Standard Mills Co. Ltd. vs M. Ramalingam And Anr.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 17 November, 1964

Coram: J.C. Shah, M. Hidayatullah, P.B. Gajendragadkar, R.S. Bachawat, S.M. Sikri

In the matter titled Standard Mills Co. Ltd. versus M. Ramalingam and another, decided on 17 November 1964, the Supreme Court of India heard arguments before a bench comprising Justices J. C. Shah, M. Hidayatullah, P. B. Gajendragadkar, R. S. Bachawat and S. M. Sikri. The judgment was authored by Justice Shah. The appellant, Standard Mills Co. Ltd., was a public limited company formed under the Indian Companies Act, 1913, with its registered office situated in Bombay. During the calendar year 1951 the company declared a dividend of Rs 11,68,000 to its shareholders, drawing the amount from total book profits of Rs 55,69,669. For the assessment year 1952‑53 the Income‑Tax Officer of Companies Circle I(2), Bombay, estimated the company’s undistributed profits at Rs 18,24,525 and allowed a rebate on that sum pursuant to Part I of the First Schedule, Paragraph B, proviso 1 of the Finance Act, 1951, applying the rate of one anna per rupee. In the subsequent assessment year 1953‑54 the net profits for the calendar year 1952 were fixed at Rs 31,03,760, and the taxable income for the year was assessed at Rs 12,94,872. In the same year the company again paid a dividend of Rs 11,68,000. Because this dividend exceeded the total income after reducing it by seven annas per rupee and after accounting for a donation of Rs 7,500, an additional income‑tax liability was levied under clause (ii) of the proviso to Paragraph B, Part I of the First Schedule of the Finance Act, 1953. The Appellate Tribunal later set aside this additional charge by order dated 18 August 1956.

Subsequently, on 12 November 1956 the Income‑Tax Officer sent a letter to the company indicating his intention to correct the assessment for the year 1952‑53 under the authority of section 35(10) of the Income‑Tax Act and to withdraw the earlier rebate. The officer reasoned that the company’s distribution of Rs 11,68,000 as dividend had, in his view, utilised the undistributed profits of the preceding year that were eligible for rebate. The company contested this position, asserting that the dividend did not, in whole or in part, arise from the undistributed profits of the assessment year 1952‑53. In a further communication dated 21 February 1958 the officer explained that an examination of the figures for the assessment year 1953‑54 showed net book profits of Rs 31,03,760. From this amount, Rs 12,37,533 were to be deducted as “undervaluation of opening stock (being profit for the last year),” leaving Rs 18,66,227. Of that balance, Rs 8,00,000 were deducted as depreciation and special depreciation reserve, resulting in a net figure of Rs 10,66,227. After deducting Rs 7,50,000 as a provision for taxation, only Rs 3,16,227 remained as profit available for distribution. The officer concluded that, in his opinion, the dividend had “come out of the profits of the earlier year,” represented by the undervaluation of opening stock, which constituted income of the previous year. The company, however, maintained that the dividend distribution was derived from the current year’s profit, which it calculated to be Rs 11,70,889, and therefore argued that there was no basis for withdrawing the rebate.

In the matter before the Income‑tax Officer, the company asserted that the profit on which a dividend of Rs 11,70,889 had been paid did not justify the withdrawal of the rebate that had previously been allowed. The Officer rejected the company’s contention and held that, although Rs 3,16,227 represented the profit available for distribution, the dividend declared for the assessment year 1953‑54 amounted to Rs 11,68,000. He further found that the remaining balance of Rs 8,51,773 had been drawn from the undistributed profits of the year 1951, which totalled Rs 18,24,525 and on which a rebate had been granted. Consequently, on 19 March 1958 the Officer ordered that the rebate permitted at the rate of one anna in the rupee on the Rs 8,51,773 be withdrawn and he issued a demand notice for the sum of Rs 53,235.13 nP.

Following that order, the company filed a petition under article 226 of the Constitution in the High Court of Judicature at Bombay. The petition sought a writ of certiorari, or any other appropriate writ, to compel the Officer to produce the case record and to direct that the order dated 19 March 1958 be set aside, thereby removing the liability of Rs 53,235.13 nP and the accompanying demand notice. The company also prayed for a writ of mandamus directing the Officer to withdraw and cancel the same order and demand notice. In support of its relief, the company argued that the provisions of section 35(10) of the Income‑tax Act were beyond the powers of the Central Legislature because they infringed articles 14, 19(1)(f), 19(1)(g), 31 and 265 of the Constitution. It further contended that section 35(10) exceeded the scope of section 3 of the Act and imposed additional tax without reference to the total income or the applicable tax rate of the company. The company maintained that the provisions introduced by section 19 of the Finance Act 1956 could not apply to its case because the Act was not retrospective; orders that had become final before 1 April 1956 were not covered by the new provision and therefore could not be altered under it. Additionally, the company asserted that the dividend of Rs 11,68,000 had not been paid out of the profits of the assessment year 1952‑53, but rather from sizable profits accumulated in other years.

The High Court dismissed the petition. During the hearing, the court did not consider the questions raised in the petition that the statute was ultra vires for violating the stated constitutional provisions, that it went beyond the ambit of section 3 of the Income‑tax Act, or that section 35(10) was inapplicable because it lacked retrospective effect. The principal issue that the court examined was whether the order issued under section 35(10), which withdrew the rebate granted in the preceding year, could be set aside on the ground that the dividend of Rs 11,68,000 had been declared out of the profits of the year in question rather than from the profits of the earlier year for which the rebate had been allowed.

In the matter before the High Court, it was observed that the dividend of Rs 11,68,000 had been declared out of the profits earned in the year of the dividend and not out of the profits of the preceding year for which the company had obtained an income‑tax rebate. The Court held that the petition presented a controversial question of fact, namely whether any of the undistributed profits of the account year 1951, on which a rebate had been allowed, had been used by the company in the account year 1952 to declare the dividend. The Court further noted that answering this factual question would require the taking of evidence, a step that the High Court, exercising its discretionary authority, was unwilling to undertake in a petition for a high prerogative writ. Consequently, with special leave, the company appealed the High Court’s order to this Court.

In the appeal, counsel for the company did not argue that section 35(10) of the Income‑Tax Act was unconstitutional, ultra vires, or beyond the legislative competence, nor did counsel contend that the provision lacked retrospective effect. Instead, counsel confined the argument to a single point: that the order issued by the Income‑Tax Officer displayed an error apparent on the face of the record and therefore fell within the category of a mistake that could be corrected by the issuance of a writ of certiorari, particularly because the Income‑Tax Act did not provide a right of appeal against an order made under section 35(10).

Section 35(10) of the Income‑Tax Act stipulates that when, in any assessment for the years beginning on the first day of April between 1948 and 1955 inclusive, a rebate of income‑tax is allowed to a company on a portion of its total income under clause (i) of the proviso to paragraph B of part I of the relevant schedules to the Finance Acts, and subsequently that amount on which the rebate was allowed is used, wholly or partly, by the company for declaring dividends in any year, then, to the extent that the rebate has not been subjected to an additional tax under clause (ii) of the same proviso, the amount used shall be deemed to have been the subject of an incorrect relief under the Act. Accordingly, the Income‑Tax Officer is required to recompute the tax payable by reducing the originally allowed rebate, treating the recomputation as a rectification of a mistake apparent from the record, with the four‑year period specified in subsection (1) reckoned from the end of the financial year in which the rebate‑covered amount was utilized.

There was no dispute that in the assessment year 1952‑53 the company received a rebate on the amount of undistributed profits under clause (i) of the proviso to paragraph B of part I of the First Schedule to the Finance Act, 1951. The Income‑Tax Officer held that the net profits available for distribution by the company in the account year 1952 amounted to only Rs 3,16,227. Consequently, without drawing upon the undistributed profits for which the rebate had been granted in the account year 1951, the company could not lawfully distribute a dividend of Rs 11,68,000. The assessment order issued by the Income‑Tax Officer for the year 1953‑54, which corresponded to the account year 1952, was apparently not placed before the High Court; however, copies of that order were annexed to the petition for special leave filed in this Court. That order revealed that the company had reported Rs 31,03,760 as book profits in its income‑tax return. After adjusting certain items that the Officer considered disallowable, the gross profit was recorded as Rs 33,37,813. From this amount the Officer deducted Rs 12,37,533 under the heading “Undervaluation of opening stock” and further deducted Rs 8,06,086 as depreciation, leaving a balance of Rs 12,94,194. By adding certain gross dividends to this balance, the taxable profits of the company were computed at Rs 12,94,872. The Officer then concluded that, because the taxable profits were subject first to the liability of tax, the remaining balance would be insufficient to provide the amount of Rs 11,60,800 that had been declared as dividend.

The whole controversy therefore revolved around the true character of the deduction of Rs 12,37,533 made by the Income‑Tax Officer in his order pursuant to section 35(10). The Officer maintained that this sum represented the profits of the preceding year and therefore had to be deducted from the book profits reported by the company in order to reflect the genuine commercial profits. The company accepted that there was an undervaluation of opening stock in the account year 1952. The assessment order for the year 1952‑53 showed that the closing stock for 1951 had been increased by Rs 12,37,533, and that against this amount the enhanced value of the opening stock for 1952, amounting to Rs 9,80,162, had been debited. Accordingly, if the discrepancy between the valuation of the 1951 closing stock and the 1952 opening stock were corrected by deducting Rs 12,37,533 from the book profits, the net balance remaining at the end of the account year 1952 would be too small to support the dividend that had been paid. Counsel for the respondent, Mr Setalvad, argued that in the assessment year 1951‑52, which dealt with the account year 1950, an adjustment had been made to the valuation of the closing stock by adding Rs 9,80,162 to the profit under the heading “Addition to closing stock (without adjustment of the opening stock this year)”. He contended that this amount represented profit of the year 1950 that had been kept out of the books by undervaluing the closing stock, and therefore could not be treated as profit of the year 1951 for which the rebate on undistributed profits was granted, rendering section 35(10) inapplicable.

In the proceedings, counsel argued that the sum of Rs 9,80,162 had been recorded as profit for the year 1950 by lowering the value of the closing stock, and therefore it should not have been treated as profit for the year 1951 for which an undistributed‑profits rebate had been granted. The contention was that the company had, in the year 1950, artificially reduced its profits by undervaluing its closing stock by Rs 9,80,162 and that the same amount, which appeared in the accounts of 1951, ought to be regarded as profit of that later year, making section 35(10) inapplicable. However, the assessment order for the account year 1950 demonstrated that the Income‑Tax Officer had in fact added the amount of Rs 9,80,162 to the total income, and the tax was computed on that basis. In the assessment of the income for the account year 1951, the officer readjusted the stock valuations, changing both opening and closing figures. The opening stock was valued at the same figure as the closing stock for 1950, which required an adjustment of Rs 9,80,162, while the closing stock for 1951 was reduced by Rs 12,37,533; the difference was taken into account when computing that year’s profits. Given these accounting entries, it was difficult to accept, without a full examination of the books, the claim that the amount of Rs 9,80,162 had not benefited from the rebate in the assessment year 1952‑53. The Court noted that at this stage it was not resolving any factual disputes. It was sufficient for the appeal to show that the petition filed by the company in the High Court and the Income‑Tax Officer’s affidavit raised contested questions of fact. The company maintained that it possessed more than Rs 11,68,000 from the profits of the account year 1952, which it could use to declare a dividend. The Income‑Tax Officer, on the other hand, held that the company did not have that amount as profit because it had manipulated the stock values to present a higher profit figure than was actually earned, and consequently the amount by which the opening stock was undervalued had been deducted from book profits. This gave rise to a factual dispute that would require the High Court, if it chose to investigate, to examine the company’s accounts for at least three years with the assistance of auditors, to determine whether the dividend was paid out of the net profits actually available in 1952 or whether it was drawn from the 1951 profits that had received the rebate. The High Court, exercising its discretion, declined to undertake such an inquiry, and the Court observed that it would not normally be appropriate to overturn that decision on an appeal under article 136.

In this matter the Court considered whether it was appropriate to intervene under article 136 of the Constitution to set aside the decision of the High Court. The petitioner, represented by counsel, argued that two exceptional circumstances justified referring the appeal back to the High Court for a detailed investigation. First, the petitioner pointed out that a separate case involving the same Bench had been decided only two days after the decision now under review; in that earlier case the High Court, acting on a petition under article 226, had issued a writ of certiorari that discharged an order made by the Income‑tax Officer. The petitioner suggested that this recent development indicated a need to re‑examine the present order. Second, the petitioner contended that the statute did not provide an appeal against an order issued by the Income‑tax Officer under section 35(10), and therefore the company faced no effective remedy for what it described as an unmistakably unjust order. The Court examined the first ground and found it to be without merit. It held that if, based on the facts of the case, the High Court was satisfied that no factual investigation was required before making an order under section 35(10), then directing a fresh investigation would be inconsistent with the authority of article 226. Moreover, the Court observed that no justification existed for concluding that an injustice, whether apparent or hidden, had occurred without a full inquiry. While acknowledging that the Income‑tax Act does not contain a specific appeal provision against a section 35(10) order, the Court stated that this omission alone could not compel the High Court to entertain a petition that it had, exercising its discretion, declined to hear. The Court further noted that a party aggrieved by an order under section 35(10) retained the remedy of filing an application under section 33A(2) to the Commissioner of Income‑tax seeking correction of the order. Consequently, the Court concluded that the appeal could not succeed, ordered its dismissal and directed that costs be awarded against the appellant.