# 7 ii COMMISSIONER OF INCOME TAX, MADRAS v. M/S. P. S. S. INVESTMENTS (P) LTD

- **Citation:** [1977] 2 S.C.R. 78
- **Court:** Supreme Court of India
- **Decided:** 1976-11-09
- **Bench:** H. R. Khanna, V. R. Krishna Iyer
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/7-ii-commissioner-of-income-tax-madras-v-m-s-p-s-s-investments-p-ltd-7109
- **Pages:** 8

## Headnote

Finance Act,
1958,
First Schedule Part IT,
Explanation (iii) to par11graph D-Calculation of rebate in computation of Super-tax, whether profits
earned during previous year to be taken into account.
The Income-tax officer took into account the respondent's entire dividend
income of the year ending December 30, 1957, while calculating the super-tax
payable by it for the assessment year 1958-59.
Jn appeal against the computation the respondent contended before the Appellate Assistant Commissioner that
the dividend-income included profits earned during the previous years, and that
rebate should be reduced only with reference to the propartionate part of the
dividend declared during 1957 which had come out of the other income assessed
to income-tax. and super-tax in the assessment year 1957-58.
The respondent's
contention was accepted in pninciple.
The Department's appeal was dismis.e<i
by the Appellate Tribunal.
The matter was then referred to the High Court
under section 66 ( 1) of the Indian Income Tax Act, 1922, and decided in favour
of the assessee.
Allowing the appeals the Court,
HELD : For computing the reduction in rebate under paragraph D of Part H
of the First Schedule to the Finance Act, 1958, the position of profits and gains
as it existed in the previous year should be taken into account and not in the
years prior to that Clause (iii) introduces a fiction with regard to the amount
of dividends which shall be deemed to have been distributed. The taxing authorities have to take into account the company's total income and the profits and
gains other than capital recJ'ipts reduced by certain allowances only in the previous year, i.e., the year in which the dividend was distributed.
The fact that
those profits and gains accrued in ye·ars prior to the previous year and included·
portions which were exempt from tax under the provisions of the Income-tax
Act would not be of much relevance.
[85 A-DJ

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7 ii
COMMISSIONER OF INCOME TAX, MADRAS
v.
M/S. P. S. S. INVESTMENTS (P) LTD.
November 9, 1976
[H. R. KHANNA AND V. R. KRISHNA IYER, JJ.]
Finance Act,
1958,
First Schedule Part IT,
Explanation (iii) to par11graph D-Calculation of rebate in computation of Super-tax, whether profits
earned during previous year to be taken into account.
The Income-tax officer took into account the respondent's entire dividend
income of the year ending December 30, 1957, while calculating the super-tax
payable by it for the assessment year 1958-59.
Jn appeal against the computation the respondent contended before the Appellate Assistant Commissioner that
the dividend-income included profits earned during the previous years, and that
rebate should be reduced only with reference to the propartionate part of the
dividend declared during 1957 which had come out of the other income assessed
to income-tax. and super-tax in the assessment year 1957-58.
The respondent's
contention was accepted in pninciple.
The Department's appeal was dismis.e<i
by the Appellate Tribunal.
The matter was then referred to the High Court
under section 66 ( 1) of the Indian Income Tax Act, 1922, and decided in favour
of the assessee.
Allowing the appeals the Court,
HELD : For computing the reduction in rebate under paragraph D of Part H
of the First Schedule to the Finance Act, 1958, the position of profits and gains
as it existed in the previous year should be taken into account and not in the
years prior to that Clause (iii) introduces a fiction with regard to the amount
of dividends which shall be deemed to have been distributed. The taxing authorities have to take into account the company's total income and the profits and
gains other than capital recJ'ipts reduced by certain allowances only in the previous year, i.e., the year in which the dividend was distributed.
The fact that
those profits and gains accrued in ye·ars prior to the previous year and included·
portions which were exempt from tax under the provisions of the Income-tax
Act would not be of much relevance.
[85 A-DJ
CIVIL APPELLATE JURISDICTION : Civil .Appeal Nos. 1853 (A)
and 1854 of 1971.
Appeal from the Judgment and Order dated the 18th April, 1969
of the Madras High Court Madras in Tax Cases Nos. 18 and 19 of
1966.
V. S. Desai, J. Ramamurthi and M. N. Shroff, for the Appellant.
T. A. Ramaclwndran, for Respondent.
The Judgment of the Court was delivered by
KHANNA, J. This judgment would dispose of two civil appeals
H
Nos. 1853(A) and 1854 of 1971 which have been filed on certificate
by the Commissioner of Income-tax against the judgment of Madras
High Court (reported in 79 ITR 456) answering the following two
questions referred to it in two references under section 66(1) of
f
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c. I. T. MADUS v. P. s. s. INVESTMENTS (Khanna J.)
79
the Indian Income-tax Act, 1922 in the affirmative in favour of the
assessee and against the revenue :
"1. Whether on the facts and in the circumstances of
the case, the Appellate Tribunal was right in holding that
for computing the reduction in rebate under Para D of Part
II to the First schedule to the Finance Act, 1959 (in R.
A. No. 169 of 1965-66)
and of Finance
Act, 1958,(in·
R. A. No. 168 of 1965-66) in the composition of profits
of the year from which the dividend had been
declared
should be looked ·into, and
2. Whether the Appellate Tribunal was right in law in
holding that the paid up capital of the assessee company
should be proportionately reduced for
the
purpose
of
reducing the rebate in Corporation Tax in the manner directed."
The matter relates to the assessment of the respondent company
for the assessment years 1958-59 and 1959-60.
For sake of convenience we may set out the facts relating to the assessment year
1958-59. It is the common case of the parties that the decision
about that year would also govern the point of controversy relating
to the other year.
The assessee is a private limited company. In
the previous year ending on December 31, 1957 relevant for
the
assessment year 1958-59, it declared a dividend of Rs. 99.000.
Its
paid up capital was Rs. 1,65,000.
The total income of the assessee
company V.'a.'i determined at Rs. 73,255 made up as under :
Rs.
Business
Nil
Other source;
26,554
Capital gains
46,701
Total income
73,255
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As the dividend of Rs. 99,000 declared by the assessee company
was in excess of 6 per cent of the paid up capital of the company,
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the Income-tax Officer
worked up the
super-tax payable
by the
assessee as under :
Corporation tax @ 50 % on Rs. 26,554 .
1 css rebate @ 30 % on Rs. 26,554 .
Reduction in rebate
.
Up to 6% of the paid-up capital 99CO .-
6% to 10% of the paid up capital in 6(C0
@10%
.
.
.
.
.
.
Balance at 20 % 82500 @ 20 % .
1Jalance carried forward to next year
,
Nil
660·00
1,65,00 ·00
Rs.
13,277
7,966 ·20
17,160 ·00
9,193 ·80
The assessee company objected to the above computation of the
super-tax and took the matter in appeal to the Appellate Assistant
Commissioner.
It was urged on
behalf of the assessee that
the
dividend of Rs. 99,000 declared during the year ending 1957 was
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[ 1977] 2 s.c.R.
out of the profits of the previous year which ended on December 31,
1956.
According to the assessee, the dividend income determined
for the assessment year 1957-58 was Rs. 1,74,196 which included
capital gains to the extent of Rs.
1,10,105.
The dividend
of
Rs. 99,000, it was urged, should be apportioned between the capital
gain of Rs. 1,10,105 and the other income of Rs. 64,091 after taking
mto account the tax payable thereon.
The assessee computed the
figures as under :
Capital rec~ipts not assessable
Capital gai.is assessed le" t&x
Other income less tax
Rs.
44,27)
75,423
22,492
1,42,194
The assessee claimed that rebate should be reduced only with
reference to the sum of Rs. 15,659 being proportionate part of the
dividend declared during the previous year ending on December 31,
1957 which had come out of the other income assessed to income-tax
and super-tax in the assessment year 1957-58.
The figure of Rs.
D
15,659 was arrived at by the assessee as under :
99,000 x 22,492
----·-----·
l ,~2,194
The Appellate Assistant Commissioner accepted in principle the
assessee's contention that the components of the dividend should be
considered with reference to the profits of the previous year.
He,
E
however, computed proportionate dividend at a higher figure by including the capital gains of Rs. 75,423 with the sum of Rs. 22,492
as shown below :
. F
Net available profits attribt.t<.ble to asscmcl
income (22,492 + 75,4 23)
Net available profits
Dividends declared .
Proportionate divido d : .
97,915
1,42,194
99,000
97,915 99,000
l,42,194
68,171
The Appellate Assistant Commissioner
retained
the
paid
up
capital at Rs. 1,65,000 as per balance sheet without apportionment
on the basis of ·taxed and non-taxed income.
The department took the mat:er in appeal to the Appellate TriG
bunal.
The Tribunal
dismissed
the
appeal
holding
that
the
"previous year" under Explanation (iii) to Paragraph D of Part II
to the First Schedule to the Finance Act, 1958, refers only to the
previous year out of the profits of which the dividends were declared
and therefore tl1e composition of the profits and gains of the company
out of which dividends were declared had to be looked irito for working out the proportion under Explanation (iii) to Paragraph D of
H
Part II to the First ·Schedule to the Finance Act of 1958.
· At tlle instance of t~e Commissioner, the questions reproduced
above were thereafter referred to the High Court.
.. .,.
c. I. T. MADRAS\'. P·. s. s. INVESTMENTS (Khanna J.)
81
In appeal before the High Court, it was argued on behalf of the
revenue that dividends having been distributed during the accounting
year relevant to the assessment year in question, it is that year alone
which has to be taken into consideration for calculating the supertax under the appropriate Finance Act.
The fact that such profits
were traceable to the profits earned during the ·year prior to the
accounting year, according to the submission, was not of significance
and had to be ignored for the purpose of working out the quantum
of rebate in such super-tax made available in the Finance Act. It
was accordingly urged that the year of distribution,
namely,
the
accounting year, is the only basis for the calculation of the rebate.
As against that, it was submitted on behalf of the assessee that it
would be unreal if the years in which the profits had been admittedly
earned was to be ignored and reliance was placed for calculation of
rebate on the ministerial act of distribution.
The High Court, while
answering the questions referred to it in favour of the assessee and
against the revenue, observed us under :
"If, therefore, 'distribution' is thus to be understood as
a ministerial act resulting from the indoor management of
the company, can that be the sine qua noll to decide the
question of quantum of rebate to which the company would
be entitled under a particular Finance Act? If the year in
which distribution is to . be effected is considered for purposes of the Finance Act and for the determination of the
quantum of rebate, then it would result in a notional implementation of the benefit contemplated by the Iagislaiure to
a company in the nature of a rebate and would not amount
to a realistic approach of such a vital problem connected
with the finances of the company.
It may be that in any
particular year when distribution of dividends have been
made, the paid-up capital might have been reduced or increased, as the case may be.
Is that paid-up capital going
to be taken as the basis for working out the relative benefits or disadvantages to be enjoyed or suffered by a company?
We are of the view that it is neither the intention
of the legislature, nor could it be said to be a reasonable
inference of the provisions thereto.
In fact, the Explanation to the Finance Act, 1958, which elucidates the term
'paid-up capital', gives the key to the interpretation of the
word 'distribution'.
'Paid-up capital' means the paid-up
capital of the company on the first day of the previous year
relevant for the assessment year ending on 31st March,
1959.
It is, therefore, clear that the paid-up capital of
the company during the assessment year cannot be said,
for purposes of Paragraph D of Part II of the First Schedule to the Finance Act, 1958, to be the paid-up capital
of the year in which the profits arose and from which dividends were distributed during the assessment year."
Before dealing with the contentions advanced, it may be appropriate to refer to the relevant provisions.
According to section 55
of the Indian Income-tax Act, 1922, in addition to the income-tax
7-1458SCI/76
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SUl'REME COURT REPORTS
[1977] 2 $.C.R.
chargetl for any year there shall be charged, levied and paid for t:Jlat
year in respect of the total income of the previous year of any
individual, Hindu undivided family, company, local authority, unregistered firm or other association of persons, not being a regi.Stered
firm, or the partners of the firm or members of the association individually, ali additional duty of income-tax (in this Act referred to as
super-tax) at the rate or rates laid down for that year by a Central
Act.
Clause (b) of section 2 of the Finance Act, 1958 (Act No. t1
of 1958) provides, inter alia, that subject to the provisions of subsections (2) and (3) with which we are not concerned, for the year
beginning on the first day of April 1958.
"(b) super-tax shall, for the purposes of section 55 of
the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter
referred to as the Income-tax Act), be charged at the rates
specified in Part II of the First Schedule."
We are concerned in the present case with Paragraph D of Part II
of the First Schedule to the Finance Act, 1958.
The relevant part
of the above paragraph reads as under :
RATE OF SUPER-TAX
In the case of every other company,-
RATES OF SUPER-TAX
On the whole of the total income .................. 50% :-
Provided t'hat ,-
(i)
(ii)
(iii)
a rebate at the rate of 40 per cent on so much of the
total income as consists of dividends from a subsidiary Indian company and a rebate at the rate of
30 per cent on the balance of the total income shall
be allowed in the case of any company which satisfies condition (a) but not condition (b)
of
the
preceding clause;
Provided further that,-
(i) the amount of the rebate under clause (i) or clause
(ii) sliall be reduced by. the sum, if any, equal to
tlie amount or the ag:gtegate of the amounts, as the
case may be, computed as hereunder :
............
. . . . . . . . . . . .
.
(c) in .:addition, in the case of a conij>ariy referred to
m c;lause. _(n) of the preceding proviso which has distributed
to I!S shar~holders during the previous year dividends in
excess of s~ per cent of its paid-up capital, not being dividends payable at a fixed rate-
I
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{;,I. T. MADRAS v. P. s. $. IIWESTMENtS (Khanna J.)
S3
ill the case of !l ctihipahy whkh is not ~uch as is
referred m ill sub-section (9) tlf section 23A of the
bit:ottie-tax Act :-
oh 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 10%
on that part of the said dividends which exceeds
itl per cent of the paid-up capital;
at tlie rate of 20%
Explunation/-For the purpose of this patagraph-
(i)
(ii)
(iii) where any portion of t~e profits and gains of the
company_ is not includ()d in its
total
income
by
reason of such portion being exemp_t from tax mider
any provision of the Inconie-tax Act, the 'paiil-up
c;apita1' of the c:ompany, the amount distributed as
dividends (not being dividends payable at a fixed
rate) , the amount representing the face value of any
bonus share.s !lnd the amount of any bonus issued
to the shareholders shall each be deemed to be such
proportion thereof as the total income of the company fbr the previous year Bears to its total ptofits
anti gains fdr that year otlier than capital teeeipts;
reduced l1y such allowances as 111ay be adtnissil:lle
under the lhcoiiie-tax Act whicli have
tltit
heert
taken into accourlt l1y the company ill its profit ahd
loss account fot that year."
In appeal before us Mr. Desai on behalf of the appellant has
urged that dividend having been distributed during the accounting
year relevant to the assessm~nt year in question; it is the profits and
gains of that year alone which s_hould be taken into tonsideration
for cajculating the rebate in the levy of super-tax.
The fact that
· such dividend was distribvted out of the profits earn&i in the years
prior t(> that was, according to the. learned
counsel,
irrelevant.
Partictilar stress in ,this context has been laid upon the language of
clause (iii) o~ the Explana.tion. contained in Paragraph D tJf Patt II
of the First Schedule to the Finanee Act; 1958.
As against that,
Mr. Ramachandran who has a_rgued the case amicus curiae has canvassed for the correctness of the view taken by the High Court.
Vf e ,haye set ,out above the relevant part of Paragraph D of Part
It of tile .Fitst Schedule to the Finance Act; 1958.
The language
in wliicli the above paragraph is Couched is so complex arid is hedged
iti With so many exception~ and provisos
that it can hardty ue
regarded as a model of clarity in legislative draftsmahsliip.
Pataghij:JH D iilitially prescribes the rate . of super-tax at 50 per cent 6n
tlie total irleome of the company.
The first
proviso then makes
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[1977] 2 s.c.R.
A provision for rebate in the assessment of the super-tax.
The rebate
for a company like the respondent with no income in the form of
dividend from a subsidiary company is to be at the rate of 30 per
cent.
The second proviso carves out reduction in the rebate. Clause
( c) of that proviso sets out the formula for calculating that reduction at a sliding scale in case the amount of distributed dividend
exceeds 6 per cent of the paid-up capital.
There then follows a third
B proviso but we are not concerned with that.
At the end comes the
Explanation consisting of three clauses.
For the purpose of the
present case, the relevant clause is (iii). The said clause makes
provision in cases which fall within its ambit for a further reduction
in the reduction mentioned above.
To put it in other words, the
paragraph seeks to prescrjbe the rate of super-tax. It then proceeds
to grant some relief to the tax payer in the levy of super-tax. It
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thereafter makes a cut in that relief.
Finally, it prescribes a cut in
that cut. The intelligence of even those with legal background gets
staggered in this continuous process. of carving exceptions to exceptions. It seems more like a conundrum, baffling the mind and requiring special acumen to unravel its mystique.
One can only wonder
as to how the ordinary tax payers, most of whom are laymen, can
keep abreast of such laws.
Yet the maxim is that every one
is
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presumed to know the law.
The one redeeming feature is that the
above pattern was given up after 1959. From 1960 to 1964 there
was another pattern. Since 1965 the charge of super-tax has been
discontinued and the rates of income-tax have been so increased as
to absorb fully the former levy of super-tax.
The fate of these appeals, as would appear from
the above,
h
depends upon the wording of clause (iii) of the Explanation.
The
said clause contemplates, inter alia, that in calculating the amount
deemed to have been distributed as dividends, certain proportion of
the amount actually distributed has to be taken into account.
The
said clause, shorn of the portions with which we are not concerned,
reads as under :
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Where any portion of the profits and gains of the company is not included in its total income by reason of such
portion being exempt from tax under any provision of the
Income-tax Act, ...... the amount distributed as dividends
...... shall .. be deemed to be such proportion thereof as
the total income of the company for the previous year
bears to its total profits and gains for that year other than
capital receipts, reduced by such allowances
as may be
admissible under the Income-tax Act which have not been
taken into account by the company in its profit and loss
account for that year.
The above clause provides a formula w:\lich has to be applied
for determining the amount of dividends which shall be deemed to
have been distributed in considering the
quantum of rebate
for
assessing the super-tax payable by a company.
The occasion for
applying this formula is indicated by the opening lines of the clause
and arises when any portion of the profits and gains of the company
c. I. T. MADRAS v. P. s. s. INVESTMENTS (Khanna J.)
85
is not included in its total income by reason of such portion being
exempt from tax under the . provisions of the Income-tax Act. Once
such an occasion arises, we have to apply the formula contained in
the latter part of the clause. According to that formula, the amount
distributed as dividends shall be deemed to be such proportion thereof as the total income of the previous year bears to its total profits
and gains for that year other than capital
receipts,
reduced
bv
certain allowances with which we are not concerned.
The words
"for the previous year" and "for that year" indicate that in finding
for the purpose of rebate the amount of dividends
which
shall be
deemed to have been distributed, we have to look to the figure of
total income and the amount of profits and gains other than capital
receipts of the company reduced by certain allowances in the previous year alone and not earlier years. Clause (iii) introduces a
fiction with regard to the amount of dividends which shall be deemed
to have been distributed.
Such a fiction can operate only within
the limits prescribed by the language of the statute creating that
fiction.
The language used in clause (iii) points to the conclusion
that the taxing authorities have to take into account the company's
total . income and the profits and gains other than capital receipts
reduced by certain allowances only in the previous year, i.e., the
year in which the dividend was distributed.
The fact that those
profits and gains accrued in years prior to the previous year and
included portions which were exempt from tax under the provisions
of the Income-tax Act would not be of much relevance as the language of the clause requires the taxing authorities to look to the
position of profits and gains .in the previous year alone.
We would,
therefore, modify the answer given by the High Court to question
No. (1) and answer the aforesaid question in the negative.
The
correct answer, in our opinion, should be that for computing the
reduction in rabate under Paragraph D of Part II of the First Schedule
to the Finance Act, 1958 the position of profits and gains as it existed
in the previous year should be taken into account and not in the
years prior to that.
No arguments have been addressed before us on the answer to
question No. (2).
We accordingly accept the appeals, set aside the judgment of the
High Court and answer question No. (1) in the negative as indicated above.
The parties in the circumstances shall bear their own
costs in this Court and in the High Court.
M.R.
Appeals allowed.
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