Commissioner Of Income-Tax, New Delhi vs Anant Rao B. Kamat

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

Court: Supreme Court of India

Case Number: Civil Appeal Nos. 687-688 of 1963

Decision Date: 8 May 1964

Coram: S.M. Sikri, J.C. Shah

The case titled Commissioner of Income‑Tax, New Delhi versus Anant Rao B. Kamat was decided by the Supreme Court of India on 8 May 1964. The bench was composed of Justice S. M. Sikri, Justice J. C. Shah and Justice Subbarao K. Shah. The official citation for the decision is reported in 1966 AIR 279 and in the 1964 volume of the Supreme Court Reports, page 263. The dispute centered on the interpretation of provisions of the Indian Income‑Tax Act, 1922, particularly section 16(2) and the meaning of the term “rebate” in relation to dividends that were declared in one year and paid in another. The factual backdrop, as recorded in the headnote, indicated that the respondent‑assessee had received dividends during the assessment years 1950‑51 and 1951‑52 from two companies that were entitled to a rebate under the Part B States (Taxation Concession) Order, 1950. For the assessment years 1951‑52 and 1952‑53 the assessee asserted before the Income‑Tax Officer that the dividend should be “grossed up” under section 16(2) without taking into account the rebate granted to the companies under the concession order. The assessee further argued that the rate to be applied to the total income of the companies should be the rate prescribed by the relevant Indian Finance Act, rather than the rate applicable in the state where the dividend was paid. The Income‑Tax Officer, however, applied the state rate in computing the grossed‑up amount. The assessee appealed this assessment, and the matter proceeded before the Income‑Tax Appellate Tribunal and thereafter before the Rajasthan High Court. Both the Tribunal and the High Court ruled in favour of the assessee, holding that the appropriate rate was the one laid down in the Finance Act and that the rebate under the concession order should not affect the gross‑up computation. The Commissioner of Income‑Tax then brought the matter before this Court, seeking reversal of the lower courts’ decisions.

The Supreme Court examined the construction of section 16(2) and emphasized that the language of the provision must be given effect, particularly the phrase “without taking into account any rebate allowed or additional income‑tax charged.” The Court held that ignoring these words would constitute a rewriting of the statute. It clarified that section 16(2) mandates the application of the tax rate of the year in which the dividend is actually paid, not the year in which the company earned the profits that gave rise to the dividend, and that the rate to be applied is the one prescribed by the relevant Finance Act. The Court distinguished the earlier decision of Rajputana Agencies Ltd. v. Commissioner of Income‑Tax, [1959] Supp. 1 S.C.R. 142, on the basis that the factual matrix differed. In addressing the second point, the Court interpreted the term “rebate” in section 16(2) as encompassing any rebate granted by statutory orders, not merely those under the Finance Act. It further observed that the format of the certificate required by the Income‑Tax Rules cannot alter the meaning of “rebate,” which is an appropriate term for a remission of tax liability. The Court referenced the decision in M/s. Maganlal Sankalchand v. Commissioner of Income‑Tax, New Delhi, C.A. No. 703 of 1963, dated 8 May 1964, and distinguished it on factual grounds. Finally, the Court held that the expressions “exemption” or “other modification” in section 60A are sufficiently wide to permit the Central Government to provide a rebate similar to that granted under the Concession Order. The judgment was rendered in civil appellate jurisdiction, pertaining to Civil Appeals Nos. 687‑688 of 1963, which were appeals from the judgment and order dated 3 February 1962 of the Rajasthan High Court.

In this matter, the Commissioner of Income Tax appealed against certificates that had been issued by the Rajasthan High Court under section 66A(2) of the Indian Income‑Tax Act, 1922. The appeal was presented before the Supreme Court on 8 May 1964, and the judgment was delivered by Justice Sikri. Counsel for the appellant, identified as S. K. Kapur and R. N. Sachthey, appeared for the Commissioner, while counsel for the respondents, listed as N. S. Palkhivala, S. P. Mehta, J. B. Dadachanji, O. C. Mathur and Ravinder Narain, represented the assessee. The central issue before the Court arose from a consolidated reference that the Income‑Tax Appellate Tribunal had made under section 66(1) of the Act, seeking a decision from the High Court on a specific question of law. The question, reproduced in the record, asked whether the appropriate portion of dividend received by the assessee, Anant Rao B. Kamat, from the two companies—Associated Stone Industries (Kotah) Ltd. and Rajputana Mining Agencies Ltd.—in the financial years 1950‑51 and 1951‑52 should be increased, or “grossed up,” using the rate applicable to the total income of those companies for the same years, without taking into account the rebate that those companies were allowed under the Part B States (Taxation Concessions) Order, 1950, commonly referred to as the Concession Order. The Tribunal had referred this question to the High Court after the Income‑Tax Officer had disallowed the gross‑up of the dividends on the ground that the state rate defined in paragraph 3(v) of the Conclusion Order should apply, while the Appellate Assistant Commissioner had affirmed the Officer’s order. The assessee succeeded before the Tribunal, which then posed the above question to the High Court for clarification.

After requesting a supplementary statement of the case, the Rajasthan High Court answered the question in the affirmative, holding that the dividend should be grossed up without regard to the concession. Counsel for the Commissioner argued before the Supreme Court that the rate applicable to the total income of the two companies should be the rate finally applied after incorporating the effect of the Concession Order. He further contended that the term “rebate” used in section 16(2) of the Act does not encompass the relief granted under the Concession Order because the Order was not intended to provide a rebate but rather to determine the tax payable. Relying on section 60A of the Act, which underlies the Concession Order, he maintained that the provision empowers the Central Government to make an exemption, reduce the rate, or otherwise modify income‑tax liability, but does not authorize the grant of a rebate. The respondent’s counsel opposed these arguments and supported the High Court’s judgment, asserting that the interpretation advanced by the Commissioner was incorrect.

The appellant’s counsel argued that the purpose of section 60A of the Act, under which the Concession Order was issued, was to allow the Central Government to grant an exemption, to reduce the rate, or to make any other modification concerning income tax, but that the provision did not empower the Government to provide a rebate. In support of this position, the counsel cited section 60A and maintained that the language of the section confined the Government’s power to actions such as exemptions or rate reductions, expressly excluding the power to award a rebate. The respondent’s counsel rejected these submissions and upheld the decision of the High Court. Before the Court could consider the arguments presented by counsel, it deemed it necessary to set out the statutory provisions that were relevant to the dispute.

The relevant provisions are reproduced below. Section 16(2) provides that, for the purpose of including any dividend in the total income of a taxpayer, the dividend shall be treated as income of the previous year in which it is paid, credited, or distributed, or is deemed to have been so paid, credited or distributed. The dividend must then be increased to an amount that, if income tax (but not super‑tax) at the rate applicable to the total income of the company—without taking into account any rebate allowed or any additional income‑tax charged—had been deducted from it, would be equal to the dividend itself. A proviso follows: when the sum from which the dividend has been paid, credited or distributed includes (i) any profits and gains of the company not included in its total income, (ii) any income of the company on which income‑tax was not payable, or (iii) any amount attributable to any allowance made in computing the profits and gains of the company, the increase required by this section shall be calculated only on the proportion of the dividend that the said sum, after deducting the enumerated inclusions, bears to the whole of that sum.

Section 18(5) states that any deduction made and paid to the account of the Central Government in accordance with the provisions of that section, as well as any sum by which a dividend has been increased under subsection (2) of section 16, shall be treated as a payment of income‑tax or super‑tax on behalf of the person from whose income the deduction was made, or on behalf of the owner of the security or the shareholder, as the case may be. A credit shall be given to that person on production of the certificate furnished under subsection (9) or section 20, as applicable, in the assessment, if any, made for the following year under the Act. The provision includes a further proviso, the wording of which continues in the next segment of the judgment.

Finally, section 60A confers on the Central Government the power to make an exemption, a reduction in rate, or any other modification in respect of income‑tax in relation to merged territories or to territories that, immediately before 1 November 1956, were part of any Part B State. The section authorises the Government, if it considers such action necessary or expedient, to avoid hardship or anomaly, or to remove difficulty that may arise from the extension of the Act to those territories. This power may be exercised by a general or special order, subject to the limitations and conditions articulated in the provision.

In relation to territories that, immediately before 1 November 1956, were part of any Part B State, the Central Government was authorized, by a general or special order, to grant an exemption, to reduce the tax rate, or to make any other modification concerning income‑tax. Such relief could be given in favour of any particular class of income, or it could apply to the whole income or to any part of the income of any person or class of persons. The provision, however, expressly limited the exercise of this power. The power could not be used in merged territories and could not be used in those Part B State territories that, before 1 November 1956, were not the State of Jammu and Kashmir, after 31 March 1955. In the case of the State of Jammu and Kashmir, the restriction applied after 31 March 1959. The only permissible use after those dates was for the purpose of rescinding an exemption, reduction or modification that had already been made.

Para 3(iii) of the Concession Order defined the expression “Indian rate of tax” as the rate obtained by dividing the amount of income‑tax and super‑tax payable in the taxable territories for the year in question by the total income for that year, using the rates prescribed by the relevant Finance Act of the Central Government. Para 3(v) of the same Order defined the expression “State rate of tax” as the rate obtained by dividing the amount of income‑tax and super‑tax payable on the total income by that total income, where the rates used were those in force in the State immediately before the appointed day, or for the year in question, as the case may be. Where a State law prescribed tax rates on the basis of total income that included agricultural income, the State rate of tax was to be calculated by dividing the tax payable on the total income, including agricultural income, by that total income, without taking into account any reduction of tax allowed on the agricultural income by the State law.

The Order further explained that where no State law existed relating to the charge of income‑tax and super‑tax, the rates of income‑tax and super‑tax in force in that State immediately before the appointed day were, for the purposes of this clause, to be deemed the rates specified in the Schedule. Para 6 of the Concession Order dealt with income of a previous year that did not fall within paragraph 5. It provided that the income, profits and gains of any previous year ending after 31 March 1949, which were not covered by paragraph 5, would be assessed under the Act for the year ending on 31 March 1951, or on 31 March 1952, as appropriate. The tax payable on such income was to be determined in accordance with the provisions of the Order, with reference to that portion of the total income, profits and gains that accrued or arose in any State other than the specified exceptions.

In this case the Court described the method of computing tax for income that arose in the former States of Patiala, East Punjab States Union and Travancore‑Cochin. The calculation was required to be made in two ways: first by applying the Indian rate of tax, and second by applying the rate of tax that was in force in the respective State immediately before the appointed day. The Court then explained that if the tax amount obtained by using the Indian rate was less than or equal to the amount obtained by using the State rate, the lower amount – that is, the tax computed under the Indian rate – would be taken as the tax payable. Conversely, if the tax computed under the Indian rate was higher than the tax computed under the State rate, the excess of the Indian‑rate tax over the State‑rate tax would be allowed as a rebate, and the reduced amount would become the tax payable.

The Court further referred to paragraph 6A of the Concession Order, which dealt with income, profits and gains chargeable to tax for the assessment years 1952‑53, 1953‑54 and 1954‑55. It held that the income, profits and gains of any preceding year that fell within the assessment year ending on 31 March 1953, 1954 or 1955 were to be charged at the Indian rates of tax. From the tax thus computed, a rebate was to be allowed each year in the percentage specified in the Order. The Order provided that, for income, profits and gains accruing or arising in the States of Saurashtra, Madhya Bharat or Rajasthan, the rebate percentages were to be 40 per cent and 10 per cent respectively for each of the three assessment years.

Turning to the statutory scheme, the Court explained that sections 16(2) and 18(5) of the Income‑Tax Act operated together. Section 16(2) required that dividends be “grossed up”, meaning that the dividend amount had to be increased, while section 18(5) treated the increase effected under section 16(2) as a payment of income‑tax on behalf of the shareholder. The Court observed that the necessity of grossing up was undisputed, but the parties disagreed on the rate to be used for the gross‑up calculation.

The appellant’s counsel, relying on the earlier decision of this Court in Rajputana Agencies Ltd. v. Commissioner of Income Tax, argued that the expression “rate applicable to the total income of the company” in section 16(2) should be interpreted in the same way as the same expression appearing in sub‑clause (b) of clause (ii) to the second explanation to the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1951. The Court rejected this argument. While acknowledging that the same words appeared in both provisions, the Court noted, as the High Court had pointed out, that section 16(2) contains the additional words “without taking into account any rebate allowed or additional income‑tax charged”. These words must be given effect, and ignoring them would amount to rewriting section 16(2). Consequently, the Court held that the rate to be applied for the gross‑up must be the rate in force for the year in which the dividend is actually paid, not the rate applicable to the year in which the company earned the profits.

The Court observed that the expression “additional income‑tax charged” appears in section 16(2) but does not appear in the sub‑clause previously cited, and therefore those words must be given effect. Ignoring them would amount to rewriting the language of section 16(2). It was noted that section 16(2) mandates the use of the tax rate applicable in the year in which the dividend is actually paid, rather than the rate that prevailed in the year in which the company earned the profits, as reflected in the cited authority [1959] Supp. 1 S.C.R. 142. The legislature, the Court held, has set a mechanical rule that must be applied regardless of any hardship or benefit that might accrue to a taxpayer. Consequently, the Court agreed with the High Court that, although the rate to be applied is the rate actually in force, any rebate that a company may be entitled to must not be taken into account, as expressly directed by section 16(2). The discussion then turned to the question of whether the benefit conferred by the Concession Order could be characterised as a rebate. The Court could not accept the contention that it was not a rebate. It pointed out that the Concession Order itself employs the term “rebate” in paragraphs 5, 6 and 6A. While it might be possible to argue about the wording of paragraph 6, paragraph 6A left no room for doubt, as it expressly provided that “there shall be allowed in each year a rebate at the percentage thereof specified hereunder.” The counsel for the appellant emphasized the language of paragraph 6, claiming that clause (i) directed the computation of tax and clause (iii) did the same, and that in this context the word “rebate” had been used loosely. The Court rejected that view, stating that the word “rebate” was not used loosely and that paragraph 6A clarified that the term must carry the same meaning in both paragraphs. Moreover, the Court observed that, absent the provisions of the Concession Order, the companies concerned would have been taxed at the rates prescribed by the relevant Finance Act. The Concession Order therefore remits what otherwise would be the proper tax liability under the Finance Act read together with the Indian Income Tax Act. The Court found the term “rebate” appropriate to describe such a remission and noted that a rebate may be authorised under section 60A of the Act. It also held that the terms “exemption” or other modifications are sufficiently broad to allow the Central Government to grant a rebate as was done under the Concession Order. During the hearing of the related civil appeal in M/s Maganlal Sankalchand v. Commissioner of Income Tax, New Delhi, the counsel for the Commissioner of Income Tax raised two further arguments. First, he contended that the word “rebate” in section 16(2) should be limited to rebates granted under the Indian Finance Act and should not include any rebate afforded by the Concession Order. He further referred the Court to rule 14 of the Indian Income Tax Rules, which prescribes the…

The Court observed that, under section 20 of the Income‑Tax Act, the principal officer of a company is required to furnish a certificate. The certificate in question contained a statement in which the officer declared, “We certify that the Company estimates that out of the profits of the said period, a certain percentage is chargeable at the full Indian rate, and a certain other percentage is chargeable at the reduced rate applicable to the named Part B State, together with any additional amounts as specified.” In addressing the first contention raised, the Court stated that it could not restrict the interpretation of the term “rebate” solely to rebates granted under the Indian Finance Act. The Court emphasized that the word “rebate” is not qualified in the statute and is sufficiently broad to encompass any rebate that may be authorised by other statutory orders. The Court further held that the particular format of the certificate, which referred to a reduced rate, does not alter the ordinary meaning of the term “rebate.” Consequently, the Court concurred with the High Court’s view that the answer to the reference question should be affirmative. Accordingly, the Court held that the appeals failed and ordered that they be dismissed, directing the appellants to pay costs, including one set of hearing fees. The dismissal of the appeals was thus affirmed.