat rate of Rs. 0-5-0 in the rupee in the case of every company, the Finance Act of 1948 drew a distinction between a company, the total income of which exceeded Rs. 25,000, and a company the income of which was less than that amount. It must be mentioned that in the Finance Act of 1949 the distinction between a company earning more than Rs. 25,000 and other companies was taken away. Section 5 of the Finance Act of 1959 with effect 1st April, 1960, has substituted sub-section (1A) of section 12 of the Income-tax Act and, consequently, omitted section 16 (2) of the Act. Sub-section (1A) of section 12 reads :
'Income from other sources shall include dividends, and any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (6A) of section 2, shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be.'
In this case the relevant provision that has to be construed is only section 16 (2) as it stood prior to its deletion from the statute book. Section 18 (5) is in these terms :
'Any deduction made and paid to the account of the Central Government in accordance with the provisions of this section and any sum by which a dividend has been increased under sub-section (2) of section 16 shall be treated as a payment of income-tax or super-tax on behalf of the person from whose income the deduction was made, or of the owner of the security or of the shareholder, as the case may be, and credit shall be given to him therefor on the production of the certificate furnished under sub-section (9) or section 20, as the case may be, in the assessment, if any, made for the following year under this Act :
Provided that, if such person or such owner obtains, in accordance with the provisions of this Act, a refund of any portion of the tax so deducted, no credit shall be given for the amount of such refund :
Provided further that where such person or owner is a person whose income is included under the provisions of clause (c) of sub-section (1) or sub-section (3) of section 16, section 44D or section 44E in the total income of another person such other persons shall be deemed to be the person or owner on whose behalf payment has been made and to whom credit shall be given in the assessment for the following year.'
Section 49B(1) reads :
'Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in section 3 who is a shareholder of a company which is assessed to income-tax in the taxable territories or elsewhere, such person shall, if the dividend is included in his total income, be deemed in respect of such dividend himself to have paid income-tax (exclusive of super-tax) of an amount equal to the sum by which the dividend has been increased under sub-section (2) of section 16.'
Section 49C(1) reads :
'Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to a shareholder of a company which has obtained the relief referred to in section 49 or granted under section 49A or under the Indian and Burma (Income-tax Relief) Order, 1936, the shareholder shall be deemed in respect of such dividend himself to have obtained such relief at the rate at which such relief has been granted in respect of income-tax only to the company for the financial year preceding the year in which the dividend was paid, credited or distributed or is deemed to have been paid, credited or distributed.'
Section 49D(1) and (2) reads thus :
'(1) If any person who is resident in the taxable territories in any year proves that, in respect of his income which accrues or arises during that year without the taxable territories (and which is not deemed to accrue or arise in the taxable territories), he has paid in any country, with which there is no reciprocal arrangement for relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower.
(2) The Central Government may, by notification in the Official Gazette, declare that the provisions of sub-section(1) shall also apply in relation to any such income accruing or arising in the United Kingdom and chargeable under this Act for the year ending on the 31st day of March, 1950, or for the year ending on the 31st of day March, 1951, or for the year ending on the 31st day of March, 1952.'
A company as a chargeable unit of taxation under the Act pays tax on its taxable income in its own capacity and acts on behalf of its shareholders. The dividend income received by the shareholders becomes taxable in their hands though the source of that income has suffered tax as the income of the company. This position, however unexceptionable it may be in law, having regard to the corporate personality of the company distinct from the individual shareholders, would result in double taxation of the same income, first in the hands of the company, and next in the hands of the shareholders. It is to avoid this inequity that section 49B has been enacted and thereby a fiction is introduced treating payment of tax by the company as payment by the shareholders. The shareholders are not liable to pay income-tax again in respect of the dividend and they can claim a refund under section 48 if the maximum rate of income-tax applicable to the companies is not applicable to them.
The question that really arises in this case relates to the mode of grossing up 'all dividend under section 16(2)'. The actual dividend received by a shareholder is not the whole of the income of the company, as income-tax paid by the company has to be deducted therefrom. Placing the shareholders in the position of the company, the net dividend actually received by the shareholder is not the true dividend but something less. The net dividend has, therefore, to be augmented by adding thereto the amount of income-tax deemed to have been paid on behalf of the shareholders of the company. This is the process of grossing up. It may so happen that dividend is paid from a portion of the profits which have not born the tax in the hands of the company. To such cases the proviso to section 16(2) applies. If all the profits of the company enjoy immunity from tax the dividend cannot be grossed up; and the shareholder cannot claim any credit under section 18(5) and of course there can be no question of refund under section 48. Where the companys profits are partly taxed and partly untaxed, the grossing up of the dividend would be made on the proportion which the companys taxable profits bear to all its total profits. In such cases, the benefit of section 18(5) would only enure to the limited extent by which the dividend is increased or grossed up.
The crucial words that call for interpretation in this case are 'the rate applicable to the total income of the company' occurring in section 16(2). That section itself provides that neither the rebate allowed nor the additional income-tax charged should be taken into account in computing the rate applicable. The Finance Act of 1949 which is relevant Act for the consideration of the present question - and indeed even the Finance Acts of the subsequent years - is on the same lines. Section 9 reads :
'(1) Subject to the provisions of sub-sections (3), (4), (5) and (6), for the year beginning on the first day of April, 1949, -
(a) Income-tax shall be charged at the rates specified in Part I of the Third Schedule'
The Third Schedule, Part I, has the following heading :
'Rates of Income-tax.
B. In the case of every company -
On the whole of total income... 5 annas in the rupee.'
Proviso (i) prescribes a rate of rebate. Proviso (ii) prescribes additional income-tax. It is, therefore, significant that section 16 (2) uses the same terms 'rate', 'rebate' and 'additional income-tax' contained in the Finance Act. We have already referred to the charging section, section 3, and it makes it quite clear that the rate of taxation is to be in accordance with the Central Finance Act to be enacted in each year.
The contention put forward on behalf of the department is that the real sense in which the expression is used is only to give such benefit to the shareholder as the company itself ultimately obtains as a result of the final taxation of its income. It is urged that a shareholder cannot have a larger benefit than the company itself and that a strict interpretation of section 16(2) would really lead to the anomaly of the shareholder obtaining a benefit not intended to be conferred upon him by the legislature.
Mr. Ranganathan, learned counsel for the department, referred to the decision in Chidambaram Chettiar v. Commissioner of Income-tax. In this case, the assessee was a shareholder in a company called the Chettinad Co. Ltd., which was a non-resident company. During the relevant year he received in India a dividend income of Rs. 47,612 from the company. The company had advanced moneys to another company resident in India and received interest on advances made by it to the latter in respect of which the resident company had deducted income-tax and super-tax at the time of payment. The Chettinad Co. had also undertaken on a compromise with the department to distribute sixty per cent. of its total income as dividend. The assessee contended that as tax on the income of the Chettinad Co. had been paid by deduction at source on its total income, and it was also clear that sixty per cent. of its total income was distributed as dividend, he was entitled to grossing up of the dividend income and relief under section 18(5). The Division Bench held that the assessee was not entitled to the grossing up and relief claimed as the income of the Chettinad Co. had not been assessed to income-tax under the Indian Income-tax Act, even though tax on its income had been paid by deduction at the source. We are of the opinion that the question involved for decision in this case did not come in for consideration in the said decision even in any remote manner. The grounds on which the decision rested was that the Chettinad Co. was not assessed to income-tax under the Indian Income-tax Act even though tax on its income had been paid at its source and that the assessee, a shareholder of the Chettinad Co., could not claim the benefit of section 16(2) or section 18(5) of the Act.
The decision in M. M. Aishoe v. Income-tax Officer, Alwaye was also cited by the learned counsel for the department. That is a decision of a single judge of the Kerala High Court. The head-note sets out the ratio of the decision in these terms :
'In order to effect a grossing up of dividend under section 16(2) of the Indian Income-tax Act, 1922, there shall be rate applicable to the total income of the company for the financial year in which the dividend is paid, credited or distributed, or deemed to have been paid, credited or distributed, and if no such rate is available, grossing up under section 16(2) is impossible, and as a result section 18(5) will not come into operation at all.
For the application of section 49B also there must be a rate of tax applicable to the total income of the company for the financial year in which the dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed.
Held, accordingly, that where a company had no income in the relevant account year and was not assessed to income-tax, a shareholder who received a dividend from the company in that year of account was not entitled to the benefits of grossing up under section 16(2) and consequential relief under section 18(5), even though the dividend was paid out of accumulated profits of the company which had borne income-tax.'
The decision in that case has no bearing on the question now in issue before us. The principle laid down in that decision is that the absence of any taxation of companys income in any relevant account year would not attract the grossing up provision under section 16(2) and necessarily would not help the shareholder getting the benefit under section 18(5).
The question in this case has to be resolved only by the interpretation of the words occurring in section 16(2) of the Act. The assessee contends that the 'rate applicable to the income of the company' is that fixed by the Finance Act, and not the deductible rate at which the company pays tax on its assessed income.
The department contends that the words should not receive such a narrow interpretation but should be understood in the context only as meaning the rate of taxation suffered or borne by the company. Which of the two rival contentions is correct, is a difficult problem, and we must say that, in the course of the arguments before us, our mind was fluctuating and was as often attracted by the one view as by the other. But the question is no longer debatable as it is concluded by the decision of the Supreme Court in Rajputana Agencies Ltd. v. Commissioner of Income-tax. In that case the assessee company declared a dividend of Rs. 30,000 during the accounting year relevant for the assessment year 1952-53 out of which a sum of Rs. 15,159 was held to be excess dividend. The companys total income was assessed in accordance with the Finance Act of 1951, read with section 2 of the Finance Act of 1952. The company carried on its business in Saurashtra, a Part B State, and it obtained rebate under paragraph 6, clause (iii), of the Part B States (Taxation Concessions) Order, 1950. The Income-tax Officer determined the additional income-tax payable by the company at the rate of 44 pies in the rupee on the excess dividends as, after the allowance of the rebate under the order, the income-tax on the companys total income worked out at 16 pies in the rupee. The company contended that the rebate allowed under the Part B States (Taxation Concessions) Order should not be taken into consideration for the purposes of determining the tax payable on excess dividend and that the rate at which the excess dividend should be taxed was the difference between five annas in the rupee and the rate prescribed by the Finance Act of 1951, in regard to the companys total income. The Supreme Court held upholding the decision of the Saurashtra High Court that 'the rate applicable to the total income of the company' in sub-clause (b) of clause (ii) of the Explanation read with clause (ii) of the proviso to paragraph (B) of Schedule I of the Finance Act of 1951, referred not to the rate prescribed by the Act for the relevant year generally in reference to income of companies but to the rate actually applied in the given case and that therefore the rate at which the company was liable to pay additional income-tax on the excess dividend was the difference between five annas in the rupee and sixteen pies in the rupee at which the company had in fact paid income-tax in the relevant year. At page 174, Gajendragadkar J. observed thus :
'The appellants case is that the expression at the rate applicable to the total income means the rate prescribed by paragraph B of the Act and not the rate at which income-tax has actually and in fact been levied. This contention has been rejected by the High Court and the appellant urges that the High Court was in error in rejecting its case. The argument is that the words at the rate applicable to the total income of the company must be strictly and literally construed and reliance is placed on the principle that fiscal statutes must be strictly construed. On the other hand, as observed by Maxwell,the tendency of modern decisions upon the whole is to narrow materially the difference between what is called a strict and beneficial construction. Now the words the rate applicable may mean either the rate prescribed by paragraph B or the rate actually applied in the light of the relevant statutory provisions. Applicable, according to its plain grammatical meaning, means capable of being applied or appropriated; and appropriateness of the rate can be determined only after considering all the relevant statutory provisions. In this sense it would mean the rate actually applied.'
Learned counsel for the assessee was really unable to distinguish the applicability of that decision to the present case. He however relied upon the following passage from the judgment of Gajendragadkar J. at page 175 :
'Besides, in construing the words the rate applicable we must bear in mind the context in which they are used. The context shows that the said words are intended to explain what should be taken to be the tax actually borne.'
The context of section 16(2) of the Indian Income-tax Act using the words 'rate applicable' fully justifies the view that the rate is one at which the company suffers tax as the ultimate result of the assessment and not at the rate at which the annual Finance Act may fix from year to year. In our opinion, the ratio of the decision of the Supreme Court fully governs the decision in this case.
Learned counsel for the assessee has laid emphasis on the fact that the question involved for decision relates to the interpretation of a fiscal enactment. A taxpayer has a right to take his stand upon the literal construction of the language of the statute, but there is no special canon of construction to aid the subject to resist taxation. In the words of Lord Russell of Killowen C.J. in Attorney-General v. Carlton Bank.
'... I know of no authority for saying that a taxing Act is to be construed differently from any other Act. The duty of the court is, in my opinion, in all cases the same, whether the Act to be construed relates to taxation or to any other subject, namely to give effect to the intention of the legislature as that intention is to be gathered from the language employed having regard to the context in connection with which it is employed.'
The fair rule seems to be to adopt a reasonable construction of the words used in the Act without leaning to the one side or the other, neither as the guardian of the revenue, nor as the protector of the taxed subject to resist tax aggression. In short, the duty of the court in this matter is colourless.
In our opinion, the rate applicable to the income of the company is not the abstract statutory rate contained in the Finance Act but the concrete rate at which the company pays tax on its assessed income after all allowance of rebates, exemptions and reliefs provided for in the statutes, the Income-tax Act and Finance Act.
The Tribunal has reached the correct conclusion on the question referred and it is therefore answered against the assessee. There will however be no order as to costs in this reference.