TMI Blog1955 (9) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... the calendar year 1950) was computed by the Income-tax Officer as follows: Rs. Rs. Net profit as per accounts 7,29,298 Less :Gain on sale of machinery 5,037 Interest on securities net 220 5,257 7,24,041 Add :Loss on sale of motor lorries 1,780 Provision for taxation 25,000 Audit fee for Provident Funds 100 Fine for breach of excise regulations 1,100 Diwali expenses in excess of 200/- 522 Donations 8,034 36,536 7,60,577 Add :Profit under section 10(2)(vii)on sale of machinery and motor cars (24,280+959) 25,239 7,85,816 Less :Bonus paid out of the previous year's excess provision (already disallowed in that year's assessment) 2,21,901 5,63,915 Less : Depreciation allowable as per assessee's statement: Normal including extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company was liable to pay additional income-tax ? (2) If the answer to question No. (1) is in the affirmative, whether the levy of the additional income-tax is ultra vires ? N. A. Palkhivala with R. J. Kolah, for the assessee. Advocate-General with G. N. Joshi, for the Commissioner. JUDGMENT. CHAGLA, C. J.-The working of the assessee company for the accounting year 1950 resulted in a loss and therefore for the assessment year 1951-52 the assessee company was not liable to pay any tax. In that very year the assessee company declared dividends amounting to Rs. 3,29,062 in respect of the year 1950, and the contention of the Department was that this sum constituted excess dividend and was liable to pay tax, and the two questions that have been raised by the Tribunal which we have to consider are (1) whether the assessee company was liable to pay additional income-tax, and (2) if the answer to question (1) is in the affirmative, whether the levy of the additional tax was ultra vires. In order to understand the contention of the assessee it is necessary as it sometimes is, to go back to the first principles of the Income-tax Act. Section 3 is the charging section and that sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso, let us look at the scheme underlying this proviso. The Legislature was anxious that companies should not act in a spendthrift fashion and should plough back some of its profits into the industry, and therefore a bait, as it were, was held out to companies not to distribute all the profits they made to their shareholders and the bait took the form of giving the companies a certain rebate. If a company did not distribute as dividends more than nine annas of its profits (substantially speaking, as I need not go into the details of the matter), then to the extent that dividends paid were less than that figure of nine annas, a rebate of one anna was given to the company concerned. If the company paid more than nine annas, then not only it lost the rebate but it was also liable to pay an additional income-tax which was provided for in clause (ii) of the proviso, and the additional income-tax was to be calculated by the difference between the rate of five annas per rupee and the rate which the excess dividend had actually borne. Therefore a company which did not follow the policy indicated by the Legislature not only ran the risk of losing the rebate which was promised to it under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here are two clear answers to this contention. If the object of the Legislature in enacting this provision at all was that a certain amount of profits should remain with the company and be ploughed back into the industry which the company was promoting, then there seems to be no reason why, because the company makes a loss, the Legislature should permit that company to take out those profits and distribute them to the shareholders. The second clear answer is that according to Mr. Palkhivala if the company made a profit of one rupee the additional tax would be attracted, but if it made no profits then the company would be exempt from the additional tax on payment of excess dividend. There seems to be no logic, there seems to be no reason nor principle why a distinction should be made between the case of two such companies. But if life is not logic, income-tax is much less so, and it is clear that we cannot impose tax upon a subject by implication or because we think that the object of the Legislature was a particular object. In order to carry out the object the Legislature must use appropriate language and if the Legislature fails to use appropriate language then this would be one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 18 of that Act. " Therefore, it is only that company to which the proviso applies which has made arrangements to pay dividends which are payable out of profits referred to in the earlier part of the proviso. Therefore the condition precedent to the application of the proviso is that there must be a declaration of dividends by the company not payable out of any profits but out of the specific profits referred to in the first part of the proviso, viz., profits liable to tax under the Income-tax Act for the year ending on the 31st March, 1952. If that be the condition precedent, then it is clear that in this case that condition is not satisfied. The company has undoubtedly declared dividends, but those dividends are not payable out of the profits liable to tax under the Income-tax Act for the year ending on the 31st March, 1952. As a matter of fact there are no profits liable to tax under the Income-tax Act for the year ending on the 31st March, 1952. But the matter does not end there. When we turn to clause (ii) with which we are concerned, which is not a case of rebate but a case of additional tax, that clause provides : " Where the amount of dividends referred to in clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in the Income-tax Act, to raise as it were the super-structure upon that foundation of the different rates on different incomes to be assessed in the manner laid down in the Finance Act. Two contentions which were urged by the Advocate-General may be noticed. One is that in the proviso the expression " .. a company which, in respect of its profits liable to tax under the Income-tax Act for the year ending on the 31st day of March, 1952, has made the prescribed arrangements for the declaration and payment within the territory of India excluding the State of Jammu and Kashmir, of the dividends payable out of such profits. . . . " is merely descriptive of a particular type of company which has made the necessary arrangements for the declaration of dividends. This contention would have considerable force if we were not faced with the expression " payable out of such profits. " The Legislature has emphasised the fact that the dividends in question are not payable out of profits but out of such profits to which reference is made in the earlier part of the proviso. The second contention of the Advocate-General is that at the end of the proviso it is enacted that the expression " di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fiscal statute are equally important, if not more important than giving effect to the object of the Legislature, and if the Legislature uses inappropriate language and fails to bring some income to tax, we must come to the conclusion that the Department is not justified in taxing the subject. In my opinion, therefore, the answer to question (1) will be in the negative. On that answer question (2) will not arise. The Commissioner to pay the costs. TENDOLKAR, J.-I agree, but having regard to the importance of the questions of law that are involved I should like to state my own reasons for coming to the same conclusion as my Lord, the Chief Justice. The question that is referred to us for decision is whether a company which has no taxable income in the accounting year is liable to pay additional income-tax by reason of the fact that it has declared an " excess dividend " within the meaning of that expression in paragraph B of Part I of the First Schedule to the Indian Finance Act, 1951. In order to appreciate this question it is useful in the first instance to have a clear idea of what an " excess dividend " is. The expression " excess dividend " was for the first time intro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual or deemed, what can be subjected to tax is total income only and nothing else. Then section 3 provides that income-tax shall be charged for any year at the rate or rates which are enacted by any Central Act, and obviously the normal function of a Finance Act in this regard is to prescribe the rate or rates that are to be charged in respect of any year on the total income for the previous year. Undoubtedly it is competent to the Legislature by the Finance Act to amend any provisions of the Income-tax Act and it could, if it so chose, so amend the Finance Act as to affect its basic structure and provide that anything other than total income is taxable. But it must be a question of construction in each case whether the Finance Act purports to bring about any such result. In this particular case the provision of the Finance Act that is relied upon as bringing about the result that a non-existing total income shall attract a so-called "additional tax " is to be found in the First Schedule, Part I, to the Indian Finance Act. The operative part of that Act, in so far as the Schedule is concerned, is to be found in section 2 which provides that for the year beginning on the 1st of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year for the assessment for the year ending on the 31st day of March, 1952, and no order has been made under sub-section (1) of section 23A of the Income-tax Act, a rebate shall be allowed, at the rate of one anna per rupee on the amount of such excess ; (ii) where the amount of dividends referred to in clause (i) above exceeds the total income as reduced by seven annas in the rupee and by the amount, if any, exempt from income-tax, there shall be charged on the total income an additional income-tax equal to the sum, if any, by which the aggregate amount of income-tax actually borne by such excess (hereinafter referred to as " the excess dividend ") falls short of the amount calculated at the rate of five annas per rupee on the excess dividend. " Now, the words in this proviso which have been relied upon by Mr. Palkhivala in support of his argument that this proviso does not bring within its scope companies which have no total income, are the following four expression : (1) " in respect of its profits liable to tax, " (2) " dividends payable out of such profits, " (3) " charged on the total income, " and (4) " an additional income-tax. " In so far as the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is that income-tax or super-tax is payable on the total income of the previous year and in prescribing a rate or rates applicable to the total income, which is all that section 2 of the Indian Finance Act, 1951, purports to do in terms of the First Schedule of that Act, it cannot conceivably be held that the Legislature intended to subject to tax anything other than the total income which alone attracts tax under the scheme of the Indian Income-tax Act. Obviously, although as I have pointed out earlier total income in a given case might be calculated as negative, total income for the purpose of attracting tax must of necessity be a positive figure, and therefore this proviso cannot apply to a company which does not have a total income which attracts tax. I next come to the last phrase that has been relied upon by Mr. Palkhivala, viz., "an additional income-tax " Now, that phrase appears to me to be inappropriate in a case in which there is no income-tax attracted at all. One can only talk of an additional tax when there is some tax to which it is an addition, and in the case of a company whose total income for the accounting year is not taxable at all it seems to me to be quite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the company, and what is sought to be taxed by the proviso where a company declares an excess dividend is, as I have pointed out earlier, not the excess dividend at all, but it is an additional tax on the total income of the company. In my opinion, therefore, this particular provision in the Indian Finance Act, 1951, cannot be read as having amended the Income-tax Act so as to provide that the excess dividend shall be the deemed income of the company and shall therefore be liable to tax. I must confess that the object of this proviso in the Indian Finance Act could, so far as I can see, only be to make an attempt to limit the dividends and to encourage or induce the companies to plough back at least a substantial part of the profits into the industry itself ; and if for achieving that object the Legislature thought fit to provide that a company which has made profits should be induced not to declare a dividend above the ceiling and to inflict a penalty on a company which declares a dividend in excess of the ceiling, there can be no logical reason why the same penalty should not be imposed or sought to be imposed on a company which has no profits to distribute by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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