CORAMANDEL FERTILIZERS LIMITED Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THE question that arises for consideration in these writ petitions is whether the assessee-company is entitled to the issuance of a certificate under S. 197(3) of the IT Act, 1961 ("the Act") to the effect that the tax need not be deducted at source from the dividend. In W.P. No. 1835 of 1978, the certificate is claimed for the year 1977 by the second petitioner and the other shareholders of the first petitioner- company. In W.P. No. 3439 of 1979, a similar certificate is claimed for the year 1978 by the 1st petitioner company and another shareholder, second petitioner therein, for himself and other shareholders similarly placed. In W.P. No. 2611 of 1980, the assessee-company and yet another shareholder seek a similar certificate for the second petitioner and for other shareholders similarly placed for the year 1979.

(2.) IT is stated by the petitioner-company that it is entitled to the benefit of the provisions of S. 80J of the Act. The first year of assessment, for which the petitioner-company is entitled to the benefit of S. 80J, was the asst. yr. 1969-70. IT declared its first dividend for the calendar year 1972. Under s. 80J, the petitioner-company is entitled to deduction in respect of profits and gains from its newly established industrial undertakings for a total period of five years for which such deductions shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking began to manufacture or produce articles. The petitioner company, though incorporated on 16th Oct., 1961 with the main object of manufacturing fertilisers by establishing a factory at Vishakhapatnam, completed the erection of the factory somewhere in 1967-68 and began production. IT declared its maiden dividend of Rs. 76,65,608 for the year 1972 at its annual general meeting held on 21st May, 1973. The petitioner- company applied for a certificate under S. 197(3) to the effect that the said dividend was not chargeable to tax in the hands of the shareholders by virtue of S. 80K of the Act and, therefore, no tax was deductible. The Revenue took the stand that the petitioner-company has not actually obtained deduction under S. 80J and, therefore, the shareholders were not entitled to claim deduction under s. 80K. The petitioner-company, therefore, moved this Court in W.P. Nos. 2279 and 2280 of 1983 for a writ of mandamus against the ITO to issue a certificate under S. 197(3). For the subsequent year also, the first petitioner declared a dividend which, according to the petitioner-company, was wholly exempt from tax in the hands of its shaeholders and he applied for a certificate under S. 197 (3). The petitioner-company filed two more writ petitions, W.P. Nos. 4305 and 4306 of 1974. This Court by its judgment dt. 9th Dec., 1974 allowed all these writ petitions and directed the ITO to issue a certificate under S. 197(3) as prayed for. The Revenue carried the matter in appeal to the Supreme Court. The Supreme Court, in its judgment in Union of India & Ors. vs. Coromandel Fertilizers Ltd. & Anr. 1976 CTR (SC) 73 : (1976) 102 ITR 533 (SC) : TC5R.461, dismissed the appeal and affirmed the decision of this Court. IT is the grievance of the petitioner that in spite of these writ petitions being allowed in respect of the dividend declared by the petitioner-company for the years 1972 and 1973, the ITO did not issue the certificates. They were issued only after the decision of the Supreme Court in 1975. In spite of the above for the succeeding years, i.e., 1974, 1975 and 1976, certificates have not been issued and, hence, the company was constrained to file these three writ petitions. He points out that the total deduction to which the petitioner-company is entitled under S. 80J, as stated in paragraph 12 of the affidavit filed by the petitioner, amounts to Rs. 10,46,59,377 and the total dividend declared from the date of the declaration of the maiden dividend in 1972 up to and inclusive of 1976 is only Rs. 6,70,74,070. There is thus, unavailed deduction of Rs. 3,75,85,307 to the credit of the petitioner-company and, hence, there can be no impediment in granting the certificate in respect of a dividend of Rs. 1,97,64,000 proposed by the petitioner-company for the year 1974. Some of the deductions claimed, while W.P. No. 1835 of 1978 was pending, were the subject-matter of appeal before the Tribunal and pursuant to the order of the Tribunal, the ITO later modified his order relating to the deduction under S. 80J. As per the revised calculation made by the ITO in accordance with the order of the Tribunal, the petitioner-company's entitlement to the deduction under S. 80J rose from Rs. 10,46,59,377 to Rs. 12,71,17,504. By another order dt. 11th Nov., 1981, the ITO amended the order and the company's entitlement under S. 80J for the five years rose further to Rs. 13,21,36,159, while the dividend declared for all these years was Rs. 6,52,00,098. The Revenue, however, does not accept these figures and has not acted upon them claiming the judgment of this Court declaring r. 19A(2) and r. 19A(3) as ultra vires is the subject-matter of an appeal to the Supreme Court and, hence, the order of the AAC or the Tribunal on the basis of which the deduction under S. 80J is worked out, cannot be the basis for allowing the benefit of S. 80K and for a determination under S. 197(3). IT was their further case that these profits are not wholly attributable to the deduction under s. 80J. In any event, it is pointed out by the learned counsel for the Revenue, Sri Srirama Rao, that even according to the assessee, if r. 19A is held to be intra vires the Act and the entitlement of the petitioner company is calculated according to the said rules, the petitioner company would not be entitled to a deduction of Rs. 13 crores and odd as now claimed by it; it would be very much less. Hence, until the petitioner-company's entitlement to the deduction under S. 80J is finally determined, the certificate under S. 197(3) cannot be directed to be issued.

(3.) IT is true that a certificate under S. 197(1) can be issued only on an application made by the assessee in this behalf. The assessee-company is obliged to deduct the tax under S. 194 unless a certificate envisaged by S. 197(1) is produced as provided under S. 197(2). The petitioner-company may, under S. 197(3), before paying the dividend to the shareholders or issuing a cheque or a warrant in respect thereof, `make an application' to the ITO to determine the appropriate proportion of the dividend to be deducted under the provisions of S. 80K and on such determination by the ITO, no tax shall be deducted on such proportionate amount. All that the petitioner- company is entitled to is to file an application to determine the appropriate proportion of the dividend referred to in S. 194 deductible in computing the total income of the recipient having regard to the provisions of S. 80K. Upon such determination by the ITO, no tax shall be deducted on such proportionate amount. The appropriate proportion of the dividend that may be deducted under the provisions of S. 80K depends upon "what are the profits and gains derived by the company which is attributable to the benefit which the company is entitled to under S. 80J for the assessment year commencing on 1st April, 1968, or for any subsequent assessment year?" After the final determination of the amount which the petitioner-company is entitled to claim by way of deduction under S. 80J in calculating the gross total income of an assessee, the income by way of dividends paid or deemed to have been paid by the company entitled to the benefit of S. 80J shall have to be deducted. Whether a certificate is issued under S. 197(1) at the instance of an assessee shareholder of the petitioner-company or a determination under S. 197(3) at the instance of the officer of the company is done, the company is enabled to deduct only the proportionate amount or not to make any deduction at all towards income-tax before paying the dividend or issuing the cheque or warrant. However, until such final determination by the appropriate authority, it cannot be postulated as to what extent the assessee-company is entitled to the benefit of S. 80J and to what extent the share holders of the assessee-company are entitled to the benefit of S. 80K. In this case, what all the petitioner-company claims is a determination under S. 197(3). The certificate envisaged by S. 197(1) is a certificate issued upon the ITO being satisfied that the total income of the recipient either justifies the deduction of income-tax at any lower rate or no deduction of income-tax at all. On the other hand, the determination under S. 197(3) is having regard to the provisions of S. 80J r/w S. 80K. In certain cases, having regard to the fact that the assessee- company is entitled to the benefit of S. 80J and the shareholder is also entitled to the benefit of s. 80K and having regard to the shareholder's other income, the shareholder is entitled to the issuance of a certificate under S. 197(1) and the company is entitled to a determination under s. 197(3) and no tax may be deductible. But that may not hold good in respect of every shareholder. The total income of an individual shareholder, notwithstanding the benefit to which the assessee- company is entitled under S. 80J and the shareholder under S. 80K, may be such that it is liable to tax and a certificate envisaged by the proviso to S. 194 or a certificate envisaged by S. 197(1) may not be issuable to such shareholder. In our view, the petitioner- company cannot make an application under S. 197(1) to issue a certificate to the shareholder that no tax is deductible from the dividend payable to its shareholders. IT can only ask for a determination under sub-s. (3) of s. 197. Upon such an application, if the ITO determines that only a certain portion of the dividend is deductible, the assessee-company may deduct that portion of the tax at source from the dividend and if the ITO holds that the whole of the income from profits and gains is attributable to S. 80J and the shareholder is entitled to the benefit of S. 80K, no tax may be deducted from any dividend declared and paid by the company. The authority to make such determination under S. 197(3) may be the same as the one under S. 197(1). But nonetheless the scope of enquiry under sub-s. (1) of s. 197 and the ambit of enquiry under sub-s. (3) of S. 197, in our view, are different. Even after the entitlement of the shareholder to the benefit of S. 80K, the total income of a shareholder may be liable to tax, in such an event, the certificate envisaged under S. 197(1) may not be issued. But, in the case of certain other shareholders, their income may be such that even after the inclusion of the entire dividend due to them, their income may not be above the exemption limit. In such a case, the determination under S. 197(3) itself would enable the company not to deduct the tax from the dividend. In so far as the petitioner-company is concerned, it would be perfectly justified in not deducting tax from the dividend declared by the company if the determination under S. 197 (3) is in its favour. Such a determination serves the purpose of a certificate. We understand the writ of mandamus prayed for by the petitioner-company is for a determination envisaged by S. 197 (3).