# ~·* ,, 'd C.I.T. MADRAS v. T. V. SUNDRAM IYENGAR (P) LTD

- **Citation:** [1975] Supp. 1 S.C.R. 93
- **Court:** Supreme Court of India
- **Decided:** 1975-04-09
- **Case number:** Civil Appeals Nos. 1392-93 of 1970
- **Bench:** Y. V. Chandrachud, R. S. Sarkaria, A. C. Gupta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/d-c-i-t-madras-v-t-v-sundram-iyengar-p-ltd-6547
- **Pages:** 14

## Headnote

Indian !ncon1e Tax Act, 1922, s. 23 A-Scope of.
Under Section 23A of the Indian Incon1e Tax Act, 1922, if in respect of
any previous year the profits and gains distributed as dividends within the
93
A
B
12 months immediately fol1owing the expiry of that previous year are Jess
than the statutory percentage of the total income of that previous year as
reduced by the amounts mentioned in els. (a), (b) and (c) and sub-s. (!),the
Income Tax Officer shall make an order that the company shall be liable to
C
pay super-tax at the prescribed rate on the undistributed balance Of the total
income of the previous year. According to Explanation 2. statutory percentage
means 45 per cent of the industrial profits and 60 per cent of non-industrial
profits.
The explanation further says that the said percentages should be
applied separately v.·ith refer.ence to the amounts of profits and gains -attributable to the two parts of the company's business as if the said amounts
were respectively the total income of the company in relation to each of its
parts, the amount of divio"ends and taxes also being sin1Uarly apportioned for
D
purpose of sub-s. (!).
In the present case 45 per cent of the industrial profits comes to Rs. 1.51
lakhs, while 60 per cent of non-industrial profits comes to Rs. 8.43 laths.
The company, instead of distributing a sum of Rs. 9.94 lakhs by way of
dividends distributed Rs. 4.20 lakhs, equally as profits of the industrial and
non-industrial activities leaving aside the profit of Rs. 13.21 Jakhs. The income Ta"'{ Officer aUOcated the aividends declared by the company to
the
E
industrial and non-industrial segments in the same proportion as the profits
of the two segments bore to the total profits of the company and levied additional super-tax under s. 23A on the entire undistributed balance of the
total profits available for distribution, namely Rs. 13.21 Jakhs.
The Order
was confirn1ed by- the Appellate Assistant Commissioner.
On appeal, the Appellate Tribunal held that in so far as the profits of
the industrial activity \vere concerned, the company must be deemed to l1ave
F
distributed by way of dividends out of those profits just so much as would be
equal to 45
per cent of such profits
and accordin_gly
it
allocated
the
dividend out of industrial and non-industrial
profits.
On
this
allocation
it came to the conclusion that the company having declared the statutory dividend on its industrial profits, was not liable to pay additional supertax in so far as these profits were concerned. 1t, however, upheld the levy
of additional super-tax on non-industrial profits.
The High Court confirmed the Tribunal's view.
Allowing the appeal,
HELD : (1) The High Court was in error in holding that the profits
of the two parts of the con1pany's business should be treated as if they were
the total income of the company for a11 purposes. In taking this view the
High Court overlooked the concluding words of Explanation 2 by reason of
which the legal fiction has to be ilimited to its duly appointed purpose. [106 D-E].
(2) The High Court and the Tribunal were wrong in holo'ing in favour of
the assessee.
Where a company has a composite bqsiness, the first step is to
ascertain the distributable profits of the t\vo parts separately. For the purpose of
finding out the minimum dividend that the company ought to have distributed,
the proper statutory percentage as prescribed by Explanation 2 has to be ap~
plied separately to the distributable profits of the two parts, as if the respective
profits are the total income of the company in relation to each part of its
business. The composite dividend distributed by the company has then to be
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SUPREME COURT REPORTS
[1975] SUPP, S.C.R.
app01iioned between the two parts in the same ratio as the respective profits
of the two parts bear to the toal profits of the company. [103H-10~B],
(3) (a) Explanation 2 by its express terms requires that for the purpose
of sub-s. (1) the amount of divide

## Text

_Characters 0–39,707 of 44,637. This is a partial read: ask again with offset=39707 for what follows._

-
-~·* ,,.. ..
'd
C.I.T. MADRAS
v.
T. V. SUNDRAM IYENGAR (P) LTD.
April 9, 1975
[Y. V. CHANDRACHUD, R. S. SARKARIA AND A. C. GUPTA, JJ.]
Indian !ncon1e Tax Act, 1922, s. 23 A-Scope of.
Under Section 23A of the Indian Incon1e Tax Act, 1922, if in respect of
any previous year the profits and gains distributed as dividends within the
93
A
B
12 months immediately fol1owing the expiry of that previous year are Jess
than the statutory percentage of the total income of that previous year as
reduced by the amounts mentioned in els. (a), (b) and (c) and sub-s. (!),the
Income Tax Officer shall make an order that the company shall be liable to
C
pay super-tax at the prescribed rate on the undistributed balance Of the total
income of the previous year. According to Explanation 2. statutory percentage
means 45 per cent of the industrial profits and 60 per cent of non-industrial
profits.
The explanation further says that the said percentages should be
applied separately v.·ith refer.ence to the amounts of profits and gains -attributable to the two parts of the company's business as if the said amounts
were respectively the total income of the company in relation to each of its
parts, the amount of divio"ends and taxes also being sin1Uarly apportioned for
D
purpose of sub-s. (!).
In the present case 45 per cent of the industrial profits comes to Rs. 1.51
lakhs, while 60 per cent of non-industrial profits comes to Rs. 8.43 laths.
The company, instead of distributing a sum of Rs. 9.94 lakhs by way of
dividends distributed Rs. 4.20 lakhs, equally as profits of the industrial and
non-industrial activities leaving aside the profit of Rs. 13.21 Jakhs. The income Ta"'{ Officer aUOcated the aividends declared by the company to
the
E
industrial and non-industrial segments in the same proportion as the profits
of the two segments bore to the total profits of the company and levied additional super-tax under s. 23A on the entire undistributed balance of the
total profits available for distribution, namely Rs. 13.21 Jakhs.
The Order
was confirn1ed by- the Appellate Assistant Commissioner.
On appeal, the Appellate Tribunal held that in so far as the profits of
the industrial activity \vere concerned, the company must be deemed to l1ave
F
distributed by way of dividends out of those profits just so much as would be
equal to 45
per cent of such profits
and accordin_gly
it
allocated
the
dividend out of industrial and non-industrial
profits.
On
this
allocation
it came to the conclusion that the company having declared the statutory dividend on its industrial profits, was not liable to pay additional supertax in so far as these profits were concerned. 1t, however, upheld the levy
of additional super-tax on non-industrial profits.
The High Court confirmed the Tribunal's view.
Allowing the appeal,
HELD : (1) The High Court was in error in holding that the profits
of the two parts of the con1pany's business should be treated as if they were
the total income of the company for a11 purposes. In taking this view the
High Court overlooked the concluding words of Explanation 2 by reason of
which the legal fiction has to be ilimited to its duly appointed purpose. [106 D-E].
(2) The High Court and the Tribunal were wrong in holo'ing in favour of
the assessee.
Where a company has a composite bqsiness, the first step is to
ascertain the distributable profits of the t\vo parts separately. For the purpose of
finding out the minimum dividend that the company ought to have distributed,
the proper statutory percentage as prescribed by Explanation 2 has to be ap~
plied separately to the distributable profits of the two parts, as if the respective
profits are the total income of the company in relation to each part of its
business. The composite dividend distributed by the company has then to be
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SUPREME COURT REPORTS
[1975] SUPP, S.C.R.
app01iioned between the two parts in the same ratio as the respective profits
of the two parts bear to the toal profits of the company. [103H-10~B],
(3) (a) Explanation 2 by its express terms requires that for the purpose
of sub-s. (1) the amount of dividends must be "similarly apportioned". [101 E]
(b) 'fhe word "similar" may generally be said to be a \Vord of a1nbiguous
import in the sense that the mere stipulation in a statute that something
should be done similarly is insufficient by itself to signify
the
<legree
of
similarity with which that thing must be done.
The "'ords "similarly apportioned" mean apportioned with reference to the amounts of profits and
gains attributable to the two parts of the oompany·s business.
The Exphtnation first refers to nn apportionment or splitting up and then provides that
the dividends and taxes shall be similarly apportioneO, that is to '>ay, similarly split up.
Accordingly, the words "similarly apportioned" have a definite
meaning and are not ambiguous. [lOlG-102 C].
(c) The' word "apportion'' is used in Explanation 2 in the sense of "split
up" so that "similarly apportioned" means "similarly split up".
~fhe divio·ends have, therefore, to be split up similarly, i.e. in the same ratio as lhc
industrial and non-industrial profits bear to each other after the total profit
is split up in two parts, indnst'fial and non-industrial. [102D-E]
(d) An assignment as a proper portion of the dividends \vould mean an
assignment in the same or similar ratio as the respective profits of the two
segments bear to the total profits of the company. Jt is not open to the
company to split up and apportion the diviocnds to the profits of the two
segments in such a manner as it finds convenient or thin ks fit.
'fhe company's freedom to apportion the dividends is conditioned by the ratio \vhich
the profits of the two segments bear to the total profits. [102 F-GJ
The sun1 of Rs. 4.20 Jakhs has to be split up in the same proportion
which the respective profits of the two segments bore to the total profits
of the company. There is a short-fall in respect of both the segments and
accordingly the company would be liable to pay adoitional super-tax at the
rate of 37 per cent on the entire undistributed balance of the distributable
profits. [102 H-103 BJ.
(4)(a) The language of s. 23A(l) as also of Explanation 2 is clear and
distinct and does not yield to more than one reasonable
interpretation~ The
fiction created by the Explanation is expressly limited to the purposes of
sub-s. (1) and there is no justification for pursuing the fiction to its logical
conclusion so as to permit it to operate beyond the limited purpose of sub-s.
(1). Under the scheme contained in s. 23A where a company has a composite business it is necessary at the outset to find out the profits attributable
to the two parts of its business. The statutory percentages as prescribed by
Explanation 2 have then to be applied separately to the profits of the two
parts.
By reason of the fiction created by Explanation 2, the profits of each
part have, for this purpose, and for this purpose alone, .to be treated a<; if
they were the total income ~f that part of th~. Company's busi_n.ess.
By. sub-s.
(1) the company becomes liable to pay add1ttonal super-tax 1f the d1v1a'ends
distributed by it are "less than the statutory percentage of the total income''.
Explanation 2 creates the fiction that for the purpose of sub-s. (1) the income
of the respective parts is to be regarded as the total inconle of each part
so that the statutory percentages can be applied separately to the income of
each part.
The fiction operates in this limited field and is in terms created
for this Iin1ited purpose. [1050-106 B].
(b) The levy of additional super-tax under s.23A(l) is a single levy. The
super-tax has to be levied "on the undistributed balance of the total- income
of the previous year".
Sub-section ( 1) itself clarifies that by these \\'Ords
is meant "total income as reduced by the amounts, if anv. referred to in
els. (a), (b) or (c) and the dividends actually distributed, ·rr any." Even iE
the Income Tax Officer finCls that the apportioned dividend in any part of
the company's business is less than the dividend that onght to have been
C.I.T. v. T. V. SUNDRAM (P} LTD.
declared by application of the statutory percentage, the additional supe1-tax
has to be levied on the whole of the undistributed profits of the company.
[106 B-D].
4RGUMENTS
For the t1ppella11t :
95
A
1. On a true interpretation of Section 23A(l) and Explanation 2 thereto
B
where the company's profits liable to be distributed as oividcnd are co1nposite consisting of industrial and non-industrial profits, the Income-tax Officer has
first to find out profits attributable to industrial activity and profits attributable
to non-industrial activity and ascertain the ratios bet\veen the industrial and
non industrial profits to the total Oistributable profit.
By the fiction created
by explanation 2 he has to treat the profits in each section as if they were
the total income of that section and apply the statutory percentage to find
out the minimum dividend that must be declared by the company.
He hat
C
then to dissect the composite dividend declarcO:
b~' the company and apportion the same between the dividend relating to industrial profiti and dividend
relating to non-ino'ustrial profits in the same ratios as the industrial profits
bear to the total distributable profits and non-indu:-.trial profits bear to the
total distributable profits. Thereafter, he has to find out \vhether the dividends so apportioned between the two parts is below the minimum distributable on the application of the statutory percentage.
If he finds that the
declared Oividend apportioned to any part of the business is below the taxable
D
minimum arrived at by applying the statutory percentage then the Incometax Officer has to levy additional super tax on the entire undistributed profits,
that is to say, on the distributable profits minus the total composite dividend
-declared by the company.
2. The levy of additional super-tax u/s. 23A(l) is a single levy and
is
-0n the undistiibuted profits on their entirety and, therefore, where on apportionment of the composite dividend declared by the company the industrial
and non-industrial profits, the J ncome-tax Officer finds that the apportioned
dividend in any part of the company's business is less than the dividend that
ought to have been declared by application of the statutory percentage the
Income-tax Officer has to levy additional super-tax on the entire undistributed
profits even though in the other sectio11 of the business the declared dividend
as apportioned may not be below the minimum that ought to have been distributed by the application of the statutory percentage.
E
F
-3. The fiction created in clause
of explanation 2 of Section 23A ( 1) prescribing that the amounts of profits or gains attributable to two parts
of
company's business should be treated as if they were the total income of
the company in relation to each of the parts is only for the ·purpose of
applying the statutory percentage which has to be applied to the total income
to find out the dividend liable to be distributed.
This fiction cannot be extended for the purpose of deeming the profits of each part as total lncon1c
for the purpose and levy of additional Sllper-tax as if there were as many
G
total income as there were parts of business profits.
4. Even on the interpretation put by the High Court and the opinion
given by it on the question referred to u'/s. 66(2) of the Income-tax Act
1922. the Income-tax Officer \Votlld be justifled in levying additional super-ta_~
on the entire distributed profit of Rs. 13,21,174 or atleast on Rs
12 36196
which i.s . the amot~nt of non-indust~inl pr9fits minus the balance ~f the 'aeclared d1v1dend attnbutable to non 1ndustnal profits i.e. Rs. 14,05.310 n1inns
Rs. 2,69,114.
·
For tl1e respondent
Section 23~ of the
Income-tax Act was recast by the
II of 1957 with effect from 1-4-1957.
Jt is this amended
applicable to the cnse under consideration as it relates to the
1957-58.
Finance
A.:t
section that is
assessment year
H
96
SUPREME COURT REPORTS
[1975] SUPP. ~.C.R.
A
The scope of Explanation 2 \\'Otlld appear to require the foUo\\'ing steps
to be taken in order to find out whether s. 23A (I) is applicable in the
case of a company whose profits consist partly of industrial activity and
partly of non-industrial activity.
B
c
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(i) Ascertain the profits relating to each part separately when
the company's business consists of partly in manufacture and partly
of other activities.
(ii) Treat the profit of each part as the total income: of the
company (in order to find out whether the dividend distributed is
leR<.: than the staulory percentage).
(iii) Apportion the taxes relating to each part and deduct such
tax from the profits of that of the company"s business.
Arrive
at the balance of income by deducting the amount coverea· by item
(3) from the an1ount covered by item (2).
(iv) Apply the statutory percentage of either 45 per cent or 60
per cent on the balance of income arrived at.
(v) Find out whether the dividend distributed and apportioned to
each part is less than the statutory percentage.
(vi) If the divioend distributed is less than the statutory percen·
tage, then on the undistributed balance of income of each part less
the taxes specified in sub·section (1) and dividend apportioned to
this part, additional super·tax to be levied at 37 per cent.
The expression 'similar' is
an
ambiguous \Vord.
The word
'apportion~
means split up.
So long as the apportionment is made with the desire to
act as fairly and justly as possible by all patties no uniform mode of appor·
tionment is necessary.
In the light of this the assessee company has appor·
tioned the dividend in accordance with the law.
There is no other method
of apportionn1ent indicated in the explanation.
Section 23A(l) is not applicable to that party of the company's profits
relating to manufacture. If he
follow~ the provisions of explanation 2 the
Income·tax Officer cannot be saiO: to be satisfied that the dividend distributed
relating to this part of the company's business is less than the statutory per·
centage.
The contention of the Revenue on the other hand is that the dividend
should be apportioned in the same proportion in which the industrial profits
and non·industrial profits bear to the total income of the company less the
tnxes specified in els. (a), (b) and (c) of s. 23A(l).
G
It is undeniable that the \Vords used in the latter part of the explanation
H
are ambiguous. They are capable of more meaning than one. The in·
terpretation contended fqr by the revenue leads to anamolous results. In the
circumstances, the construction which favours the assessee and saves it from
the penal consequences deserved to be adopted.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos.
1392-93
of 1970.
From the j11dgment and order dated the 23rd January, 1969 of
the Madras High Court in Tax Cases No. 116 of 1965 and 190 of
1967, Reference No. 48 of 1965 and 72 of 1967.
D. N. Kharkhanis and S. P. Nayar, for the appellant.
S. Swaminathan and S. Gopalakrislman, for respondent.
•
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c. I. T. v. T. v. SUNDRAM (P) LTD. (Chandrachud, !.)
The Judgment of the Court was delivered by
CHANDRACHUD, J.-These appeals by certificate granted by the
High Court of Madras under section 66A(2) of the Income-tax Act,
1922 arise out of a common judgment dated January 23, 1969 delivered by the High Court in Tax Cases Nos. 116 of 1965 and 190
of 1967. Tax Case No. 116 of 1965 arose out of the reference made
by the Income-tax Appellate Tribunal undei; section 66 (1) of the
Act while Tax Case No. 190 of 1967 arose out a reference made
by the Tribunal in pursuance of an order made by the High Court
under section 66(2) of the Act.
The question which arises for
consideration in these appeals is whether under section 23A of the
Act, the asscssee-company is liable to pay additional super-tax in
respect of any portion of its profits.
Section 23A of the Act of 1922, in so far as material read
thus at the relevant time :
"23A. (1) Where the Income-tax Officer is satisfied that m
respect of any previous year the profits and gains distributed as dividends by any company within the twelve
months immediately following the expiry of that previous
year are less than the statutory percentage of the total
income of the company of that previous year as reduced
by-
( a) the amount of income-tax and super-tax payable by
the company in respect of its total income, but excluding the amount of any super-tax payable under this
section ;
(b) the amount of any other tax levied under ahy _Jaw
for the time being in force on the company by the
Government or by a local authority in excess of the
amount, if any, which has been allowed in computing
the total income ; and
(c) in the case of a banking company, the amount actually
transferred to a reserve fund under section 17 of the
Banking Companies Act, 1949 ;
the Income-tax Officer shall. unless he is satisfied that
havi.ng regard to the losses incurred by the company in
earlier years or to the smallness of the profits made in
the previous year, the payment of a dividend or a larger
dividend than that declared would be unreasonable make
97
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an order in wr!tfog that the company shall, apart from
the sum determmed as payable by it on the basis of the H
assessment under section 23, be liable to pav super-tax
at the rate of fifty per cent in the. case of "a company
whose business consists wholly or mainly in the dealing
in or holding of investments, and at the rate of thirtyseve_n J?er cent in the case of any other company on the
und1stnbutecl balance of the total income of the previous
98
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SU!'REME CQ_URt REPORTS
[1975] SUPP, 'S.C.R.
year, that is to say, on the total income as rednced by
the amounts, if any, referred to in clause (a), clause (b)
or clause (c) and the dividends actually distributed, if
any.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Explanation 2.-For the purposes of this section. statutory
percentage means,-
(i)
Jn the case of a company whose business consists
wholly or ma;nJy in the dealing in or holding of
investments
l 00%
(ii) Tn the case of an Jndian company whose
business consists wholly in the manufacture or
processing of goods or in mining or in the generation or distribution of electricity or any other
from of power
4 5 %
(iii) In the
case
of an Indian
company
a
part
only
of whose
business
consists
in
~ny
of
the
activities
specified
in
~ clause (ii)-
(a) ,;n relation to the said part
of
the
company's business
45%
(b) i'n relation to the remaining part of the
company's business --
(1) if it is a comp111y
which satisfies the
conditions
specified
rn
sub-clause
(a)
of clause (iv)
(2) in any other case
the said percontages being applied separately
wit11 reference to the amounts of profits and
gains attributable to tile two parts of the company's
business
aforesaid
as if the
said
amounts were respectively the total income of
the company in relation to each of its parts. the
amount of dividends and taxes also being similarly apportioned for the purposes of sub-sPction
ti).
x
x
x
x
x
x
90%
60%
x
For the assessment year 1957-58 relevant to the previous year
ended December 31, 1956 the company was assessed to additional
super-tax under the aforesaid provision. The business of the company
consists partly in the manufacture or process111g of goods and partly.
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c. I. T. v, T. v. SUNDRAM (P) LTD. (Chandrachud, !.)
99
of an activity of a non-industrial nature.
Out of a total income
A.
of Rs. 37,98,774 the profits of the company available for distri?ution
came to Rs. 17,41,814 out of which Rs. 3,36,504 represented mdnstrial profits and Rs. 14,05,310 represented non-industrial profits. The
company distributed by way of dividends a sum of Rs. 4.20,640
only clai111ing that the dividend was declared equally out of the
profits of the industrial and non-industrial activities. Thus, the profits
B
which were available for distribution but which were not distributed
came to Rs. 13,21,174.
The Income-tax ·Officer, while making the assessment, allocated
the dividends declared by the company to the industrial and nonindustrial segments in the same proportion as the profits of the two
C
segments bOre to the total profits of the company. By tbis method,
out of the total dividend of Rs. 4,20,640 declared by the company,
a sum of Rs. 81,264 was treated as dividends declared out of industrial profits while a sum of Rs. 3,39,376 was treated as dividends
declared out of non-industrial profits. Holding that under section 23A,
the company was liable to distribute by way of dividends a sum
D
of Rs. 1,51,426 out of industrial profits and a sum of Rs. 8,43,186
out of non-industrial profits. the Income-tax Officer levied additional
super-tax on the entirety of the undistributed balance of the total
income, that is to say, on Rs. 13,21,174.
The Appellate Assistant Commissioner having rejected the appeal,
E
the company carried the matter in a further appeal to the Income-tax
Appellate Tribunal, Madras Bench, contending that it had declared
dividends utilising the industrial and non-industrial profits equally
and since the dividends thus declared out of industrial .profits exceeded
the statu~ory percentage of the minimum distributable dividend as provided in section 23A, the levy, of additional super-tax on the indusF
trial profits was unjustified. On the other hand, it was submitted on
behalf of ;he Department of section 23A, to be apportioned in the same
for the purposes of section 23A. to be apportioned in the same
ratio in which the profits themselves were apportioned between industrial and non-industrial activities. The Tribunal rejected the method
canvassed by the Department as "a Rule of thumb;' but then it also
rejected the m"thod adopted by the company of allocating the declared
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dividend half and half to the profits of the two segments.
Having
rejected both the methods, the Tribunal held that in so far as profits
of the industrial activity were concerned, the conipany must be deemed
to have distributed by way of dividends out of those profits just so
much, neither more nor less, as would be equal to
45 per cent
of such profits.
Accordingly, the Tribunal allocated
a
sum
of
Rs. 1,51,426 as dividends out of industrial profits and the balance,
H
namely, Rs. 2,69,214 as dividends out of non-industrial profits.
On
this allocation the Tribunal came to the conclusion that the company,
having declared . the statutory dividend on its industrial profits, was
not liable to pay additional super-tax in so far as those profits were
concerned.
It, however, upheld the levy of additional super-tax on
non-industrial profits.
100
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SUPREME COURT REPORTS
(1975] SUPP. S.C.R.
Under section 66 (1) of the Act, the Tribunal referred the following question for the opinion of the High Court :
(1) "Whether on the facts and in the circumstances of the
case, Tribunal was right in holding tbat the assessee company
was not liable Jo the additional super-tax under sec. 23A in respect of the assessee's industrial profits for the assessment year
1957-58".
Under section 66(2) of the Act the Tribunal referred to tbe High
Court the following question :
(2) "Whether on the facts and in ihe circumstances of
the case, the Tribunal is right in holding that additional super-
. tax is not lcviable under sec. 23A of the Act, in respect of any
portion of the profits of the assessee company for the a,ssessment
year 1957-58."
The second question on which the High Court called for a reference
may seem to suggest that under the judgment of the Tribunal the
Company was held not liable to pay additional super-tax in respect
of any portion of its profits. Tha,t is ·not so. The Tribunal held that
the Company was not liable to pay additional super-tax on its industrial profits but was liable to pay it on non-industrial profits.
The High Court confirmed the Tribunal's view. It held that there
was no justific;\tion in Explanation 2 for the apportionment of dividends in the ratio which the industrial profits bear to non-industrial
profits, that it was open to the assessee to apportion the dividends
in such a way as to conform to the requirements of section 23A in
respect of one of the two segments of its business and that the profits
of the other segment only would attract the incidence of aPditional
super-tax.
The High Court demonstrated the absurdity of the contrary view witb the help of a hypothetical illustration.
We are concerned in this appeal with the true construction ot
section 23A as recast by Finance Act 2 of 1957.
The section, in
so far as relevant, is extracted above.
It has no application to
companies in which the public are substantially interested. The section provides for levy of additional super-tax at 50 per cent in the
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case of a company whose business consists wholly or mainly in
tbe dealing in or holding of investments and at 37 per cent in the
case of any other company.
The additional super-tax is leviable if
in respect of any previous year the profits and gains distributed as
dividends within the 12 months immediately following the expiry
of that previous year are Jess than the statutory percentage of the
total income of the previous year as reduced by the amounts mentioned
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in clauses (a),(b) and (c) of sub-section (1). The additional
super-tax, which in the instant case would be 37 per cent, is payable
on the undistributed balance of the total income of the previous year.
By 'undistributed balance ~of the total income'
is meant the total
income as reduced by the a,mounts, if any, referred to in clauses (a),
(b) and ( c) of sub-section ( 1) and the dividends actually distributed,
if any.
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By ;Explanation 2, 'statutory percentage' means for the present A
purpose, 45 per cent of inddstrial profits and .60 per cent of nonindustrial profits. These percentages ha,ve to be applied separately to
the profits of the two segments as if those profits Were respectively the
total income of the company in relation to each segment of its business. The dividends and taxes have also to be 'similarly apportioned',
for the purposes of sub-section (1).
Two questions arise for decision : (1) Whether the dividends distributed by the Company have to be apportioned as between .the
profits of the industrial and non-industrial segments of its bu&incss
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in the same proportion as the respective profits bear to the total profits
of the Company; and (2) Whether, if on apportionment, the d.ividend
.apportionable to one of the two segments is found to be less than
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the statutory percentage in respect of that segment, the additional
super-tax is Jeviable on the entire balance of the Company's undis~
tributed profits or whet]ler it is leviahle on the balance of undistributed'
profits of that segment only in respect of which the short-fall has
occurred. The second question may not strictly arise if on the first
question it is found that the dividend apportiom\ble to the two segD
ments is less than the statutory percentage in respect of both the
~egments. AU the same, it would be necessary to examine that qμestion
also as the High Court has, held that the liability to pay the add!tiolllll
super-tax must be restricted to the undistributed profits of that segment
only, in respect of which the default has occurred.
On the first question, the language of Explanation 2 is clear
apd admits of no doubt or difficulty. It requires by its express terms
that for the purposes of sub-section (1), the amount of dividends
must be "similarly apportioned".
But,, counsel for the respondent
urged that since the Explanation does not refer to any apportionment
at all, the words "similarly apportioned" cannot be ascribed any
rational meaning and it would therefore be open to the company
to apportion the dividends 50 : 50 to the profits of the two segments.
Relying on "Words and Phrases Legally Defined" by Saunders, Vol.
V, p. 79 where it is stated that the word 'similar' is an ambiguous
word, it was submitted that the benefit of an ambiguity in a taxing
statute must go to the assessee and accordingly, the company would
be free to make a convenient apportionment of dividends so as to
attract the least incidence of the additional super'tax. Counsel also
relied on Burrow's "Words and Phrases'', Vol. I, p. 217, where it
is said that so long as the 11pportionment is made with the desire
to act as fairly and justly as possible by all parties, no uniform mode
of apportionment is necessary.
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The word 'similar' may be said to be a word of ambiguous import
in the sense that the mere stipulation in a statute that something
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should be done similarly is insufficient by itself to signify the degree
of similarity with which that thing must be done. A thing can be done
similarly without its being a slavish copy of the model. But Expl,anation
2 indicates with meticulous particularity, how similarly dividends and
taxes must be apportioned, When it SaJ"ll that they mnst be "similarly
apportioned", the reference obviously is to the apportionment which is
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SUPREME COURT REPORTS [1975) SUPP. s.c.J.t.
spoken of earlier in the Expla,nation. After specifying what particular
percentages shall constitute the statutory percentage for the purposes
of section 23A, Explanation 2 provides that the said percentages
shall be applied separately "with reference to the amounts of profits
and gains attributable to the two parts of the company's business."
The words "similarly apportioned" which thereafter occur
in
the
Explanation mean apportioned "with reference to the amounts of
profits and gains attributable to the two parts of the company's
business". Thus, the Expl,a,nation first refers to an apportiawmcnt
or splitting up and then provides that the dividends and taxes shall
be similarly apportioned, that is to say, similarly split up. Accordingly,
the words '·similarly apportioned" convey a definite meaning and are
not ambiguous.
It is urged that the division of total profits of a company into
industrial and non-industrial profits
cannot
be the result of any
apportionment properly. so-ca11ed but must conform to the company's
books of account and therefore, Explanation 2 ca,nnot be said to
refer to any apportionment before speaking of the dividends and
taxes being "similarly apportioned''.
This argument reads too much
in the word 'apportioned'. That word is used in !Expl11;11ation 2 in
the sense of 'split up', so that 'similarly apportioned' means simply
'similarly split-up'. The dividends have therefore to be split up similarly, that is, in the same ratio as to industrial and non-industrial
profits bear to each other after the total profit is split up in two parts,
industrial and non-industrial.
According to Burrow's Words and
Phrases Vol. I. p. 217, to 'apportion' means 'to split up'.
It is therefore impossible to accept the respondent's contention that
though Explanation 2 requires that dividends should be similarly
apportioned, it would be open to the company to make any convenient division of the dividends distributed by it.
According to the
Shorter Oxford English Dictionary, 3rd Ed., Vol. l, p. 87, to 'apportion' is 'to assign as a proper portion'.
An assignment as a proper portion
of
the
dividends
would
mean an assignment in the same or similar ratio as the respective
profits of the two segments bear to the total profits of the company.
Ir is thus not open to the company to split up and apportion the
dividends to the profits of the two segments in such manner as it
finds convenient or thinks fit.
The company's freedom to apportion
the dividends is conditioned by the ratio which the profits of the
two segments bear to the total profits.
The total
distributable profits
of the
company came to
Rs. 17,41 ,814 out of which the industrial profits are Rs. 3,36,504
and the non-industrial profits are Rs. 14,05.310. Forty-five per cent
of the industrial profits comes· to Rs. 1,51,426 while 60 per cent of
the non-industrial profits comes to Rs. 8,43,186. The company therefore ought to have disfribnted a sum of Rs. 9.94,612 by way of
dividends whereas it distributed a sum of Rs. 4,20,640 only. This
sum of Rs. 4,20,640 has to be split up in the same proportion which
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c. I. T. v. T. v. SUNDRAM (P) LTD. (Chandrachud, !.)
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the respective profits of the two segments bear to the total profits of
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the company.
That is to ~ay, a sum of Rs. 81,264 from out of
the total dividends distributed is apportionable to the industrial profits
while a sum of Rs. 3,39,376 is_ apportionable to the non-industrial
profits. There is thus a short-fall in respect of both the segments and
accordingly the company would be liable to pay the additional supertax at the rate of 37 per cent on the entire undistributed balance of
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distributable profits.
The hypothetical illustration which was cited before the Incometax Officer and which is relied upon by the High Court may at the
highest, if its fundamental premise is true, show that the interpretation canvassed by the Revenue may conceivably work out injustice.
But if the language of the statute is clear and unambiguous, and if
two interpretations are not reasonably possible, it would be wrong to
discard the plain meaning of the words used in order to meet a
possible injustice.
Besides, the illustration only assumes an injustice
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and therefore its fundamental premise is wrong.
The distributable
profits of the hypothetical company are said to be Rs. 1,00,000 out D
of which Rs. 30,000 are industrial and Rs. 70,000 non-industrial
profits. Applying the statutory percentage of 45 and 60 per cent
respectively, the company must
distribute by
way
of dividends
Rs. 13,500 plus Rs. 42,000, that is, Rs. 55,500. The High Court says
that even if the company distributes Rs. 55,500 by way of dividends,
apflertioning Rs. 13,500 to industrial profits and Rs. 42,000 to nonindustrial profits, it would violate section 23A because, if the sum
of Rs. 55,500 is to be apportioned in the same ratio which the profits
of the two segments bear, a sum of Rs. 16,650 will be apportionable
to industrial profits and Rs. 38,850 to non-industrial profits.
The
fallacy of this illustration consists in its overlooking that if the comp~ny is liable to distribute Rs. 55,500 by way of dividend&
and
it does distribute that sum, there is no violation of section 23A. That
section applies only if "profits and gains distributed as dividends ....
are less than the statutory percentage of the total income .... as reduced .... "
If the dividends have to be apportioned in the ratio of profits of
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the two segments, the taxes have also to be similarly apportioned for
Explanation 2 speaks of "the amount of dividends and taxes also
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being similarly apportioned".
A "similar" apportionment of taxes,
it is urged by the respondent, may in practice lead to impossible and
unreal situations since the taxes on the profits of the two segments
ma.y be unequal as in the case of a newly established industrial undertaking which, in respect of its industrial income, may enjoy a tax concession.
There is no merit in this contention. The method specified
in section 23A has to be worked out according to its scheme and 1t
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is no answer 10 the obligation to apportion the dividends and taxes,
that taxes levied on the profits of the two segments are unequal or
are leviable on a different basis.
Thμs, the High Court and the Tribunal were wrong in holdmg
in favour of the assessee on the first of the two questions which we
· have framed for consideration.
Where a company has a composite
10 SC/75-8
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SUPREME COURT REPORTS
(1975] SUPP. S.C.R.
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business, as for example industrial and non-industrial business, the
- first step is to ascertain the distributable profits of the' two parts separately: For the purpose of finding out the minimum divided that the
company ought to 'have distributed, the proper statutory percentage as
prescribed by Explanation 2 has to be applied separately to the dis·
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tributable profits of the two parts, as if the respective profits arc
the total income of the company in relation to each part of its business.
The composite dividend distributed by the company has then to be
apportioned between the two parts in the same ratio as the respective
profits of the two parts bear to the total profits of the company.
_ We have shown that in the instant case the dividend apportionable
between the two parts of the company's business is less than the
statutory percentage in respect of both the parts. T!"!c High Court,
like the Tribunal, gave to. the company the choice to allocate the
dividend suitably to the two parts and held on such allocation that
since the default had occurred in respect of the profits of the nonindustrial part only, the company would be liable to pay the additional
super-tax on the undistributed balance of the non-industrial profits
.only.
The second question which we propose to consider, though it
does not arise on our findings, is whether the company is liable to
pay additional super-tax on the undistributed balance of non-industrial
profits only or whether it is liable to pay the additional super-tax
on the entire undistributed balance of its distributable profits.
We
have heard a full argument on this question and if we did not decide
it the view of the High Court is likely to cause misunderstanding.
As observed by Chagla C- J_ in Sir Kasturchand Ltd. v'. Commissioner of Income-tax, Bombay City,(') section 23A was enacted in
terrorem against private companies. The object of the section .is to
prevent evasion of super-tax by the shareholders of a company in
which the public are not substantially interested. The shareholders of
a private company could avoid the high incidence of super-tax by
allowing the profits of the company to accumulate in its hands so
that the accumulated profits could be distributed eventually ia the
form of bonus shares which are not assessable as income in their
hands.
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In considering whether the company is liable to pay additional
super-tax on the entire balance of distributable profits, it has to be
borne in mind that section 23A is clearly penal in nature ; for, in
the the circumstances mentioned therein, if a private company fails
to distribute by way of _dividends the statutory percentage of its distribntable profits, it becomes liable to pay, apart from the sum determined as payable by it on the basis of the assessn1ent under section 23,
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super-tax at 50 per cent or 37 per cent as the ease may be, on the
undistributed balance of its distributable profits.
In the first place,
this provision being penal, the burden wonld lie on the revenue to
prove that the conditions laid down by the section are satisfied.( 2)
(I} 17 I. T. R. 493, ot 495 and 496.
(2)
Commissioner of Income·tax, West· Bengal v. Gangad/rar Banerjee & Co.
(p} Ltd., 57 LT.R. 176, 184.
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C. I. T. v: T. v. SUNDRAM (P) LTD. (Chandrachud, J.)
105
Secondly, penal statutes have t<l._ be construed strictly in the sense that
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if there is a reasonable interpretation which will avoid the penalty,
that interpretation ought to be adopted : "When the legislature imposes a penalty, the words imposing it must be clear and distinct".(')
Jt is contended on behalf of the respondent that the language of
section 23A (1) read with Explanation 2 is ambiguous and therefore
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the court ought to adopt the interpretation which favours the assessee,
more particularly because the relevant provisions provide for the imposition of a penalty.