PETITIONER: COMMISSIONER OF INCOME-TAX,BOMBAY CITY I, BOMBAY Vs. RESPONDENT: AFCO (P) LTD., BOMBAY DATE OF JUDGMENT: 15/10/1962 BENCH: ACT: Income Tax-Rebate-Claim by private company for rebate-"Claim to Which the provisions of s. 23A of the Income-tax Act cannot be made applicable"-Indian Income-tax Act, 1922 (11 of 1922), s. 23-A-Finance Act, 1955 ( 15 of 1955), s. 2,Sch. 1, Part 1, Item B. HEADNOTE: For the year of account ending March 31, 1955, the appellant, a private limited company, earned a total income of Rs. 49,843. The company declared a' dividend of Rs. 11,712 on July 13, 1955, and before the close of the year of assessment 1955-55 declared an additional dividend of Rs. 5,612, thereby distributing in the aggregate dividend which was not less than 767 60% of the total income, reduced by the income-tax and supertax payable by it. The company then claimed rebate at the rate of one anna in the rupee on the amount computed according to Sch. 1, Part 1, Item B, read with s. 2 of the Finance Act, 1955. The Income-tax authorities rejected the claim on the ground that the expression "company to which the provisions of s. 23A of the Income-tax Act cannot be made applicable" in the provision of law aforesaid in the Finance Act, 1955, on which the appellant company relied, referred to a company against which in no circumstances could an order under s. 23A be made, and private limited companies being companies in respect of which an 'order under s. 23A could be made if the conditions prescribed relating to distribution of dividend were fulfilled, the benefit of rebate was not admissible in favour of the appellant company. The Appellate Tribunal and the High Court took the view that the benefit of a rebate provided by the Finance Act could not be denied to a private company if the conditions prescribed in s. 23.A(1) of the Income-tax Act were fulfilled, because, according to their view, the expression "can not be made applicable" only refers to a state of affairs in which having regard to the circumstances an order tinder s. 23A could not be made. Held, that the appellant company was entitled to the rebate claimed by it. The expression "to which the provisions of s. 23A of the Income-tax Act can not be made applicable" in Sch. 1, Part 1, Item B, of the Finance Act, 1955, meant that the appli- cability of s. 23A of the Income-tax Act depended upon an order to be made by the Income-tax Officer, and not upon any exclusion by the provisions of the Act. It was only when an order under s. 23A would not, having regard to the circumstances, be.justified that the right to obtain rebate under the Finance Act was claimable. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 21. of 1962.
Appeal by special leave from the judgment and order dated
September 23, 1958, of the Bombay High Court in I.T.
Reference No. 87 of 1957.
H.N. Sanyal, Additional Solicitor-General of India, N. D.
Karkhanis and R. N. Sachthey, for the appellant.
A.V. Viswanatha sastri, J. B. Dadwhanji, O. C. Mathur and
Ravindra Narain, for the, respondent,
768
1962. October 25. The judgment of the Court was delivered
by
SHAH, J.-For the year of account ending March 31, 1955, Afco
Private Ltd.-a private limited company-earned a total income
which was finally computed in assessment proceedings by
order of the Income-tax Tribunal, at Rs. 49,843/-. The
company declared a dividend of Rs. 11,7121- on July 13,
1955, and before the close of the year of assessment 1955-56
declared an additional dividend of Rs.5,612/-, thereby
distributing in the aggregate dividend which was not less
than 60% of the total income, reduced by the income-tax and
super-tax payable by it. The company then claimed rebate at
the rate of one anna in the rupee on the amount computed
according to Schedule 1, Part 1, Item B read with s. 2 of
the Finance Act 15 of 1955. The Income-tax Officer and the
Appellate Assistant Commissioner rejected the claim because
in their view the claimant was a company to which the
provisions of s. 23A of the Income-tax Act could not be made
applicable. In appeal, the Income-tax Appellate Tribunal,
Bombay ‘, reversed the order of the Income-tax authorities.
The Tribunal opined that the expression “cannot be made
applicable” in Item B of Part 1 of Schedule 1 of Finance Act
15 of 1955 must be read in conjunction with s. 23A of the
Income-tax Act, and the benefit of rebate provided by the
Finance Act, 1955, cannot be denied to a Private Company if
the conditions prescribed in s. 23A(1) are fulfilled.
The following question referred by the Tribunal to the High
Court of judicature at Bombay was answered in the
affirmative :-
“Whether on the facts and in the circumstances
of the case, the assessee company having
distributed dividends of over 60% of the
company’s total income less income-tax and
super-tax payable thereon is entitled to the
rebate of
769
1 anna per rupee on the undistributed balance
of profits as provided in clause (1) of the
proviso to item B of Part 1 of the 1st
Schedule to the Finance Act of 1955 ?”
By the Finance Act 15 of 1955 Schedule 1 Item B read with s.
2 of the Act rates of tax were prescribed in the case of
companies. Item B providedthat “in the case of every
company-
Rate surcharge
on the whole of total income Four annas one twen-
in the tieth of rupee the rate specified in the pre- ceeding column.
Provided that in the case of a company which,
in respect of its- profits liable to tax under
the Income-tax Act for the year ending on the
31st day of March, 1956, has made the
prescribed arrangements for the declaration
and payment within the territory of India, of
the dividends payable out of such profits.,
and has deducted super-tax from the dividends
in accordance with the provisions of sub-
section (31) of section 18 of that Act-
(i) 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 in respect
of the whole or part of the previous year for
the assessment for the year ending on the 31st
day of March, 1956, and the company is a corn
any to which the provisions of section 23A of
the Income-tax Act cannot be made applicable,
a rebate
770
shall be allowed at the rate of one anna per
rupee on the amount of such excess ;
(ii)x x x x”
By s. 23A(1) of the Income-tax Act at the material time the
Income-tax Officer was authorised to order a company to pay
super-tax, at the rate of eight annas in the rupee in the
case of a company whose business consisted wholly or mainly
in the dealings in or holding of investments, and at the
rate of four annas in he rupee in the case of any other
company, on the undistributed balance of the total income of
the previous year, that is to say, on the total income
reduced by the amounts of income-tax and super-tax and any
other tax payable under any law in excess of the amounts
allowed in computing the income, and in the case of Banking
companies in addition to the taxes, funds actually
transferred to a reserve fund, and the dividends actually
distributed, if any, where in respect of any previous year
the profits and gains distributed as dividend by the company
within the twelve months immediately following the expiry of
that previous year were less than 60% of the total income of
the company of that year as reduced by the amounts
aforesaid, unless the Income-tax Officer was satisfied that
having regard to losses incurred by the company in earlier
years or to the smallness of the profits made in the
previous year, the payment of a dividend or a larger
dividend than that declared would be unreasonable. It is
manifest that the order under s. 23A(1) would (excluding
certain procedural conditions) be ordinarily made if the
company has distributed by way of dividend within the twelve
months immediately following the expiry of the accounting
year less than the prescribed percentage of the total income
as reduced by the, amount of taxes paid in the case of non-
Banking Companies and reserve fund in addition thereto in
the case of Banking Companies
771
By the first paragraph of sub-s. (9) of s. 23 A it is
provided that “Nothing contained in this section shall apply
to any company in which the public are substantially
interested or to a subsidiary company of such company if the
whole of the share capital of such subsidiary company has
been held by the parent company or by its nominees
throughout the previous year.” This clause is followed by
two explanations. Explanation 1, in so far as it is
material to this case, provides :-
“Explanation 1-For the purposes of this
section, a company shall be deemed to be a
company in which the public are substantially
interested-
(a) x x x x
(b) if it is not a private company as
defined in the Indian Companies Act, 1913 (VII
of 1913), and
(i) x x x x
(ii) x x x x
(iii) x x x x
Explanation 2.- x x x x”
Section 23A was enacted to prevent evasion of liability to
pay super-tax by shareholders of certain classes of
companies taking advantage of the disparity between the
rates of super-tax payable by individuals and by the
companies. The rates of super-tax applicable to companies
being lower than the highest rates applicable to individual
assessees, to prevent individual assessees from avoiding the
higher incidence of super-tax by the expedient of
transferring to companies the sources of their income, and
thereby securing instead of dividends the benefit of the
profits of the company, the Legislature had by Act XXI of
1930, as modified by Act VII of 1939, enacted a special
772
provision in s. 23A investing the Income-tax Officer with
power, in certain contingencies prescribed in the section to
order that the undistributed balance of the assessable
income reduced by the amount of taxes and the dividends
shall be deemed to have been distributed at the date of the
general meeting. By the Finance Act 15 of 1955 s. 23A (1)
was amended and the Income-tax Officer was directed to make
an order that the Company shall be liable to pay super-tax
oil the undistributed balance at the rates prescribed under
the section. But by virtue of sub. s. (9) of s. 23A the or-
der can be made only in respect of a company in which the
public are not substantially interested or of a subsidiary
company of such company if the whole of the share capital of
such subsidiary company has been held by the parent company
or by its nominees throughout the previous year, and by cl.
(b) of the first explanation thereto a private company as
defined in the Indian Companies Act, 1913, is not a company
in which the’ public are substantially interested. It is,
therefore, competent to the Income-tax Officer to pass an
order under s. 23A (1) if the conditions thereof are
fulfilled directing payment of super-tax by a private
company at the rates prescribed by the Finance Act 15 of
1.955 on its undistributed balance. To reduce the rigour of
this provision the Legislature has provided for inducement
in the form of rebate on the difference between nine annas
in every rupee of the total net income, and the amount of
dividend declared, to companies which have declared
dividends so as not to attract the application of an order
under s. 23A. But that benefit is admissible only in favour
of companies to which the provisions of s. 23A of the Act
cannot be made applicable.
The Income-tax authorities held that the expression
company to which the provisions of s. 23A of the Income-tax
Act cannot be made applicable’ is descriptive of a class of
companies against which in no circumstances can an order
under s. 23A of the
773
Indian Income-tax Act be made, and private limited companies
being companies in respect of which an order under s. 23A of
the Income-tax Act can be made if the conditions prescribed
relating to distribution of dividend are fulfilled, the
benefit of rebate is not admissible in their favour. The
Tribunal and the High Court held that the expression
“‘cannot be made applicable” only refers to a state of
affairs in which having regard to the circumstances an order
under s. 23k of the Indian Income-tax Act cannot be made.
In our judgment the Income-tax Appellate Tribunal and the
High Court were right in so holding. The Legislature has
used the expression “cannot be made applicable” which
clearly means that the applicability of s. 23A depends upon
an order to be made by the Income-tax Officer, and not upon
any exclusion by the provisions of the Act. Before an order
can be made under s. 23A of the Income-tax Act, the Income-
tax Officer has to ascertain (i) whether the company
conforms to the description in sub-s. (9) of s. 23A; if it
does’ the lncome-tax Officer has no power to make an order ;
and (ii) if the company is not one which falls within cl.
(9) of s. 23A whether having regard to inadequacy of the
declaration of dividend, an order for payment of super-tax
should not, because of the losses incurred by the company in
the earlier years, or to the smallness of the profits in the
previous year, be made. Satisfaction of the Income-tax
Officer as to the existence of several conditions prescribed
thereby- even if the company is one which does not fall
within sub-s. (9) of s. 23A is a condition of the making of
the order. The language used by the Legislature clearly
indicates that it is only when an order under s. 23A will
not, having regard to the circumstances’ be justified that
the right to obtain rebate under the Finance Act 15 of 1955
is claimable. The Legislature has not enacted that the
benefit of rebate is admissible only to companies against
which the order under sub-s. (1) of s. 23A can never be
made.
774
The Legislative history as disclosed by the earlier Finance
Acts supports this interpretation of the relevant provision.
In the Finance Acts prior to 1955 rebate under Part I of the
1st Schedule Item B was admissible if the company had in
respect of profits liable to tax under the Indian Income-tax
Act made the prescribed arrangements for declaration and
payment of dividends payable out of the profits and had
deducted super-tax from the dividends in accordance with s.
18(3D) & (3E), where the total income reduced by seven annas
in the rupee’ and the amount exempt from income-tax exceeded
the amount of any dividends declared and no order had been
made under sub-s. (1) of s. 23A of the Income-tax Act. The
right to rebate arose under those Finance Acts if no order
under s. 23A was made. The Income-tax Officer had therefore
to decide even before completing the assessment of the
company whether the circumstances justified the making of an
order under S. 23A, and unless an order under s. 23A was
made the assessee became entitled automatically to the
rebate of one anna in the rupee. Such a provision led to
delay in the disposal of assessment proceedings and caused
administrative inconvenience. It appears that the
Legislature modified the scheme of granting rebate in
enacting the Finance Act of 1955 with a view to simplify the
procedure and avoid delays, and not with the object of
depriving the private limited companies as a class, of the
benefit of rebate which was permissible under the earlier
Acts.
Counsel for the Income-tax Commissioner invited our
attention to the Finance Acts of 1956 and 1957 and contended
that the Legislature in dealing with the right to rebate
under Part II relating to the rates of super-tax used
phraseology which restricted the right of rebate only to
public companies. Ie must be noticed that even under the
Finance Act of 1955 by Part II of Schedule 1, item D, a
rebate of three annas per rupee of the total income was to
bf
775
allowed to companies in respect of profits liable to tax
under the Income-tax Act for the year ending March 31, 1956,
if the company had made prescribed arrangements for payment
of dividend payable out of profits and for reduction of
super-tax from dividends in accordance with the provisions
of sub-s. 3D of s. 18 of the Act and the company was a
public company with a total income not exceeding Rs.
25,000/-. This provision was slightly modified in the
Finance Act of 1956 where the rebate admissible was at the
rate of five annas in the rupee, (other condition being
fulfilled) if the company was a public company with total
income not exceeding Rs. 25,000/to which the provisions of
s. 23A could not be made applicable. Under the Finance Act
of 1957 rebate was admissible in favour of companies
“referred to in sub-s. (9) of s. 23A of the income-tax Act
with total income not exceeding Rs. 25,000/-.” All these
provisions about rebate were enacted in prescribing the
rates of super-tax. In the Finance Act of 1955 the
Legislature in dealing with the right of rebate under Part I
prescribing rates of income-tax, made it admissible in
respect of companies to which provisions of s. 23A of the
Income-tax Act could not be made applicable, whereas under
Part II prescribing rates of super-tax, rebate was made
admissible in respect of public companies having income not
exceeding the prescribed amount and rebate at a lower rate
where the income exceeded the prescribed limit. If it was
intended by the Legislature to exclude private limited
companies from the benefit of rebate the Legislature would
have adopted the same phraseology as was used in that Act in
dealing with the rebates in prescribing rates of super-tax.
The legislative history instead of supporting the case of
the Income-tax Department yields inference against their
interpretation.
We are therefore of the view that the High Court was right
in holding that the company was
776
entitled to the rebate claimed by it. The appeal therefore
fails and is dismissed with costs.
Appeal dismissed.
