- (1.) THIS is a writ petition under article 226 of the Constitution directed against the order passed under section 35 of the Income-tax Act, 1922 (hereinafter referred to as the Act), dated the 31st March, 1962, where by the Income-tax Officer further reduced the rebate allowed under the second proviso 1(b) of Paragraph D of Part II of the First Schedule to the Finance Act of 1956, by reducing the paid up capital by that capital by that capital which carried a fixed rate of dividend with the ordinary shareholders.
(2.) THE facts leading up to the petition are these : THE petitioner is a public limited company. THE relevant assessment year is the assessment year 1956-57, the accounting year being the year ending the 31st December, 1955. By an assessment order dated the 7th July, 1960, the total income of the petitioner was assessed at Rs. 48,21,860 and the amount of tax payable thereon was determined at Rs. 22,94,400. After adjusting payments of Rs. 14,00,000 made under sections 18A and 23B, the net demand payable arrived at was Rs. 8,93,658. Subsequently, by an order under section 35 of the Act dated the 9th August, 1960, the net demand payable was reduced to Rs. 8,84,505. THE rectification made was not accepted by the petitioner and an appeal against that order is said to be pending. As penal interest was also levied, a revision against the latter order was filed before the Commissioner under section 33A, the prayer being for remission of penal interest under section 18A(6). This revision also is paid to be pending. The Income-tax Officer subsequently discovered that the rebate of corporation tax had not been reduced by the amount which was calculated on the excess of dividend declared over 6% of the paid up capital as required by the second proviso (i)(b) of Paragraph D, Part II, First Schedule, to the Finance Act of 1956. A notice was thereupon issued under section 35 of the Act to show cause why the necessary modification under the aforesaid provision of the Finance Act should not be carried out. The petitioner objected and finally on the 31st of March, 1962, the impugned order rectifying the assessment under section 35 was passed. It was held that not only the capital in respect of preference shares of Rs. 35 lakhs which carried a fixed dividend at 6% stood to be excluded but also the capital of Rs. 1,57,50,000 of preferred ordinary shares which carried a fixed dividend declared and paid to ordinary shareholders. The dividend on the preference shares of Rs. 35 lakhs at 6% worked out at Rs. 2,10,000 and at 4% fixed on preferred ordinary shares at Rs. 6,30,000. These two fixed dividends amounting to Rs. 8,40,000 and according to the Income-tax Officer stood to be excluded along with the share capital of preference shares of Rs. 35 lakhs and of Rs. 1,57,50,000 of preferred ordinary shares for the purpose of considering the reductions in rebate. In this view of the matter, it was held that the rebate of corporation tax was calculated in excess by a sum of Rs. 2,22,031.25 nP. by which the total rebate of Rs. 12,05,465 should have been reduced. As this was considered to be a clerical mistake apparent from the record, the assessment was modified under section 35 of the Act and a revised demand notice was accordingly issued. The writ petition is directed against the said order under section 35 of the Act and the demand issued pursuant thereto.
(3.) THE short but difficult question which arises is as to the interpretation which is to be placed on the expression paid up capital as given in the Explanation to Paragraph D of the Aforesaid part of the Financier Act, 1956. THE relevant portion of the Explanation runs : (1) For the purposes of paragraph D of this part - (i) THE expression Paid up capital means the paid up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on 31st day of March, 1957, increased by any premiums received in cash by the company on the issue of its shares, standing to the credit of the share premium account as on the first day of the previous year aforesaid... Therefore, the paid up capital for purpose of calculating the rebate that has to be reduced under the second proviso (1)(b) to the said Paragraph D has to be that capital which carries a dividend at a fixed rate. The question that has to be determined is as to what exactly is the capital which can be said to be entitled to a dividend at fixed rate ? The relevant portion of the second proviso to the said Paragraph D runs : Provided further that - (i) the amount of the rebate under clause (i) or clause (ii), as the case may be, of the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as hereunder... (b) in addition, in the case of company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid up capital, not being dividends payable at a fixed rate - JUDGEMENT_101_ITR50_1963Html1.htm The petitioner company had issued three kinds of shares. They were as already observed : (1) Preference shares of Rs. 35 lakhs, which carried cumulative fixed rate of dividend at 6%, (2) Ordinary shares, and (3) Preferred ordinary shares of the value of Rs. 1,57,50,000. It is the character and nature of these latter shares which are the bone of contention in this petition. Article 4 of the articles of the company provides : (4) The capital of the company is two crores ten lakhs divided into (a) Preference share capital : Rs. 35,00,000, preference shares of Rs. 100 each; Rs. 15,75,000, preferred ordinary shares of Rs. 10 each; (b) Equity share capital of Rs. 1,75,0000, ordinary shares of Rs. 10 each, and the following rights, privileges and conditions attracted to such shares :- (i) The preference shares shall confer on the holders thereof the right to a fixed cumulative preferential dividend at the rate of 6% per annum free of income-tax on the capital for the time being paid up or credited as paid up thereon and in a winding up shall have priority to both the preferred ordinary and ordinary shares as to payment off of capital and arrears of dividend whether declared or not up to the commencement of the winding up and as regards return of capital shall rank in priority both to the preferred ordinary and ordinary shares but shall not confer any further right to participate in profits or assets. Such preference shares shall not carry any voting rights. (2) Subject to the provisions for payment to the holders to the holders of the said preference shares contained in sub-clause (1) hereof, the profits of the company earned in any year after carrying to reserve or other special accounts or carrying forward such amounts as may be determined in accordance with the provisions of these articles shall be applied first in payment of a dividend at the rate of 4 per cent. per annum, free of income-tax, on the capital for the time being paid up on the preferred ordinary shares and thereafter any surplus shall be applied in payment of a dividend on the capital for the time being paid up on the preferred ordinary shares shall not confer any voting rights. (3) In the event of the company being wound up the surplus assets available after payment off of the capital paid up or credited as paid up on the preference shares and the payment off of arrears of dividend, whether declared or not, up to the commencement of winding up on such preference shares in accordance with the provisions of sub-clause (1) hereof shall be applied firstly in payment off of the capital and dividend, if any, declared and in arrears, at the commencement of winding up, on the ordinary shares and the balance, if any shall be distributed to the holders of the preferred ordinary shares and ordinary shares rateably. ;