PETITIONER:
RAJPUTANA AGENCIES LTD.
Vs.
RESPONDENT:
COMMISSIONER OF I. T., BOMBAY
DATE OF JUDGMENT:
09/10/1958
BENCH:
GAJENDRAGADKAR, P.B.
BENCH:
GAJENDRAGADKAR, P.B.
AIYYAR, T.L. VENKATARAMA
SARKAR, A.K.
CITATION:
1959 AIR 265 1959 SCR Supl. (1) 142
CITATOR INFO :
D 1960 SC1016 (18)
D 1966 SC 279 (4)
ACT:
Income-tax-Assessment of company-Declaration of dividend in
excess of statutory limit-Additional income-tax-Computation"
Rate applicable to the total income of the company ",
Meaning of --Indian Finance Act, 1951, First Schedule Para.
B, proviso (ii), explanation (ii)(b).
HEADNOTE:
The assessee, a private limited company in Saurashtra, was
assessed for the assessment year 1952-53 on a total income
of Rs. 26,385. It was assessable at the rate of four annas
per rupee but in view of the provisions of the Part B States
(Taxation Concession) Order, 1950, it was actually assessed
at the rate of sixteen pies per rupee. The assessee had
declared dividend of Rs. 30,000 out of which Rs. 15,159 was
found to be excess dividend. On this excess dividend the
assessee was liable to pay additional income-tax and the
dispute was regarding the rate at which tax was to be
computed. Clause (ii) of the proviso to para. B of Part.
I of the First Schedule to the Finance Act, 1951, which
applied to the case, provided that the additional income-tax
was to be equal to the sum by which the aggregate amount of
income-tax actually borne by the excess amount fell short of
the amount Calculated at the rate of five annas per rupee on
the excess dividend. Sub-clause (b) of cl. (ii) to the
second explanation to proviso to para. B provided that the
aggregate amount of income-tax actually borne by the excess
dividend was to be determined at the rate applicable to the
total income of the company. The assessee contended that
the words 'at the rate applicable to the total income of the
company' meant the rate prescribed by para. 8 of the Act,
i.e. four annas per rupee, and not the rate as reduced by
the Order at which the income-tax had actually and in fact
been levied and that consequently it was liable to pay
additional income-tax on the excess dividend at the rate of
one anna per rupee only.
Held, that the expression 'rate applicable to the total
income of -the company' meant the rate actually applied and
that the assessee was rightly charged at the rate of forty-
four pies per rupee being the rate by which the rate at
which the assessee was actually assessed fell short of the
rate of five annas per rupee. The clause referred to the
specific or definite rate which -was determined to be
applicable to the taxable income of the company for that
specific year and not to the rate prescribed by the Act for
the relevant year generally in reference to incomes of
companies.
143
Elphinstone Spinning and Weaving Mills Co. Ltd. v. Commis-
sioner of Income-tax, Bombay City, [1955] 28 I.T.R. 81, con-
sidered.
JUDGMENT:
CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 91 of 1957.
Appeal from the judgment and order dated March 29, 1956, of
the Saurashtra High Court at Rajkot in Civil Reference No. I
of 1955.
Shankarlal G. Bajaj and P. C. Aggarwal, for the appellant.
K. N. Rajagopala Sastri, R. H. Dhebar and D. Gupta, for
the respondent.
1958. October 9. The Judgment of the Court was delivered by
GAJENDRAGADKAR, J.-This appeal arises from the assessment
proceedings taken against the appellant, Rajputana Agencies
Ltd., Lavanpur, for its income for the assessment year 1952-
53, the accounting period being the corresponding Marwadi
Year ending in October, 1951. The appellant is a’ private
limited company and it was assessed to income-tax and super-
tax by the Income-tax Officer, Morvi Circle, Morvi, on a
total income of Rs. 26,385. The appellant had declared
dividend of Rs. 30,000. The Income-tax Officer held that
out of the said amount of dividend, Rs. 15,159 was excess
dividend. On this basis the Income-tax Officer determined
the additional income-tax payable by the appellant at the
rate of forty-four pies in a rupee on the said excess
dividend. The additional income-tax payable by the
appellant in that behalf was computed at Rs. 3,473-15-0.
This order was passed on November 25, 1952.
The appellant filed an appeal against this order before the
Appellate Assistant Commissioner of Income-tax at Rajkot.
The appellate authority determined the additional income-tax
payable by the appellant at Rs. 2,084-12-0 on August 29,
1953. An appeal was preferred by the appellant against the
appellate order before the Income-tax Appellate Tribunal,
Bombay, but the appellate tribunal confirmed the order under
appeal on November 27, 1954. The
144
appellant then moved the appellate tribunal under s. 66(1)
of the Income-tax Act and the appellate tribunal, by its
order passed on April 25, 1955, referred two questions to
the High Court at Saurashtra for its opinion. In the
present appeal, we are concerned with ,the second of the
said two questions. This question as framed by the tribunal
was: Whether the expression ” at the rate applicable to the
total income of the company ” as appearing in sub-cl. (b) of
el. (ii) to the second explanation to proviso to paragraph B
of Part I of the First Schedule to the Indian Finance Act,
1952, means the rate at which a company’s total income is
actually assessed or the rate prescribed by the respective
Finance Act without taking into consideration the rebate
allowed in the respective years in accordance with the
provisions of the Part ‘ B ‘ States (Taxation Concessions)
Order, 1950 (hereinafter called the Order). Section 2 of
the Finance Act, 1952, provides that the provisions of s. 2
of, and the First Schedule to the Finance Act, 1951, shall
apply in relation to income-tax and super-tax for the
financial year 1952-53 as they apply in relation to the
income-tax and super-tax for the financial year 1951-52 with
the modification that, in the said provisions for the
figures 1950, 1951 and 1952 wherever they occur, the figures
1951, 1952 and 1953 shall be respectively substituted ; and
so in the present case we are really concerned with the
material provisions of the Finance Act, 1951 (herein. after
called the Act).
By its judgment delivered on March 29, 1956, the High Court
answered this question against the appellant and held that
the expression ” at the rate applicable to the total income
of the company ” means the rate at which the company’s total
income is actually assessed. The appellant then applied for
and obtained a certificate from the High Court under Art.
133(1)(c) of the Constitution read with s. 66A(2) of the
Income-tax Act that the case is a fit one for appeal to this
Court. It is with this certificate that the present appeal
has been brought to this Court; and the only point which it
raises for our decision relates to the construction of the
expression ” at the rate applicable
145
to the total income of the company ” appearing in the
relevant provision of the Act.
The appellant does not dispute its liability to pay
additional income-tax under cl. (ii) of the proviso to
paragraph B of Part I of the First Schedule to the Act. The
dispute between the parties is in regard to the rate at
which the additional income-tax has to be charged. I The
appellant has paid income-tax on its total income in the
relevant assessment year at the rate of sixteen pies in a
rupee in accordance with the computation prescribed by para.
6 of the Order; and it is urged on its behalf, that the
rebate to which it is entitled under the provisions of the
said Order is irrelevant in determining the rate at which
the additional income-tax can be computed against it. On
the other hand, the respondent contends that the additional
income-tax has to be computed at the rate at which the
appellant’s income has been actually assessed and so the
rebate granted to the appellant under the said Order must be
taken into account in determining the said rate of the
additional tax.
It would be relevant, at this stage, to refer to the
provisions of the Order under which the appellant has
admittedly obtained rebate as a company carrying on its
business in Saurashtra. By the Order, the Central
Government made exemptions, reductions in the rate of tax
and modifications specified in the Order in exercise of the
powers conferred by s. 60A of the Income-tax Act. This
Order applied to Part ‘B’ states which included all Part ‘B’
States other than the State of Jammu and Kashmir. Paragraph
5 of the Order deals with income of a previous year
chargeable in the Part ‘B’ States in 1949-50. Sub-clause
(3) of paragraph 5 shows that the State assessment year
1949-50 means the assessment year which commences on any
date between April 1, 1949 and December 31, 1949. We are
not concerned with the provisions of this paragraph.
Paragraph 6(iii) applies to the present case. The effect of
para. 6(1), (ii) and (iii) is that in respect of so much of
the income, profits and gains included in the total income
as accrue or arise in any State other
19
146
than the States of Patiala and East-Punjab States Union
and Travancore-Cochin
(i) the tax shall be computed (a) at the Indian rate of
tax; and (b) at the State rate of tax in force immediately
before the appointed day;
(ii) where the amount of tax computed under subclause (a) of
clause, (1) is less than or is equal to the amount of tax
computed under sub-clause (b) of clause (1) the amount of
the first mentioned tax shall be the tax payable;
(iii) where the amount of tax computed under subclause (a)
of clause (1) exceeds the tax computed. under sub-clause (b)
of clause (1), the excess shall be allowed as a rebate from
the first mentioned tax and the amount of the first
mentioned tax as so reduced shall be the tax payable.
Thus under el. (iii) the amount of income-tax levied against
the appellant is not the amount computed at the Indian rate;
it represents the difference between the amounts calculated
at the Indian rate of tax and that calculated at the State
rate of tax. The excess of the first amount over the second
is allowed as a rebate. In other words, the Indian rate of
tax prescribed by the relevant provisions of the Act does
not by itself determine the amount of tax payable by the
appellant for the relevant year.
It is well known that when different Part ‘ B ‘ States
merged with the adjoining States or Provinces and were made
taxable territories under the Income-tax Act, the operation
of the Indian rate of tax was introduced by phases and
rebates on a graduated scale were allowed to the assessees
under the provisions of this Order. As we have already
mentioned, it is common ground that the appellant was
entitled to and has obtained rebate under sub-cl. (iii) of
paragraph 6 of ‘the Order, with the result that his total
income has been taxed to income-tax at the rate of sixteen
pies in a rupee. The point for determination is whether
this rebate is relevant in determining the rate at which the
additional income-tax has to’ be levied against the
appellant under the relevant provisions of the Act.
147
Let us now consider the relevant provisions of the Act.
Section 3 of the Income-tax Act which is the charging
section provides that ” where any Central Act enacts that
income-tax shall be charged for any year at any rate or
rates, tax at that rate or those rates shall be charged for
that year in accordance with, and subject to the provisions
of, this Act in respect of the total income of the previous
year of the’ assessee “. Thus, when levying income-tax
against the total income of the assessee, the rate at which
the tax has to be levied is prescribed by the Act for the
relevant year. Section 2 of the Act provides that, subject
to the provisions of sub-ss. (3), (4) and (5), income-tax
shall be charged at the rates specified in Part I -of the
First Schedule; and sub-s. (7) provides that ” for the
purpose of this section, and of the rates of tax imposed
thereby, the expression ” total income ” means total income
as determined for the purposes of income-tax or super-tax,
as the case may be, in accordance with the provisions of the
Act “. So we must turn to the First Schedule to the Act to
find the rate at which the appellant can be assessed.
Paragraph B of the said Schedule deals with companies and it
provides that, in the case of every company, on the whole of
total income the tax is leviable at the rate of four annas
in the rupee. There is a proviso to this paragraph and the
clause which calls for our construction in the present
appeal occurs in the explanation to el. (ii) of this
proviso. This proviso deals with the case of a company
which in respect of its profits liable to tax under the Act
for the relevant year has made the prescribed arrangements
for the declaration and payment within the territory of
India excluding the State of Jammu and Kashmir of the
dividends payable out of such profits and has deducted the
super-tax from the dividends in accordance with the
provisions of sub-s. (3D) or (3E) of s. 18 of that Act; and
in that connection, it provides:
(1) where the total income, as reduced by seven annas in
the rupee and by the amount, if any, exempt from income-tax
exceeds the amount of any dividends (including dividends
payable at a fixed rate) declared
148
in respect of the whole or, part of the previous year for
the assessment for the year ending on the 31st day of March,
1951, and no order has been made under subsection (1) of
section 23A of the Income-tax Act,, a rebate shall be
allowed, at the rate of one anna per rupee on the amount of
such excess
(ii) where the amount of dividends referred to in clause
(1i) above exceeds the total income as reduced by seven
annas in the rupee and by the amount, if, any, exempt from
income-tax, there shall be charged on the total income an
additional income-tax equal to the sum, if any, by which the
aggregate amount of income-tax actually borne by such excess
(hereinafter referred to as ” the excess dividend “) falls
short of the amount calculated at the rate of five annas per
rupee on the excess dividend.
It would thus be seen that the object of the legislature in
enacting this proviso is to encourage companies to plough
back some of their profits into the industry not to
distribute unduly large portions of their. profits to their
shareholders by declaring unreasonably high or excessive
dividends. In order to give effect to this intention the
legislature has offered an inducement to the companies by
giving them a certain rebate. If a company does not
distribute as dividends more than roughly nine annas of its
profits which is specified as distributable, then the rebate
of one anna is given to the company to the extent that the
dividend paid by it was less than the distributable
dividend. If the company pays more than the distributable
amount of dividend then it was not entitled to claim any
rebate; but, on the contrary, it becomes liable to pay an
additional income-tax as provided in cl. (ii) of the
proviso. In other words, the intention of the legislature
appears to be that companies should no doubt declare reason-
able dividend and thereby invite the investment of capital
in business; but they should not declare an excessive
dividend and should plough back part of their profits into
the industry. It is with this object that the provision for
rebate has been made. It would be noticed that,, in
addition to the rebate received by the appellant under the
relevant provisions of the
149
Order, it would have been entitled to receive the rebate
under el. (1) of the proviso to paragraph B if the dividend
declared by it had not exceeded the specified distributable
amount. In fact the dividend declared by the appellant has
exceeded the said amount and the appellant has thus become
liable to pay additional income-tax in respect of the excess
dividend under cl, (ii) of the proviso to paragraph B. Under
this clause, ” the appellant shall be charged on the total
income an additional income-tax equal to the sum, if any, by
which the aggregate amount of income-tax actually borne by
such excess (hereinafter referred to as ” the excess
dividend “) falls short of the amount calculated at the rate
of five annas per rupee on the excess dividend “. This
provision raises the problem of determining the aggregate
amount of income-tax actually borne by the excess dividend;
and it is to help the solution of this problem that an
explanation has been added which says, inter alia, that ”
for the purposes of cl. (ii) of the above proviso the aggre-
gate amount of income tax actually borne by the excess
dividend shall be determined as follows:
(i) the excess dividend shall be deemed to be out of the
whole or such portion of the undistributed profit,% 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;
(ii) such portion of the excess dividend as is deemed to be
out of the undistributed profits of each of the said years
shall be deemed to have borne tax(a) if an order has been
made under sub-section (1) of section 23A of the Income-tax
Act, in respect of the undistributed profits of that year,
at the rate of five annas in the rupee, and
(b) in respect of any other year, at the rate applicable to
the total income of the company for that year reduced by the
rate at which rebate, if any, was allowed on the
undistributed profits.”
Clause (1). explains what shall be deemed to be the
150
excess dividend and how it, should be ascertained. Clause
(ii) lays down how the portion of the excess dividend as is
deemed to be out of the undistributed profits of each of the
years mentioned in cl. (ii) of the proviso shall be deemed
to have borne tax. Sub. clause (a) of cl. (ii) is concerned
with cases where an order has been made under s. 23A (1) in
respect of the undistributed profits of that year at the
rate of five annas in a rupee. We are not concerned with
this clause in the present appeal. It is sub-cl. (b) of el.
(ii) of the explanation to the proviso to paragraph B that
falls for consideration in the present appeal.
The appellant’s 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 (1) “. 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
appropriate; 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. In the present case, if sub-cl. (b) is read as a
whole, and all the material words used are given their plain
grammatical meaning, its construction would present no
serious difficulty. When the clause refers to the rate
applicable, it is necessary to remember that it refers to
the rate applicable to- the total income of the company for
(1) Maxwell on ” Interpretation of Statutes “, 10th Ed. p.
284.
151
that year. In other words, the clause clearly refers to the
specific or definite rate which is determined to be
applicable to the taxable income of the company for the
specific year; and it is not the rate prescribed by the Act
for the relevant year generally in reference to incomes of
companies. The result is that, for determining the
aggregate amount of income-tax actually borne by the excess
dividend, the department must take into account the rate at
which the income of the company for the specific year has in
fact been applied or levied.
Besides, in construing the words “I 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 “. If
the legislation had intended that the tax actually borne
should in all, cases be determined merely by the application
of the rate prescribed for companies in general, the
explanation given by the material clause would really not
have been necessary. That is why in our opinion, the
context justifies the construction which we are inclined to
place on the words ” the rate applicable “.
The same position is made clear by the further provision in
sub-cl. (b) itself which requires that the relevant rate has
to be reduced by the rate at which the rebate, if any, has
been allowed on the undistributed profits; which means that,
for determining the rate in sub-cl. (b), it is necessary to
take into account the rebate which may have been allowed to
the company under el. (1) of the proviso to paragraph B, so
that in such a case the rate applicable cannot be the rate
prescribed in paragraph B of the Act; it must be the rate so
prescribed reduced by the rate at which the rebate has been
granted under cl. (1) of the proviso to paragraph B. It is
thus clear that the words ” rate applicable in such cases
mean the rate determined after deducting from the rate
prescribed by paragraph B the rate of rebate allowed by el.
(1) of the proviso to the said paragraph. Therefore, at
least in these cases, the material words mean the rate
actually applied. If that be the true position, the rate
applicable must in
152
all cases mean the rate actually applied. The same words
cannot have two different meaning,% in the same clause.
Incidentally we may point out that the provision of the Act
in regard to the payment of additional income-tax appears to
be intended to impose a penalty for distributing dividends
beyond the distributable.limit mentioned by the statute.
The method prescribed for determining the amount of this
additional income-tax is this. Calculate the amount at the
rate of five annas per rupee on the excess dividend and
deduct from the amount so determined the aggregate amount of
income-tax actually borne by such excess dividend; the
balance is the amount of additional income-tax leviable
against the company. In adopting this method, if rebate
admissible under cl. (1) of the proviso to para. graph B has
to be deducted from the rate prescribed, it is difficult to
understand why a rebate granted under paragraph 6(iii) of
the Order should not likewise be deducted. We accordingly
hold that the rate applicable in sub-cl. (b) of cl. (ii) of
the explanation read with cl. (ii) of the proviso to
paragraph B of Schedule I of the Act means the, rate
actually applied in a given case. On, this construction the
rate at which the appellant is liable to pay the additional
income-tax would be the difference between the rate of five
annas and the rate of sixteen pies in a rupee at which the
appellant has in fact paid income-tax in the relevant year.
That is to say, the additional income-tax is leviable at the
rate of forty-four pies in a rupee.
In its judgment, the High Court of Saurashtra has referred
with approval to the decision of the Bombay High Court in
Elphinstone Spinning and Weaving Mills Co., Ltd. v.
Commissioner of Income-tax, Bombay City(1). In this case,
Chagla C. J. and Tendolkar J. have held that if a company
has no taxable income at all for the assessment year 1951-52
and in that year it pays dividends out of the profits earned
in the preceding year or years, additional income-tax cannot
be levied on the company by reason of the fact that it has
paid an excess dividend within the meaning of that
[1955] 28 I.T.R. 811.
153
expression in, the proviso to paragraph B of Part I of the
Act. We are not concerned with this aspect of the matter in
the present appeal. However, in dealing with the question
raised before them, the learned judges have incidentally
construed the relevant words ” rate applicable” as meaning
the rate actually applied; and their observations do support
the view taken by the Saurashtra High Court in the present
case.
The result is the appeal fails and is dismissed with costs.
Appeal dismissed.