- (1.) THIS is a special case stated under section 90 and Order 35, rule 1 of the Code of Civil Procedure. The facts and the controversies between the parties were embodied in an agreement, as is expected in such a case. The agreement was arrived at on May 16, 1966. In view of the fact that it proceeds on the basis of the admitted facts in the said agreement, it is preferable to relate the relevant facts from the agreement. "whereas the company is a public limited company for the object of carrying on, inter alia, business as manufactures of Aluminium. The L. I. C. is the holder of 7537 cumulative redeemable preference shares of the company. The Articles of Association of the company, prior to amendment thereof on the twenty seventh day of April one thousand nine hundred and sixty two, conferred on the holder of the said cumulative redeemable preference shares the right, inter alia, to a fixed cumulative preference dividend of five per cent: per annum subject to income tax. At an extraordinary general meeting of the company held on the twenty seventh day of April one thousand nine hundred and sixty two the company's Articles of Association were altered in respect of the payment of dividend by providing a dividend of six and quarter per cent per annum (subject to income tax payable by the company ). For the year ended 31. 12. 1960 the company declared on 27. 4. 1961 dividend on its redeemable preference shares after increasing the stipulated rate of 5 percent by 11 per cent i. e. Rs. 5. 55 per share, in terms of the preference Shares (Regulation of Dividends) Act, 1960 less income tax payable by the company at 20 percent i. e. Rs. 4. 44 per share. The Income Tax Officer, Companies District I, Calcutta by his letter dated 16th March 1961 provisionally determined that twelve per cent of the dividend declared or the year ended 31. 12. 1960 was exempt from tax under section 15c of the Indian Income-lax Act, 1922. In other words, eighty-eight per cent of the dividend was not exempt from tax under section 15c of the Indian Income-tax Act, 1922. The Company deducted from the whole of the aforesaid dividend declared for the year ended 31. 12. 60, i. e. Rs. 5. 55 per share, its own income tax at twenty per cent and from the aforesaid eighty-eight per cent of the aforesaid Rs. 4. 44 per share the shareholders' income tax at twenty per cent and super tax at ten per cent. For the year ended 31. 12. 61 the company declared on 27. 4. 62 dividend on the said preference shares at Rs. 5. 55 per share less income tax payable by the company at twenty per cent i. e. Rs. 4. 44 per share. The Income Tax Officer, Companies District I, Calcutta by his letter dated 11th January 1963 finally determined that 76. 2 per cent of the dividend declared for the year ended 31,12. 61 was exempt from tax under sections 85 and 191 (2) of the Income Tax Act, 1961 road with Rule 20 of the Income Tax Rules, 1962. The Company deducted from the whole of the aforesaid dividend declared for the year ended 31. 12. 61, i. e. Rs. 5. 55 per share, its own income tax at twenty percent and as the shareholders' income tax at twenty per cent and super tax at ten per cent were deducted from the whole of the aforesaid Rs. 4. 44 per share, before the receipt of the Income Tax Officer's aforesaid letter of 11th January 1963, the L. I. C. and other shareholders were advised to get correct relief at the time of their assessments. The rate of dividend payable on the preference shares for the year ended, 31. 12. 62 onwards was changed from five percent per annum (subject to income tax) to 611/4 percent per annum (subject to income tax payable by the company ). For the year ended 31. 12. 62 the company declared on 27. 4. 63 dividend on the said preference shares at Rs. 6. 25 per share subject to income tax payable by the company at twenty-five per cent i. e. Rs. 4. 60 per share. The Income Tax Officer, Companies District I, Calcutta by his certificate dated 20. 3. 63 determined that forty-two percent of the dividend declared for the year ended 31. 12. 62 was exempt from tax. In other words, fifty-eight per cent of the dividend was not exempt from tax. The company deducted from the whole of the aforesaid dividend declared for the year ended 31. 12. 62 i. e. Rs. 6. 25 per share, its own income-tax at twenty-five per cent and from the aforesaid fifty-eight per cent of the aforesaid Rs. 4. 69 per share the shareholders' income-tax at twenty-five per cent and super tax at five per cent. For the year ended 31. 12. 63 declared on 27. 4. 64 dividend on the said preference shares at Rs. 6. 25 per share subject to income-tax payable by the company at twenty five per cent, i. e. Rs. 4. 69 per share. The Income Tax Officer, Companies District III, Calcutta by his certificate dated 26th February 1964 determined that 53 per cent of the dividend declared for the year ended 31. 12. 63 was exempt from tax. In other words forty seven per cent of the dividend was not exempt from tax. The Company deducted from the whole of the aforesaid dividend declared for the year ended 31. 12. 63 i. e. Rs. 6. 25 per share, its own Income Tax at twenty-five per cent and from the aforesaid forty-seven per cent of the aforesaid Rs. 4. 69 per share the shareholders' income-tax at twenty per cent. The company contends that, in view of the provisions of payment of dividend "subject to income-tax" and subject to income tax payable by the company, as stipulated in the company's Articles of Association before and after amendment thereof as aforesaid, it is entitled to the deduction of its own income tax on payment of dividend to shareholder even if the company has not paid the tax on the whole of its income or any part thereof. L. I. C. disputes the right of the company to make deduction towards company's own income tax on that portion, of the dividend which is paid out of the tax exempt profits and contends that the company is not entitled to deduct tax payable by the company on twelve per cent of the dividend paid for the year ended the 31st day of december 1960, on 76. 2 percent of the dividend paid for the year ended, the 31st day of December 1961, on 42 per of the dividend paid for the year ended the 31st day of December 1962 and on 53 per cent of the dividend paid far the year ended the 31st day of December 1963 which were all paid out of the profits of the company exempt from tax in its own hand. L. T. C. claims that it is entitled to refund of Rs. 1003. 93 for the year ended 31st December 1960, Rs. 1374. 95 for the year ended 31st December, 1961, Rs. 4938. 24 for the year ended 31st december 1962 and Rs. 6231. 59 for the year ended 31st December 1963 as amounts wrongly deducted by the company as Its own income tax on the dividend declared out of the profits exempt from tax in its own hand. The said four amounts make a total of Rupees Eighteen thousand five hundred and forty-eight and seventy four paise.
(2.) IN the circumstance, the questions which were referred have been summarised in paragraph 22 in these words (i) Whether on the facts and in the circumstances the Company was competent to deduct its own tax at twenty per cent from the portion of the dividends paid by it to the L. I. C. for the years 1960 and 1961 and at twenty-five per cent for the years 1962 and 1963 on its holding of 7537 redeemable preference shares which had been paid from those portions of the Company's profits which were tax free in the hands of the company under the Income Tax Act; (ii) Whether the terms "subject to Income Tax" and "subject to Income-tax payable by the company" as stipulated in the company's Articles of Association before and after amendment thereof as aforesaid mean that the company is entitled to deduct its own tax on payment of dividend to the preference share holders even if the company had not paid tax on the whole of its income or any particular part thereof ; (iii) Whether the L. I. C. is entitled to recover from the Company the amount of the company's Income Tax at twenty per cent deducted by the Company from the portion of the dividends paid to the L. I. C. for the years 1960 and 1961 and at twenty five per cent for the years 1962 and 1963 on its holding of preference shares which portion has been paid from those portions of the profits of the Company which were tax free in its hand under the Indian Income Tax Act that if the Honble High Court should answer the above questions Nos. (i) and (ii) or any of them in the negative and/or the above question No. (iii) in the affirmative, the Company shall pay to the L. I. C. the sum of Rs. 18548. 71 (particulars whereof have been set out in paragraph 14 of the said Annexure 'a' hereto) and that if the Hon'ble High Court should answer the above questions Nos. (i) and (ii) or any of them in the affirmative and/or the above question No. (iii) in the negative the L. I. C. shall not claim from the Company any refund of the said sum of Rs. 18548. 71 deducted by the company as Income tax on the dividends declared by it the agreement makes it clear that in course of the relevant years there were several changes.
(3.) THE Indian Income Tax Act, 1922 was applicable till 31st March, 1962. Sections 3 and 15c in the particular clauses 1 and 4 thereof are the more material provisions of the Act. The Indian income Tax Act, 1962 came into force from the 1st day of April, 1962 section 4 corresponding to section 3 of the old Act, 84, corresponding to clause (1) of section 15c of the old Act and 85 corresponding to clause 4 of section 15c of the old Act are the more material provisions of the new Act.;