Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court: " Whether, on the facts and in the circumstances of the case, and on a correct interpretation of Clause (1)(c)(iii)(B) of the second proviso to Para- graph F of the First Schedule to the Finance Act, 1965, the Tribunal was correct in holding that the amount by which the rebate from income-tax payable by the assessee should be reduced under the said clause should be computed with reference to the proposed dividend of Rs. 24,000 and not with reference to the dividend of Rs. 60,000 relating to the profits of the assessment year 1964-65 though declared and distributed during the previous year for the assessment year 1965-66 ? "
(2.) The assessee is a private limited company engaged in the manufacture of plastic goods. The provisions of Section 104 of the I.T. Act apply in the case of the assessee. There is also no dispute that according to sub-el. (B) of Clause (c) of the second proviso to Paragraph F of the Finance Act, 1965, its rebate from tax was liable to reduction @ 7.5% on the whole amount of its dividends other than dividends on preference shares. It will be relevant to set out the proviso as also the relevant provisions of the Finance Act, 1965, which are as follows : " Paragraph F In the case of every company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (XXXI of 1956),-- Rate of income-tax On the whole of the total income 80 per cent.: Provided that a rebate shall be allowed in the case of such companies on such income at such rate or rates as are specified hereunder :...... Provided further that-- (i) the amount of rebate arrived at under the preceding proviso in the case of a company referred to in item I or item II of that 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 :-- (a) On the aggregate of the sums computed in the manner provided in cl. (i) of the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1964 (V of 1964), as reduced by the amount, if any, which is deemed to have been taken into account, in accordance with cl. (ii) of the said proviso, for the purpose of reducing the rebate mentioned in clause (i) of the said proviso to nil ; at the rate of 100 per cent. (b) On the amount representing the face value of any bonus shares or the amount of any bonus issued to its shareholders during the previous year with a view to increasing the paid-up capital except where such bonus shares or bonus have been issued wholly out of the share premium account of the company after the 31st day of March, 1964; at the rate of 12.5 per cent. (c) in addition, in the case of -- (i) a comany as is referred to in section 108 of the Income-tax Act, or (ii) a company as is referred to in clause (iii) of sub-section (2) or sub-section (4) of section 104 of the said Act, or (iii) such a company as is exempt from the operation of section 104 of the said Act by a notification issued under the provisions of sub-section (3) of that section, which has declared or distributed to its shareholders during the previous year any dividends other than dividends on preference shares -- (A) in the case of a company which since the date of the commencement of its activities has declared or distributed any dividends for the first time during the previous year or any one of the four previous years immediately preceding such previous years -- on that part of the dividends other than dividends on preference shares which exceeds ten per cent, of the paid-up equity capital at the rate of 7.5 per cent. (B) in any other case -- on the whole amount of the dividends other than dividends on preference shares at the rate of 7.5 per cent. (ii) Where the sum arrived at in accordance with Clause (i) of this proviso exceeds the amount of the rebate arrived at under the preceding proviso, only so much of the amounts of reduction mentioned in sub- Clauses (a), (b) and (c) of Clause (i) of this proviso as is sufficient, in that order, to reduce the rebate to nil shall be deemed to have been taken into account for the purpose :......"
(3.) The ITO held that the reduction in the rebate was to be calculated on a dividend of Rs. 60,000 which though related to the profits of the earlier year, that is to say, assessment year 1964-65, was distributed during the year under reference. He, accordingly, reduced the rebate by Rs. 4,500, being the tax on Rs. 60,000 @ 7.5%.;