(1.)THE following Judgment of the court was delivered by :
(2.)THIS is an appeal against the judgment and order of the High court of Bombay dated 3/08/1956, in a reference under s. 66 (1) of the Indian Income-tax Act by the Appellate tribunal, Bombay. The tribunal referred four questions for the decision of the High court. The High court did not answer the first question because it was not pressed, and answered the remaining in the negative, after modifying them. It has certified this case as fit for appeal to this court, and hence this appeal. The Commissioner of Income-tax, Bombay City, is the appellant, and the Khatau Makanji Spinning and Weaving Co. Ltd., Bombay, (the assessee Company), is the respondent.
The assessee Company has its year of account ending June 30 every year. At the close of the account year 1951, it carried forward profits amounting to Rs. 30,680.00. In that year, it appears it had earned a rebate by declaring dividends below the limit fixed by the Finance Act. For the account year 1952 its book profits were Rs. 28,67,235.00 less allowances for depreciation and tax. After these and other sundry adjustments, the balance available for distribution was Rs. 5,02,915.00. It may be pointed out that the Incometax Officer on processing the income found the total income to be Rs. 5,26,681.00. For the account year 1952, the assessee Company declared dividends amounting to Rs. 4,78,950.00 and carried forward the balance of Rs. 23,965.00.
We are concerned with the assessment year 1953-54, and the Finance Act, 1953, isapplicable. That Finance Act applied the Finance Act, 1951, with some changes. The Finance Act, 1953, with the modifications will be referred to briefly, hereinafter, as the Finance Act. The Income-tax Officer found that the assessee Company had declared excess dividends amounting to Rs. 1,87,691.00. He calculated additional income-tax on it at 5 annas in the rupee after deducting income-tax borne by the profits of the previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of one anna in the rupee as allowed by the Finance Act. This additional tax amounted to Rs. 21,115-4-0.
(3.)THE appeals of the assessee Company under the Income-tax Act failed. THE tribunal held that the excess dividends were deemed to be paid out of undistributed profits of earlier year ending 30/06/1951, amounting to Rs. 6,60,720.00 on which a rebate of 1 anna in the rupee was given in the assessment year, 1952-53. Tile tribunal observed that additional incometax was also a tax on income, and that the Finance Act could say that the tax would be payable on the income of any year preceding the previous year. THE tribunal, however, referred four questions to the High court, of which the first need not be quoted because it was abandoned before the High court. THE other questions were: ' (ii) If the answer to question No. 1 is in the negative whether the said provisions go beyond the ambit and scope of the Indian Income-tax Act ? (iii) Whether additional income-tax can be levied, assessed and recovered under the provisions of the Indian Income-tax Act ? (iv) Whether at any rate the additional incometax has been legally charged under the Indian Finance Act, 1953, read with the Indian Incometax Act?' THE High court compressed the three questions into one, and it reads: ' Whether additional income-tax has been legally charged under clause (ii) of the proviso to paragraph B of Part 1 of the. First Schedule to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with Section 3 of the Indian Income-tax Act?' This question was answered by the High court in the negative.
In the opinion of the High court, s. 3 of the Indian Incometax Act lays down the liability to tax, and it puts the tax on the total income of the previous year. Themethod of computing this total income is also to be found in the Finance Act. The Finance Act merely provides the rate applicable to the income so found. According to the High court, the Finance Act in providing that additional incometax should be paid upon the accumulated profits of the previous years goes beyond the purpose for which the central Act is passed every year, and cannot stand by itself without the support of s. 3 of the Indian Income-tax Act. The High court held that the Finance Act had ' misfired', because it did not resort to legislation which would have conformed to the object for which the Finance Act was passed every year. The learned chief justice, who delivered the judgment of the High court, stated that there were several methods open to the legislature to achieve that purpose but that it had not resorted to any of them. This is what the learned chief justice observed: ' The Legislature could have achieved this object by one of three methods. It could have treated the excess dividend declared by the company as a notional income and made it apart of the total income of the previous year. It could have provided for rectification of the assessment of the year in which these profits were charged at a lesser rate, and we now find that Parliament has actually provided for this in the Finance Act, 1956. Or, finally, it could have provided for a penalty imposed upon a company which transgressed the direction of Parliament that it should not pay dividend beyond a particular ceiling ... The ambit of Section 3 is clear and the ambit is that the tax to be levied must be a tax on income and the power of Parliament is equally clear and that is to fix the rate at which income-tax is to be charged upon the total income of the previous year of the assessee. In our opinion, the provision of the Finance Act travels beyond the ambit of Section 3, and if Parliament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend.'