TMI Blog1975 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... Court under section 66(2) of the Act. The question which arises for consideration in these appeals is whether under section 23A of the Act, the assessee-company is liable to pay additional super-tax in respect of any portion of its profits. Section 23A of the Act of 1922, in so far as material, read thus at the relevant time : " 23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by-- (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of spy super-tax payable under this section ; (b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income ; and (c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and partly of an activity of a non-industrial nature. Out of a total income of Rs. 37,98,774 the profits of the company available for distribution came to Rs. 17,41,814 out of which Rs. 3,36,504 represented industrial profits and Rs. 14,05,310 represented non-industrial profits. The company distributed by way of dividends a sum of Rs. 4,20,640 only, claiming that the dividend was declared equally out of the profits of the industrial and non-industrial activities. Thus, the profits which were available for distribution but which were not distributed came to Rs. 13,21,174. The Income-tax Officer, while making the assessment, allocated the dividends declared by the company to the industrial and non-industrial segments in the same proportion as the profits of the two segments bore to the total profits of the company. By this method, out of the total dividend of Rs. 4,20,640 declared by the company, a sum of Rs. 81,264 was treated as dividends declared out of industrial. profits while a sum of Rs. 3,39,376 was treated as dividends, declared out of non-industrial profits. Holding that under section 23A, the company was liable to distribute by way of dividends a sum of Rs. 1,51, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1957-58 ? " Under section 66(2) of the Act the Tribunal referred to the High Court the following question : " (2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that additional super-tax is not leviable under section 23A of the Act, in respect of any portion of the profits of the assessee-company for the assessment year 1957-58 ? " The second question on which the High Court called for a reference may seem to suggest that under the judgment of the Tribunal the company was held not liable to pay additional super-tax in respect of any portion of its profits. That is not so. The Tribunal held that the company was not liable to pay additional super-tax on its industrial profits but was liable to pay it on non-industrial profits. The High Court confirmed the Tribunal's view. It held that there was no justification in Explanation 2 for the apportionment of dividends in the ratio which the industrial profits bear to non-industrial profits, that it was open to the assessee to apportion the dividends in such a way as to conform to the requirements of section 23A in respect of one of the two segments of its business and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the company's undistributed profits or whether it is leviable on the balance of undistributed profits of that segment only in respect of which the short-fall has occurred ? The second question may not strictly arise if on the first question it is found that the dividend apportionable to the two segments is less than the statutory percentage in respect of both the segments. All the same, it would be necessary to examine that question also as the High Court has held that the liability to pay the additional super-tax must be restricted to the undistributed profits of that segment only, in respect of which the default has occurred. On the first question, the language of Explanation 2 is clear and admits of no doubt or difficulty. It requires by its express terms that, for the purposes of sub-section (1), the amount of dividends must be " similarly apportioned ". But counsel for the respondent urged that since the Explanation does not refer to any apportionment at all, the words " similarly apportioned " cannot be ascribed any rational meaning and it would, therefore, be open to the company to apportion the dividends 50 : 50 to the profits of the two segments. Relying on Word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reads too much in the word " apportioned ". That word is used in Explanation 2 in the sense of " split up ", so that " similarly apportioned " means simply " similarly split up ". The dividends have, therefore, to be split up similarly, that is, in the same ratio as the industrial and non-industrial profits bear to each other after the total profit is split up in two parts, industrial and non-industrial. According to Burrow's Words and Phrases, volume 1, page 217, to " apportion " means " split up ". It is, therefore, impossible to accept the respondent's contention that though Explanation 2 requires that dividends should be similarly apportioned, it would be open to the company to make any convenient division of the dividends distributed by it. According to the Shorter Oxford English Dictionary, 3rd edition, volume 1, page 87, to " apportion " is " to assign as a proper portion ". An assignment as a proper portion of the dividends would mean an assignment in the same or similar ratio as the respective profits of the two segments bear to the total profits of the company. It is thus not open to the company to split up and apportion the dividends to the profits of the two segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be apportioned in the same ratio which the profits of the two segments bear, a sum of Rs. 16,650 will be apportionable to industrial profits and Rs. 38,850 to non-industrial profits. The fallacy of this illustration consists in its overlooking that if the company is liable to distribute Rs. 55,500 by way of dividends and it does distribute that sum, there is no violation of section 23A. That section applies only if the profits and gains distributed as dividends ...are less than the statutory percentage of the total income... as reduced... If the dividends have to be apportioned in the ratio of profits of the two segments, the taxes have also to be similarly apportioned, for Explanation 2 speaks of " the amount of dividends and taxes also being similarly apportioned ". A " similar " apportionment of taxes, it is urged by the respondent, may in practice lead to impossible and unreal situations since the taxes on the profits of the two segments may be unequal as in the case of a newly established industrial undertaking which, in respect of its industrial income, may enjoy a tax concession. There is no merit in this contention. The method specified in section 23A has to be wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interested. The shareholders of a private company could avoid the high incidence of super-tax by allowing the profits of the company to accumulate in its hands so that the accumulated profits could be distributed eventually in the form of bonus shares which are not assessable as income in their hands. In considering whether the company is liable to pay additional super-tax on the entire balance of distributable profits it has to be borne in mind that, section 23A is clearly penal in nature ; for, in the circumstances, mentioned therein, if a private company fails to distribute by way of dividends the statutory percentage of its distributable profits, it becomes liable to pay, apart from the sum determined as payable by it on the basis of the assessment under section 23, super-tax at 50 per cent. or 37 per cent., as the case may be, on the undistributed balance of its distributable profits. In the first place, this provision being penal, the burden would lie on the revenue to prove that the conditions laid down by the section are satisfied (Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd.). Secondly, penal statutes have to be construed strictly in the sense tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des, that the prescribed percentages should be applied separately with reference to the amounts of profits and gains attributable to the two parts of the company's business, " as if the said amounts were respectively the total income of the company in relation to each of its parts.............for the purposes of sub-section (1) ". The fiction created by the Explanation is thus expressly limited to the purposes of sub-section (1) and there is no justification for pursuing the fiction to its logical conclusion so as to permit it to operate beyond the limited purpose of sub-section(1). Under the scheme contained in section 23A, where a company has a composite business it is necessary at the outset to find out the profits attributable to the two parts of its business. The statutory percentages as prescribed by Explanation 2 have then to be applied separately to the profits of the two parts. By reason of the fiction created by Explanation the profits of each part have for this purpose, and this purpose alone, to be treated as if they were the total income of that part of the company's business. By sub-section (1), the company becomes liable to pay additional super-tax if the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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