Commissioner Of Income-Tax Bombay City... vs Afco (P) Ltd., Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 25 October, 1962

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In this case, the Court recorded that the parties were Commissioner of Income‑Tax, Bombay City, and Afco (P) Ltd., Bombay, and that the matter was heard on 25 October 1962 before a Bench consisting of Justice J. C. Shah, Justice J. L. Kapur and Justice M. Hidayatullah. For the accounting year ending on 31 March 1955, Afco Private Ltd., a private limited company, earned a total income which was finally assessed by order of the Income‑Tax Tribunal at the sum of Rs 49,843. The company paid a dividend of Rs 11,712 on 13 July 1955 and, before the close of the next assessment year 1955‑56, declared an additional dividend of Rs 5,612. Consequently, the aggregate dividend paid was not less than sixty per cent of the total income after deduction of the income‑tax and super‑tax that were payable by the company. Pursuing the provisions of Schedule I, Part I, Item B read with section 2 of the Finance Act 15 of 1955, the company claimed a rebate at the rate of one anna per rupee on the amount computed under those provisions. The Income‑Tax Officer and the Appellate Assistant Commissioner rejected the claim on the ground that, in their opinion, the claimant was a company to which the provisions of section 23A of the Income‑Tax Act could not be made applicable. On appeal, the Income‑Tax Appellate Tribunal, Bombay, set aside the order of the tax authorities. The Tribunal held that the expression “cannot be made applicable” in Item B of Part I of Schedule I of the Finance Act 15 of 1955 must be read in conjunction with section 23A of the Income‑Tax Act, and that the rebate provided by the Finance Act 1955 could not be denied to a private company if the conditions prescribed in section 23A(1) were satisfied.

The Tribunal then referred a specific question to the High Court of Judicature at Bombay, seeking confirmation that, on the facts and in the circumstances of the case, a company which had distributed dividends amounting to more than sixty per cent of its total income after deducting income‑tax and super‑tax was entitled to the rebate of one anna per rupee on the undistributed balance of profits as provided in clause (i) of the proviso to Item B of Part I of the First Schedule to the Finance Act of 1955. The Court answered this question affirmatively. The Court further explained the relevant statutory framework. By the Finance Act 15 of 1955, Schedule I, Item B, read with section 2 of the Act, the rates of tax applicable to companies were prescribed. Item B provided that, in the case of every company, a surcharge of four annas (i.e., one twentieth of a rupee) was to be levied on the whole of the total income, as specified in the preceding column of the schedule. The proviso to Item B stated that, provided a company, in respect of its profits liable to tax under the Income‑Tax Act for the year ending on 31 March 1956, had made the prescribed arrangements for declaration and payment within India of the dividends payable out of such profits, and had deducted super‑tax from those dividends in accordance with sub‑section (31) of section 18 of that Act, then two further conditions would apply. First (i), where the total income, after reduction by seven annas per rupee and by any amount exempt from income‑tax, exceeded the amount of any dividends (including fixed‑rate dividends) declared with respect to the whole or part of the preceding year for the assessment year ending on 31 March 1956, and the company was one to which the provisions of section 23A of the Income‑Tax Act could not be made applicable, a rebate would be allowed at the rate of one anna per rupee on the amount of such excess. The second (ii) part of the proviso contained additional provisions, which were not reproduced in full in the judgment.

The Court observed that the Finance Act allowed a rebate when a company paid super‑tax on its dividends in accordance with sub‑section (31) of section 18 of the Income‑tax Act. The rebate applied in the following situation: if the total income of the company, after being reduced by seven annas per rupee and by any amount that was exempt from income‑tax, was greater than the amount of any dividends—whether ordinary dividends or dividends payable at a fixed rate—declared for the whole or part of the previous year for the assessment year ending on 31 March 1956, and if the company was one to which the provisions of section 23A of the Income‑tax Act could not be made applicable, then a rebate was to be allowed at the rate of one anna per rupee on the excess amount. The Act also contained further provisions indicated by the placeholder “(ii) X X X X.”

By virtue of section 23A(1) of the Income‑tax Act, the Income‑tax Officer at the material time possessed the authority to order a company to pay super‑tax on the undistributed balance of the total income of the preceding year. The rate of super‑tax was prescribed as eight annas per rupee for a company whose business consisted wholly or mainly of dealing in or holding investments, and as four annas per rupee for any other company. The undistributed balance was defined as the total income after deduction of income‑tax, super‑tax and any other tax payable under any law in excess of amounts allowed in computing the income. For banking companies, the calculation also included funds actually transferred to a reserve fund and any dividends actually distributed, if any. The provision further required that, for any preceding year, if the profits and gains distributed as dividend by the company within twelve months immediately following the expiry of that year were less than sixty per cent of the total income of that year—after the aforementioned deductions—then super‑tax could be imposed, unless the Income‑tax Officer was satisfied that, considering losses incurred in earlier years or the smallness of profits in the preceding year, the payment of a dividend or a larger dividend would be unreasonable. Consequently, an order under section 23A(1) would ordinarily be made, subject to certain procedural conditions, where the company had distributed a dividend within twelve months after the accounting year’s expiry that fell below the prescribed percentage of the total income after tax deductions for non‑banking companies, and below the same percentage after including reserve‑fund transfers for banking companies.

The Court further noted that the first paragraph of sub‑section (9) of section 23A expressly excluded from its operation any company in which the public were substantially interested, as well as any subsidiary of such a company where the whole of the subsidiary’s share capital was held by the parent company or by its nominees throughout the preceding year.

The provision required that the company’s share capital be held by the parent company or by its nominees throughout the previous year. Following this requirement, the statute set out two explanatory notes. The first explanatory note, to the extent it was relevant to the present dispute, stated: “Explanation 1 – For the purposes of this section, a company shall be deemed to be a company in which the public are substantially interested – (a) X X X X (b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and (i) X X X X (ii) X X X X (iii) X X X X.” The second explanatory note was recorded simply as “Explanation 2 – X X X X.” Section 23A had been enacted to prevent shareholders of certain classes of companies from avoiding the higher super‑tax rates that applied to individuals by shifting their income to companies, which were taxed at lower rates. The legislative intent was to stop individual assessees from transferring income to a corporate body in order to receive the profit as dividends and thereby escape the higher personal super‑tax liability. To achieve this, Act XXI of 1930, as amended by Act VII of 1939, introduced a special provision in section 23A that empowered the Income‑tax Officer, in the circumstances specified in the section, to declare that any undistributed portion of assessable income, after reduction by taxes paid and dividends actually distributed, would be deemed to have been distributed on the date of the general meeting. The Finance Act 15 of 1955 later amended subsection (1) of section 23A, directing the Income‑tax Officer to issue an order that the company would be liable to pay super‑tax on the undistributed balance at the rates prescribed by the section. However, subsection (9) of section 23A limited the officer’s power to issue such an order only against a company in which the public were not substantially interested, or against a subsidiary of such a company where the parent or its nominees held the entire share capital of the subsidiary throughout the preceding year. Moreover, clause (b) of the first explanation clarified that a private company, as defined in the Indian Companies Act 1913, did not fall within the category of a company in which the public were substantially interested. Consequently, the Income‑tax Officer was authorised to issue an order under subsection (1) of section 23A, provided the statutory conditions were satisfied, requiring a private company to pay super‑tax on its undistributed balance at the rates specified in Finance Act 15 of 1955. To mitigate the strictness of this rule, the legislature offered an incentive in the form of a rebate equal to the difference between nine annas per rupee of total net income and the amount of dividend actually declared, applicable to companies that had declared dividends and therefore would not be subject to an order under section 23A. Nonetheless, that rebate benefit was limited in its application.

The Court observed that the rebate under the Finance Act of 1955 is available only to companies to which the provisions of section 23A of the Income‑tax Act cannot be made applicable. The Income‑tax authorities had interpreted the expression “company to which the provisions of section 23A of the Income‑tax Act cannot be made applicable” as describing a class of companies against which, in any circumstance, an order under section 23A could not be made. Accordingly, they held that private limited companies, which are subject to an order under section 23A when the conditions relating to dividend distribution are satisfied, could not claim the rebate. The Tribunal and the High Court, however, construed the phrase “cannot be made applicable” to refer merely to a factual situation in which, after considering the surrounding circumstances, an order under section 23A would not be justified. The Court agreed with that view, stating that the legislature deliberately used the wording “cannot be made applicable” to indicate that the applicability of section 23A depends on the Income‑tax Officer’s decision rather than on any categorical exclusion contained in the statute.

The Court explained that before an order under section 23A can be issued, the Income‑tax Officer must first determine whether the company falls within the description given in sub‑section (9) of section 23A; if it does, the Officer has no authority to make an order. If the company does not fall within that description, the Officer must then examine whether, because of an inadequate dividend declaration, past losses, or a small profit in the preceding year, an order for payment of super‑tax should be avoided. The Officer’s satisfaction of all prescribed conditions, even when the company is outside sub‑section (9), constitutes a prerequisite for the order. The legislature’s language makes clear that only when an order under section 23A would not be justified, considering the facts, does the right to claim the rebate arise. The statute does not limit the rebate to companies for which an order under sub‑section (1) of section 23A can never be made. The Court further noted that a review of earlier Finance Acts confirms this interpretation, showing that before 1955 the rebate under Part I of the First Schedule, Item B, was available to companies that had made the required arrangements for dividend declaration and payment and had deducted super‑tax from the profits liable to tax.

In this case the Court observed that earlier Finance Acts allowed a rebate of dividends when a company complied with sections 18(3D) and 18(3E), the total income was reduced by seven annas per rupee, the amount exempt from income‑tax exceeded any declared dividends, and no order had been made under sub‑section (1) of section 23A of the Income‑Tax Act. The right to obtain the rebate arose under those Finance Acts only if no order under section 23A had been issued. Consequently the Income‑Tax Officer was required to decide, even before completing the assessment of the company, whether the facts justified the issuance of an order under section 23A. If such an order was not made, the assessee automatically became entitled to a rebate of one anna per rupee. The Court noted that this requirement caused delays in the disposal of assessment proceedings and created administrative inconvenience.

The Court further explained that the Legislature appeared to have altered the scheme of granting the rebate by enacting the Finance Act of 1955. The purpose of that amendment was to simplify the procedure and to avoid the delays described above, not to deprive private limited companies as a class of the rebate benefit that had been available under the earlier Acts.

Counsel for the Income‑Tax Commissioner drew the Court’s attention to the Finance Acts of 1956 and 1957. Counsel argued that, in dealing with the right to rebate under Part II, which related to the rates of super‑tax, the Legislature used language that limited the right to rebate solely to public companies.

The Court observed that even under the Finance Act of 1955, Part II of Schedule I, item D, provided a rebate of three annas per rupee of total income to companies whose profits were liable to tax under the Income‑Tax Act for the year ending 31 March 1956. This entitlement required that the company had made the prescribed arrangements for payment of dividends out of profits and for reduction of super‑tax from the dividends in accordance with sub‑section 3D of section 18, and that the company was a public company whose total income did not exceed Rs 25,000.

The Court noted that the Finance Act of 1956 slightly modified that provision. Under the 1956 Act a rebate of five annas per rupee became admissible, subject to the same other conditions, if the company was a public company with total income not exceeding Rs 25,000 and to which the provisions of section 23A could not be applied.

Under the Finance Act of 1957 the rebate was allowed in favour of companies referred to in sub‑section (9) of section 23A of the Income‑Tax Act, provided their total income did not exceed Rs 25,000. The Court pointed out that all these rebate provisions were enacted in the context of prescribing the rates of super‑tax.

Finally the Court highlighted that in the Finance Act of 1955, when dealing with the right of rebate under Part I, which prescribed the rates of income‑tax, the rebate was made available to companies to which the provisions of section 23A could not be applied. In contrast, under Part II, which prescribed the rates of super‑tax, the rebate was made admissible in respect of …

The statutory scheme provided that a rebate on tax was available to public companies whose total income did not exceed the amount prescribed by the legislation. When the income of such a public company went beyond the prescribed ceiling, the statute allowed a rebate, but at a reduced rate. The language of the provision therefore distinguished between public companies that fell within the income limit and those that exceeded it, granting each a different quantum of relief. If the Legislature had intended to keep private limited companies out of the benefit of any rebate, it would have employed the same precise wording that it used elsewhere in the Act when it dealt with rebates in the context of super‑tax rates. In other words, the same phraseology that excluded private limited companies from super‑tax rebates would have been repeated here if that exclusion had been contemplated. However, a careful examination of the legislative history shows that the Parliament did not use such wording in this part of the legislation. The historical records, rather than supporting the interpretation advanced by the Income‑Tax Department, actually point in the opposite direction, indicating that the legislature did not intend to bar private limited companies from receiving the rebate under the provisions that were being considered.

Accordingly, the Court concluded that the High Court’s decision was correct in holding that the company was entitled to the rebate it claimed. The Court affirmed that the company’s claim fell within the ambit of the statutory provision and therefore could not be denied. As a result, the appeal filed against the High Court’s judgment was rejected. The Court ordered that the appeal fail and that it be dismissed, and it further directed that the costs of the proceedings be awarded against the appellant.