SUNDARAM AND COMPANY PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question referred to us for decision arises in connection with proceedings under section 23A of the Income-tax Act in relation to the assessment of the assessee, Sundaram and, Co. (Pte.) Ltd., for the year 1951-52. It runs :

(2.) THE assessee is a private limited company consisting of three shareholders. Its paid-up capital is Rs. 6,000. Even prior to the year of account in question, the company had accumulated reserves which after deducting dividends already declared amounted to Rs. 1,17,919. It is obvious that those reserves representing accumulation of past profits had exceeded its paid-up capital.

(3.) THERE can be no doubt on a reading of the section, that the first proviso to the section would apply to the case and the Income-tax Officer would be entitled to direct the company to distribute the entirety of the profits earned in the year less income-tax and super-tax payable. But it is contended that the second proviso would relieve the assessee of that obligation because it had already declared sixty per cent. of its profits as dividend. Reliance is placed in support of this argument on the presence of the word "further" in the second proviso which means, according to the assessee, that section 23A would cease to apply if there had been a declaration of dividend of not less that fifty-five per cent. of the assessable income except to the extent of making up the deficiency of 60 per cent. If that contention were to be accepted the company which has reserves representing accumulation of profits over and above its paid up capital, could be called upon to distribute the entirety of its profits under the section only if it had failed to distribute fifty-five per cent. thereof, while the same company if it had distributed fifty-five per cent. of its profits could be absolved from distributing the remaining profits except to make up sixty per cent. This would mean that the legislature discriminated between companies in the same position, having accumulated profits, namely (1) those that distributed dividends less than fifty-five per cent. of the profits and (2) those distributing more but not the entire profits. That cannot be correct. Section 23A is intended to strike at attempts to avoid super-tax payable by the shareholders by adopting the device of forming private companies and allowing profits to accumulate therein without declaring dividends. The contention of the assessee, if accepted, would mean that the shareholders can be allowed to avoid super-tax and accumulate their profits in the company by adopting the simple device of declaring fifty-five per cent. of the profits as dividends. Such a construction would lead to absurd if not discriminatory results. We will, however, see whether there is any warrant for this interpretation on the terms of the section. The effect of a proviso ordinarily is to except out of a substantive part of the enactment or to qualify something enacted therein which but for the proviso would be within it. Proviso 1 and 2 are therefore exceptions to what is contained in section 23A(1). The rule is that a proviso should be considered in relation to the principal matter to which it stands as a proviso. On a reading of section 23A(1) as a whole along with the provisos it would be clear that what the legislature intended to lay down was that ordinarily a company earning sufficient profits should distribute as dividend sixty per cent. at least of its assessable income. Where it had distributed no less than fifty-five per cent., there would be no obligation on its part to distribute even that sixty per cent. unless the Income-tax Officer calls upon it to distribute the other five per cent. as well. But if the company had accumulated reserves from and out of its past profits which exceeded its paid up capital, it was bound to distribute the entirety of the profits earned. That intention unfortunately has not been clearly expressed in the form in which the provisos are enacted. The draftsman had obviously blundered in using the word "further" in the second proviso. If one has regard to the object with which section 23A was enacted, it would be evident that the second proviso was intended only as an exception to sub-section (1) to which it relates and not to the first proviso. The first proviso in that case would govern both sub-section (1) and the second proviso as well. That this is the true interpretation is apparent from the terms of the first proviso itself which states that the section (main section and the proviso) shall apply in the cases specified by it as if the word 100 per cent. were substituted for the word sixty per cent. That would mean that the proviso was intended for the entire section, namely, sub-section (1) read with the second proviso. A different construction would lead to absurdity and repugnance. In Craies on Statute Law, 5th edition, it is stated at page 84 : "The general rule", said Willes J. in Christopherson v. Lotinga, "is stated by Lord Wensleydale in these terms : To adhere to the ordinary meaning of the words used and to the grammatical construction, unless that is at variance with the intention of the legislature to be collected from the statute itself or leads to any manifest absurdity or repugnance in which case the language may be varied or modified so as to avoid such inconvenience but no further. I certainly", continued Willes J., "subscribe to every word of the rule except the word absurdity unless that be considered as used there in the same sense as repugnance. That is to say something which would be absurd with reference to the other words of the statute as to amount to a repugnance."