- (1.) IN this case the assessee is a private limited company incorporated under the INdian Companies Act. The accounting year is 1358 fasli corresponding to the period from 1st of October, 1950, to 30th of September, 1951. The main source of the income of the assessee was of agricultural character. The non-agricultural income was derived from fisheries, ferries, ground rent and money-lending business. IN the year of account the total profits of the assessee was Rs. 2,72,234/-. Out of this amount a sum of Rs. 76,679/- was non-agricultural income and the balance of Rs. 1,95,555/-was agricultural income. The assessee declared a dividend of Rs. 1,00,000/- on 26th of October, 1952 upon the basis of the accounts for the year ending on 30th oi September, 1951. IN the Finance Act of 1951 there is a provision with regard to the charge of income-tax to the following effect: "B. IN the case of every company JUDGEMENT_606_ITR32_1957Html1.htm
(2.) 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 31st day of March, 1952, 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 super-tax from the dividends in accordance with the provisions of Sub-section (3D) or (3E) of Section 13 of the 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 31st day of March, 1952, and no order has been made under Sub-section (1) of Section 23-A 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 (i) 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." Under the provisions of this clause, the Income-tax Officer held that a sum of Rs. 56,868/-had been distributed as excess dividend and the assessee was liable to pay an additional income-tax at the rate of one anna per rupee on the excess dividend. The matter was taken up in appeal to the Appellate Assistant Commissioner, who allowed the appeal and held that no additional tax was leviable. The view taken by the Appellate Assistant Commissioner was that the income of the assessee was partly agricultural and, therefore, a part of the dividend should be deemed to have been paid out of the agricultural income; and since the taxable income of the assessee was about Rs. 77,000/- the dividend paid out of the taxable income would work out at Rs. 28,000/- which was less than seven annas in the rupee and hence there was no excess dividend distributed in accordance with the provisions of the Finance Act. The income-tax Appellate Tribunal, however, reversed the order of the Appellate Assistant Commissioner and held that the assessee was liable to be taxed on the amount of Rs. 56,868/- in accordance with the provisions of the Indian Finance Act, 1952. The Income-tax Appellate Tribunal observed that "this will be a hard case, but we have to administer the law as we find in the statute book". At the instance of the assessee the Income-tax Appellate Tribunal has submitted the following question of law for the determination of the High Court: "Whether on the facts and circumstances of this case the amount of Rs. 56,8687- is excess dividend liable to be taxed under the Indian Finance Act of 1952?" The argument put forward by Mr. S.N. Dutta on behalf of the assessee is that the Income-tax Appellate Tribunal has misconstrued the provisions of the Finance Act of 1952 and that the Company was liable to pay tax only if the amount of dividends exceeds the total income of the Company in respect of which the Company was liable to pay tax under the Indian Income-tax Act. The view taken by the Tribunal is that there is no reason why there should be a different treatment for a dividend paid out of non-taxable income and "in the character of a dividend there is no attribute of taxable dividend or non-taxable dividend" and that "the Finance Act nowhere says that there will be an apportionment of dividend with reference to taxable or non-taxable income". We consider that this view of the Tribunal is erroneous as a matter of law. It is true that the First Schedule to the Finance Act of 1952 dealing with taxation of Companies does not expressly say that the, dividends referred to should be paid out of taxable income. But the proper approach is to construe the provisions of the Indian Finance Act, 1952, in the context and background of Sections 2, 3 and 4 of the Indian Income-tax Act. To put it differently, the language of the First Schedule of the Finance Act must be construed "subjectae materies." that is with reference to the material provisions of the Indian Income-tax Act. Now, Section 2 (15) of the Indian Income-tax Act defines "total income" as meaning total amount of income, profits and gains computed an the manner laid down in the Act. Section 3 of the Indian Income-tax Act is also important. Section 3 is in the following terms : "3. Charge of Income-tax. 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 every individual, Hindu undivided family, company and local authority, and of every firm and other association or persons or the partners of the firm or members of the association individually." Section 4 states that the total income of any previous year of any person includes all income, profits and gains from whatever source derived, subject to certain exceptions. Section 4 (3) (viii) provides that agricultural income shall not be included in computing the total income of the person receiving it. Turning to the Finance Act of 1952 we find that Section 2, which deals with the charge of income-tax and supertax, enacts as follows: "2. (1) Subject to the provisions of Sub-sections (3), (4) and (5), for the year beginning on 1st day of April, 1951, (a)income-tax shall be charged at the rates specified in Part I of the First Schedule, increased in each case by a surcharge for the purposes of the Union at the rate specified therein in respect of each such rate of income-tax, and (b) rates of super-tax shall, for the purposes of Section 55 of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Income-tax Act'), be those specified in Part II of the First Schedule, increased in the cases to which paragraphs A, B and C of that Part apply, by a surcharge for the purposes of the Union at the rate specified therein in respect of each such rate of super-tax. JUDGEMENT_606_ITR32_1957Html2.htm Section 2 (7) of this Act is important and must be quoted in full: "2. (7) For the purposes 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 Income-tax Act, and the expression 'earned income' has the meaning assigned to it in Clause (6AA) of Section 2 of that Act." Part B of the First Schedule also refers to the "total income" of the Company and provides that "where the amount of dividends referred to in Clause (i) above exceeds the total income as reduced by seven annas in the rupee.... 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 falls short of the amount calculated at the rate of five annas per rupee on the excess dividend". On an examination of all these statutory provisions it is clear that the amount of dividends referred to in Part B of the First Schedule of the Finance Act, 1952, must be taken to mean as the amount of dividends paid out of the taxable profits of the Company, that is, profits liable to be taxed under the Income-tax Act. As the agricultural income is not to be taken into account in the computation of total income under the provisions of Section 4 (3) (viii), it is manifest that the liability of the Company to tax under the Finance Act arises only if the amount of dividends paid out of the taxable profits exceeds the total taxable income as reduced by seven annas in the rupee. If that is the correct interpretation of Part B of the First Schedule of the Finance Act, it follows in this case that the appellate Tribunal was not justified in holding that an additional tax was payable on the amount of Rs. 56,868/- in accordance with the computation made at page 30 of the paper book. The question then arises whether the assessee has distributed dividends in excess of the total income as reduced by seven annas in the rupee within the meaning of Part B of the First Schedule of the Finance Act. It is the accepted case that for the accounting year in question the total profit of the assessee was Rs. 2,72,234/- out of which Rs. 76,679/- was derived from non-agricultural sources and Rs. 1,95,555/- was derived from the agricultural sources. It is also mentioned by the Appellate Tribunal in the statement of the case that a sum of Rs. 1,00,000/- was distributed as dividend. The Appellate Assistant Commissioner took the view that out of the dividend of Rs. 1,00,000/-distributed by the assessee a sum of Rs. 28,000/-should be attributed to non-agricultural income of the assessee and the balance of Rs. 72,000/- should be attributed to the agricultural income of the assessee. An argument to a similar effect was advanced before us by the learned Counsel on behalf of the assessee. In our opinion, this argument must be accepted as correct and it must be held that out of the total amount of Rs. 1,00,000/- distributed as dividend, only a sum of Rs. 28,000/- was attributable to the income of the assessee from non-agricultural sources. This view is borne out by a decision of a Division Bench of this High Court in Jagdish Chandra Deo v. Dhanpati Singh, 1945 13 ITR 64. There is also a case of the Allahabad High Court to a similar effect, Syed Mohammad Isa v. Commissioner of Income-tax, C. P. & U. P., 1942 10 ITR 267. There is also an English authority which is not exactly in point but the principle laid down in that case is valuable as furnishing an analogy. In Sinclair v. Brougham, 1914 AC 398 , a building society formed in 1851 under the Building Societies Act, 1836, and empowered by its rules to borrow to an unlimited extent, started and developed a banking business.
(3.) IN 1911 the society was ordered to be wound up. A question of priority arose between the outside creditors, the unadvanced share-holders and the depositors. The assets were insufficient for payment to all the claimants in full but more than sufficient for payment to the outside creditors and the shareholders. It was held by the House of Lords that the principle laid down in Re Hallet's Estate, (1880) 13 Ch D 696 (D), should be applied and the assets remaining after payment to the outside creditors must be take to represent in part moneys which the depositors could follow, and in part moneys which the society could follow, and ought to be distributed, therefore, pari passu between the depositors and the unadvanced shareholders according to the amounts respectively credited to them in the books of the society at the commencement of the winding up. At page 424, there is a passage from the speech of Viscount Haldane to the following effect:-- "What is there must be apportioned accordingly among those whose money it represents, and the question of how the apportionment should be made is one of fact. IN the present case the working out of a proper apportionment based on the principle of tracing not only would involve immense labour but would be unlikely to end in any reliable result. The records necessary for tracing the dealings with the funds do not exist. We have, therefore, treating the question as one of presumption of fact, to give such a direction to the liquidator as is calculated to bring about a result consistent with the principles already laid down. I think that this direction should be that, without disturbing anything that has up to now been settled or agreed, he should apportion the entirety of the remaining assets (including mortgages and loans) between the depositors and the share-holders in proportion to the amounts paid by the depositors and the shareholders respectively. In this way I am of opinion that the nearest approach practicable to substantial justice will be done. I think that this is the utmost extent to which, consistently with well-established principles, a Court of Justice can go in compelling the society to restore that of which it has become possessed through its ultra vires transactions." For the reasons we have attempted to express we consider that only the amount of Rs, 28,000 out of the total amount of Rs. 1,00,000 paid out as dividends should be attributed to the taxable income of the assessee and we hold, therefore, that the amount distributed was less than the total income assessed to income-tax less seven annas to the rupee and hence there was no excess dividend distributed within the meaning of Part B of the First Schedule of the Finance Act of 1952. It follows, therefore, that in the facts and circumstances of the case the amount of Rs, 56,868 is not excess dividend liable to be taxed under the Indian Finance Act of 1952, and the question referred to the High Court must be answered in favour of the assessee and against the Income-tax Department. The assessee is entitled to the costs of this reference. Hearing fee Rs. 250. ;