SARJOO PROSAD, C. J. - (1.) THIS is a reference made under sec. 66 (1) of the Indian Income-Tax Act. The relevant facts have been set out in the order of reference and lie within a short compass. The assessee is a Hindu joint family and carries on its business in the name and style of Maganlal Sankalchand, with Shri Hiralal K. Parikh as the Karta of the family. It derives income from money-lending business, property and dividends on shares.
(2.) DURING the financial or accounting year 1949-50 ending on 31st March, 1956, the assessee received a net dividend income of Rs. 1,73,839/- from two Companies, viz. , Associated Stone Industries (Kotah) Ltd. and Rajputana Mining Agencies Ltd. , the latter being the managing agents of the former. These Companies declared dividends on 29th September, 1949, and 16th November, 1949, respectively, for the year ending 30th September, 1949 ; and the dividends were paid to the assessee on dates which fell within the relevant financial year. These Companies are situated in Kotah which formed part of the erstwhile Part B State of Rajasthan. The profits of the said Companies during the year ending 1949-50, if assessed, would be for the assessment year 1950-51. The Companies however, have not paid any income-tax so far. They have been claiming concessions which they allege were granted to them by the then Ruler of Kotah and though the claim was turned down by the Department, a suit was instituted claiming exemption and restraining the Department from taxing the Companies. The Department, however, has sought to tax the assessee in respect of the dividends received from the aforesaid Companies during the financial year 1949-50. This was done because the assessee in his return submitted that the dividends may be "grossed up" under sec. 16 (2) of the Income-tax Act and the difference between the gross dividend and net dividend may be taken as the tax paid on behalf of the assessee under sec. 18 (5) of the Act. It was further submitted by the assessee that in case the Associated Stone Industries (Kotah) Ltd. is finally held to be exempt from tax, the difference so allowed may be recoverable from the assessee under sec. 18 (5) of the Act and the assessment may be rectified under sec. 35 of the Act in the light of the above understanding. In view of the stand taken by the assessee the Income-tax Officer proceeded to assess the dividends received. In doing so, the Income-tax Officer grossed up only 50% of the dividends, since, according to him, 50% thereof was exempt from income-tax, though not from super-tax, under paragraph 12 of the Part B States (Taxation Concessions) Order, 1950, hereinafter called the Taxation Order. The order of the Income-tax Officer was in substance upheld by the Appellate Assistant Commissioner who dismissed the appeal of the assessee, and by an order dated 12. 3. 57 the Income-tax Appellate Tribunal also affirmed the same. In connection with the said assessment of income from dividends several questions of law appear to have been raised by the assessee before the departmental authorities as well as before the Income-tax Appellate Tribunal, and the Tribunal has accordingly referred the following questions for our decision - "1. Whether a moiety of the net dividend income of Rs. 1,73, 839/- requires to be 'grossed up' and if so, at what rate of tax, if any? 2. At what rate a moiety of the said dividend income of Rs, 1,73,839/- is liable to be taxed for the assessment year 1950-51 as part of the assessee's total income for the previous year ended 31. 3. 1950? 3. Whether all income of the assessee, including dividend income, that accrued or arose to it in Rajasthan prior to 1. 4. 1950 is liable to be taxed under the Indian Income-tax Act, 1922?" At the outset it may be observed that the learned counsel for the assessee does not press his contentions in respect of the third question, which may, therefore, be taken to have been correctly answered by the Tribunal. Indeed in view of the decision of the Supreme Court in the Union of India Vs. Madan Gopal Kabra (1) the question could not be answered otherwise and the learned counsel was well-advised in not canvassing the question any further; and it cannot be urged that after the amendment of sec. 1 (2) of the Income-tax Act with effect from 1. 4. 50 the State of Rajasthan was not included in the "taxable territories" as mentioned in sec. 2 (14 A) of the Act, or that the income accruing or arising to the assessee in Rajasthan during the year 1949-50 was not taxable in the hands of the assessee. Therefore, the answer to the question must be in the affirmative. We have now to confine our attention to the other two questions which have been referred to us for adjudication. It would be convenient to take up the discussion of these questions together, since their answers depend upon the application of some of the relevant provisions of the Indian Income-tax Act and the Taxation Order. It has been already observed that the net dividend income of Rs. 1,73,839/- was received by the assessee during the financial year 1949-50 and the dividends were also declared and paid by the Companies to the assessee during the said financial year. The profits of the said Companies during the year ending 1949-50, if assessed, would be for the assessment year 1950-51. In that case the proviso to paragraph 6 of the Taxation Order would be attracted, inasmuch as the year previous to the assessment year falls partly before the 1st day of April, 1949. Hence in the case of either Company the tax payable on its income as determined under the aforesaid paragraph of the Taxation Order will have to be reduced by 50%. The relevant proviso runs thus: - "provided that where the previous year falls partly before and partly on or after the 1st day of April, 1949, the tax payable under cl. (ii) or (iii), as the case may be, in respect of so much of the income, profits and gains as accrue or arise in the State of Madhya Bharat or Rajasthan, shall be reduced further by an amount equal to such proportion of the tax payable as the period falling before that day bears to the whole period of the previous year. " Further the tax payable by either Company on its income, during the relevant period, which accrued in Rajasthan will have to be determined by applying the rates mentioned in the Schedule to the Taxation Order, i. e. , at the rate of 15 pies in the rupee (vide, Explanation to cl. (v) of para. 3 of the Taxation Order ). It follows, therefore, that in respect of the profits accruing in Rajasthan tax will not be payable by the Companies at the full Indian rate of four annas in the rupee, with one-twentieth of it as surcharge. Similarly as the first proviso to paragraph 6 of the Taxation Order applies to the assessment of tax in respect of the Companies, paragraph 12 of the Taxation Order applies to assessment on the income of the share-holders. Paragraph 12 of the Taxation Order is as follows: - "where the total income of an assessee chargeable to tax for the assessment for the year ending on the 3lst day of March, 1951, includes any income from dividends paid by a company registered in a State in which there was no State Law relating to the charge of income-tax and super-tax and the dividend is paid out of profits which were not liable to be taxed, in whole or in part, either in the State or in the taxable territories no income-tax shall be payable by the assessee on such proportion of the dividend as the non-taxable profits of the company arising in the State bear to the total income of the company. " Thus only a moiety of the income received by the assessee would be liable to be taxed in its hands in respect of the dividends received from the aforesaid Companies during the said accounting year, and, therefore, under this paragraph the Income-tax Officer excluded 50% of the said dividends in computing the tax payable by the assessee for the assessment year 1950-51. To this extent there is no controversy between the parties. The controversy between the assessee and the Department relates to the question of "grossing up", as it is technically called, of the remaining amount of the income from dividends. The assessee claims that on grossing up it should be allowed the benefit of the full Indian rate of tax payable by the Companies in respect of the dividends in question, without any regard to the actual rates at which the Companies may be assessed and without taking into account any rebates that may be allowed to these Companies in view of the concession available to them under paragraph 6 of the Taxation Order read with sec. 16 (2) of the Income-tax Act as amended. The Department on the contrary pleads that the grossing up should be done at the actual rate of tax payable by the Companies, which in view of the concession permissible under the Taxation Order could not be more than 16 pies in the rupee. In substance, therefore, it comes to this that although it is common ground that only half of the dividend received by the assessee should be grossed up, the controversy is in respect of the "rate applicable to the total income of the Company" as contemplated by sec. 16 (2) of the Income-tax Act as amended. The Tribunal held that the moiety would have to be included in the total income of the assessee without being grossed up and the reason which it gave for arriving at that conclusion is as follows : - "no evidence has been placed before us that either of these two companies had any 'total income' as that term is defined in the I. I. T. Act so that the rate applicable to the company can be determined. Obviously, as the I. I. T. Act became applicable to these companies only on 1. 4. 50, there was no rate applicable to the total income of these companies for the financial year 1949-50. Hence on this short ground, we would reject the assessee's contention. The result will be that the moiety of the dividend will have to be included in the total income of the assessee without being grossed up and he will be liable to pay tax upon it subject to such concession as he may get under the said T. C. Order. '' After a copy of Tribunal's order under sec. 33 (4) was communicated |to the assessee, he made an application on 8th May, 1957, under sec. 35 of the Act for rectification of the order. The Tribunal, however, rejected the application by its order dated 22nd June, 1957. The assessee stated in that application that a proceeding under sec. 34 of the Income-tax Act was pending against the Company, the Associated Stone Industries (Kotah) Ltd. , and no such action could be taken unless the income of the Company had escaped assessment. It was, therefore, urged that the very initiation of a proceeding under sec. 34 of the Act presupposes that there was a rate applicable to the total income of the Company which is alleged to have escaped assessment. The Tribunal, however, was justified in rejecting the application on the ground that no material had been placed before it in regard to the total income of the Company. The position thus remained unaffected. The mere institution of proceedings under sec. 34 of the Act does not necessarily imply that there was any such definite income which had to be assessed. The matter was still in the stage of investigation and in the absence of any definite evidence as to the total income of the Companies, the rates of assessment could not be! ascertained nor the requisite proportions required by the law determined. It is, therefore difficult to see how on these facts any question of grossing up arises at all and we consider it unnecessary to answer the hypothetical question on the interpretation of sec. 16 (2) of the Income-tax Act, though we must observe that prima facie it appears to us that the claim of the assessee is correct and that the grossing up in case it had to be done had to be made at the full rate of tax applicable to the total income of the Company for the financial year for which the dividend was paid "without taking into account any rebate allowed or additional income-tax charged". There is after all a distinction between a Company as an entity and the share-holder as such and the rebate allowed to the Company out of the tax does not directly go to the pocket of the shareholders as income, though it may be ploughed back in the working assets of the Company. The question, however, is merely a hypothetical question on the facts of this case; and for the present, therefore, we do not feel inclined to commit ourselves to any definite answer on the point. We need only say that the answer to the first question on the above facts must be in the negative. The learned counsel for the assessee has, however, taken exception to the remark of the Tribunal in the passage quoted above, wherein it says that "obviously as the Income-tax Act became applicable to these Companies only on 1. 4. 1950, there was no rate applicable to the total income of these Companies for the financial year 1948-50". It is pointed out that if this is true, then there is no reason why these dividends should be taxed at all. We fee] constrained to admit with the utmost deference that apparently there is some inconsistency in the observation made by the Tribunal, though, as we have shown, it does not affect the material part of the decision on the question of grossing up of the net dividends. The main reason which weighed with the Tribunal in refusing to gross up was that no evidence had been placed before the Tribunal as to either of the two Companies having a "total income", as the term is defined within the meaning of the Indian Income-tax Act so that the rate applicable to the income of the Companies could be determined. The question whether any rate was or was not applicable to the income of the Companies for the financial year 1949-50 leads, however, to a consideration of the other question as to the rate, if any, at which a moiety of the said dividend income is liable to be taxed for the assessment year 1950-51 as a part of the assessee's total income for the previous year ending 31st March, 1950. The contention of the assessee is that there was no rate at which the dividend could be charged whereas the Department submits that it is chargeable to tax, subject to such concessions as the assessee may get under the Taxation Order. Learned counsel for the assessee relies upon sec. 2 (3) (a) of the Indian Finance Act, 1950 (Act No. XXV of 1950) and sec. 1 (2) of the Indian Finance Act, 1949 (Act No. XIV of 1946 ). We know already that the aforesaid Companies declared and paid dividend on 29th September, 1949, and 16th November, 1949 respectively, both within the financial year 1949-50, which is the previous year of the assessee for the assessment year 1950-51. Hence in accordance with the provisions of sec. 16 (2) of the Act, the income from dividends is a part of the assessee's income during the previous year and as such is liable to be taxed subject to such concessions as he may be entitled to under the Taxation Order. Now sec. 2 (3) (a) of the Finance Act of 1959 runs as follows - "in making any assessment for the year ending on the 31st day of March, 1951 - (a) where the total income of an assessee, not being a company, includes any income chargeable under the head "salaries" as reduced by the deduction for earned income appropriate thereto, or any income chargeable under the head ''interest on securities" or any income from dividends in respect of which by virtue of sec. 49-B of the Income-tax Act he is deemed himself to have paid the income-tax imposed under that Act, the income-tax payable by the asstssee on that part of his total income which consists of such inclusions shall be an amount bearing to the total amount of income-tax payable according to the rates applicable under the operation of the Indian Finance Act, 1949 (XIV of 1949), on his total income the same proportion as the amount of such inclusions bears to his total income;" It would thus appear that where the total income of an assessee includes income from dividends, the income-tax payable by the assessee on that part of the income from dividends should bear the same proportion to the total amount of income-tax payable, according to the rates applicable under the operation of the Indian Finance Act, 1949 (XIV of 1949) on his total income, as the amount of dividend so included bears to his total income. Therefore, in computing the tax a reference has to be made to the rates applicable under the Indian Finance Act, 1949; but it is urged that the Finance Act of 1949, as sec. 1 (2) shows, extends to the whole of India, except the territories which immediately before the 1st November, 1950, were comprised in Part B States. Rajasthan being excluded from the operation of the Finance Act of 1949, there was no rate at which the tax could be computed as respects income accrued in Rajasthan during the relevant financial year. Prima facie the argument appears to be attractive; but, in our opinion, the Tribunal has correctly answered the question. It is obvious from the language of sec. 2 (3) (a) of the Finance Act of 1950 itself that it does not lay down that the assessee shall pay tax on his dividend income for the assessment year 1950-51 at the rates prescribed by the Indian Finance Act, 1949. It merely says that for a certain purpose (one has to compute tax on the total income for the assessment year 1950-51 at the rates mentioned in the Finance Act, 1949. The rates mentioned in the Finance Act, 1949, were, therefore, to be considered, irrespective of the fact whether when the dividend income accrued or arose in the previous year relating to the assessment year 1950-51, the Finance Act, 1949, was or was not applicable to the territory within which the shareholder assessee resided. In other words, instead of mentioning the rates in the Finance Act of 1950 itself, for the sake of convenience the section referred to the rates mentioned in the Finance Act of 1949 for the purpose of computing the assessment. What has, therefore, to be considered is not whether the Indian Finance Act, 1949, was or was not applicable to the territory when the income accrued or arose is the previous year but simply the rates mentioned in the Finance Act of 1949. These rates applied proprio vigore on account of provisions of sec. a (3) (a) of the Finance Act of 1950 itself. In view of the charging sec. 3 read with sec. 16 (2) of the Indian Income-tax Act there can be no doubt that the dividend income that accrued to the assessee during the previous year 1949-50 was chargeable to tax during the assessment year 1950-51 and this could be done only on the strength of the provisions of the Indian Finance Act, 1950. Sec. 2 (3) (a) of this Act instead of saying that tax shall be payable at such and such rates merely refers to the rates set out in the Finance Act of 1949; but the fact remains that the liability to pay the tax on the income is in no way dependent upon the application of the Finance Act of 1949 itself. It is, therefore, immaterial whether the Finance Act, 1949. did or did not apply at the relevant time to the territory within which the assessee resided or the income accrued. The second question has to be answered accordingly. In our opinion the decision of the Tribunal on all the points appears to be correct and the questions must be answered in the manner indicated above. The Department is entitled to its costs of this reference which are assessed at Rs. 100/- only.
(3.) ALONG with the above reference certain other references were also consolidated in which the same points arose and the facts were substantially identical. All these references are also answered as decided above. .;