Agrawal, J. - (1.)THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), by its order dated February 19, 1972, passed under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), has referred the following questions arising out of the order of the Tribunal dated June 1, 1970, in Income-tax Appeals Nos. 666 and 667 of 1968-69, for the opinion of this court:
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the shares of the assessee corporation were not preference shares ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the mistakes in the original assessments in not reducing the rebates on super-tax for the assessment year 1964-65 and income-tax for the assessment year 1965-66, with reference to the dividends declared by the assessee, were mistakes apparent from the records within the meaning of Section 154 of the Income-tax Act ?

(2.)THESE questions relate to the assessment years 1964-65 and 1965-66.
In the Finance Act, 1964, provision was made with regard to imposition of super-tax at the rate of 55% on every company other than the Life Insurance Corporation of India in Paragraph D of Part II of the First Schedule to the said Act. Under the proviso appended to Paragraph D aforesaid, a rebate at the rate of 37.5% was to be allowed in the case of any company, as referred to in Section 108 of the Income-tax Act, to the total income exceeding Rs. 25,000. There was, however, a further proviso whereunder it was provided that in the case of a company referred to in Section 108 of the Act, which has declared or distributed to its shareholders during the previous year any dividends other than dividends on preference shares, the amount of rebate would be reduced by 7.5% on the whole amount of the dividends other than dividends on preference shares. In other words, the rebate that was allowed was to be reduced by 7.5% on the dividend other than dividend on preference shares. In the Finance Act, 1965, First Schedule, Part I. Paragraph F, income-tax at the rate of 80% was prescribed on the whole of the total income of every company other than Life Insurance Corporation of India. Under the proviso in the said paragraph, rebate was given in respect of income of the company as is referred to in Section 108 of the Income-tax Act. There was, however, a further proviso for the reduction of the amount of rebate by 7.5% in case of a company, as is referred to in Section 108 of the Act, which has declared or distributed to shareholders during the previous year any dividend other than dividend on preference shares and the said reduction in the rebate at the rate of 7.5% was to be made on the whole amount of the dividend other than dividend on preference shares.

The Rajasthan Financial Corporation (hereinafter referred to as "the assessee") is a State Financial Corporation established by the Government of Rajasthan under the provisions of the State Financial Corporations Act, 1951, (hereinafter referred to as "the Financial Corporations Act"). It was established in the year 1955, by a notification issued by the State Government under Section 3 of the Financial Corporations Act, with an authorised capital of Rs. 2,00,00,000 divided in 2,00,000 shares of Rs. 100 each. The subscribed and paid up capital of the assessee is Rs. 1,00,00,000 divided into 1,00,000 shares of Rs. 100 each. The assessee has been established for advancing and granting loans to industries in the State of Rajasthan. In the previous years relating to the assessment years 1964-65 and 1965-66, the assessee had declared dividend of Rs. 3,50,000 at the rate of 3 1/2% on its shares. For the assessment year 1964-65, the assessee had submitted a return declaring a total income of Rs. 5,39,757. The Income-tax Officer assessed the income of the assessee at Rs. 5,58,237 for that assessment year. In respect of the assessment year 1965-66, the assessee had submitted a return declaring a total income of Rs. 6,14,120. The Income-tax Officer assessed the income of the assessee at Rs. 6,20,342 for the said year.

After the aforesaid assessment orders had been passed, the Income-tax Officer initiated proceedings under Section 154 of the Act for the rectification of the assessment orders and passed orders dated December 14, 1966, whereby the Income-tax Officer held that the assessee was liable to tax at the rate of 7.5% on the dividend declared by it in both the assessment years in view of the provisions contained in the Finance Act, 1964, and the Finance Act, 1965. The Income-tax Officer by his order aforesaid rectified the assessment orders for the assessment years 1964-65 and 1965-66 accordingly. The assessee filed appeals against the aforesaid orders dated December 14, 1966, passed by the Income-tax Officer and the said appeals were disposed of by the Appellate Assistant Commissioner by a common order dated July 31, 1968. Before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that the shares of the assessee were in the nature of preference shares and the dividend which was declared by the assessee during the assessment years 1964-65 and 1965-66 was dividend on preference shares and tax was not payable on the said dividends. It was also submitted on behalf of the assessee that the provisions of Section 154 of the Act could not be invoked in the matter of imposition of tax on the dividends declared by the assessee inasmuch as the error in the assessment orders could not be said to be an error apparent on the face of the record. The Appellate Assistant Commissioner held that the expression "preference shares" presupposes existence of at least two categories of shares which is not the case here and that from the provisions of the Financial Corporations Act, it was not possible to infer that the shares of the assessee enjoy any preference for payment of dividends, or repayment of capital over other shares, and the liability for payment of excess dividend tax was clearly attracted. The Appellate Assistant Commissioner was, however, of the view that the provisions of Section 154 ) cannot be invoked where the proposed action involves any controversy or debatable point of law and that there was clearly room for controversy on the question as to whether shares in question have attributes of preference shares and in such a case, the provisions of Section 154 could not be invoked. The Appellate Assistant Commissioner, therefore, cancelled the order dated December 14, 1966, passed by the Income-tax Officer under Section 154 of the Act. The Department went in appeal before the Tribunal against the aforesaid order passed by the Appellate Assistant Commissioner and the Tribunal by its order dated June 1, 1970, allowed the said appeal of the Department. The Tribunal held that having regard to the terms under which the shares were issued, there was no room for contending that the shares were in any sense preference shares according to the criteria laid down in the Companies Act, 1956, or according to the criteria which were judicially accepted earlier as distinguishing preference shares from other shares and, therefore, the Appellate Assistant Commissioner was quite right in taking the view that the Income-tax Officer had clearly committed a mistake in not taking into account the dividend on these shares and reducing the rebate to which the assessee was entitled. The Tribunal, however, disagreed with the Appellate Assistant Commissioner that the said mistake was not apparent from the record. According to the Tribunal, there was no room for argument that the shares of the assessee were really preference shares. The Tribunal, therefore, held that the Income-tax Officer was quite competent to rectify the mistake in regard to the dividends declared and reduce the rebate to which the assessee was entitled. The Tribunal, therefore, upheld the order of the Income-tax Officer passed under Section 154 of the Act.

Feeling aggrieved by the aforesaid order passed by the Tribunal, the assessee moved the Tribunal for referring to this court the questions of law arising out of the order of the Tribunal and the Tribunal had referred the questions mentioned above to this court for its opinion.

(3.)SHRI B. P. Agrawal, the learned counsel for the assessee, has submitted that the shares of the assessee were in the nature of preference shares and the dividend that was paid by the assessee on its shares for the previous years relevant to the assessment years 1964-65 and 1965-66, being dividend on preference shares, had rightly been taken into consideration for granting rebate and that the Income-tax Officer was not justified in reducing the said rebate by 7 1/2% on the ground that the said dividend was not paid on preference shares. The aforesaid contention of SHRI Agrawal necessitates the interpretation of the expression "preference shares" as contained in the Finance Act, 1964, and the Finance Act, 1965. The submission of SHRI Agrawal was that the expression "preference shares" in the Finance Act, 1964, and the Finance Act, 1965, must be given its natural meaning and should not be construed in the sense in which it is used in company law. In our opinion, there is no merit in this contention. The. expression "preference shares" has not been defined in the said Finance Acts. Nor. is it defined in the Income-tax Act. The provisions of the Finance Act, 1964, and the Finance Act, 1965, provide for rebate to a company and the term "company" is defined in Section 2(17) of the Income-tax Act. The aforesaid definition of "company" as contained in Section 2(17) of the Act refers to an Indian company and the expression "Indian company" has been defined in Section 2(26) to mean a company formed and registered under the Companies Act, 1956, and includes a company formed and registered under any law relating to companies formerly in force in any part of India. The aforesaid definitions of the expressions "company" and "Indian company" show that the provisions in the Finance Act, 1964, and the Finance Act, 1965, relating to rebates were mainly in relation to companies formed and registered under the Companies Act, 1956, and companies formed and registered under any law relating to companies formerly in force in any part of India. Since the Legislature was dealing with companies formed and registered under the law dealing with companies, it must be held that in using the expression "preference shares" in the Finance Acts of 1964 and 1965, Parliament intended to use it in the sense in which it is generally understood in company law. We are, therefore, unable to accept the contention of SHRI B. P. Agrawal that the provisions of the Companies Act, 1956, cannot be invoked for the purpose of construing the expression "preference shares" as contained in the Finance Act, 1964, and the Finance Act, 1965.
The next contention urged by Shri Agrawal was that even if the expression "preference shares" as contained in the Finance Act, 1964, and the Finance Act, 1965, is construed with reference to the provisions contained in Companies Act, 1956, the shares of the assessee were in the nature of "preference shares" and the dividend paid on the said shares was dividend paid on preference shares and was, therefore, entitled to rebate under the Finance Act, 1964, and the Finance Act, 1965. In order to appreciate the aforesaid contention of Shri Agrawal, it will be necessary to consider the provisions contained in the Companies Act, 1956, with regard to preference shares. The relevant provisions in this regard are contained in Section 85 of the Companies Act, 1956, which reads as under :

"85. (1) 'Preference share capital' means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely :--

(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax ; and

(b) that as respects capital, it carries or will carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely:--

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding-up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Explanation.--Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:--

(i) that, as respects dividends, in addition to the preferential right to the amount specified in Clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid ;

(ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in Clause (b), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

(2) 'Equity share capital' means, with reference to any such company, all share capital which is not preference share capital.

(3) The expressions 'preference share' and 'equity share' shall be construed accordingly."

A perusal of the aforesaid provisions shows that a preference share, as commonly understood in company law, must have two attributes, viz., (i) as respects dividends, it must carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate ; (ii) as respects capital, it must carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up.