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

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: SHAH J.

In this case, the Court noted that for the financial year ending 31 March 1955, Afco Private Ltd., which was a private limited company, had a total income that was finally assessed by the Income‑Tax Appellate Tribunal at the amount of Rs 49,843. The company paid a first dividend of Rs 11,712 on 13 July 1955 and, before the close of the assessment year 1955‑56, paid an additional dividend of Rs 5,612. By these two payments the company had distributed a total dividend amounting to at least sixty percent of its total income after deducting the income tax and super‑tax that were payable. Having satisfied that distribution condition, the company claimed a rebate calculated at the rate of one anna per rupee on the balance of profits that remained undistributed, a rebate that was provided under Schedule I, Part I, item B, read with section 2 of the Finance Act of 1955 (Finance Act 15 of 1955). The claim was rejected by the Income‑Tax Officer and by the Appellate Assistant Commissioner on the ground that, in their opinion, the company fell within the category of a company to which the provisions of section 23A of the Income‑Tax Act could not be made applicable. The company appealed the rejection, and the Income‑Tax Appellate Tribunal in Bombay reserved the order of the tax authorities. The Tribunal held that the phrase “cannot be made applicable” appearing in item B of Part I of Schedule I of the Finance Act must be read together with section 23A of the Income‑Tax Act, and that the rebate prescribed by the Finance Act could not be denied to a private company where the conditions laid down in section 23A(1) were satisfied. Consequently, the Tribunal referred a question to the High Court of Judicature at Bombay, asking whether, on the facts and circumstances of the case, a company that had distributed dividends equal to more than sixty percent 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 then referred to the wording of Schedule I, item B, as read with section 2 of the Finance Act, which set out the rates of tax applicable to companies. Item B stated that for every company the rate on the whole of total income was four annas in the rupee, which represented one‑twentieth of the rate specified in the preceding column, 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 1956, had made the prescribed arrangements for the declaration and payment of dividends within India and had deducted super‑tax from the dividends in accordance with the provisions of

In the judgment the Court referred to sub‑section (3D) of section 18 of the Finance Act, which provided that where a company’s total income – after being reduced by a rebate of seven annas in the rupee and after deducting any amount that was exempt from income‑tax – exceeded the amount of any dividend (including a fixed‑rate dividend) declared for the whole or part of the preceding year for the assessment year that ended on 31 March 1956, and where that company could not be subjected to the provisions of section 23A of the Income‑tax Act, a rebate of one anna per rupee was to be allowed on the excess amount. The Court then explained the operation of section 23A(1) as it stood at the relevant time. Under that provision the Income‑tax Officer possessed the authority to order a company to pay a super‑tax. The rate of super‑tax was set at eight annas in the rupee for a company whose business was wholly or mainly engaged in dealing in or holding investments, and at four annas in the rupee for any other company. The super‑tax was to be levied on the undistributed balance of the total income of the preceding year, meaning the total income after deducting income‑tax, any super‑tax already payable, and any other tax payable under any law that exceeded the amounts allowed in computing income. For banking companies an additional deduction was made for amounts actually transferred to a reserve fund and for dividends that had actually been distributed, if any. The provision further required that, for any previous year, if the company had distributed dividends within twelve months after the year’s expiry that amounted to less than sixty per cent of the total income of that year after the aforesaid reductions, the super‑tax could be imposed, unless the Income‑tax Officer was satisfied that, because of losses carried forward from earlier years or because of the small profit earned in the preceding year, it would be unreasonable to require the payment of a dividend or a larger dividend than had been declared. The Court observed that, apart from certain procedural requirements, an order under section 23A(1) would normally be made where a company failed to distribute, within twelve months after the accounting year, the prescribed percentage of its total income after tax deductions – for non‑banking companies the tax‑deducted income, and for banking companies the tax‑deducted income together with any reserve‑fund transfers. Finally, the Court quoted the first paragraph of sub‑section (9) of section 23A, which stated that the section would not apply to any company in which the public were substantially interested, nor to a subsidiary of such a company where the parent or its nominees held the entire share capital of the subsidiary throughout the previous year. The Court noted that this clause was followed by two explanations, and that Explanation 1, as far as it was relevant to the present case, was thereafter considered.

In this case the Court examined the terms of section 23A of the Income‑Tax Act, beginning with Explanation 1 which states that, for the purposes of the section, a company shall be regarded as one in which the public are substantially interested “… (b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and …”. The provision was originally enacted to prevent shareholders of certain classes of companies from evading liability for super‑tax by exploiting the difference between the higher super‑tax rates that apply to individuals and the lower rates that apply to companies. Because companies were taxed at a lower super‑tax rate than the highest individual rate, the legislature sought to stop individual assessee from avoiding the higher tax by diverting their income to a company and then receiving profit benefits instead of dividends. To achieve this, Act XXI of 1930, as later amended by Act VII of 1939, introduced a special rule in section 23A that empowered the Income‑Tax Officer, in prescribed circumstances, to declare that the undistributed portion of assessable income, after deducting the tax already paid and any dividends, would be treated as having been distributed on the date of the company’s general meeting. The Finance Act (15 of 1955) subsequently amended subsection (1) of section 23A, directing the Income‑Tax Officer to issue an order that the company must pay super‑tax on the undistributed balance at the rates prescribed under the section. However, subsection (9) of section 23A confines the power to make such an order to a company in which the public are not substantially interested, or to a subsidiary of such a company provided that the parent or its nominees held the entire share capital of the subsidiary throughout the previous year. Clause (b) of the first Explanation clarifies that a private company, as defined in the Indian Companies Act, 1913, does not fall within the category of a company in which the public are substantially interested. Consequently, where the conditions prescribed in section 23A are satisfied, the Income‑Tax Officer is competent to pass an order under subsection (1) requiring a private company to pay super‑tax on its undistributed balance at the rates fixed by Finance Act (15 of 1955). To mitigate the strictness of this requirement, the legislature introduced a rebate: companies that declare dividends sufficient to reduce the difference between nine annas per rupee of total net income and the amount of dividend declared are entitled to a rebate, thereby avoiding the operation of an order under section 23A. This rebate, however, is available only to companies to which the provisions of section 23A cannot be made applicable. The income‑tax authorities 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 against which, under any circumstances, an order under section 23A could not be issued.

In this case the Court observed that an order under section 23A of the Indian Income‑Tax Act could not be issued against a private limited company when the conditions relating to the distribution of dividend were satisfied, and consequently the benefit of the rebate was unavailable to such companies. The Tribunal and the High Court had previously held that the expression “cannot be made applicable” referred only to a situation in which, after considering the relevant circumstances, an order under section 23A could not be made. The Court agreed with that interpretation and affirmed that the legislature’s use of the phrase “cannot be made applicable” meant that the applicability of section 23A depended upon the Income‑Tax Officer actually issuing an order, rather than on any automatic exclusion contained in the statute.

Before the Income‑Tax Officer could issue an order under section 23A, the officer was required to determine two matters. First, the officer had to ascertain whether the company fell within the description given in sub‑section (9) of section 23A; if the company did fall within that description, the officer possessed no power to make an order. Second, if the company did not fall within sub‑section (9), the officer had to consider, in view of the inadequacy of the dividend declaration, whether an order for payment of super‑tax should be avoided because the company had incurred losses in earlier years or because the profits in the preceding year were too small. The officer’s satisfaction that the prescribed conditions were met, even when the company was not covered by sub‑section (9), formed a necessary condition for the making of an order.

The Court noted that the language employed by the legislature clearly indicated that a rebate under the Finance Act (15 of 1955) could be claimed only when, after examining the circumstances, an order under section 23A would not be justified. The statute did not limit the availability of the rebate solely to companies for which an order under sub‑section (1) of section 23A could never be issued. The Court further observed that the legislative history, as shown by earlier Finance Acts, supported this construction. In Finance Acts enacted before 1955, a rebate under Part I of the First Schedule, item B, was available provided the company, with respect to profits liable to tax, had made the prescribed arrangements for declaring and paying dividends out of those profits, had deducted super‑tax from the dividends in accordance with section 18(3D) and (3E), and where the total income after reduction by seven annas per rupee and the amount exempt from tax exceeded the amount of any dividend declared, and no order had been made under sub‑section (1) of section 23A. Thus, under those earlier Acts, the right to a rebate arose only when no order under section 23A had been issued.

The provision that a rebate could be claimed only when no order under section twenty‑three A had been made required the Income‑tax Officer to determine the appropriateness of such an order before completing the company’s assessment. If the officer did not issue an order under section twenty‑three A, the assessee automatically became entitled to a rebate of one anna per rupee of total income. This requirement caused considerable delay in the disposal of assessment proceedings and created administrative inconvenience for both the tax authority and the taxpayer. The legislature appeared to have altered the rebate scheme by enacting the Finance Act of nineteen fifty‑five with the purpose of simplifying the procedure and avoiding such delays. The amendment was not intended to deprive private limited companies as a class of the rebate benefit that had been available under earlier finance acts. Counsel for the Income‑tax Commissioner referred to the Finance Acts of nineteen fifty‑six and nineteen fifty‑seven. He argued that the legislature, in Part II dealing with rates of super‑tax, employed language that restricted the rebate right solely to public companies. It is necessary to note that even under the Finance Act of nineteen fifty‑five, Part II of Schedule I, item D, provided a rebate of three annas per rupee of total income to companies that satisfied certain conditions. Those conditions required the company to have made the prescribed arrangements for payment of dividends out of profits. The company also had to have reduced super‑tax on those dividends in accordance with sub‑section three‑D of section eighteen of the Income‑tax Act. Additionally, the company had to be a public company whose total income did not exceed twenty‑five thousand rupees. The Finance Act of nineteen fifty‑six modified the earlier provision by permitting a rebate at the rate of five annas per rupee. The higher rate applied if the company was a public company with total income not exceeding twenty‑five thousand rupees and the provisions of section twenty‑three A could not be made applicable to it. Under the Finance Act of nineteen fifty‑seven, the rebate was made admissible to companies referred to in sub‑section nine of section twenty‑three A of the Income‑tax Act, provided their total income did not exceed twenty‑five thousand rupees. All of these provisions concerning the rebate were enacted in the context of prescribing the rates of super‑tax. In the Finance Act of nineteen fifty‑five, the legislature, while dealing with the right of rebate under Part I, which prescribed rates of income‑tax, allowed the rebate for companies to which the provisions of section twenty‑three A could not be applied. Conversely, under Part II, which prescribed rates of super‑tax, the rebate was limited to public companies whose income did not exceed the prescribed threshold, with a lower rebate rate applicable when income exceeded that limit. If the legislature had intended to exclude private limited companies from the rebate benefit, it would have employed the same restrictive language in Part II as it used in Part I when prescribing the super‑tax rates.

The Court observed that the legislative history, instead of lending support to the position advanced by the income‑tax Department, produced an inference that was adverse to the Department’s interpretation of the relevant provisions. In light of that observation, the Court affirmed that it was of the view that the High Court had correctly held that the company was lawfully entitled to the rebate which it had claimed under the statute. Accordingly, the Court concluded that the appeal raised no viable ground of opposition and therefore could not succeed. On that basis, the Court ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. The dismissal of the appeal was thus confirmed, and the order of the High Court with respect to the rebate was left undisturbed.