CIT Kerala v. The Kerala Financial Corporation — 1971 DIGILAW 189 (KER)

JUDGMENT T.S. Krishnamoorthy Iyer, J. 1. This is a reference under S.256(1) of the Income Tax Act, 1961 by the Income Tax Appellate Tribunal, Cochin Bench, at the instance of the Commissioner of Income Tax, Kerala. The question referred for decision is: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount to be taken for purposes of reduction in rebate on Corporation Tax under the Finance Act of 1954 is only Rs. 2,09,076/46 and not Rs. 3,50,000/-?" The assessee is the Kerala Financial Corporation constituted under the State Financial Corporations Act of 1951. (Act LXIII of 1951). S.43 of the said Act declares that for the purposes of the Income Tax Act, the Financial Corporation shall be deemed to be a company within the meaning of that Act and shall be liable to income tax and supertax accordingly on its income, profits and gains. 2. For the assessment year 1964-65 the accounting year being the year ending with 31-3-1964 the total income of the assessee for purposes of income tax was determined at Rs. 4,76,258/- and income tax at the rate of 25 % on the total income was levied. In pursuance to S.6 of the State Financial Corporations Act, 1951 the Kerala State Government has at the time of issuing the shares by the notification dated 23-11-1963 issued with the approval of the Central Government guaranteed payment of annual dividend at the rate of 3 1/2 %to the shareholders of the assessee. In the year of account, the State Government paid Rs. 1,40,923.54 as 'subvention' to enable the assessee to declare a dividend at the rate of 3 1/2% to its shareholders. S.2(1)(b) of the Finance Act, 1964 (Act 5 of 1964) provided that super tax for purposes of S.95 of the Income Tax Act, 1961 be charged at the rates specified in part II of the First Schedule of the Finance Act. Paragraph D of Part II of the First Schedule of the Finance Act, 1964 prescribed the rate of supertax at 55 % on the whole of the total income of every company, other than the life Insurance Corporation of India. Paragraph D of Part II of the First Schedule of the Finance Act, 1964 prescribed the rate of supertax at 55 % on the whole of the total income of every company, other than the life Insurance Corporation of India. But the assessee is entitled to a rebate at the rate of 30% in the rate of supertax because of the latter portion of clause (ii) in the first proviso of Paragraph D in part II of the First Schedule. Clause (i) (c) (B) of the second proviso to paragraph D of Part II of the First schedule provided that the rebate of 30% shall be reduced by 7.5% on the whole amount of the dividends paid by the assessee. 3. The assessee claimed before the Income Tax Officer that the reduction 7.5% in the rebate of supertax should be only on the amount of Rs. 2,09,076/46 after excluding the 'subvention' of Rs. 1,40,923/54 paid by the State Government [ to fulfil the guarantee in the matter of payment of 3 1/2 %annual dividend to the shareholders. This was for -the reason that the available profits with the assessee for distribution of dividends was only Rs. 2,09,076/46. The Income Tax Officer as well as the Appellate Assistant Commissioner rejected the plea of the assessee and directed reduction in rebate of Supertax on the sum of Rs. 3,50,000/- declared as dividends. But the Income Tax Appellate Tribunal upheld the plea of the assessee and held that the dividend to be taken into account for purposes of reduction in the rebate is only the dividend distributed from out of the profits of the assessee and the 'subvention' made by the State Government should not be taken into account. 4. S.4 of the Income Tax Act is the charging provision for the levy of Income Tax and directs that income tax shall be charged for any assessment year on the total income of the previous year if any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates. 4. S.4 of the Income Tax Act is the charging provision for the levy of Income Tax and directs that income tax shall be charged for any assessment year on the total income of the previous year if any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates. S.95(1) of the Income Tax Act is the charging provision for the levy of supertax, and it reads:- "In addition to the income tax charged for any assessment year, and save as otherwise provided in this Act, there shall be charged for that assessment year in respect of the total income of the previous year or previous years, as the case may be, of every person, not being a registered firm, an additional duty of income tax (in the Act referred to as supertax) at the rate or rates laid down for that assessment year by any Central Act." In the Finance Act of 1964 (Act 5 of 1964) the levy of income tax on companies was regulated by Part I, Paragraph D and the levy of supertax was regulated by Part II, Paragraph D of the First Schedule read with S.2(1)(b) of that Act. S.2(1)(b) of the Finance Act, 1964 reads: Provided that, where by virtue of any provision of this Act supertax is to be charged in respect of the income of a period other than the previous year, supertax shall be charged accordingly." In the Finance Act of 1964 (Act 5 of 1964) the levy of Income Tax on companies was regulated by Part I, Paragraph D and the levy of supertax was regulated by Part II, Paragraph D of the First Schedule read with S.2(1)(b) of the Finance Act, 1964 reads: "2. Income Tax and' supertax - (1) Subject to the provisions of sub-sections (2), (3) (4) and (5) for the assessment year commencing on the Ist day of April, 1964,- (a)................................................................ Income Tax and' supertax - (1) Subject to the provisions of sub-sections (2), (3) (4) and (5) for the assessment year commencing on the Ist day of April, 1964,- (a)................................................................ (b) supertax shall, for the purposes of S.95 of the Income Tax Act, 1961 (43 of 1961) (hereinafter referred to as the Income Tax Act), be charged at the rates specified in Part II of the First Schedule, and in the cases to which Paragraphs A, B and C of that Part apply, shall be increased by a surcharge for purposes of the Union calculated in the manner provided therein." The relevant provisions relating to rates of supertax applicable to the assessee before us are contained in Paragraph D of Part II of the First Schedule to the Finance Act. We shall extract them. "Paragraph D In the case of every company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956),- Rates of Supertax On the whole of the total income. ....... 55 % provided that - (i) ....................................................... (a) ...................................................... (b) ...................................................... (ii) a rebate ................; and at the rate of 30 per cent on the balance of the totalincome shall be allowed in the case of a company which satisfies condition (a) of the preceding clause and which is such a company as is referred to in S.108 of the Income Tax Act with , a total income exceeding Rs. 25,000/-; (iii) ...................................................... (iv) ...................................................... Provided further that (i) the amount of the rebate under clause (i) or clause (ii) or clause (iii) of the preceeding 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: - (a) ...................................................... (b) ...................................................... 25,000/-; (iii) ...................................................... (iv) ...................................................... Provided further that (i) the amount of the rebate under clause (i) or clause (ii) or clause (iii) of the preceeding 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: - (a) ...................................................... (b) ...................................................... (c) in addition, in the case of a company referred to in clause (i) or clause (ii) or clause (iii) of the preceeding proviso (being such a company as is referred to in S.108 of the Income Tax Act or any other company as is referred to in clause (iii) of sub-section (2) of S.104 of that Act) which has declared or distributed to its shareholders during the previous year any dividends other than dividends on preference shares (A) in the case of a company which since the date of the commencement of its activities has declared or distributed any dividends for the first time during the previous year or any one of the four previous years immediately proceeding such previous year on that part of the dividends other than dividends on preference shares which exceeds 10 per cent of the paid-up equity capital; at the rate of 7.5% (B) in any other case - on the whole amount of the dividends other than dividends on preference shares: at the rate of 7.5%" The question for decision is whether "the whole amount of the dividends" in clause (i)(c)(B) of the second proviso to Paragraph D of the First Schedule of the Finance Act, 1964 will include the sum of Rs. 1,40,923.54 loaned by the State Government to the assessee to make up the deficit for payment of annual dividend at the rate of 3 1/2% or whether the reduction in the rebate has to confined to the sum of Rs. 2,09,076.46 being the profits of the assessee set apart for payment of dividend. 5. S.2, sub-section (22) of the Income Tax Act contains only an inclusive definition of 'dividend'. The said definition is not exhaustive and it cannot help us to understand or to interpret the word 'dividend' used in Part II of the First Schedule of the Finance Act, 1964. Counsel for the Revenue relied on S.205 of the Companies Act, 1956 to support his plea that the reduction in rebate has to be on the sum of Rs. 3,50,000/-. Counsel for the Revenue relied on S.205 of the Companies Act, 1956 to support his plea that the reduction in rebate has to be on the sum of Rs. 3,50,000/-. S.205 of the Companies Act, 1956 reads: "Dividend to be paid only out of profits - No dividend shall be declared or paid except out of the profits of the company or out of moneys provided by the Central or a State Government for the payment of the dividend in pursuance of a guarantee given by such Government." It is clear that the above provision enables a company to declare dividend not only out of its profits but also out of moneys provided by the Central or a State Government in pursuance of a guarantee given by such Government. In Robert Alan Hill v. Permanent Trustee Co. ( AIR 1930 PC 302 ) Lord Russell observed: "A limited company not in liquidation, can make no payment by way of return of capital to its shareholders except as a step in an authorised reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders, must and can only be made by way of dividing profits. Whether the payment is called 'dividend' or 'bonus' or any other name, it still must remain a payment on division of profits." S.205 of the Companies Act read with the above observations prima facie supports the submission of the Revenue regarding the interpretation of 'dividends' in Part II, Paragraph D, clause (i) (c) (B) of the First Schedule. 6. But a closer examination of the provisions will reveal that it is only the dividend paid out of the profits of the assessee that can suffer a reduction of rebate at the rate of 7.5%. It is admitted that the assessee is entitled to a rebate of 30% in the rate of supertax on the balance of the total income because its total income exceeds Rs. 25,000/- and it satisfies the requirements of clause (i) (a) of Paragraph D of the First Schedule as it has made the prescribed arrangements for the declaration and payment within India of dividends payable out of profits liable to be taxed under ] the Income Tax Act for the assessment year commencing on the first day of April 1964. 25,000/- and it satisfies the requirements of clause (i) (a) of Paragraph D of the First Schedule as it has made the prescribed arrangements for the declaration and payment within India of dividends payable out of profits liable to be taxed under ] the Income Tax Act for the assessment year commencing on the first day of April 1964. That the assessee satisfies the conditions prescribed in clause (i) (a) of the first proviso to Part II of the First Schedule of the Finance Act, 1964 is not disputed. The assessee is not liable to pay income tax or supertax on any portion of Rs. 1,40,924.54 paid by the State Government to make up the shortfall for payment of dividend at the rate of 3 1/2% as it does not form part of the total income of the assessee within the meaning of S.4 of the Income Tax Act for levy of income tax. S.96 of the Income Tax Act reads: "Subject to the provisions of this Chapter, the total income of any person shall, for the purposes of supertax be the total income as assessed for the purposes of income tax, and where an assessment of total income has become final and conclusive for the purposes of income tax for any assessment year, the assessment shall also be final and conclusive for the purpose of supertax for the same assessment year." In view of S.96 of the Income Tax Act the sum of Rs. 1,40,924.54 does not form part of the total income for supertax also. 7. In annexure A which is the assessment order of the Income Tax Officer dated 23-12-1964 the total income in the assessment year in question for levy of income tax and supertax was determined at Rs. 4,76,258/-. It is agreed that the sum of Rs. 4,76,258/- does not include the amount paid by the State Government. The liability to tax is not imposed by the Finance Act, but by the Income Tax Act. As already observed the levy of supertax has been authorised by S.95 of the Income Tax Act and the rate alone is prescribed by the Finance Act, 1964. The quantum of the amount to suffer reduction in the rebate in the rate of supertax should therefore depend on an interpretation of the provisions in Part II of the First Schedule to the Finance Act, 1964. The quantum of the amount to suffer reduction in the rebate in the rate of supertax should therefore depend on an interpretation of the provisions in Part II of the First Schedule to the Finance Act, 1964. Counsel for the Revenue contended whether or not a portion of the dividend came out of the total income of the previous year the quantum of dividends regulates only the rebate claimable in the rate of supertax and not the supertax itself. It was therefore argued that in the matter of claiming the rebate the total dividend paid has to be taken into account irrespective of its source. However attractive this argument may be, it is not justified because of S.43 of the State Financial Corporations Act and the wording of clause (i)(c)(B) of the second proviso read with clause (i)(a) of the first proviso to paragraph D of Part II of the I First Schedule to the Finance Act, 1964. S.43 and its first proviso are in these terms: "For the purposes of the Indian Income Tax Act, 1922 (Act XI of 1922), the Financial Corporation shall be deemed to be a company within the meaning of that Act and shall be liable to income tax and supertax accordingly on its income, profits and gains: Provided that any sum paid by the State Government under the guarantee given in pursuance of S.6 or S.7 or S.8 shall not be treated as the income, profits and gains of the Financial Corporation and any interest on debentures bonds or deposits paid by the Financial Corporation out of such sum shall not be treated as expenditure incurred by it:" (Second proviso is not extracted as it is not relevant). In view of the above provision Rs. 1,40,923/54 paid by the Government to the assessee cannot be treated as income, or gains of the assessee. The policy behind the provision directing a reduction in the rebate in the rate of supertax because of payment of dividend in the case of company must have been to ' discourage payment of large dividends disproportionate to the profits of the company and to induce the company to plough back as much profits as working capital in the company. The policy behind the provision directing a reduction in the rebate in the rate of supertax because of payment of dividend in the case of company must have been to ' discourage payment of large dividends disproportionate to the profits of the company and to induce the company to plough back as much profits as working capital in the company. The words "such profits" in the latter portion of clause (i)(a) of the first proviso to Paragraph D of Part II must have reference to the profits of the company liable to lax under the Income Tax Act. It will then follow that "the dividends payable out of such profits" in that clause should mean dividends payable out of the profits of the company liable to tax under the Income Tax Act. The expression "the whole of the dividends" in clause (i) (c) (B) of the second proviso to Paragraph D of Part II of the First Schedule, in our view, must refer to the 'dividends' referred to in clause (i) (a) of the first proviso to the same Paragraph. Thus on an examination of the provisions it is clear that 'the whole amount of the dividends in clause (i) (c) (B) of the second proviso must be taken to mean the amount of the dividend paid out of the profits of the company that is liable to be taxed. We, therefore hold that the reduction in the rebate can only be on the sum of Rs. 2,09,076/46 and not on the sum of Rs. 3,50,000/-. We answer the question in the affirmative, that is in favour of the assessee and against the Department. We make no order as to costs. A copy of this judgment will be forwarded by the Registrar under his signature and the seal of this Court to the Cochin Bench of the Income Tax Appellate Tribunal.