# Commiss1otier of Tncome-ta:x. /Jombay City v. Khalau Makanji Spinning & Weaving Co. Ltd

- **Citation:** [1960] 3 S.C.R. 880
- **Court:** Supreme Court of India
- **Decided:** 1960
- **Case number:** Civil Appeal No. 477 of 1957
- **Bench:** S. K. Das, J. L. Kapur, M. Hidayatullah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commiss1otier-of-tncome-ta-x-jombay-city-v-khalau-makanji-spinning-weaving-co-1904
- **Pages:** 8

## Headnote

·Additional Income-tax-If could be levied on excess dividends,
'When there are pro.fits in the preceding years-Manner of calculation
pf tax-Indian Finance Act, r949 and r950, Para. B, of Part I of
·the First Schedule.
After making all allowances and deductions, the income of
the asscssee company was finally assessed for the years 1949.50
T
3 S.C.R. SUPREME COURT REPORTS
881
and 1950-51 at Rs. 3.423 and Rs. 3,312 respectively. The assessee
1960
company had declared dividends of Rs. 46,024 and Rs. 56,326
for the above two years. Though no profits were brought Commissioner of
forward from the previous years, the income-tax officer applied
In~om~-tax,
the proviso to para. B of Part 1 of the Third and First Schedules
om ay
of the Finance Act, 1949 and 1950, assessed the difference in
1
vr,1 / .. 1
h
dd. .
l .
d
h
d .
t
t J a gaon '' ec rici y
eac year to a
1t10na mcome-tax an
c arge
mcome- ax a
Supply co. Ltd.
the rate of annas 5 in the rupee on the amounts for the two
assessment years. The High Court held that though excess
dividends were, in fact, paid, the absence of profits from previous
years rendered the Finance Act unworkable in this case.
The question was if the second proviso to para. B read with
the explanation which sets out the manner of calculation of the
tax applied and whether it was the intention of the Finance Act
to levy the additional income-tax on the excess dividends even
if there were no profits brought forward from preceding year or
years:
Held, that the second proviso to para. B of Part I of the
first schedule of the Finance Act, 1950, which corresponds to the
corresponding paragraph of the Finance Act, 1949, introduces a
fiction which postulates that there should be undistributed profit
of one or more years immediately preceding the previous year,
that such undistributed profits should be sufficient to cover the
amount of excess dividend actually paid out in the year under
assessment, and that the undistributed profits should not have
b ·en taken likewise to cover an excess dividend of any other
previous year. The excess dividends have first to be connected
with the profits of the preceding years and then the tax borne on
those profits has to be found out, and tax is then payable at an
enhanced rate and amounts to the difference between the tax
actually borne by the profits and that demandable under the
paragraph. Where there are no profits of any preceding year or
years, the fiction wholly fails and the method of calculation,
equally so.
Held, further, that the income-tax law seeks to put in the
net certain class of income, and can only successfully do so, if it
frames a provision appropriate to that end. If the law fails and
the taxpayer cannot be brought within its letter, no question
of unjustness as such, arises.

## Text

Commiss1otier of
Tncome-ta:x.
/Jombay City
v.
Khalau Makanji
Spinning &
Weaving Co. Ltd.
JI idayatullah J.
1960
May4.
880
SUPREME COURT REPORTS
[1960]
of the previous year, and it would not cover something which is not the income of the previous year,
or made fictionally so.
The Finance Act could have
gone further, as pointed out by the learned Chief
Justice in the extract quoted, and made the profits a
part of the total income of the previous year under
assessment, but it did not do so.
The Finance Act
could have also resorted 1;o some other fiction, which
might conceivably have met the case; but it has
failed to do so.
Even if one considers the dividends
as having come out of the profits of preceding years,
they do not become the income of the relevant previous year, and unless the :Finance Act expressly laid
down that it should be taxed as part of the total
income, the purpose is not achieved.
Indeed, the
Finance Act continues to say that the tax shall be on
the total.income, as defined in the Indian Income-tax
Act and as determined under that Act. It is impossible to say that the additional income-tax was properly laid upon the total income, because what was
actually taxed was never a part of the total income .
of the previous year.
For these reasons, we are of opinion that the High
Court was right in answering the question which it
had framed, in the negative.
In the result, the appeal fails, and is dismissed
with costs.
Appeal dismissed.
THE COMMISSIONER OF INCOME-TAX,
BOMBAY
v.
THE JALGAON ELECTRICITY SUPPLY CO.,
LTD.
(S. K. DAS, J. L. KAPUR and M. HIDAYATULLAH, JJ.)
·Additional Income-tax-If could be levied on excess dividends,
'When there are pro.fits in the preceding years-Manner of calculation
pf tax-Indian Finance Act, r949 and r950, Para. B, of Part I of
·the First Schedule.
After making all allowances and deductions, the income of
the asscssee company was finally assessed for the years 1949.50
T
3 S.C.R. SUPREME COURT REPORTS
881
and 1950-51 at Rs. 3.423 and Rs. 3,312 respectively. The assessee
1960
company had declared dividends of Rs. 46,024 and Rs. 56,326
for the above two years. Though no profits were brought Commissioner of
forward from the previous years, the income-tax officer applied
In~om~-tax,
the proviso to para. B of Part 1 of the Third and First Schedules
om ay
of the Finance Act, 1949 and 1950, assessed the difference in
1
vr,1 / .. 1
h
dd. .
l .
d
h
d .
t
t J a gaon '' ec rici y
eac year to a
1t10na mcome-tax an
c arge
mcome- ax a
Supply co. Ltd.
the rate of annas 5 in the rupee on the amounts for the two
assessment years. The High Court held that though excess
dividends were, in fact, paid, the absence of profits from previous
years rendered the Finance Act unworkable in this case.
The question was if the second proviso to para. B read with
the explanation which sets out the manner of calculation of the
tax applied and whether it was the intention of the Finance Act
to levy the additional income-tax on the excess dividends even
if there were no profits brought forward from preceding year or
years:
Held, that the second proviso to para. B of Part I of the
first schedule of the Finance Act, 1950, which corresponds to the
corresponding paragraph of the Finance Act, 1949, introduces a
fiction which postulates that there should be undistributed profit
of one or more years immediately preceding the previous year,
that such undistributed profits should be sufficient to cover the
amount of excess dividend actually paid out in the year under
assessment, and that the undistributed profits should not have
b ·en taken likewise to cover an excess dividend of any other
previous year. The excess dividends have first to be connected
with the profits of the preceding years and then the tax borne on
those profits has to be found out, and tax is then payable at an
enhanced rate and amounts to the difference between the tax
actually borne by the profits and that demandable under the
paragraph. Where there are no profits of any preceding year or
years, the fiction wholly fails and the method of calculation,
equally so.
Held, further, that the income-tax law seeks to put in the
net certain class of income, and can only successfully do so, if it
frames a provision appropriate to that end. If the law fails and
the taxpayer cannot be brought within its letter, no question
of unjustness as such, arises.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 477 of 1957.
Appeal from the judgment and order dated
September 9, 1955, of the Bombay High Court in
Income-tax Reference No. 37/x of 1954.
K. N. Rajagopal Sastri and D. Gupta, for the
appellant.
N. A. Palkhivala, B. K. B. Naidu and I. N. Shroff,
for the respondent.
882
SUPREME COURT REPORTS
[1960]
z960
1960. May 4. The Judgment of the Court was
delivered by
Commissioner of
HIDAYATULLAH, J.-This appeal is with a certifi'
Income-tax.
Bombay
cate granted by the High Court against its judgment
v.
. . and order dated September 9, 1955, in a reference
Jalgaon Electricity
d
66(1)
f th
I d'
I
t
A t
Th
supply co. Ltd. un er s.
o
e
n ian
ncome- ax
c .
e
-
Tribunal had referred the following questions for the
Hidayatullah J. decision of the High Court:
"(1) Whether there was any excess dividend
declared by the assessee Company?
(2) Whether the assessee Company is liable to
pay additional income-tax in respect of the excess
dividend paid by the assessee Company ? "
The High Court answered the first question in the
affirmative and the second, in the negative. The
Commissioner of Income-tax, Bombay is the appellant
before us, and the Jalgaon Electric Supply Co., Ltd.
(the assessee Company) is the respondent.
The facts of the case are simple. For the assessment
years 1949-50 and 1950.51, the book profits of the
ii.ssessee Company were respectively Rs. 1,22, 469 and
Rs. 76,886.
After adjustment of depreciation allowance and other deductions, the income of the assessee
Company was finally assessed at Rs. 3,423 and
Rs. 3,312 respectively. The assessee Company declared
a dividend of Rs. 46,024 in the first year and Rs. 56,326
in the next. The Income-tax Officer, applying the
Proviso to Para. B of Part I of the Third and :First
Schedules of the Finance Acts, 1949 and 1950 respectively, assessed the difference in each year to additional
income-tax, and charged income-tax at the rate of 5
annas in the rupee on the amounts for the two assessment years. The assessee Company appealed first to
the Appellate Assistant Commissioner and then to the
Tribunal. In the Tribunal, there was a difference of
opinion between the President and the Accountant
Member, the former holding that the assessee Company
was not liable and the latter, that it was.
The case
was then referred to a third Member, who agreed with
the President. The main reason for the decision of
the majority was that there were no profits in the years
.preceding .the previous year, and that, therefore, the
said Paragraphs could not, on their terms, operate in
3 S;C.R. SUPREME COURT REPORTS
883
t.he circumstances. The view of the minority was that
I96o
even if there were no profits, the intention of the
Finance Act to levy the additional income-tax on the Co'f'n7~:.:!~;:;, ''f
excess dividends was perfectly plain, and that the
Bombay
assessee Company was liable. It may be mentioned
v.
h.
h
th d · •
f th T, 'b
1 t
d jalgaon Electricity
:i.t t 1s stage t at
e ecrs10n o
e
n una
urne
supply co. Ltd.
entirely upon the fact that no profits were brought
--
forward from the previous years, and that, therefore, Hidayatullah J.
the Paragraphs could not be applied. The High Court
held that though excess dividends were, in fact, paid,
the absence of profits from previous years rendered the
Finance Act unworkable in this case. It, therefore,
accepted the reasons given by the Tribunal, and upheld
its decision.
Paragraph B of Part I of the First Schedule of the
Finance Act, 1950 corresponds to the corresponding
Paragraph of the Finance Act, 1949. It is, therefore,
not necessary to refer to them separately. We shall
confine ourselves to the Finance Act, 1949. It may
also be pointed out that the circumstances of the two
years are also on par, except that the amounts of
income and the excess dividends are different. The
paragraph reads as follows:
" B. In the case of every companyRate
On the whole of total income ...... Five annas in
the rupee:
Provided that in the case of an Indian Company-
(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, 1950, and no
order has been made under sub-section (1) of section
23A of the Income-tax Act, a rebate shall be allowed
at the rate of one anna per rupee on the amount of
such excess;
(ii) where the amount of dividends referred to ·in
clause (i) above exceeds.the .total inconw as reduced
by seven annas in the rupee and by the· amount, if
.. any, exempt from income-tax, there shall be charged
Commissioner of
Income-tax,
· Bombay
v.
J algaon Electricity
Suppl."Y Co. Ltd. ·
H idayatullah J.
884
SUPREME COURT REPORTS
[1960]
'i-~
on the total income an additional income-tax
equal to the sum, if any, by which the aggregate
amount of income-tax actually borne by such excess
(hereinafter referred to as 'the excess dividend')
falls short of the amount calculated at the rate of
five annas per rupee on the excess dividend.
For the purposes of the above proviso, the expression 'dividend' shall have the meaning assigned to \
it in clause (6A) of section 2 of the Income-tax Act, .l. ,-
but any distribution included in that expressioi1,
made during the year ending on the 31st day of
March, 1950, shall be deemed to be a dividend
declared in respect of the whole or part of the
previous year.
For the purpose of clause (ii) of the above proviso,
•
the aggregate amount of income-tax actually borne
r--.
by the excess dividend shall be determined as
follow·s:-
(i) the excess dividend shall be deemed to be out
of the whole or such portion of the undistributed
profits of one or more years immediately preceding
the previous year as would be just sufficient to cover
the amount of the excess dividend and as have not
likewise been taken into account to cover an excess L..-,
dividend of a preceding year;
·1
(ii) such portion of the excess dividend as is
.
deemed to be out of the undistributed profits of each
of the said years shall be deemed to have borne
tax,-
(a) if an order has been made under sub-section
(1) of section 23A of the Income-tax Act, in respect
of the undistributed profits of that year, at the rate
of five annas in the rupee, and
(b) in respect of any other year, at the rate applicable to the total income of the company for that
year reduced by the rate at which rebate, if an~-,
was allowed on the undistributed profits. "
The scheme of the Finance Act in relation to excess
dividends and their chargeability to additional ......_.
income-tax has been examined by us in Civil Appeal
-
No. 427 of 1957 decided today.
We are concerned in
this c1,1.se with the application of the second Proviso
-
3 S.C.R.
SUPREME COURT REPORTS
885
to the Paragraph, read with the explanations (not sor960
called), which set out the manner of calculation of Commissioner of
the tax. As we have already pointed out in the other
Incomet<1:r,
case, the additional income-tax is payable if dividends
Bumbay
in excess of the limit fixed by the legislature are paid
v.
. .
·
Th'
dd't'
l ·
t
t k
Jalgaon Electricity
m any year.
is a
I 10na mcome- ax a es note supply :co. Lid.
of such tax as might have been paid on the profits,
-
albeit at a lower rate, in any previous assessment ffidayatullah ].
year and gives dedl_lction for that amount.
The
additional income-tax is payable on the excess dividends calculated at a different rate but allowing for
the tax already paid. For this purpose, the aggregate amount of income-tax to be borne by the excess
dividends has to be calculated in a particular manner.
This manner is indicated in the Paragraph, and it
begins by providing that the excess dividend shall be
deemed to be out of the whole or such portion of the
undistributed profits of one or more years preceding
the previous year as would be just sufficient to cover
the amount of the excess dividend and were not likewise taken into account to cover an excess dividend
of a previous year. It is then provided that the excess
dividends which are so deemed to be the undistributed profits of each of the previous years shall be
deemed to have borne the tax.
The fictions which have been introduced postulate
that there should be undistributed profits of one or
more years immediately preceding the previous year,
that such undistributed profits should be sufficient to
cover the amount of excess dividend actually paid
out in the previous year under assessment, and that
the undistributed profits should not have been taken
likewise to cover an excess dividend of any other
previous year. Where there are no profits of any
preceding year or years, the fiction wholly fails and
the method of calculation, equally so.
We do not
agree with the argument of the Commissioner that
the fiction can be given effect to, even if the profits
of preceding years do not exist. The argument suggests
that the chargeability of excess dividends to additional income-tax can arise under the terms of the
Paragraph even in such circumstances. But a plain
reading of the Proviso clearly shows that the excess
IIS
886
SUPREME COURT REPORTS
[1960]
z96o
dividends have first to be connected with the profits
of the preceding years and then the tax borne on
Commissioney of h
b
Income-tax,
t ose profits has to e found out, and the tax is pay.
Bombay
able at an enhanced rate and amounts to the differv.
ence between the tax actually borne by the profits
J algaon lilectricitv
d
h
d
d bl
d
h
p
T
supply co. ua: an
t at
eman a e un er t e
aragraph.
he
--
High Court repelled the argument of the CommisHidayatullah J. sioner in much the same way as we have done, and
we entirely agree with the reaso,ns given by it.
The Accountant Member, whose decision was in a
minority, gave two reasons. The first was that "the
explanation provides for the determination of the
years out of the profits of which the excess dividend
has come", and the second was that "in order to
escape the liability imposed by Cl. (ii), the company
must prove that the excess dividend has borne tax
5 annas in the rupee as it is only in that event that
the additional tax payable will be nil". These reasons
were also put before us for acceptance. We are, however, unable to agree. The fiction cannot be whittled
down in the manner suggested in the first reason.
The fiction incorporates within itself not only what the
Accountant Member says but also a mode of calculation, which is not a part of the fiction. It is the mode
of calculation which cannot be given effect to, though
we would go further and say that the fiction itself
fails because no profits of preceding years at all existed. The second reason given by the Accountant Member assumes the liability to pay tax, and ·that is not
permissible, because that is the fact in issue to be
decided. That fact can only be decided if the Paragraph can be made applicable to the present case and
not otherwise. We cannot start with the assumption
that additional in.come-tax on excess dividend has
got to be paid, whether the Paragraph applies or not.
That would be begging the very question to be
decided.
The Commissioner also suggested numerous modifications of the language to give effect to the intention
to levy additional income-tax on excess dividends, and
pointed out, as did the Accountant Member, that it
would be unjust to allow an escapement of tax, where
there were no profits of preceding ye.ars, to set off
L~
•
3 S.C.R.
SUPREME COURT REPORTS
887
against the excess dividends. In our opinion, the
z960
question of modification of the language cannot arise Commissioner of
in the circumstances of the case. Our reasons have
.Income-tax, -
been given in Civil Appeal No. 427 of 1957, decided toBombay
day, and we need not go over the ground again.
v.
. .
Th
·
1
t"
f
· t
·
1 d Th Jalgaon Electricity
ere is a so no ques 10n o unJUS ness invo ve .
e supply co. Ltd.
Income-tax law seeks to p11t in the net certain class
of income, and can only successfully do so, if it frames Hidayatullah J.
a provision appropriate to that end. If the law fails
and the tax-payer cannot be brought within its letter,
no question of unjustness as such, arises. The answers
given by the High Court to the two questions were
correct in the circumstances of the case.
In the result, the appeal fails, and will be dismissed
with costs.
Appeal dismissed .
KA V ALAPPARA KOTTARATHIL KOCHUNI
AND OTHERS
v.
THE STATE OF MADRAS AND OTHERS
(B. P. SINHA, c. J., JAFER IMAM, A. K. SARKAR,
K. SUBBA RAO and J. C. SHAH, JJ.)
Marumakkathayam Law-Enactment for removal of doubtsConstitutional validity-Madras Marumakkathayam (Removal of
Doubts) Act, I955 (32 of r955)-Constitution of India, Arts. r9(r)
(f), ]I, 3rA.
These petitions by the holder of Kavalappara Sthanam, his
wife, daughters and son challenged the constitutional validity of
the Madr8s Marumakkathayam (Removal of Doubts) Act, 1955,
passed by the Madras Legislature soon after the Privy Council
had declared the properties in possession of the Sthanee to be
Sthanam properties in which the members of the tarwad had no
interest. Section 2 of the Act, which contained the substantive
provision, was as follows:--
" 2. Notwithstanding any decision of Court, any sthanam in
respect of which :-
~a) there is or had been at any time an intermingling of the
properties of the sthanam and the properties of the tarwad, or
(b) the members of the tarwad have been receiving maintenance from the properties purporting to be sthanam properties
as of right, or in pursuance of a custom or otherwise, or
(c) there had at any time been a vacancy caused by there
being no male member of the tarwad eligible to succeed to the
Sthanam,
I960
May 4.