KHANNA. - (1.) THIS judgment would dispose of two civil appeals Nos. 1853 (A) and 1854 of 1971 which have been filed on certificate by the Commissioner of Income-tax against the judgment of Madras High Court (reported in (1971) 79 ITR 456 (Mad)) answering the following two questions referred to it in two references under Section 66 (1) of the Indian Income-tax Act, 1922 in the affirmative in favour of the assessee and against the revenue: "1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that for computing the reduction in rebate under Para D of Part II to the First Schedule to Finance Act, 1959 (in R. A. No. 169 of 1965-66) and of Finance Act, 1958 (in R. A. No. 168 of 1965-66) in the composition of profits of the year from which the dividend had been declared should be looked into, and
(2.) WHETHER the Appellate Tribunal was right in law in holding that the paid up capital of the assessee company should be proportionately reduced for the purpose of reducing the rebate in Corporation Tax in the manner directed." 2. The matter relates to the assessment of the respondent company for the assessment years 1958-59 and 1959-60. For sake of convenience we may set out the facts relating to the assessment year 1958-59. It is the common case of the parties that the decision about that year would also govern the point of controversy relating to the other year. The assessee is a private limited company. In the previous year ending on 31/12/1957 relevant for the assessment year 1958-59, it declared a dividend of Rs. 99,000. Its paid up capital was Rs. 1,65,000. The total income of the assessee company was determined at Rs. 73,255 made up as under: JUDGEMENT_712_4_1976Html1.htm As the dividend of Rs. 99,000 declared by the assessee company was in excess of 6 per cent of the paid up capital of the company, the Income-tax Officer worked up the super-tax payable by the assessee as under: JUDGEMENT_712_4_1976Html2.htm The assessee company objected to the above computation of the supertax and took the matter in appeal to the Appellate Assistant Commissioner. It was urged on behalf of the assessee that the dividend of Rs. 99,000 declared during the year ending 1957 was out of the profits of the previous year which ended on 31/12/1956. According to the assessee, the dividend income determined for the assessment year 1957-58 was Rs. 1,74,196 which included capital gainst to the extent of Rs. 1,10,105. The dividend of Rs. 99,000, it was urged, should be apportioned between the capital gain of Rs. 1,10,105 and the other income of Rs. 64,091 after taking into account the tax payable thereon. The assessee computed the figures as under: JUDGEMENT_712_4_1976Html3.htm The assessee claimed that rebet should be reduced only with reference to the sum of Rs. 15659 being proportionate part of the dividend declared during the previous year ending on 31/12/1957 which had come out of the other income assessed to income-tax and super-tax in the assessment year 1957-58. The figure of Rs. 15,659 was arrived at by the assessee as under : JUDGEMENT_712_4_1976Image1.jpg The Appellate Assistant Commissioner accepted in principle the assessee's contention that the components of the dividend should be considered with reference to the profits of the previous year. He, however, computed proportionate dividend at a higher figure by including the capital gains of Rupees 75,423 with the sum of Rs. 22,492 as shown below: JUDGEMENT_712_4_1976Image2.jpg The Appellate Assistant Commissioner retained the paid up capital at Rupees 1,65,000 as per balance sheet without apportionment on the basis of taxed and non-taxed income.
(3.) THE department took the matter in appeal to the Appellate Tribunal. THE Tribunal dismissed the appeal holding that the "previous year" under Explanation (iii), to Paragraph D of Part II to the First Schedule to the Finance Act, 1958, refers only to the previous year out of the profits of which the dividends were declared and therefore the composition of the profits and gains of the company out of which dividends were declared had to be looked into for working out the proportion under Explanation (iii) to Paragraph D of Part II to the First Schedule to the Finance Act of 1958. At the instance of the Commissioner, the questions reproduced above were thereafter referred to the High Court.;