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Commissioner of Income-tax Vs. Jasrup Baijnath and Sons (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 131 of 1966
Judge
Reported in[1971]82ITR513(Cal)
ActsIncome Tax Act, 1922 - Sections 2(6A), 16(2), 18(3D) and 23A; ;Finance (No. 2) Act, 1957
AppellantCommissioner of Income-tax
RespondentJasrup Baijnath and Sons (P.) Ltd.
Appellant AdvocateSuhas Sen, Adv.
Respondent AdvocateNone
Cases ReferredPunjab Distilling Industries Ltd. v. Commissioner of Income
Excerpt:
- p.b. mukharji, j.1. this is a reference at the instance of the commissioner of income-tax, west bengal. the statement of the case raises two questions for answer by this court. they are :'(1) whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the rebate of super-tax was allowable to the assessee under clause (ii) of the first proviso to paragraph d of part ii of the first schedule to the finance (no. 2) act of 1957 ?' '(2) if the answer to the first question is in the negative--whether the tribunal was right in holding that no withdrawal of rebate granted by the first proviso to paragraph d of part ii of the finance (no. 2) act of 1957 was justified under clause (i) of the second proviso to the said paragraph ?' 2. the relevant facts.....
Judgment:

P.B. Mukharji, J.

1. This is a reference at the instance of the Commissioner of Income-tax, West Bengal. The statement of the case raises two questions for answer by this court. They are :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rebate of super-tax was allowable to the assessee under Clause (ii) of the first proviso to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act of 1957 ?'

'(2) If the answer to the first question is in the negative--whether the Tribunal was right in holding that no withdrawal of rebate granted by the first proviso to Paragraph D of Part II of the Finance (No. 2) Act of 1957 was justified under Clause (i) of the second proviso to the said paragraph ?'

2. The relevant facts recorded in the statement of the case are as follows : The assessee, Messrs. Jasrup Baijnath Bahety & Sons Private Ltd., of 35, Cross Street, Calcutta, is a private limited company. The controversy relates to the assessment year 1957-58 for which the previous year was the calendar year 1956. The Income-tax Officer determined the total income of the company at Rs. 8,962. The share capital of the company, which stood at Rs. 3,84,000 at the beginning of the year, was reduced to Rs, 96,000 by the order of this court dated the 24th July, 1956. The reduction in capital thus amounted to Rs. 2,88,000. The company distributed amounts, in cash to the shareholders in consequence of such reduction. It is recorded in paragraph 5 of the statement of the case that the assessee-company was formerly carrying on the business of generation and supply of electricity at Khandwa, Madhya Pradesh. Since the electricity supply was taken over by the State Government, the assessee had practically no business and the share capital was in excess of the requirements of the company. The High Court ordered the reduction of capital in the following terms :

'The capital of Messrs. Jasrup Bijnath Bahety & Sons (Private) Ltd. henceforth is Rs. 96,000 divided into 3,840 shares of Rs. 25 each reduced from Rs. 4,34,000 divided into 4,340 shares of Rs. 100 each and by extinguishing the unissued capital of Rs. 40,000 and reducing 3,840 of the issued ordinary shares by Rs. 75 each. The 3,840 shares were part of 4,340 ordinary shares. At the time of registration of this minute the full sum of Rs. 25 per share has been and is to be deemed paid up on the said 3,480 ordinary shares.'

3. The Income-tax Officer found that there were accumulated profits to the extent of Rs. 97,399. In his order the Income-tax Officer records as follows :

'During this year the assessee effected reduction in the share capital. Share capital which stood at Rs. 3,84,000 at the beginning of the year was reduced to Rs. 96,000 by order of the court, dated 24th July, 1956. Reduction in capital amounts to Rs. 2,88,000. The company is distributing amounts in cash to its various shareholders. The distribution by the company on the reduction of share capital would be regarded as dividend to the extent to which the company possesses accumulated profits.'

4. The reason for setting out the above observation of the Income-tax Officer is that quite a good deal of argument on behalf of the revenue has been advanced on this aspect of the case which we shall notice later on. But what the Income-tax Officer came to say in that order was :

'The accumulated profits of the company are as under --

Contingency reservesRs. 11,500Accumulated balance of profit and loss accountRs. 44,435Provision for income-taxRs. 3,988Profits on the sale of machinery incorrectly credited to the goodwill accountRs. 37,476

Rs. 97,399'

5. Having stated so far, the Income-tax Officer finally records his conclusion in these terms:

'Since no part of these profits are allowed to have arisen before the first day of April, 1933, the company would be deemed to have declared dividend in this year to the extent of Rs. 97,399 under Section 2(6A)(d). Tax shall be calclulated as per annexure 'A'.'

6. This again has been the subject of argument as to how far the intro-duction of the doctrine of 'deeming to have declared dividend' was justified by the Income-tax Officer.

7. The assessee appealed to the Appellate Assistant Commissioner who agreed with the Income-tax Officer that to the extent of Rs. 97,399 there was a distribution of dividend under Section 2(6A)(d). The order of the Appellate Assistant Commissioner dated June 12, 1963, in particular, notices two contentions. The first contention was with regard to the reduction of rebate of the super-tax on the declaration of excess dividend. He formulates the first contention to be that the definition in Clause (d) of Sub-section (6A) of Section 2 of the Income-tax Act means a distribution out of the accumulated profits and not any distribution on the reduction of its capital. He dismisses it as a contention without merit. The relevant observations that he makes are as follows :

'After all, the words used in the Act are any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose....' These words do not require that the distribution should be out of the accumulated profits. It is enough if the company has accumulated profits and any distribution is made on the reduction of capital. The reduction of capital and the accumulated profits to the extent of Rs. 97,399 are not questions in the appeal. Therefore, this contention is rejected.'

8. The second contention that he notices is that the distribution in Clause (c) of the second proviso to Paragraph D of the Finance (No. 2) Act, 1957, means actual distribution and does not include notional distribution. The Appellate Assistant Commissioner also dismissed this contention as without merit. His relevant observations on this point are as follows :

'The words used are ' distributed to its shareholders during the previous year dividends in excess of....'. These words require that the company should have distributed dividends. There is no discussion of difference between notional distribution and actual distribution in these words. The only requirement is distribution of dividends. Dividend is defined in the Income-tax Act m Clause (6A) of Section 2. In the above paragraph, I have held that the distribution made by the assessee-company falls under the definition of 'dividend'. It is therefore clear that Clause (c) of the second proviso applies and the rebate in the super-tax should be reduced by the amount of the excess dividend distributed by the assessee-company. In view of this discussion the reduction of the rebate from super-tax made by the Income-tax Officer is correct and is upheld.'

9. In the result, the assessment was reduced and the Income-tax Officer was directed by the Appellate Assistant Commissioner to modify the assessment accordingly.

10. The assessee appealed to the Tribunal who allowed the appeal. The Tribunal came to the following conclusions :

'Section 2(6A)(d) is general and applied to any distribution by the company on the reduction of its capital to the extent to which the company possessed accumulated profits and it does not matter whether the reduction of capital was bona fide or with a view to avoidance of super-tax by the shareholders.

We are, however, of the opinion that the assessee is entitled to succeed in its contention that the rebate allowable to it cannot be withdrawn under the terms of the second proviso referred to above. The assessee-company is a private limited company and so is not a company in which the public are substantially interested. Clause (i) of the first proviso applied to an Indian company (meaning thereby a company which has made arrangement for the declaration of dividend within India and for deduction of super-tax from dividends under Section 18(3D) which is a company in which public are substantially interested and 'with a total income not exceeding Rs. 25,000'). Clause (ii) applied to an Indian company which does not fulfil 'condition (b)' of Clause (i). Condition (b) can apply only if the case of the company is one in which public are substantially interested with a further restriction that its total income falls below Rs. 25,000. If this interpretation is correct, Clause (ii) would apply only to an Indian company (as referred to earlier) which is itself a company in which the public are substantially interested but with total income exceeding Rs. 25,000. Clause (in) would apply to foreign companies (which have not provided for declaration of dividend in India) and to Indian companies in which public are not substantially interested. The second proviso providing for withdrawal of rebate applies only to companies entitled to rebate under Clause (i) or Clause (ii) of the first proviso, that is, to Indian companies in which public are substantially interested. This distinction is understandable because it is in the case of public limited companies that distribution of excessive dividends or issue of bonus shares are discouraged.

In the present case, the assessee being a company in which public are not substantially interested the rebate admissible is 20% as mentioned in Clause (iii) of the first proviso and there is no question of any further withdrawal of the rebate.'

11. Having regard to these conclusions of the Tribunal, the result followed in allowing the appeal and the Tribunal directed the Income-tax Officer to recompute the super-tax with reference to Clause (Hi) of the first proviso to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act, 1957.

12. This controversy and its decisions at the different stages, as set out above, represent a tragedy of multiple errors. The questions canvassed, decided and raised here turn essentially and fundamentally on the language of Paragraph D of Part II of the Finance (No. 2) Act, 1957. The language of the statute has to be clearly borne in mind at every stage to come to a decision on the points raised. Paragraph D opens with the words :

'In the case of every company, Rates of super-taxOn the whole of the total income... .50 per cent.'

13. This is followed by three provisos--(i), (ii) and (iii). Proviso (i) says

'Provided that,--

(i) a rebate at the rate of 40 per cent. on so much of the total income as consists of dividends from a subsidiary Indian company and a rebate at the rate of 35 per cent. on the balance of the total income shall be allowed in the case of any company which-

(a) in respect of its profits liable to tax under the Income-tax Act for the year ending on the 31st day of March, 1958, has made the prescribed arrangements for the declaration and payment within India of the dividends payable out of such profits and for the deduction of supertax from dividends in accordance with the provisions of Sub-section (3D) of Section 18 of that Act ; and

(b) is such a company as is referred to in Sub-section (9) of Section 23A of the Income-tax Act with a total income not exceeding Rs. 25,000 ;

(ii) a rebate at the rate of 40 per cent. on so much of the total income as consists of dividends from a subsidiary Indian company and a rebate at the rate of 30 per cent. on the balance of the total income shall be allowed in the case of any company which satisfies condition (a) but not condition (b) of the preceding clause :

(iii) a rebate at the rate of 40 per cent. on so much of the total income as consists of dividends from a subsidiary Indian company and a rebate at the rate of 20 per cent. on the balance of the total income shall be allowed in the case of any company not entitled to a rebate under either of the preceding clauses.'

14. The main contention on behalf of the revenue is that the Tribunal was in error in applying Clause (iii) of the first proviso of Paragraph D of Part II of the First Schedule of the Finance (No. 2) Act, 1957, and it should have applied Clause (ii) of that proviso and condition (a) set out above. This is the crux of the contention on this statement of the case. It depends on a proper interpretation of these provisos and clauses.

15. Looking at these three provisos, the first conclusion is that the rebates of 40%, 35%, 30%, and 20%, as mentioned in these three provisos, are allocated and dividend to go with the total income consisting of dividends under a subsidiary Indian company on the one hand and the balance of the total income on the other. The question naturally arises : where there is no question of any income from any dividend from any subsidiary Indian company, would these provisos have any application The point of significance is that there is no dividend from any subsidiary Indian company in the present case.

16. Secondly, looking again at the provisos, there is no justification for coming to the conclusion, which the Tribunal did at in saying the Clause (ii) of the proviso applied only to an Indian company but Clause (iii) applied only to foreign companies which have not providedfor declaration of dividends in India and to Indian companies in which public are not substantially interested. Apparently, this attempted distinction which the Tribunal tried to make, drew its sustenance and inspiration from the reference to Section 18(3D) of Income-tax Act in proviso (i)(a) set out above. It will be remembered that Section 18 is in Chapter IV of the Income-tax Act under the heading 'Deduction and assessments relating to payment by deduction at the source'. It may also be remembered that Section 2(5A) of the Income-tax Act says that a company means not only an Indian company but also 'any association, whether incorporated or not and whether Indian or non-Indian, which is or was assessable or assessed as a company for the year ending 31st March, 1948, or which has been declared by general or special order of the Central Board of Revenue to be a company for the purposes of this Act'. It follows, therefore, that the distinction between foreign and Indian companies intended to be drawn by the Tribunal is not justified on a reading of these provisos.

17. Thirdly, proviso (i)(a) makes it clear that the rebate mentiond there shall be allowed in the case of a company which satisfies the condition that it must have 'made the prescribed arrangements for the declaration and payment within India of the dividends payable out of such profits and for the deduction of the super-tax from the dividends in accordance with Section 18(3D) of the Income-tax Act'. The words OF expressions 'prescribed arrangements for the declaration and payment of the dividends payable out of such profits' are significant. The words 'prescribed arrangements 'can only mean arrangements prescribed either by the Income-tax Act or the rules made thereunder or by the Companies Act or the rules made thereunder or under the articles of the company. Such prescribed arrangements for the declaration and payment of dividends cannot mean notional or deemed dividends such as are contemplated in Section 23A of the Income-tax Act. Section 18(3D) of the Income-tax Act is not also concerned with deemed or notional dividend but with deducting super-tax on the amount of the dividend as increased in accordance with Section 16(2) of the Income-tax Act. The two parts of proviso (i)(a) are clearly separate, namely, the part that makes for 'prescribed arrangements for the declaration and payment of dividends payable out of such profits 'on the one hand and the part 'for the deduction of super-tax on dividends in accordance with the provision of Section 18(3D) of the Income-tax Act'. The first part cannot include deemed or notional dividends at all. As the language clearly says, it means dividend which has been declared and paid by the prescribed arrangements. The second part under Section 18(3D) of the Income-tax Act may include consideration of deemed dividend as the section itself provides. In order to succeed, therefore, the revenue has to establish in this case that the dividend taken to be dividend in this case was a dividend according to prescribed arrangements within the meaning of proviso (i)(a) of Paragraph D of the Finance Act quoted above. On the facts the revenue cannot do this in the present case. Therefore, the contention of the revenue to come within Clause (a) of proviso (i) cannot succeed.

18. Lastly, the overriding problem remains whether what has happended in this case can at all be called dividend within the meaning of the Income-tax Act or the Finance Act or both these Acts stated above. Much of the classical, traditional and orthodox company law notion of dividend to-daydoes not hold good. Dividend under the Income-tax Act could never have been dreamt to be dividend under the older Companies Acts. But they are now dividends. But even then the question is whether reduction of share capital, without anything more, and especiallo when the reduction of share capital has taken place solely on the ground of the State taking over the business of the assessee-company, namely, manufacture and supply of electricity, leading to the situation where the company found that its capital was in excess of the requirements of the company, is dividend under the Income-tax Act read with or without the Finance Act.

19. Section 2(6A) of the Income-tax Act says :

'Dividend includes-

(a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;

(b) any distribution by a company of debentures, debenture stock or deposit certificates in any form, whether with or without interest, to the extent to which the company possesses accumulated profits, whether capitalized or not;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation,whether capitalized or not;

(d) any distribution by a company, on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalized or not;

(e) any payment by a company, not being a company in which the public are substantially interested within the meaning of Section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits.'

20. This is followed by a statement about what the word 'dividend' does not include. An Explanation to this Section 2(6A) provides that the expression 'accumulated profits' does not in this context include capital gains before the 1st April, 1946, or after the 31st March, 1948, and before the 1st April, 1956. Section 2(6C) says that income includes, inter alia, dividend. Looking at the statutory description of what is dividend in Section 2(6A) of the Income-tax Act, an inseparable adjunct appears as 'accumulated profits'. In other words, dividend in this respect cannot be conceived without some association or other with accumulated profits. The question immediately arises where there is a reduction of share capital because the Government has taken over the main item of business of manufacture and supply of electricity, then without anything more about accumulated profits being found as a fact, could this reduction of capital be dividend within the meaning of the Income-tax Act or the Finance Act. For instance, if a company is started by subscription to shares and immediately on allotment of shares it is found that a good part of the business of the company has become either unnecessary or impossible and the company, therefore, reduces the share capital and returns the money to the shareholders who had subscribed for the shares, then this return is not out of any accumulated profits because no profits had been earned, far less accumulated, and can only be regarded as refund of the capital subscribed by the shareholder. In that case certainly it would not be dividend either in the traditional meaning of the word or even in the extended meaning of it under the Income-tax Act or the Finance Act.

21. It will be appropriate at this stage to make a reference to the decision of the Supreme Court in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax, [1965] 57 I.T.R. 1 ; 35 Comp. Cas. 511 ; [1965] 3 S.C.R. 1 (S.C.). The Supreme Court there expressed the view that under Section 2(6A)(d) of the Income-tax Act the legislature was enacting a provision irreality to tax the profits in the hands of the shareholders received by them under the cloak of capital. The majority judgment expressed the view that the expression 'distribution' connoted something actual and not notional. This ratio of the decision, therefore, shows that the Appellate Assistant Commissioner was clearly wrong in trying to make this distinction and suggesting that actual distribution was not necessary but notional distribution would do. No doubt, the Supreme Court there expressly said that while the distribution had to be actual it could be physical and it could also be constructive, e.g., by crediting the amount due in the respective accounts of the shareholders or by actually paying to each one of them the amount due to him and came to the conclusion that 'distribution' has the same meaning which was given to it under Section 16(2) of theAct saying 'credited or paid'. It was also said there by the majoritythat the date of the resolution for the reduction of capital and not theseveral dates of payments to the shareholders fixed the date for ascertaining the quantum of accumulated profits under Section 2(6A)(d). Thedissenting minority judgment expresses certain views suggesting that theword 'distribution' under Section 2(6A)(d) means allotment or apportionment of the surplus among the shareholders; and that the allotment takesplace and each shareholder gets a vested right of his portion of the surplus assoon as the capital stands reduced. The question before the Supreme Court,however, did not raise the question of 'accumulated profits' because thereit was an admitted fact that the profits had accumulated, having regard to question No. 2 appearing at page 5 of that report which is as follows :

'2. Whether the accumulated profits amounting to Rs. 4,69,244-13-0 could be deemed to have been distributed on the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs within the meaning of Section 2(6A)(d) of the Income-tax Act?'

22. Here, there is no finding at all before us that there was any accumulation of profit as such and what was the extent of it. No doubt, the Income-tax Officer, as already set out elsewhere in this judgment, had tried to describe as accumulated profit a certain figure, manifestly under a misconception because he tried to include contingency reserve, accumulated balance under the profit and loss account and provision for income-tax which could by no means be considered as accumulated profits of the company. Even profits from the sale of machinery could not be said to be accumulated profits without something more and mere appreciation of the original value of the machinery will not bring it within the expression 'accumulated profits of the company'. Accumulation of profits is a deliberate act and implies a conscious volition to accumulate the profits.

23. Reduction of share capital is a well-known legal concept in company jurisprudence. Section 100 of the Companies Act deals with the special resolution for reduction of share capital followed by Sections 101, 102 and 103 dealing respectively with applications to the court for confirmatory order, registration of the order and liability of members in respect of such reduced shares.

24. Section 100 of the Companies Act makes it clear that:

'Subject to confirmation by the court, a company limited by shares ora company limited by guarantee and having a share capital, may, if soauthorised by its articles, by special resolution, reduce its share capital inany way ; and in particular and without prejudice to the generality of theforegoing power, may-

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up ;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid up share capital which is lost, or is unrepresented by available assets ; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company.....'

25. It is well known that reduction of share capital can be effected in company law by various methods, particularly classified as (i) with sanction of the court, and (ii) without such sanction. Forfeiture or surrender of shares or cancellation of unissued shares are examples of reduction of share capital for which sanction of the court is not necessary. In other cases, where the company wants to reduce its share capital, it can do so after obtaining sanction of the court. (See the House of Lords decision in Westburn Sugar Refineries Ltd., [1951] 1 All E.R. 881 (H.L.)).

26. The question of 'deemed dividend' in this context is relevant in so far as the Income-tax Officer tried to include the concept of deemed dividend in the facts and circumstances of this case and in so far as the language of the three provisos of paragraph D of Part II of the First Schedule of the Finance (No. 2) Act, 1957, are concerned. Section 2(6A) of the Income-tax Act does not expressly mention or even impliedly include the concept of deemed dividend. The express Section dealing with deemed dividend, and specially with super-tax on such deemed dividend, is Section 23A of the Income-tax Act. Clause (b) of proviso (i) of Paragraph D of Part II of the Finance (No. 2) Act, 1957, expressly mentions Sub-section (9) of Section 23A which means that no part of Section 23A of the Income-tax Act applies to a company in which public are substantially interested or to a subsidiary company of such company if the whole of the share capital of such subsidiary company is held by the parent company or by its nominees throughout the previous year. Explanation (ii) of Paragraph D of Part II of the finance (No. 2) Act, 1957, expressly says that the expression 'dividend' shall be deemed to include any distribution included in the expression 'dividend' as defined in Clause (6A) of Section 2 of the Income-tax Act. The question then is: if Section 2(6A) does not include the concept of deemed dividends, would that concept come in to be included for the purposes of allowing rebates for super-tax on a company ?

27. I shall now make a brief reference dealing with the computation of the reduction of the amount of rebate under Clause (i) or Clause (ii). This will appear in the last proviso after Clause (in) and again proviso (i) with Sub-clauses (a), (b) and (c). The opening words of this proviso are :

'Provided further that the amount of the rebate under Clause (i) or Clause (ii) shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as hereunder.'

28. Then follows Sub-clauses (a), (b) and (c) giving the nature and theamount of computation. Sub-clause (a) of this proviso (i) further providesfor the case where the whole amount of the rebate shall be reduced onthat part of the sum arrived at in accordance with Clause (i) of the secondproviso to Paragraph D of Part II of the First Schedule to the FinanceAct, 1956, as is referable to that amount of bonus shares, bonus or dividends, as the case may be, which has not been deemed to have been takeninto account in accordance with Clause (ii) of the said proviso for thepurpose of reducing the rebate mentioned therein to nil. A study of thispart of the language of this particular proviso shows that the subjectunder consideration there is, (1) the amount of bonus shares, (2) bonus, or(3) dividends, which have not been deemed to have been taken intoaccount. Now that would naturally suggest that Clauses (i) and (ii) ofthe proviso which we have discussed have some reference to dividends andnecessarily to deemed dividends. This is followed by Sub-clause (b) whichallows for reduction of rebate at the rate of 30% 'on the amount representing the face value of bonus shares or the amount of any bonus issuedto its shareholders during the previous year with a view to increasing thepaid up capital except to the extent to which such bonus shares or bonushave been issued out of premiums received in cash on the issue of its shares'.The subject under Sub-clause (b), therefore, is bonus shares within theratio where such bonus shares is to increase the paid up capital and withthe special exceptions for bonus shares which are issued out of premiumsreceived in cash. Neither of these two Sub-clauses (a) and (b) are intendedto be applied here. What the revenue suggests is that the next Sub-clause (c) is relevant which provides different amounts of rebate at therate of 10%, 20% or 30% 'in addition in the case of a company referredto in Clause (ii) of the preceding proviso which is distributed to its shareholders during the previous year dividends in excess of 6 per cent. of itspaid up capital, not being dividends payable at a fixed rate, with limitsindicated with reference to the paid up capital'. The contention of therevenue in this case has been that because the first proviso (ii) applied,therefore, Sub-clause (c) of the next proviso (i) applied in this case. Sub- Clause (c) also on a reading shows that it relates to dividends and consequently also must include deemed dividends. This contention of the revenue does not and cannot any more arise having regard to the viewwe have taken of the first proviso (ii) of Paragraph D and having regardto the fact that the revenue has not been also able to satisfy condition (a)of the first proviso (i).

29. The legal position then is this. Section 2(6A) of the Income-tax Act describes what dividend includes and what it does not include. I have shown by my analysis that that description is inseparably associated with 'accumulated profits'. Section 2(6CJ says that income includes dividend. As Section 3 of the Income-tax Act charges the income or the total income to income-tax, it necessarily follows that the income-tax attaches to dividends as part of the income or a kind of income. Section 18(3D) of the Income-tax Act refers to the deduction of super-tax from dividends and provides for deduction of such tax at the source and which is expressly recognized in proviso (i)(a) of Paragraph D of the Finance (No. 2) Act, 1957, as being one of the conditions, which, when present, will be a part of the qualification of a company to be entitled to the rebate provided in proviso (i) or Paragraph D of the Finance Act. Paragraph D of Part II of the Finance (No. 2) Act, 1957, deals with the case of rates of super-tax in the case of a company. The subject there is super-tax on a company. Supertax is provided in Chapter IX of the Income-tax Act* 1922, of which Section 55, inter alia, lays down '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'. Section 56A provides for exemption from super-tax payable by a company in respect of certain dividends, with which we are not concerned in the present reference although item (5) thereof in sub- Clause (i) mentions the case where the Central Government is satisfied that the Indian companies wholly or mainly engaged in an industry for the manufacture or production of machinery and equipment for generation, transmission and distribution of electrical energy. The next relevant section is Section 23A of the Income-tax Act dealing with super-tax on undistributed income and what has been called in this branch of the law as deemed dividends. Dividends attract both tax and super-tax. Normally, dividends are declared by the company and tax attaches to such declared dividers. But the concept in Section 23A of the Income-tax Act is to impose the super-tax on undistributed dividend or undeclared dividend in case which satisfy the condition laid down in Section 23A of the Income-tax Act. Finally, the legal position is qualified by the language of the different provisos and Sub-clauses appearing in Paragraph D, Part II, of the Finance (No. 2) Act, 1957, and which we have set out above.

30. The super-tax under this Paragraph D of the Finance (No. 2) Act, 1957, is on every company on its total income. That is the main provision. What follows thereafter is a system of rebates mentioned in the different provisos in the sub-clauses that follow. On principle of construction, the primary imposition is of the super-tax on the total income of every company which is the language of Paragraph D of the Finance (No. 2) Act, 1957. Normally, on this scheme of provisions, the rebate has to be claimed by the company and for the super tax being imposed, it is the company-assessee which claims that it is entitled to rebate according to the provisos and their sub-clauses. But the primary fact must be first satisfied by the revenue that the case is one where the income of the company is liable to super-tax. The only point here is whether the reduction of share capital, in the facts and circumstances of this case, has produced an income which is liable to super-tax. The revenue contends that it has, on the ground that it is an income by a k.jnd of extended meaning of the word 'dividend', a conclusion which we are unable to uphold. Here, on the facts and circumstances of the case, we are satisfied that the reduction of share capital has not produced or has not been shown to have produced on any evidence an income by the way of 'dividend', as contended by the revenue, according to the extended connotation of the word 'dividend'.

31. We shall now proceed to answer the questions raised. Question No. 1 raises the issue whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rebate of super-tax was allowable to the assessee under Clause (iii) of the first proviso to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act of 1957, The answer to that question is that before the Tribunal comes to any finding of allowing rebate on super-tax, it has to be satisfied that the super-tax is leviable on the total income of the company under Paragraph D of the Finance (No. 2) Act, 1957, because it is only in that event that the question of rebates on that super-tax can arise. This primary condition, we hold, has not been satisfied in this case and therefore the Tribunal was not right in holding that any rebate of super-tax was allowable in the sense that no super-tax itself was leviable on the reduction of share capital which occurred in the facts and circumstances of the case. Question No. 1 raises and involves the basic question whether super-tax is leviable on the income of the company concerned and it is only when that is established that the question of any rebate therefrom can arise. As the first condition has not been satisfied, the consequential question of allowing rebate on super-tax really does not arise. We answer question No. 1 accordingly. We hold further that this reduction of share capital has not produced an income on which a super-tax can be attached nor is it a dividend within the meaning of the Income-tax Act or Paragraph D of the Finance (No. 2) Act, 1957. We hold further that there is no evidence to hold that this reduction of share capital in the particular case meant any return of 'accumulated profits'. We also hold there is no question in the present case of any dividend from any subsidiary Indian company within the meaning of Paragarph D of the Finance (No. 2) Act, 1957, and its provisos. The conditions laid down in proviso (i), (ii) or (iii) of Paragraph D of the Finance (No. 2) Act, 1057, are not present in the instant reference.

32. Question No. 2 raises the issue that, if the answer to question No. 1 is in the negative, whether in that case the Tribunal was right in holding that no withdrawal of rebate granted by the first proviso to paragraph D, of Part II of the Finance (No. 2) Act of 1957 was justified under Clause (i) of the second proviso. The question does not arise having regard to our findings above and, even if it did, Clause (i)(a) of the proviso in Paragraph D of the Finance (No. 2) Act, 1957, has not been satisfied as found by us. We answer question No. 2 accordingly.

33. We need only record in conclusion that the assessee has not appeared to contest this reference. There would be no order as to costs.

Sabyasachi Mukharji, J.

34. I agree.


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