# CLOTH TRADERS v. C.I.T

- **Citation:** [1979] 3 S.C.R. 984
- **Court:** Supreme Court of India
- **Decided:** 1979-05-04
- **Bench:** P. N. Bhagwati, D. A. Desai, A. D. KosHAL
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/cloth-traders-v-c-i-t-7833
- **Pages:** 23

## Headnote

c
lncome Tax Act, 1961 (43 of 1961)-Sections 85A
&
SOM-Whether
rebate of income tax admissible on the amount of dividend received bJ
the
assessee company from an Indian company or whether confined onl}' to divideml income as computed under the Act after making lhe deduction on
the
interest paid on borrowings for making the investmentJ.
The earliest provision granting exemption Of super-tax in respect of in.tercorporate dividends was made aB far back as 9th December, 1933 in a Notification issued by the Governor General in Council and it provided as follows :
'The Governor General in Council is plea<:ed to exempt from super-tax.
D
(i) so much of the income of any investment trust company as is derived
from dividend paid by any other company which hm; paid or will pay
super-tax in respect of the profits. out of wliich such dividends are
paid."
This Notification was followed by a provision of a similar kind
granting
exemption from super-tax in respect of certain specified categories of interE
corporate dividends introduced as s. 56A in the Indian Income Tax Act,
1922.
F
G
H
When this Act was repealed mid the present Act enacted with effect from 1st
April, 1962 s. 99, sub-section (1) was introduced in the present Act exempting
c~rtain categories of income from super-tax and one of such cate~t..-rics was that
set out in cl. (iv). Section 99, sub-section (i) cl. (iv) read as follows:
"99(1) Super Tax shall not be payable by any asse~!lsee in respect
of the following amounts which are included in his total income-
(iv) if the assessee is a company, any dividend received by it
from an Indian Company, subject to the provi5ions contained in the
Fifth Schedule."
This provision continued to be in force upto 31st March, 1965 subject to a
minor inconsequentiaJ amendment made by Finance Act, 1964,
but
by
an
amendment made by Finance Act 10 of 1965, the provision was omitted
and
Chapter VI-A and s. 85A were introduced in the present .A.ct with effect from
!st April, 1965. Chapter VIA comprised ss. 80A to SOD providing for certain
specified deductions to be made in computing total incomf) while s. 85A pro- I
vided for deduction of tax on inter-corporate dividends.
The original Chapter VIA and certain other sections ind.uding s. 85A were
deleted from the present Act by Finance (No, 2) Act, 1967 with effect from !st
April, 1968 and replaced by a new Chapter VIA which contains a fasciculus of
soctions from s. 80A to s. 80VV. Section 80A, sub-sectioa (!) provides that
(984)
•
•
...
•
•
'
CLOTH TRADERS V. C.I.T.
985
in computing the total income of an assessee there shall be allowed from his
A
gross total income, in occordance with and subject to the provisions of Chapter
VIA, the deductions specified in s. BOC to s. SOVV and sub-section (2) of that
section imposes a ceiling on slich deductions by enacting that the aggregate.
amount of such deductions shall not, in any case, exceed the gross total income
of the essessee. The expression "gross total income" is defined in cl. (5) of s.
SOB to mean the total income computed in accordance with the provisions of
the Act before· making any deduction under Chapter ,VJA or -under s. 280. 0
B
Section SOM is the new section which corresponds to the repealed s. 85A and it
provides for deduction in respect of certain categories of inter-corporate
dividends. There were several amendments made subsequently in this section
but
they relate primarily to the percentage of the income to be allowed
as a
deduction.
One amendment that was made by Finance Act, 1968, was that the words
C
"received by it" occurring in sub-section ( l) of s. SOM \vere omitted with effect
from 1st April, 1968. The Finance Act of 1968 also provided in sub-section
(2) and (3) of s. 31 that notwithstanding the omission of s. 99, sub-section (I),
cl. (iv) and s. 85.A, the provisions of these sections shall have and be deemed
always to have effect, subject to the modification that the words "received
by
it" in the opening part of these sections

## Text

_Characters 0–39,108 of 62,061. This is a partial read: ask again with offset=39108 for what follows._

A
CLOTH TRADERS (P) LTD., ETC .
••
ADDL. COMMR. OF INCOME TAX, GUJARAT-I, ETC.
May 4, 1979
ll
[P. N. BHAGWATI, D. A. DESAI AND A. D. KosHAL. JJ.]
c
lncome Tax Act, 1961 (43 of 1961)-Sections 85A
&
SOM-Whether
rebate of income tax admissible on the amount of dividend received bJ
the
assessee company from an Indian company or whether confined onl}' to divideml income as computed under the Act after making lhe deduction on
the
interest paid on borrowings for making the investmentJ.
The earliest provision granting exemption Of super-tax in respect of in.tercorporate dividends was made aB far back as 9th December, 1933 in a Notification issued by the Governor General in Council and it provided as follows :
'The Governor General in Council is plea<:ed to exempt from super-tax.
D
(i) so much of the income of any investment trust company as is derived
from dividend paid by any other company which hm; paid or will pay
super-tax in respect of the profits. out of wliich such dividends are
paid."
This Notification was followed by a provision of a similar kind
granting
exemption from super-tax in respect of certain specified categories of interE
corporate dividends introduced as s. 56A in the Indian Income Tax Act,
1922.
F
G
H
When this Act was repealed mid the present Act enacted with effect from 1st
April, 1962 s. 99, sub-section (1) was introduced in the present Act exempting
c~rtain categories of income from super-tax and one of such cate~t..-rics was that
set out in cl. (iv). Section 99, sub-section (i) cl. (iv) read as follows:
"99(1) Super Tax shall not be payable by any asse~!lsee in respect
of the following amounts which are included in his total income-
(iv) if the assessee is a company, any dividend received by it
from an Indian Company, subject to the provi5ions contained in the
Fifth Schedule."
This provision continued to be in force upto 31st March, 1965 subject to a
minor inconsequentiaJ amendment made by Finance Act, 1964,
but
by
an
amendment made by Finance Act 10 of 1965, the provision was omitted
and
Chapter VI-A and s. 85A were introduced in the present .A.ct with effect from
!st April, 1965. Chapter VIA comprised ss. 80A to SOD providing for certain
specified deductions to be made in computing total incomf) while s. 85A pro- I
vided for deduction of tax on inter-corporate dividends.
The original Chapter VIA and certain other sections ind.uding s. 85A were
deleted from the present Act by Finance (No, 2) Act, 1967 with effect from !st
April, 1968 and replaced by a new Chapter VIA which contains a fasciculus of
soctions from s. 80A to s. 80VV. Section 80A, sub-sectioa (!) provides that
(984)
•
•
...
•
•
'
CLOTH TRADERS V. C.I.T.
985
in computing the total income of an assessee there shall be allowed from his
A
gross total income, in occordance with and subject to the provisions of Chapter
VIA, the deductions specified in s. BOC to s. SOVV and sub-section (2) of that
section imposes a ceiling on slich deductions by enacting that the aggregate.
amount of such deductions shall not, in any case, exceed the gross total income
of the essessee. The expression "gross total income" is defined in cl. (5) of s.
SOB to mean the total income computed in accordance with the provisions of
the Act before· making any deduction under Chapter ,VJA or -under s. 280. 0
B
Section SOM is the new section which corresponds to the repealed s. 85A and it
provides for deduction in respect of certain categories of inter-corporate
dividends. There were several amendments made subsequently in this section
but
they relate primarily to the percentage of the income to be allowed
as a
deduction.
One amendment that was made by Finance Act, 1968, was that the words
C
"received by it" occurring in sub-section ( l) of s. SOM \vere omitted with effect
from 1st April, 1968. The Finance Act of 1968 also provided in sub-section
(2) and (3) of s. 31 that notwithstanding the omission of s. 99, sub-section (I),
cl. (iv) and s. 85.A, the provisions of these sections shall have and be deemed
always to have effect, subject to the modification that the words "received
by
it" in the opening part of these sections were deleted.
The net effect of these
amendments was that the words ''received by it" following upon
the words
))
"'dividend" were omitted with retrospective effect from s. 99 sub-section (1), cl.
(iv) and s. 85A and s. SOM was to be read as if the words "received by it"
were not in the opening part of that section.
The Gujarat High Court having taken a view against the assessees (appellants), appeals were preferred against the judgment relating to the ruisessment
years 1965-66 and 1966-67 when s. 85A was in force.
In view of the conflict of opinion between the view of the Gujarat High
Court, and the view taken by the Bombay, Madras and Calcutta High Courts,
the Income Tax Appellate Tribunal, referred similar matters
under s.
257
of the Act to this Court.
In the appeals and references before this Court, the question was whether
E
on a true interpretation of Sections 85A and SOM of the Income Tax Act, 1961,
rebate of inc~me tax is admissible on the actual amount of dividend recetved
F
by nu nssessee, being a company, from an Indian company, or it is confined
only to the dividend income as computed in accordance with the provisions of
the Act, that is after making the deductions specified in s. 57 including deductions of the interest paid on borrowings fOr making the investments.
Allowing the appeals and answering the questions referred by the Tribunal
in favour of the assessees :
HELD :
1. The assessees are entitled to relief under s. SSA for the assessG
meat years 1965-66, 1966-67 and 1967-68 and under s. 80M for the assessment
years 1968-69 and 1969-70 in respect of the entire amount of dividend income
without deductions of interest paid on borrowings for acquiring the shares.
.
.
[1006 BJ
2. Sections 85A and SOM were not written by the Legislature on a clean
s!ate,. nor were they the outcome of any new or innovative exercise of legislative Judgment: but they were preceded by similar provisions granting rebate of
H
super·tax or income tax on inter-corporate dividends and these provisions
as
7-409SCI/79
: l ·:'''
986
SUPREME COURT REPORTS
[1979] 3 s.c.R.
A
interpreted by the Courts throw light on the true meaning and content on
ss. SSA and SOM. [991 F].
B
c
D
3. It is clear from the Notes on cl. 31 which subsequently became s. 31
of the Finance Act. 1968, that the amendments retrospectively deleting the
words "received by it'' from the opening part of s. 99, sub~section (1), cl. (iv)
and s. 85A were made with a view to widening the scope of the relief granted
under these sections, as it was felt that the presence of these words might
render these sections inapplicable in cases where the shares to which the divi
4
dend relates are registered in the name of a person other than the asscssee
and the dividend is, there.fore, received strictly speaking, by such other person
and not by the assessee. The object of introducing these am1~ndments was to
widen the scope of the tax relief provided under s. 99, sub-section (1). cl. (iv)
and s. 85A by making it available to the assessee even though the shares
tc>
which the dividend related were registered in the name of a person other than
the assessee and not to narrow it down by restricting it to n~:t dividend computed after making deductions allowable under the provisions Qf the Act.
[99S-&GJ.
4. Even after the deletion. of the words "received by it", the~ expressions "any
dividend from an Indian company" and "e.ny income by way of dividends from
an Indian company" occurring in the opening part of these sections continue
to mean the same thing, namely, the full amount of dividend derived or obtained from an Indian company. The decisions of the Bombay, Calcutta and
Madras High Courts interpreting these sections cannot, therefore, be said to be
displaced by the retrospective omission of the words "received by it." (998 H999 BJ.
S. It is clear on a plain natural construction of the language of s. 99 subaection (1), cl. (iv), tbe.t it grants exemption from super-tax in respect of
•any dividend from an Indian company" and these last mentioned words cannot mean anything else than the full amount of dividend derived from an
Indian company. They cannot obviously mean dividend fron1 an Indian company minus any expenses incurred in earning it, or less any other deduction
allowable under the Act. [999 C-D].
6. The words, "the following amounts which are included in his total inJ!
come", in the opening part of s. 99, sub-section (1) do not have any limitative
effect so as to restrict "dividend from an Indian Company" in respect of which
'llo..
exemption from super-tax is granted to dividend computed i11 accordance with
•
the provisions of the Act and forming part of the total income. The exemption from super~tax granted under s. 99 sub-section (1) is not only in respect
of "dividend from an Indian company" referred to in cl. (iv), but also in
respect of other items of income mentioned in clauses (i) to (iii) and (v).
G
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7. The legislature clearly wanted to provide that the different categories of
income mentioned in clauses (i) to (v) should be eligible for exemption from
super-tax, only if they are included in the total income and the Legislature
could have made such a provision separately in respect of each category cf
income in the opening part of s. 99 sub-section (1), but instead of adopting
such legislative device, which would have been both inapt and inelegant, the
Legislature chose to use an omnibus expression, "the follow.ing amounts which
are included in his total incomen, which would cover. all the~ different items of
income dealt with in clauses (i) to (v). [999 F-G].
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CLOTH TRADERS v. C.I.T.
987
.. '
S. It would, therefore, seem that though the exemption from super-tax
,.
-granted under clause (iv) of sub-section (i) of s. 99 would be applicable oilly
1f the particular item of income namely, "dividend from an In_dian company" is
.included in total income, what is exempted is "dividend from an Indian company" which can only mean the full amount of dividend received from an
Indian company. [1000 BJ.
Commissioner of Income Tax, Kera/a v. South India Bank Ltd., 59 ITR a
763; referred to .
9. Section 85A in its opening part by using the words "where the tolal
income of an asessee . . . . includes any income by way of dividends, from an
Indian Company", lays down a condition for its applicability, which is that
the total income must include income by way of divdend from
an Indian
company. It is only if this category of income forms a component part of total
C
income that the provisions enacted in the section is attracted and the assessee
becomes entitled to rebate on income calculated with reference to the "income
so inc!nded".
[1001 FJ.
10. The meaning of the section would become clear if the words "income
by way of dividends from an Indian company", are substituted for the words
"income so included." Then it would be obvious that the rebate on income
D
tax is to be calculated by applying the average rate of tnx to the "income by
way of dividends from an Indian company" which can only mean the full
amount of dividend received from an Indian company, [1002 B-C].
_J.
Commissioner of Income Tax v. Indian Guarantee & General Insurance Co.
•
)
Ltd., 903 ITR 348 approved.
11. There is a close similarity between s. SSA and s. SOM so far as the
E
opening part of the two sections is concerned, but in the latter part, there is a
difference inasmuch as s. 85A provides for calculation of rebate of income tax
on ~'income so included", whiles. SOM provides-for deduction of the whole or
part of "such income by way of dividends". The language employed by the
legislature in s. SOM leaves no doubt that the deduction, whether whole or 60
per cent, is to be calculated with reference to the entire
amount of income
by way of dividends. [1002 D-E].
F
12. Section SOM occurs in Chapter VIA which is headed
"Deduction to
be made in. computing total income". The marginal note to the section, indicates, that it provides for deduction in respect of certain inter-corporate dividends. [1002 F, 1003C] .
13. Section 80A sub-section (1) provides that in computing the total income
of an aascssee, the deductions specified in s. SOC to SOVV shall be made from
his gross total income, and gross total income, according to the definition in
s. SOB, cl. (5) means the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VIA or under s.
2SO.O. What s. SOA, sub-section (I) requires is that first the total income of
1he assessee must be computed in accordance with the provisions of the Act
without taking into account the deductions required to be made under Chapter
VIA or under s. 280.0 and then from the gross total income thus computed,
the deductions specified in s. SOC to SOVV must be made in order to arrive
'at the total income. But sub-section (2) of s. SOA provides that the aggregate
G
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988
SUPREME COURT REPORTS
[1979] 3 S.C.R.
A
amount of the deductions required to be made under Chapter VIA shall not
exceed the gross total income of the assessee so that the total income arrived ait
""!--
B
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after making the deductions specified in s. SOC to 80VV frorr.t the grOM total
income can never be a minus or. negative figure.
This provision imposing a
ceiling on the deductions which may be made under sections SOC
lo 80VV
clearly postulates that in a given case the aggregate amount of these deductions
may exceed the gross total income. [1002 0·1003 B].
14. The words "where the gross total income of an assesse~: .... includes any
income by way of dividends from a domesti.; company" are intended only to
provide that a particular category of income, namely, income by way of dt~1i-·
dends from a domestic company should form a component part of the gros~1
total income. These words merely prescribe a condition for the applicability
ef the section namely, that the gross total income must includ~~ the ootegory of
income described by the words "Income by way of dividends from a domestic
company". If the gross total income includes this particular category of income,
whatever be the quantum of such income included, the condition would
be
satisfied and the assessee would be eligible for ·deduction of the whole or 60
per cent of "such income".
[1003 F-G].
15. The words "such income" as a matter of plain grammar must be substituted by the words "income by way of dividends from a do.mestic company",
in order to arrive at a proper construction of the section and if that is done,
it would be obvious that the deduction is to be in respect of the whole or 60
per cent of the "income by way of dividends from a domestic companyn which
&an only mean the full amount of dividends received from a domestic compe.ny.
The deduction permissible under the section is, therefore, to be calculated with
reference to the full amount of dividends received from a domestic company
and not with reference to the dividend income as computed in accordance with
the provisions of the Act, that is, after making deductions provided under the
Act.
[1004 B·C].
16. If the Legislature was of the view that the deduction should not be in
respect of the full amount of dividends received from a domestic compan:y,
ll
but it should only be · in respect of the amount of dividend computed after
deducting a1!owable expenditnre, the legislatnre would have undoubtedly amCitded s. SOM, sub-section (!) and made its intention quite clea!C. (1005 CJ.
G
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17. The legislature in fact amended s. 80M several tirnes in respect of
other ttK1.tters subsequent to the decision of the Bombay lligh Court in the
New Great Insurance Co.'s case and the decision of the M'adras High Court
in the Madras Auto Service's case, but it did not choose to amend the language employed in s. 80M, subRsection (1) for the purpose of overriding tl1e
interpretation placed by the courts. This indicates legislative recognition
of
the interpretation placed by the Courts on s. S5A and s. SOM. (1005 D·EJ.
IS. Section SOK read with rule 20, s. SOMM, s. SON and s. S0.0 which
occur_ in the same group of sections as s. &OM, use the same legislative formula
as s. SOM and open with the identical words "where the gross total income ·Of
an assessee-includes any income:· It appears on a plain reading of these
sections that the deduction admissible is in respect of the whole of the income
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CLOTH TRADERS V. C.I.T.
989
re.ceived by the assessee and not. in respect of the income computed after making the deductio!'s provided under the Act. [1005 F-G]
Madras Auto Service v. Income Tax Officer, 101 ITR 589; approved.
ClvIL APPELLATE JURISDICTION : Civil Appeal Nos. 117-118 of
1975.
(From the Judgment and Order dated 28-11-1973 of the Gujarat
High Court in I.T.R. No. 21 of 1972).
TAX REFERENCE NO. 2 OF 1975
(From the Tax Reference made by the Income Tax Tribunal
Ahmedabad against its order dated 7-7-1973 in LT.A. No. 643
(AHD) /71-72).
TAX REFERENCE NOS. 6-9 OF 1975
(Fr~ the Tax Reference made by the Income Tax Tribunal
Ahmedabad in R.A.
Nos. · 103-106/AHD/74-75 arising out
of
I.T.A. Nos. 946-949iAHD/72-73 for Assessing years 1966-67 to
B
c
1969-70).
p
TAX REFERENCE NO. 16 OF 1975
(From the Tax Reference made by the Income Tax Tribunal
Ahmcdabad in Refe.rence Application No. 62/ AHD/74-75 arising out
of LT.A. No. 580/AHD/72-73).
'
TAX REFERENCE NO. 18 OF 1975
(From the Tax Reference made by the Income Tax Appellate
Tribunal, Ahmedabad Bench in R.A. No. 271/AHD/74-75 arising
out of I.T.A. No. 2431/AHD/72-73 decided on 29-7-74 assessment
year 1969-70).
CIVIL APPEAL NOS. 117-118/75
For the Appellant : Mr. B. Sen, I. N. Shroff and H. S. Parihar .
For the Respondent : S. N. Kacker, Sol. Gen., B. B. Ahuja and
Miss A. Subhashini .
For the Interveners: (1) Ramakrishna Sons Ltd. : S. P. Mehta,
E
T. A. Ramachandran and M/s. J. Ramachandran, (2) M/s. Jardine
G
Henderson Ltd. : Dr. Debi Pal and D. N. Gupta, . (3) Indore Exporting & Importing Co. Ltd. : Dr. Debi Pal, Miss Bina Gupta and
Mr. Prneen Kumar, and ( 4) Keto Investments (P) Ltd. : S. T. Desai,
Mrs. A. K. Verma and J. B. Dadachanji, K. J. John and Shri Narain.
TAX REFERENCE NO. 2 OF 1975
R
"
For the Appellant:
S. N. Kacker, Sol. Gen!, S. P. Nayar and
Miss A. Subhashini.
'
990
SUPREME COURT REPORTS
[1979] 3 S.C.R.
A
For the Respondent : F. S. Nariman, I. N. Shroff, and
H. S.
Parihar.
For the Interveners : (1) M/s. Jardine Henderson Ltd.
Dr.
Debi Pal and D. N. Gupta, (2) Indore Exporling & Imporling Co.
Ltd. : Dr. Debi Pal, Miss Bina Gupta and Mr. Praveen Kumar, and
B
(3) M/s. Ajay Inv!estment Co. : Praveen Kumar and Miss Bina
Gupta.
TAX REFERENCE NOS. 6-9 OF 1975
For the Appellant : F. S. Nariman, I. N. Shroff, and H. S. Parihar.
For tlze Respondent : S. N. Kacker, Solicitor General, S. P. Nayar
0
and Miss A. Subhashini.
For the Intervener Central India Industries : Dr. Debi Pal, Miss.
Bina Gupta and Mr. Praveen Kumar.
•
TAX REFERENCE NO. 16 OF 1975
For the Appellant : Mrs. A. K. Vemm and J. B. Dadachanji, K. J.
D
John and Shri Narain.
E
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For the Respondent : S. N. Kacker, Sol. Genl. and Miss A.
Subhashini.
For the lnterveners-Central India Industries : Dr. Debi Pal, Miss.
Bina Gupta and Mr. P~aveen Kumar.
TAX REFERENCE NO. 18 OF 1975
For the Appellant : S. P. Mehta, K. C. Patel, Shri Narain, J. B.
Dadachanji, Mrs. A. K. Verma and Miss Arti Mehta.
For the Respondent : Miss A. Subhashini.
For the Intervener-Central India Industries Ltd :
Dr. Debi Pal,
Miss Bina Gupta and Mr. Praveen Kumar.
The Judgment of the Court was delivered by
BHAGWATI, J.-This group of appeals and References
raises
ashort question of construction of sections 85A and SOM of the Income
Tax Act, 1961 (hereinafter referred to as the present Act).
The
question is whether on· a true interpretation of these sections, rebate
of income tax is admissible on the actual amount of divident received·
by an assessee, being a company, from an Indian company, or it is
confined only to the dividend income as computed in accordance with
the provisions of the Act, that is, after making the deductions specified
H
in section 57 including deduction of the interest paid on borrowings
for making the investments.
The Gujarat High Court has taken a
view against the assessee while a different view has been taken by the
•
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CLOTH TRADERS V. C.I.T. (Bhagwati, J.)
991
Bombay, Madras and Calcutta High Courts.
The appeals are preferred by the assessee, namely, Cloth Traders (P) Ltd. against the
judgment of the Gujarat High Court and they relate to the assessment
years 1965-66 and 1966-67 when section 85A was in force.
The
Reference before us have been made directly by the Tribunal under
section 257 of the Act in view of the conflict of opinion amongst the
High Courts.
Out of these References, three are at the instance of
the assessees, namely,
C. V. Mehta (P) Ltd.,
M/s. Distributors
(Baroda) Pvt. Ltd., and H. K. (Investment) Co. Pvt. Ltd. and one
is at the instance of the Commissioner of Income-tax, Gujarat. They
relate to different assessment years : assessment year 1969-70 in case
of C. V. Mehta (P) Ltd. and Distributors (Baroda) Pvt. Ltd. and
assessment years 1965-66 to 1969-70 in case of H. K. (Investment)
Co. Pvt. Ltd.
TI1e interpretation of both sections 85A and 80M is
involved in these References since section 85A with some minor alterations made in it from time to time was in force during the assessment
years 1965-66 to 1967-68 and section 80M followed upon it with
effect from the commencement of the assessment year 1968-69
as
part of Chapter IV A.
Though the language of sections 85A and 80M
is almost identical, there are some verbal dissimilarities, but as
we
shall presently point out, they do not make any difference in interpretation so far as the present question is concerned.
We are concerned in these appeals and References only with the
interpretation of sections 85A and 80M but in order to arrive at the
true interpretation of these sections, it is necessary to refer briefly to
the history of the legislation enacted in these sections, since these
sections were not written by the Legislature on a clean slate, nor were
they the out come of any new or innovative exercise of legislative
judgment, but they were preceded by similar provisions granting rebate of super tax or income tax on inter-corporate dividends and these
provisions as interpreted by the courts throw light on the true meaning and content of sections 85A and SOM .
The earliest provision granting exemption of super-tax in respect
of inter-corporate dividends was made as far back as 9th December
1933 in a Notification issued by the Governor General in Council and
it provided as follows :
"The Governor General in Council is pleased to exempt
from snper-tax-
(i) s? mu~h of the income of any investment trust company as 1s derived from dividend paid by any other company
A
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A
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D
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F
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If
992
SUPREME COURT REPORTS
[1979] 3 s.c.R,
which has paid or will pay super-tax in respect of the profits
out of which such dividends are paid."
This provision came up for consideration before a Division Bench
of the High Court of Bombay in Commissioner of Income Tax v.
Industrial Investment Trust Co. Ltd. (1) and the question was whether
the dividend income exempted from super-tax was the entire income
by way of dividend received by an investment trust company or the
dividend income as computed in accordance with the provisions of
!be Act, that is, after deducting the expenses incurred in earning it.
The High Court of Bombay held that the "dividend income which was
exempted under the notification would be the dividend income received
by the assessee and not the said income less any further amounts",
because ''the notification must be regarded as a self-contained one and
not controlled by any .other provisions of the Act" and there was "no
warrant to construe the word 'Income' in the notification as total income, nor to qualify the dividend income specified in the said notifi·
cation as the dividend income computed under section 12 of the Act".
It was thus held that the entire amount of dividend received by an
investment trust company would be exempt from super-tax and not
the amount of dividend minus the expenses incurred in earning it. This
Notification was followed by a provision of a similar kind granting
exemption from super-tax in respect of certain specified categories of
inter-corporate dividends introduced as section 56A in
the
Indian
Income-tax Act, 1922 (hereinafter referred to as the Old Act) by
Finance Act, 1953. It is not necessary to make any detailed reference
to this provision since there is no decided case which has considered
this provision or expressed an opinion upon it.
When the old Act was repealed and the present Act enacted with
eM'ect from 1st April, 1962, section 99, sub-section (1) was introduced in the present Act exempting certain categories of income from
super-tax and one of such categories was that set out in clause (iv).
Section 99, sub-section (1), clause (iv) read as follows :
"99(1) Super-tax shall not payable by an assessee in respect of the following amounts which are included in
his total income.
(iv) if the assessee is a company, any dividend received
by it from an Indian company, subject to the provisions contained in the Fifth Schedule".
(I) 67 l. T. R. 436.
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CLOTH TRADERS v. C.I.T. (Bhagwati, J.)
993
This provision continued to be in force upto 31st March, 1965
:subject to a minor inconsequential amendment made by Finance Act,
1964. Now a question arose before the High Court of Bombay, in
Commissiuner of Income Tax v. Indian Guarantee & General Insurance
Co. Ltd. (1) whether the exemption granted under this provision was
in regard to the entire amount of dividend received by the assessee from
an Indian company or it was limited to the dividend income computed
in accordance with the provisions of the Act and forming
part of
total income.
The argument of the assessee based on the words 'any
dividend received by it from an Indian company' was that it was the
full amount of dividend received by the assessee which was exempt
from super-tax, while the Revenue relying on the words "amounts
which are included in his total income" contended that it was only the
amount of dividend computed in accordance with the provisions of
the Act and forming part of total income which was entitled to the
benefit cf exemption under this provision. The High Court accepted
the contention of the assessee and pointed out that on a plain reading
of sub-clause (iv) of sub-section (1) of section 99 it was clear that
the, exemption from super-tax was granted in respect of "any dividend
received by it from an Indian company" and these last words, according to their plain grammatical construction, could mean only one
thing, uamely, the entire amount of dividend received by the assessee
from an Indian company and nothing less. · The High Court emphasised
the word "received" following immediately upon the word 'dividend'
and observed that the use of this word also showed that the exemption was in regard to the dividend received and not in regard to the
"dividend received minus the expenses". · Th.e High Court pointed
-out that the words "amounts which are included in his total income"
in the opening part of section 99 sub-section ( 1) did not have any
!imitative effect, but they were used merely as a convenient mode of
·describing the different items of income set out in clauses (i) to (v)
.of that sub-section. Clanses (i) to (v) referred to different items of -
income which were sought to be exempted from super-tax under subsection (1) of section 99 and it was only if these items of income
were included in the total income of the assessee that the question of
exemption from super-tax would arise and hence the legislature used
the general words "amounts which are included in his total income"
in the opening part of sub-section ( 1) of section 99 as an omnibus
formula to cover these different items. These words according to the
High Court wefe descriptive of the items of income included in the
.::omputation of the total income and were not indicative of the qnantum
(!) 90 I. T. R. 348.
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SUPREME COURT REPORTS
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of the amounts of the different items included in such computation·
and they did not, therefore, have the effect of cutting down the plain.
natural meaning of the words "any dividend received by it from an.
Indian company" which represented the quantum of income in respect
of which exemption from super-tax was granted under tbe section.
This view, observed the High Court, not only followed logically and
inevitably from the words used in the statutory provision, but was
also in consonance with the object of the legislation, which was to·
prevent donble taxation of the amount of dividend with the view to
encouraging investment by companies in the share capital of other
companies. It may be pointed out that the same view in regard t0<
the construction of clause (iv) of sub-section (1) of section 99 was.
taken by the Calcutta High Court in Commissioner of Income-tax v ..
Darbhanga Marketing Co.('')· and it was held that under tbat provision, exemption from super-tax was granted to an assessee in respect
of "any dividend received by it" which meant the full amount of dividend received by tl1e asscssee and not "dividend received minus the·
amount of interest on monies borrowed for earning the same".
The·
Calcutta High Court observed : "The expressions 'which are included'
in his total income' in sub-section ( 1) of section 99 and
'incomes
forming part of total income' in the heading are descriptive of tbe·
items included in the computation of the total income and not indicative of the quantum of the amounts included under the
diffe-rent
items in the computation of total income.
Such a construction of
these expressions would be in harmony with the obvious meaning of
the expression 'dividend received' ".
The decision of the Bombay
High Court in Industrial Investment Trust Co's case
(supra) was.
strongly relied upon by the Calcutta High Court in coming to this decision and the view taken by the Calcutta High. Court was noted with
approval by the Bombay High Court in New Great Insurance Co's·
case (supra).
The same view was also taken by the Madras High
Court in Commissioner of Income-tax v. Madras Motor and General'
lnsutance Co. Ltd.(') and it was approved in later decision of the
same Court in Madras Auto Service v. Income-tax Officer( 8). It
would, thus, be seen that notwithstanding the words "amounts which
are included in bis total income" in the opening part of sub-section
(1) of section 99, all the three High Courts, namely, Bombay, Calcutta and Madras took the view that the entire amount of dividend'
received by the assessee from an Indian Company was exempt from:
H
(!) 80 L T. R. 723,
(2) 99 I. T, R. 243.
(3) IOI I. T. R, 589.
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CLOTH TRADERS v. C.I.T. (Bhagwati, J.)
995
super-tax and the exemptiou was not limited to dividend income
computed in accordance with the provisions of the Act and forming
part of the total income.
Section 99, sub-section (1) however remained in force only upto
the close of the assessment year 1964-65 and by an amendment made
by ·Finance Act 10 of 1965, section 99, sub-section (1) was omitted
and Chapter VI-A and section 85A were introduced in the present
Act with effect from 1st April, 1965. Chapter VI-A comprised sections 80A and 80D providing for certain specified deductions to be
made in computing total income while section 85A, in so
far
as
material, provides as follows :
"85A. DEDUCTION OF TAX ON INTER-CORPORATE DIVIDENDS :-Where the total income of an assessee being a company includes any income by way of
dividends received by it from an Indian company or a company wbich has made the prescribed arrangements for the
declaration and payment of dividends (including dividends
on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is
chargeable on its total income for any assessment year of
so much of the amount of income-tax calculated at the
average rate of income-fax on the income
so
included
(other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount
of twenty-five per cent thereon; .......... "
c
E
There were some amendments made in section 85A by Finance Act,
F
1966 but they are not material for our present purpose and we need
not refer to them.
Section SSA also came to be considered by the
Bombay High Court in the New Great l11sura11ce Co's case (supra)
because two of the assessment years with which the Bombay High
Court was concerned in that case were assessment years 1965-66 and
1966-67 when section 85A was in force.
The Bombay High Court
G',
pointed out that except for some minor verbal changes section 85A
was almost in the same terms as section 99, sub-section (1), clause
(iv), the only real differences being that the exemption granted under
section 99, sub-section (!). clause (iv) was in regerd to super-tax,
while the deduction allowed under section 85A was in regard to income-tax.
The same interpretation was, therefore, placed on section
HI
85A as in the case of section 99 sub-section ( 1), clause (iv) and it
was held that under section 85A, the assessee would be entitled to de-
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SUPREME COURT REPORTS
[1979] 3 S.C.R.
duction of income-tax in respect of the whole of the dividend received
from an Indian company.
The expression "where the total income
........ includes any income by way of dividends" in the opening part
of section SSA was construed as referring to the category of income
by way of dividends received from an Indian company so that if this
particular category of income is included in the computation of total
income, the assessee would be entitled to a deduction of so much of
the amount of income tax calculated at the ~verage rate of incometax ou the "income so included" as exceeds an amount of twenty-five
per cent of such income.
The words "income so included" were read
to mean not the quantum of the "income by way of dividends" included in the total income but the income falling within the category
of "income by way of dividends from an Indian company" included
in the total income.
Thus the view taken by the Bombay High Court
was that under Section SSA also, the deduction admissible was in
respect of the entire dividend received by the assessee from an Indian
'company and not in respect of dividend income minus deductions allowable under tl1e provisions of the Act in computing the tot;,! incom.e.
The original Chapter VI-A and certain other sections including
section 85A were deleted from the present Act by Finance (No. 2)
Act, 1967 with effect from !st April, 196S and replaced by a new
Chapter VI-A which contains a fasciculous of sections from section
SOA to section 80VV. Section SOA, sub-section ( 1) provides that in
computing the total income of an assessee there shall be allowed from
bis gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deduction specified in section SOC to section 80VV and sub-section (2) of tba~ _section imposes a ceiling on
such deductions by enacting that the aggregate amount of such deductions shall not, in any case, exceed tbe gross total income of the assessee.
The exl'ression "gross total income" is defined in clause (5)
of section SOB to mean the total income computed in accordance with
the provisions of the Act before making any deduction under Chapter
VI-A or under section 280.0. Section 80M is the new section which
corresponds to the repealed section 85A and it provides for deduction
in respect of certain categories of inter-corporate dividends. It is the
ir.terpretation of this section which constitutes the subject matter of
controversy between the parties and hence it would be desirable to
set it out in extenso.
This section has undergone changes from· time
to time since the date of its enactment and we will, therefore, reproduce
it in the form in which it was during the assessment years 1968-69
and 1969-70 being the assessment years with which we are concerned
in these cases :
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CLOTH TRADERS v. C.I.T. (Bhagwati, J.)
997
"SOM. DEDUCTION IN RESPECT OF
CERTAIN
INTER-CORPORATE DIVIDENDS:
(1) Where the gross total income of an assessee being a
company includes any income by way of dividends received
by it from a domestic company, there shall, in accordance
with and subject to the provisions of the section, be allowed,
in computing the total income of the assessee, a deduction
from such income by way of dividends of an amount equal
to-
(a) where the assessee is a foreign company-
(i) in respeet of such income by way of ~ends
received by it from an Indian company which
is not such a company as is referred to in section 1 OB and which
is mainly engaged in a
priority industry .......... 80% of such income
(ii) in respect of such income by way of dividends
other than the dividends referred to in subclause (i) .......... 65% of such income.
(b) where the assessee is domestic company in respect of
any such income. by way of dividends ........ 60%
of such income."
There were several amendments made subsequently in this section but
they relate primarily to the percentage of the income to be allowed as
a deduction ~nd do not hav~ ~ny bearing on the question of interpretation posed before us.
,One amendment is, however, material and
that was made by Finance Act 1968 by which the words "received
by it" occurring in sub-section (1) of section SOM were omitted with
effect from 1st April, 1968. The Finance Act of 1968 also provided
in sub-sections (2) and (3) of section 31 that notwithstanding the
omission of section 99, sub-section (1), clause (iv) and section 85A,
the provisions of those sections shall have and be deemed always to
have effect, subject to the modification that the words "received by it"
in the opening part of those sections were deleted.
The net effect
of these amendments was that the words "received by it" following
upon the word "dividend" were omitted with retrospective effect from
section 99, sub-section (1), clause {iv) and section 85A and section
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SUPREME COURT REPORTS
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SOM wa& to be read as if the words "received by it" were not in the
opening part of that section.
We shall presently consider the language of section SOM for the
purpose of arriving at its true interpretation, but before we do so, we
must refer to an ari:ument advanced on behalf of the Revenue that
whatever might have been the interpretation placed on section 99, subsection (1), clause (iv) by the Bombay, Calcutta and Madras High
Courts and on section 85A by the Bombay High Court, it cannot hold
good any more in view of the retrospective deletion of the words' "received by it" in the opening part of these sections.