Commissioner of Income Tax, Bombay vs AFCO (P) Ltd.

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 21 of 1962

Decision Date: 15 October 1962

Coram: Shah, J.

In this case the Court recorded that the petition was filed by the Commissioner of Income Tax for Bombay City against the respondent, Afco (P) Ltd., also located in Bombay, and that the judgment was delivered on 15 October 1962. The matter concerned a claim for a rebate under the Income‑Tax Act by a private limited company. The specific issue was whether the provision in Schedule 1, Part 1, Item B of the Finance Act 1955, which referred to a “company to which the provisions of section 23A of the Income‑Tax Act cannot be made applicable,” could be invoked to deny the rebate to the appellant company. The appellant was a private limited company that, for the year of account ending 31 March 1955, had a total income assessed at Rs 49,843. It declared a dividend of Rs 11,712 on 13 July 1955 and, before the close of the assessment year 1955‑56, declared an additional dividend of Rs 5,612, thereby distributing in total a dividend that was not less than sixty per cent of its total income after the deduction of income‑tax and surcharge payable. On that basis the company claimed a rebate at the rate of one anna per rupee on the amount computed in accordance with Schedule 1, Part 1, Item B read with section 2 of the Finance Act 1955. The Income‑Tax authorities rejected the claim, holding that the expression “company to which the provisions of section 23A of the Income‑Tax Act cannot be made applicable” referred to a company against which, under any circumstances, an order under section 23A could not be made. Since a private limited company could be subject to an order under section 23A if the conditions relating to dividend distribution were satisfied, the authorities concluded that the rebate was not admissible to the appellant. Both the Appellate Tribunal and the High Court affirmed this view, stating that the benefit of the rebate could not be denied to a private company when the conditions laid down in section 23A(1) of the Income‑Tax Act were fulfilled, because, in their opinion, the phrase “cannot be made applicable” only described a situation where, given the facts, an order under section 23A could not be issued. The Court held, however, that the appellant company was entitled to the rebate it claimed. The Court explained that the expression “to which the provisions of section 23A of the Income‑Tax Act cannot be made applicable” in Schedule 1, Part 1, Item B of the Finance Act 1955 means that the applicability of section 23A depends on the issuance of an order by the Income‑Tax Officer, and not on any categorical exclusion in the statute. Accordingly, the right to obtain the rebate under the Finance Act arises only when, after considering the circumstances, an order under section 23A would not be justified.

In this civil appeal numbered twenty‑one of the year 1962, the appellant sought special leave to challenge a judgment and order dated 23 September 1958 delivered by the Bombay High Court in income‑tax reference number eighty‑seven of 1957. Counsel for the appellant included the Additional Solicitor‑General of India and two other lawyers, while counsel for the respondent comprised four advocates. The matter was heard on 25 October 1962 and the judgment was delivered by Justice Shah. The factual backdrop concerned the financial year ended 31 March 1955 of Afco Private Limited, a private limited company, whose total income was finally assessed by order of the Income‑Tax Tribunal at forty‑nine thousand eight hundred forty‑three rupees. The company declared a dividend of eleven thousand seven hundred twelve rupees and one anna on 13 July 1955, and before the close of the assessment year 1955‑56 it declared an additional dividend of five thousand six hundred twelve rupees, thereby distributing in total a dividend amounting to at least sixty percent of its total income after deducting the income‑tax and super‑tax that it was liable to pay. Pursuing the benefit of the Finance Act of 1955, the company claimed a rebate calculated at the rate of one anna per rupee on the amount that remained after the dividend distribution, the computation being made in accordance with Schedule 1, Part 1, Item B read with section 2 of that Act. The Income‑Tax Officer together with the Appellate Assistant Commissioner rejected the claim on the ground that, in their opinion, the company fell within the class of companies to which the provisions of section 23A of the Income‑Tax Act could not be made applicable. The appellant appealed this decision to the Income‑Tax Appellate Tribunal in Bombay, which set aside the order of the tax authorities. The Tribunal held that the phrase “cannot be made applicable” appearing in Item B of Part 1 of Schedule 1 of the Finance Act of 1955 must be interpreted in conjunction with section 23A of the Income‑Tax Act, and that the rebate under the Finance Act could not be denied to a private company when the conditions laid down in section 23A(1) were satisfied. Consequently, the Tribunal referred a specific question to the Bombay High Court for determination, asking whether, on the facts and circumstances of the case, a taxpayer company that had distributed dividends exceeding sixty percent of its total income after reduction by income‑tax and super‑tax was entitled to the one‑anna‑per‑rupee rebate on the undistributed balance of profits as provided in clause (1) of the proviso to Item B of Part 1 of the first Schedule to the Finance Act of 1955. The Finance Act of 1955, through Schedule 1, Item B read with section 2, prescribed the rates of tax applicable to companies. Item B stipulated that for every company a surcharge of four annas per rupee was to be levied on the whole of total income, subject to a proviso that in the case of a company which, with respect to its profits liable to tax for the year ending 31 March, had made the prescribed arrangements for declaring and paying dividends within the territory of India and had deducted super‑tax from those dividends in accordance with the relevant subsection of the Income‑Tax Act, a rebate of one anna per rupee would be allowed on the excess amount.

In 1956 the company had complied with the statutory requirements for declaring and paying dividends within the territory of India, and it had deducted super‑tax from those dividends in accordance with sub‑section (31) of section 18 of the Income‑tax Act. The statute provided that, where the total income of the company – after reducing it by seven annas per rupee and by any amount that was exempt from income‑tax – exceeded the amount of any dividend, including any dividend payable at a fixed rate, that was declared in respect of the whole or part of the preceding year for the assessment year ending on 31 March 1956, and where the company was a company to which the provisions of section 23A of the Income‑tax Act could not be applied, a rebate at the rate of one anna per rupee was to be allowed on the amount of such excess. The provision continued with further conditions that were not reproduced in full. By section 23A(1) of the Income‑tax Act, at the relevant time, the Income‑tax Officer was empowered to order a company to pay super‑tax on the undistributed balance of the total income of the previous year. The rate of super‑tax was eight annas per rupee where the company’s business consisted wholly or mainly of dealing in or holding investments, and four annas per rupee for any other company. The undistributed balance was defined as the total income reduced by the amounts of income‑tax, super‑tax and any other tax payable under any law that exceeded the amounts allowed in computing the income. For banking companies, the calculation also required the deduction of funds actually transferred to a reserve fund and of any dividends that had actually been distributed, if any. The statute further specified that, for any preceding year, if the profits and gains distributed as dividend by the company within the twelve months immediately following the expiry of that year were less than sixty per cent of the total income of that year as reduced by the aforesaid amounts, the Income‑tax Officer could, unless satisfied that losses incurred in earlier years or the small size of the profits made the payment of a dividend or a larger dividend would be unreasonable, order the payment of super‑tax. Consequently, an order under section 23A(1) would, apart from certain procedural conditions, ordinarily be made where the company had distributed, within the twelve months immediately after the accounting year, less than the prescribed percentage of the total income after deducting the amount of taxes paid in the case of non‑banking companies, and also after deducting the reserve‑fund contribution in the case of banking companies. The first paragraph of sub‑section (9) of section 23A provided that nothing in that section would apply to any company in which the public were substantially interested, or to a subsidiary company of such a company where the whole of the share capital of the subsidiary had been held by the parent company or its nominees throughout the preceding year.

The provision states that a subsidiary company is exempt from the application of the section when the entire share capital of that subsidiary has been held by its parent company or by nominees of the parent throughout the preceding year. This clause is followed by two explanations. Explanation 1, to the extent it is relevant to the present case, defines a company in which the public are substantially interested. It sets out that a company is deemed to be one in which the public are substantially interested if, for example, it is not a private company as defined in the Indian Companies Act, 1913, and satisfies certain further criteria enumerated in sub‑clauses (i), (ii) and (iii). Explanation 2 is also listed, although its contents are not reproduced in full because they are not material to the issues being decided.

The purpose of Section 23A was to prevent the evasion of liability for the super‑tax by shareholders of particular classes of companies who might exploit the difference between the rates of super‑tax payable by individuals and those payable by companies. Because the rates applicable to companies are lower than the highest rates applicable to individual assessee‑s, the legislature, through Act XXI of 1930 as amended by Act VII of 1939, inserted a special provision in Section 23A. This provision vested the Income‑Tax Officer with the power, in specified circumstances, to deem the undistributed balance of assessable income—after reducing it by taxes paid and dividends declared—to have been distributed on the date of the general meeting. The Finance Act 1955 amended subsection (1) of Section 23A, directing the Income‑Tax Officer to order that a company shall be liable to pay super‑tax on the undistributed balance at the rates prescribed by that Act. However, subsection (9) limits the making of such an order to a company in which the public are not substantially interested, or to a subsidiary of such a company where the whole share capital of the subsidiary has been held by the parent or its nominees throughout the previous year. Moreover, under clause (b) of the first explanation, a private company as defined in the Indian Companies Act, 1913, is expressly excluded from being a company in which the public are substantially interested. Consequently, the Income‑Tax Officer is competent to pass an order under Section 23A (1) when the prescribed conditions are satisfied, directing a private company to pay super‑tax on its undistributed balance at the rates set out in the Finance Act 1955. To mitigate the strictness of this provision, the legislature introduced a rebate on the difference between nine annas in every rupee of the total net income and the amount of dividend declared, to companies which

The Court observed that the rebate provided in the Finance Act of 1955 was intended only for companies that had declared dividends in order to avoid the operation of an order under section 23A of the Income‑Tax Act. However, the Court explained that this benefit could be claimed solely by companies to which the provisions of section 23A could not be applied at all. The Income‑Tax authorities had interpreted the phrase “company to which the provisions of section 23A of the Income‑Tax Act cannot be made applicable” as describing a class of companies that were absolutely exempt from any order under section 23A, regardless of the circumstances. Accordingly, they held that private limited companies, which are subject to an order under section 23A if the statutory conditions concerning dividend distribution are satisfied, were not entitled to the rebate.

The Tribunal and the High Court, however, took a different view. They held that the expression “cannot be made applicable” should be understood to refer only to the factual situation in which, after considering the relevant circumstances, an order under section 23A could not be justified. In the Court’s judgment, the reasoning of the Income‑Tax Appellate Tribunal and the High Court was affirmed. The Court noted that the legislature deliberately used the words “cannot be made applicable” to indicate that the applicability of section 23A depends on a determination made by the Income‑Tax Officer, rather than on any categorical exclusion contained in the statute itself.

The Court explained that before an order under section 23A can be issued, the Income‑Tax Officer must first decide (i) whether the company falls within the description provided in sub‑section (9) of section 23A; if it does, the Officer has no power to make an order, and (ii) if the company does not fall within sub‑section (9), whether, in view of an inadequate dividend declaration, the officer should refrain from ordering payment of super‑tax because the company has incurred losses in earlier years or because its profits in the immediately preceding year are minimal. The Officer’s satisfaction of these conditions— even when the company is not covered by sub‑section (9)— is a prerequisite for the issuance of an order.

The Court further pointed out that the statutory language makes it clear that the rebate under the Finance Act of 1955 is claimable only when, after assessing the factual circumstances, an order under section 23A would not be justified. The legislature did not intend to limit the rebate solely to companies against which an order under sub‑section (1) of section 23A could never be made. The Court supported this interpretation by referring to the legislative history revealed by earlier Finance Acts, which showed that before 1955 the rebate under Part I of the First Schedule, Item B, was available to any company that, with respect to profits liable to tax, had made the prescribed arrangements for declaring and paying dividends and had deducted super‑tax from those dividends in accordance with sections 18(3D) and 18(3E), provided that the total income was reduced by seven annas in the rupee, the exempt amount exceeded the declared dividend, and no order had been made under sub‑section (1) of section 23A. Thus, the right to rebate arose only where no order under section 23A was made, a rule that the Court found to be consistent with the legislative intent.

The Court observed that, under the earlier Finance Acts, a company was eligible for a rebate when it had made the prescribed arrangements for the declaration and payment of dividends out of its profits and had deducted super‑tax from those dividends in conformity with sections 18(3D) and 18(3E) of the Income‑Tax Act. In such cases the total income of the company was reduced by seven annas per rupee, and the amount exempt from income‑tax exceeded the amount of any dividends that were declared, provided that no order had been made under sub‑section (1) of section 23A of the Act. The right to claim the rebate arose only where no order under section 23A had been passed. Consequently, the Income‑Tax Officer was required to determine, even before completing the assessment of the taxpayer, whether the factual circumstances justified the issuance of an order under section 23A. In the absence of such an order, the assessee became automatically entitled to a rebate of one anna per rupee. The Court noted that this procedural requirement caused significant delays in the disposal of assessment proceedings and created administrative inconvenience for the tax administration.

The Court further explained that the Legislature appeared to have modified the rebate scheme by enacting the Finance Act of 1955 with the purpose of simplifying the procedure and avoiding the delays that had arisen, rather than with the intention of depriving private limited companies as a class of a benefit that had previously been available. Counsel for the Income‑Tax Commissioner drew the Court’s attention to the Finance Acts of 1956 and 1957 and contended that, in dealing with the right to rebate under Part II, which concerned the rates of super‑tax, the legislature employed language that restricted the rebate to public companies only. The Court pointed out that, even under the Finance Act of 1955, Part II of Schedule 1, item D, provided a rebate of three annas per rupee of total income to companies whose profits were liable to tax for the year ending 31 March 1956, provided that the company had made the prescribed arrangements for dividend payment and reduction of super‑tax in accordance with sub‑section 3D of section 18, and that the company was a public company with total income not exceeding Rs 25,000. This provision was slightly altered by the Finance Act of 1956, which allowed a rebate of five annas per rupee, subject to the same conditions, if the company was a public company with total income not exceeding Rs 25,000 to which the provisions of section 23A could not be made applicable. Under the Finance Act of 1957, a rebate was permissible in favour of companies “referred to in sub‑section (9) of section 23A of the Income‑Tax Act” with total income not exceeding Rs 25,000. All these provisions concerning the rebate were enacted as part of the legislation prescribing the rates of super‑tax. In the Finance Act of 1955, when dealing with the right of rebate under Part I, which prescribed the rates of income‑tax, the Legislature made the rebate admissible to companies to which the provisions of section 23A of the Income‑Tax Act could not be

In this matter the Court observed that the provision of the Act made the rebate unavailable under Part I, which governs the rates of income‑tax, but that under Part II, which governs the rates of super‑tax, the rebate was expressly permitted for public companies whose total income did not exceed the amount prescribed by the statute. The Court further noted that a reduced rebate rate applied when a public company’s income was above the prescribed ceiling. The Court reasoned that, had the Legislature intended to bar private limited companies from receiving any rebate, it would have employed the same language that it used elsewhere in the Act when setting out the rebate provisions for super‑tax. In other words, the legislature would have used identical phrasing to indicate an exclusion of private companies, as it had done in other sections dealing with rebates. However, an examination of the legislative history showed that the language employed did not support the Income‑Tax Department’s interpretation that private companies were to be excluded. Instead, the history suggested that the rebate was meant to be available to the company in question. Accordingly, the Court held that the decision of the High Court was correct in concluding that the appellant company was entitled to the rebate it claimed. On that basis, the Court affirmed the lower court’s ruling, dismissed the appeal, and ordered that the appellant pay the costs of the proceedings.