TMI Blog1989 (9) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... the income-tax assessment of the assessee-company for the assessment year in question, the Income-tax Officer bad to give effect to it. In so doing, the Income-tax Officer restricted the deduction given to the assessee-company under section 85A in the sum of Rs. 10,70,796. This was because he included in the computation of the assessee-company's total income for the purpose its long-term capital gains. He rejected the assessee-company's submission that long-term capital gains should not be taken into account in determining the average rate of income-tax for the purposes of working out the deduction under section 85A. In appeal from the Income-tax Officer's order, the Appellate Assistant Commissioner followed two decisions of the Income-tax Appellate Tribunal and directed the Income-tax Officer to grant the deduction by excluding, for the purpose of calculation of the average rate of income-tax, long-term capital gains from the assessee-company's total income, The Revenue preferred an appeal against the Appellate Assistant Commissioner's decision to the Tribunal. The Tribunal followed an earlier order in which it had been held that the context in which the words "average rate of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income." Section 2(10) defines the average rate of income-tax to mean the average rate arrived at by dividing the amount of income-tax calculated on the total income by such total income. "Income" is defined by section 2(24) to include, inter alia, "any capital gains chargeable under section 45". In Birla Bombay P. Ltd. V. CIT [1980] 121 ITR 142, this court considered the interpretation to be placed upon section 85A. It held that the provision was clear. It provided for a deduction from the income-tax which an assessee-company was liable to pay. For the purposes of calculating the deduction, the average rate of income-tax was first required to be ascertained. After it had been ascertained, it had to be applied to the assessee-company's inter-corporate dividend income and the deduction to be allowed was equivalent to the difference between this figure and 25 per cent. of the inter-corporate dividend. There was, it was said, no warrant for ignoring the definition of "average rate of income-tax" found in section 2(10). This was the view whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flat rate of income-tax of 25 per cent. on inter-corporate dividends. He submitted that the intention was to be achieved by excluding capital gains for the purpose of calculating the average rate of income-tax. Our attention was drawn by Mr. Dalvi, in the context of these submissions, to the judgment of the Supreme Court in K. P. Varghese v. ITO[1981] 131 ITR 597. The Supreme Court was concerned with the interpretation of section 52(2). Literally interpreted, it said, the provision suggested that the Legislature had imposed a liability to tax on an assessee who was bound by law to carry out his contractual obligation to sell his property at the agreed price and honestly carried out the contractual obligation. It would be strange if obedience to the law should attract the levy of tax on income which had neither arisen to the assessee nor had been received by him. There were situations where it would be absurd and unreasonable to apply section 52(2) according to its strict literal construction. The court, therefore, had to eschew literalness in the interpretation of section 52(2) and try to arrive at an interpretation which avoided any absurdity and made the provision rational and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, 1965. The paragraph therein relevant to section 85A reads thus: "19. In view of the merger of super tax with income-tax, the Finance Act, 1965, has introduced a new section 85A with effect from April 1, 1965, providing, in substance, that income-tax will be chargeable on the inter-corporate dividends referred to above at the rate of 25 per cent. ( 15 per cent. in the types of cases referred to in paragraph 18). This will be achieved by granting a rebate, to the company receiving the dividends, of that part of the income-tax calculated on the dividends at the average rate of income-tax applicable to the company's total income which exceeds the amount of income-tax calculated on the dividends at the above-mentioned rate of 25 per cent. or 15 per cent. as the case may be." A similar Circular No. 4-P was issued on July 21, 1966, in regard to the Finance Act, 1966. The relevant clause therein upon which Mr. Dalvi relied is clause 32, which reads thus : "32. A company receiving dividends from any domestic company is entitled, under section 85A, to a rebate of income-tax which has the effect of limiting the tax on such dividends to a specified percentage of the dividends. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e even though they were riot in accord with the literal interpretation of section 52 and departed or deviated therefrom. That circulars of the Central Board of Direct Taxes issued under section 119 and analogous provisions of the earlier Income-tax Acts were binding upon the officials of the Revenue had been decided by the Supreme Court's judgments in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913. In Navnit Lal's case [1965] 56 ITR 198 (SC) the vires of a provision in the Indian Income-tax Act, 1922, was challenged. In upholding the constitutionality thereof, the Supreme Court took into account a circular issued by the Central Board of Revenue which directed officials of the Revenue to act in such manner that past transactions, which would normally have attracted the stringent provisions that were challenged, were substantially granted exemption from the operation thereof. The Supreme Court held that (at p. 203) "a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act . . .". In the case of Ellerman Lines Ltd. [1971] 82 ITR 913 (SC), the circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circular explaining the provisions of the Finance Act, 1966. The sentences therein relevant to the controversy before us are the first, the penultimate and the ultimate sentences. The first sentence says that a company receiving dividends from any domestic company is entitled, under section 85A, to a rebate of income-tax which has the effect of limiting the tax on such dividends to a specified percentage of the dividends. The penultimate sentence says that income-tax on inter-corporate dividends received by a company other than a foreign company from any domestic company is limited to 25 per cent. thereof and the ultimate sentence says that the Finance Act, 1966, had not made any change in the effective rates of tax in respect of inter-corporate dividends. The understanding of the Board, as suggested by these sentences, appears to be that section 85A has the effect of limiting the tax on inter-corporate dividends to a specified percentage thereof and that, in the case of intercorporate dividends received from a domestic company, it is limited to 25 per cent. We agree with the submission of Mr. Jetley, learned counsel for the Revenue, that no part of paragraph 32 can be read as be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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