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Income tax Reference Case No. 14 of 1959, decided on 6th October 1961.

Company

-------Super-tax -- Rebate "Company to which section 23-A cannot be made applicable'' Company which has beers permitted by Commissioner to distribute less than 60 per cent. Right to rebate Finance Act, 1955, Sch. I, Part I, Item B, Proviso, para. (i) Income tax Act, 1922., S. 23-A.

A company which has been permitted by the Commissioner of Income tax to distribute less than 60 per cent. of the profits as dividend in the exercise of his powers under subsection (3) of section 23-A and in respect of which therefore, the Income tax Officer cannot make an order under subsection (1) of the section, is "a company to which the provisions of section 23-A cannot be made applicable" within the meaning of paragraph (i) of the proviso to Part I, Item B of Schedule I of the Finance Act, 1955, and is entitled to rebate provided in the said paragraph (i) of the proviso.

Commissioner of Income tax v. Afco (Private) Ltd. (1959) 35 I T R 177 ref.

D. M. Chandrasekhar, Government Pleader for the Commissioner.

K. R. Ramarnani and John D'Souza for the Assessee.

JUDGEMENT

SOMNATH IYER, J.

This reference made at the instance of the. Commissioner of Income tax in Mysore by the Income tax Appellate Tribunal under section 66(1) of the Income tax Act involves the interpretation of clause (i) of the proviso to Item B of Part I of Schedule I to the Finance Act, 1955; which reads :

"THE FIRST SCHEDULE

(See section 2)

PART I

Rates of Income-tax

B. In the ease of every company .

	Rate	Surcharge
on the whole of total income	Four annas in the rupee	One twentieth of the rate specified in the preceding column:

Provided that in the case of 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 1956, has made the prescribed arrangements for the declaration and payment within the territory of India, of the dividends payable out of, such profits; and has deducted super tax from the dividends in accordance with the provisions of subsection (3D) of section 18 of that Act

(i) Where the total income, as reduced by seven annas in the rupee and by the amount, if any, exempt from income tax, exceeds the amount of any dividends (including dividends payable at a fixed rate) declared in respect of the whole or part of the previous year for the assessment for the year ending on the 31st day of March, 1956, and the company is a company to which the provisions of section 23-A of the Income tat Act cannot be made applicable, a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess; .."

This is how the question arises.

The income of the assessee, which is a company, in respect of the previous year ending on December 31, 1954, was assessed to income tax and, in the course of these proceedings, under the provisions of the Finance Act referred to above, the assessee claimed the rebate referred to in it. The Income tax Officer declined to allow the rebate and his decision was confirmed in appeal by the Appellate Assistant Commissioner. Rut, in the further appeal preferred to the Income tax Appellate Tribunal, the assessee-company was able to obtain the rebate which it claimed. The Commissioner of Income tax thereupon asked the Tribunal to make a reference to this Court under section 61(1) of the Income-tax Act. The Tribunal has accordingly referred to this Court the following question

"Whether, on the facts and in the circumstances of the case, the assessee company, though not falling within the Explanation to subsection (9) of section 23-A of the Income tax Act, is entitled to the rebate of one anna per rupee on the undistributed balance of profits as provided in clause (i) of the proviso to Item B of Part I of the First Schedule to the Finance Act, 1955 "

In the question formulated by the Tribunal, there was a typographical error and we have suitably corrected it.

The two conditions to be established under the Finance Act, 1955, in order that the assessee company could claim a rebate are that its total income, as reduced in the manner specified, exceeded the amount of the declared dividends and that the provisions of section 23-A of the Income tax Act could not have been made applicable to it. These are the requirements of the Finance Act, 1955.

The assessee company during the relevant period did not distribute its entire total income as dividends. Its total income, as reduced in the manner specified in the relevant part of Schedule L to the Finance Act, exceeded the amount of the dividends declared. So, if the assessee company was a company to which the provisions of section. 23-A could not have been made applicable, it was entitled to the rebate which it claimed. The only reason: why the Income tax Officer and the Appellate Assistant Commissioner disallowed the claim of the assessee company was that although the claim was otherwise admissible under the provisions of the Finance Act referred to above, it had to be disallowed since the assessee company was not one to which the provisions of section 23-A of the income tax Act could not have been made applicable. That a company claiming a rebate under the relevant provisions of the Finance Act should be one to which the provisions of section 23-A of the Income tax Act cannot be made applicable is indisputable. The question is whether the assessee-company is one to which the provisions of section 23-A could not have been made applicable.

Now, section 23-A(1) of the Income tax Act, as it stood before it was amended by the Finance (No. 2) Act, 1957, with effect from. April 1, 1957, empowered the Income tax Officer to demand the payment of super tax at the rates specified in that subsection from any company which had not distributed at least sixty per cent. of its total income as dividends. The word "any" occurring in this subsection makes it perfectly clear that that subsection was applicable to every company which had not made the required distribution of its total income.

But, subsection (9) of section 23-A exempted the companies, in which the public were not substantially interested, out of the operation of section 23-A(1). It is admitted that the assessee is not a company in which the public are substantially interested. It is, therefore, clear that subsection (9) of section 23-A which exempts companies in which the public are substantially interested from the payment of the super tax referred to in section 23-A(1) was clearly inapplicable to the assessee company.

Section 23-A(1) of the Income tax Act, as it stood before its amendment, read :

"23-A. Power to assess individual members of certain companies. ( ) Subject to the provisions of subsections (3) and (4), 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 sixty per cent. 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 any 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 Banking Companies Act, 1949 (X of 1949) ;

the Income tax Officer shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super tax at the rate of eight annas in the rupee in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of four annas in the rupee in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any : . . . "

The assessee company which did not admittedly distribute during the relevant period sixty per cent. of its total income was clearly only one to which the provisions of section 23-A(I) could have been normally made applicable, and the Income tax Officer, if he was not satisfied, having regard to the losses incurred by it in earlier years or to the smallness of the profits made in the previous year, that the payment of a dividend or a larger dividend than that declared would be unreasonable, could have made an order that the company shall pay super tax at the specified rates.

It should be mentioned that the dividends distributed by the assessee company were less than sixty per cent. of its total income during the .relevant period, and this smaller distribution was permitted by the Commissioner of Income tax by an order made by him on July 4, 1954, on an application presented to him under subsection (3) of section 23-A of the Act. That subsection which was repealed by the Finance (No. 2) Act, 1957, with effect from April 1, 1957, but which was nevertheless applicable to the assessee-company, reads :

"(3) Where on an application presented to him in this behalf by a company within the period of twelve months referred to in subsection (1) or within the period of three months referred to in subsection (2), the Commissioner of Income tax is satisfied, having regard to the current requirements of the company's business or such other requirements as may be necessary or advisable for the maintenance and development of that business, the declaration or payment of a dividend or a larger dividend than that proposed to be declared or paid would be unreasonable, he may reduce the amount of the minimum distribution required of that company under sub section (1) to such figure as he may consider fit and further determine the period within which such distribution should be made."

The assessee company proposed to distribute only thirty nine per cent. of its total income by way of dividends and the Commissioner of Income-tax taking the view that for the maintenance and development of the business of the assessee company and its current requirements, it was necessary for the company to retain in its hands the remaining part of its income, permitted such distribution.

It is on the basis of this order that the assessee company claimed the rebate under the provisions of the Finance Act. What was urged on its behalf was that when the Commissioner made his order under sub section (3) of section 23-A, it was no longer possible for the Income tax Officer to apply section 23-A(1) to the assessee; company and that, therefore, this was a case in which the provisions of section 23-A could not be made applicable to the assessee company which was, therefore, entitled to the rebate directed to be allowed by the Finance Act.

That contention, although repelled by the Income tax Officer and the Appellate Assistant Commissioner, succeeded before the Income talc Appellate Tribunal and it is the correctness of the contention which requires to be examined in this reference.

The Government Pleader, on behalf of the Commissioner of Income tax, has pressed on us the view that since the assessee company was one in which the public were not substantially interested, it was clearly one to which the provisions of section 23-A were applicable and that, therefore, the rebate claimed by the company was inadmissible since one of the conditions to be established for earning the rebate was non existent.

Our answer to the question referred to us in this case should depend on the words "cannot be made applicable" occurring in that part of clause (1) of the proviso of Item B of Part I of Schedule I to the Finance Act, 1955, which reads :

. . and the company is a company to which the provisions of section 23-A of the Income tax Act cannot be made applicable ..

It is clear from this part of the proviso that no company to which section 23-A(1) of the Income tax Act can be made applicable can claim a rebate. So, if it can be said that when the assessee company claimed the rebate, it was one to which the provisions of section 23-A of the Income tax Act could have been made applicable, the answer to the question referred to us has to be in favour of the Commissioner and not otherwise. The question to be considered, therefore, is whether the provisions of section 23-A(1) of the Income tax Act could or could not have been made applicable to the assessee company.

We are not impressed by the argument addressed by Mr. Government Pleader that since the assessee company was one in which the public were not substantially interested and, since the only companies to which section 23-A was made inapplicable by section 23-A(9) were companies in which the public were substantially interested, the assessee company was one to which section 23-A was clearly applicable or could have been made applicable. Section 23-A (9) on which Mr. Government Pleader constructed his arguments reads

"23-A. (9) Nothing contained in this section shall apply to any company in which the public are substantially interested or to a subsidiary company of such company if the whole of the share capital of such subsidiary company has beep held by the present company or by its nominees throughout the previous year . . . .

This subsection does not, in our opinion, make section 23-A applicable to every company in which the public are not substantially interested, even if for some other reason it becomes manifest that that section cannot be made applicable to it. All that this subsection provides is that if a company is one in which the public are substantially interested, the provisions of section 23-A are inapplicable. It does not specify the companies to which section 23-A is applicable but only specifies those to which it is inapplicable. The question whether, as contended by the assessee-company it was one to which section 23-A could not be made applicable cannot be answered with reference to section 23-A (9) but on a proper construction of the other provision of that section.

Now, it is obvious that that part of section 23-A the possibility of the applicability of which has to be examined in this case, is section 23-A (1), since it is clear that no other part of that section was or could have been made applicable to the assessee company. That subsection which empowers the Income tax Officer to demand the payment of super tax referred to in it can, it is plain, be made applicable only if the company from which such super tax is demanded ha3 not distributed at least sixty per cent. of its total income as dividends. It is thus clear that even though a company is not one in which the public are substantially interested, if it has distributed at least sixty per cent. of its total income as dividends, it is one to which section 23-A(1) cannot be made applicable is the condition precedent for making section 23-A(1) applicable is therefore the non distribution by the company of at least sixty per cent. of its total income as dividends.

If, as the Commissioner permitted by his order which he made under section 23-A(3), the assessee company was permitted to distribute only thirty nine per cent. of its total income as dividends, the effect of that order was to substitute for the sixty per cent. of the total income referred to in section 23-A(l), thirty nine per cent. of the total income of the assessee company. The resultant position, therefore, was that in the case of the assessee company the Income tax Officer could have exercised power under section 23-A(1), only if the assessee company distributed less than thirty nine per cent. of its total income as dividends. But, if the assessee company did distribute, as admittedly it did, all the thirty nine per cent. of its total income as dividends in pursuance of the permission granted by the Commissioner of Income tax, can it be said that it was possible for the Income tax Officer to nevertheless make section 23-A(1) applicable to it and make an order directing it to pay the super tax referred to in that subsection If he could not make any such order, it is plain that what he could not do was to make section 23-A(1) applicable to the assessee company.

It is in our opinion, abundantly clear that when the order was made by the Commissioner under section 23-A(3) reducing the distributable dividends to thirty one per cent. of the total income of the assessee company that company, which would normally become liable to pay super tax under section 23-A(1) by reason of the non distribution of at least sixty per cent. of its total income as dividends, was taken out of its operation by reason of the order made by the Commissioner, with the result that it became impossible for the Income tax Officer to make section 23-A(l) applicable to it.

Mr. Government Pleader submitted that on a proper construction of the Finance Act, 1955, a company to which section 23-A of the Income tax Act is applicable is not entitled to a rebate although that section became inapplicable by reason of an order made by the Commissioner under section 23-A(3) of that Act. He contended that the only effect of the order made by the Commissioner under section 23-A(3) vas to except the assessee company out of section 23-A(1), which obviously was applicable to it, and that, therefore, the claim for rebate made by the assessee company to which section 23-A(1) was at the inception applicable, was inadmissible.

This argument cannot, in our opinion, succeed. What we have to consider is not the question whether the provisions of section 23-A(l) were applicable to the company and could have been made applicable to it if an order had not been made by the Commissioner under section 23A(3) but whether it was possible for the Income tax Officer, if he proposed to make an order under section 23-A(l) to make that subsection applicable to the assessee-company, after the Commissioner made his order. That, in our opinion, is the material question arising in this reference, since the words appearing in clause (i) of the proviso to Item B of Part I of Schedule I to the Finance Act, 1955, are "cannot be made applicable", and not "are not applicable".

It would be possible to hold that the provisions of section 23-A(1) could have been made applicable to the assessee company only if we can come to the conclusion that even after the Commissioner made an order under section 23-A(3), the income tax Officer could have properly issued a notice to the assessee company calling upon it to show cause why the super-tax referred to in that subsection should not be imposed on it. Mr. Government Pleader had to admit that after the Commissioner made his order it was impossible for the Income tax Officer to commence any proceedings under section 23-A(1) against the assessee-company for the imposition of such super tax. That inability on his part amounts very clearly to his incapacity to make the provisions of section 23-A(1) applicable to the assessee-company. If he could not make an order under section 23-A(1) against the assessee company that in ability is manifestly attributable to the impossibility of the application of section 23-A(1) to the assessee company: It is plain that the emphasis of the Finance Act, 1955, on which the asses e company depended is not on the inapplicability of section 23-A at some initial and immaterial point of time but on the impossibility of its actual application at the stage when the validity of the claim for the rebate is considered. Indeed, under the earlier Finance Acts, all that was necessary to obtain rebate was to establish that no order under section 23A(1) had been made by the Income tax Officer when the rebate was claimed. The words occurring in those Finance Acts were :

" . . and no order has been made under subsection (1) of section 23-A of the Income tax Act, a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess."

It is also unreasonable to think that although a company which has distributed at least sixty per cent. of its total income as dividends is one to which section 23-A(1) cannot be made applicable and, therefore, can claim a rebate, a company which is not bound to distribute so much of its total income as dividends but could, by reason of the permission accorded to it by the Commissioner, so distribute a smaller part of its income, may be brought within the ambit of section 23-A and become disentitled to the rebate. Section 23-A(1) of the Income-tax Act, which aimed at the imposition of super tax only on a company which failed to distribute at least sixty per cent. of its income as dividends, can have no application to a company permitted to snake a smaller distribution and Which cannot therefore be charged with any omission to distribute the required amount. That being so it is clear that this was a case in which the provisions of section 23-A of the Income-tax Act could not have been made applicable to the assessee-company when it claimed the rebate.

The view that we take in this case receives support from the pronouncement of their Lordships of the High Court of Bombay in Commissioner of Income-tax v. Afco (Private) Ltd. ((1959) 35 I T R 177). That was a case where a company in which the public ware not at all interested distributed sixty per, cent. of its total income as dividends and claimed a rebate under the provisions of the Finance Act, 1955. That rebate was refused on the ground that since the company did not fall within the scope of section. 23-A(9), the provisions of section 23-A(1) were applicable to it. Their Lordships were 'of the view that the claim for, rebate was unanswerable for the mason that the company in that' case which had distributed sixty percent of its total income as dividends was one to which the provisions of section 23-A(1), could not have been made applicable, being immaterial whether the company was or was not one in which the public were substantially interested.

In our opinion the answer to the question in this reference must be in favour of the assessee. Our answer is that on the facts arid in the circumstances of the case, the assessee-company, though not failing within the Explanation to subsection (9) of section 23-A of the Income tax Act, is entitled to the, rebate claimed by it.

The Commissioner must pay the assessee the costs of this reference. Advocate's fee Rs. 250.

Question answered accordingly.

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