TMI Blog1963 (10) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... 960, the total income of the petitioner was assessed at ₹ 48,21,860 and the amount of tax payable thereon was determined at ₹ 22,94,400. After adjusting payments of ₹ 14,00,000 made under sections 18A and 23B, the net demand payable arrived at was ₹ 8,93,658. Subsequently, by an order under section 35 of the Act dated the 9th August, 1960, the net demand payable was reduced to ₹ 8,84,505. The rectification made was not accepted by the petitioner and an appeal against that order is said to be pending. As penal interest was also levied, a revision against the latter order was filed before the Commissioner under section 33A, the prayer being for remission of penal interest under section 18A(6). This revision also is said to be pending. The Income-tax Officer subsequently discovered that the rebate of corporation tax had not been reduced by the amount which was calculated on the excess of dividend declared over 6% of the paid up capital as required by the second proviso (i)(b) of Paragraph D, Part II, First Schedule, to the Finance Act of 1956. A notice was thereupon issued under section 35 of the Act to show cause why the necessary modification under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culating the rebate that has to be reduced under the second proviso (1)(b) to the said Paragraph D has to be that capital which carries a dividend at a fixed rate . The question that has to be determined is as to what exactly is the capital which can be said to be entitled to a dividend at a fixed rate? The relevant portion of the second proviso to the said Paragraph D runs: Provided further that-- (i) the amount of the rebate under clause (i) or clause (ii), as the case may be, of the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as hereunder... (b) in addition, in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid up capital, not being dividends payable at a fixed rate-- On that part of the said dividends which exceeds 6 per cent. But does not exceed 10 per cent. Of the paid up capital at the rate of 0-2-0 per rupee. The petitioner company had issued three kinds of shares. They were as already observed: (1) Preference shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, up to the commencement of winding up on such preference shares in accordance with the provisions of sub-clause (1) hereof shall be applied firstly in payment off of the capital and dividend, if any, declared and in arrears, at the commencement of winding up, on the ordinary shares and the balance, if any shall be distributed to the holders of the preferred ordinary shares and ordinary shares rateably. It will be noticed that though the preference shares are cumulative, there is no express provision regarding the preferred ordinary shares. This would mean that if in any year there is no surplus left after the preference shareholders had been paid their fixed dividend of 6%, the preferred ordinary shareholders would not be entitled to get dividend at the fixed rate of 4% and, as it is not cumulative, the right to receive it would not be carried forward. Only if there is a sufficient surplus left after paying the preference shareholders that the preferred ordinary shareholders have to be paid, if possible at a rate up to 4%. Along with this, if any surplus is still left over, they will share rateably with the ordinary shareholders. In the relevant year of assessment, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the following rights, namely:-- (i) that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up,....it has a right to participate, whether fully or to a limited extent,.... Sub-section (2) of section 85 deals with the second kind of share capital, i.e., equity share capital . This means, with reference to any such company, all share capital which is not preference share capital. Sub-section (3) provides that the expression preference share and equity share shall be construed accordingly. Therefore, broadly speaking, within the framework of preference share capital and equity share capital, there are various modes of participating in the profits. In Palmer's Company Precedents, sixteenth edition, Part I, at least ten different modes of participating in the profits by the preference shareholders are enumerated. These inter alia are: whether the dividend to be attached thereto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, therefore, 'ordinary preferred stock' is a sub-class of ordinary stock which has some preference or priority over another sub-class of ordinary stock. It is manifest that preferred ordinary shares in the present case are nothing but a sub-class of equity shares which have some preference or priority over those shares. They have no concern with preference shares , which carry a fixed rate of dividend. The preferred ordinary shares fall within the category or class called equity shares but having certain priority in special circumstances, when participating in profits with the equity shareholders. With this background, the position under the Companies Act of 1956 may now be examined in order to determine the precise point which arises here, whether the capital of ₹ 1 crore, 57? lakhs relating to preferred ordinary shares in the present case carry dividends at a fixed rate within the meaning of the Explanation to Para. D and whether the dividends thereon were payable at a fixed rate within the meaning of the second proviso (i)(b) of Para. D of the Finance Act, 1956? For this purpose the relevant article of association of the company reproduced her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be paid first before the balance, if any, is again equally divided between ordinary shareholders and the preferred ordinary shareholders. In these circumstances, without doing violence to the language of the articles of association, it is not possible to hold that preferred ordinary shares carry a fixed rate of 4 per cent. dividend. The words entitled and payable in the Explanation to the second proviso to clause (i)(b) convey the same meaning. Entitled , means entitled in law, i.e., something which could be enforced in law. Payable similarly means payable in accordance with law. It is impossible for any preferred shareholder to claim that he shall be paid each year, regardless of the profits made by the company, dividends at the rate of 4 per cent. If such a position could never be taken up by a preferred ordinary shareholder, then it necessarily follows that such share does not carry a fixed rate of dividend, as the rate of dividend may vary according to the circumstances prevailing in each year between zero per cent. and four per cent. and even beyond that depending upon an identical amount being declared for an equity shareholder also. The word fixed in Corpus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,52,500 Less:-- Dividend on 35,000 preference shares (Rs. 35,00,000) at the rate of 6% ₹ 2,10,000 Dividend on 15,75,000 preferred ordinary shares (Rs. 1,57,50,000) at the rate of 4% 6,30,000 8,40,000 Amount of dividend considered by the I.T.O. vide I.T.O.'s order annexure 'M' page 70 paragraph 6. 0--12--0 per share on 1,75,000 ordinary shares. 1,31,250 0--12--0 per share on 15,75,000 preferred ordinary shares 11,81,250 13,12,500 Less 6% on ₹ 17,50,000 (2,75,000 ordinary shares). 1,05,000 Excess dividend on which rebate has been reduced by the I.T.O. 12,07,500 The interpretation placed by me on the Explanation to the 2nd proviso to clause (i)(b) of Paragraph D is not only in consonance with common sense but will permit comparison of like with like. This wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and was not a mere clerical or arithmetical mistake in calculation. I cannot accede to this contention. In this case the provisions of the Finance Act of 1955 contained in Paragraph D of Part II whereby the rebate given under clause (ii) of the first proviso had to be further recalled as required by clause (i)(b) of the 2nd proviso thereto, was not inadvertently given effect to and that provision being mandatory, it is idle to contend that a mistake of law apparent from the record was committed by the Income-tax Officer which justified the invoking of section 35 of the Act. I have already taken a similar view in a case, such as the present, in A.H. Wheeler and Co. v. Income-tax Officer, Allahabad, Writ No. 3471 of 1962, decided on 9th April, 1963 [1964] 51 I.T.R. 92, wherein I followed the Supreme Court decision in M.K. Venkatachalam, Income-tax Officer v. Bombay Dyeing and Manufacturing Co. Ltd. [1958] 34 I.T.R. 143 ; [1959] S.C.R. 703 and held that the provisions of section 35 were properly attracted to the case. The last contention raised was that no specific notice was given to the petitioner before interest under section 18A(6) of the Act was modified by an order under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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