# DISTRIBUTORS (BARODA) PVT. LTD v. UNION OF INDIA AND TWO ORS

- **Citation:** [1985] Supp. 1 S.C.R. 778
- **Court:** Supreme Court of India
- **Decided:** 1985-07-01
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/distributors-baroda-pvt-ltd-v-union-of-india-and-two-ors-9125
- **Pages:** 32

## Headnote

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778
[Y.V.
DISTRIBUTORS (BARODA) PVT. LTD.
v.
UNION OF INDIA AND TWO ORS.
July 1, 1985
CHANDRACHUD, C.J., BHAGWATI, AllAR8NDRA NATH
SEN, D.P. MADON AND M.P. THAKKAR, JJ]
Income Tax Act 1961 Sections 80M(J) and 80A.,4 :
income by way of inturcorporate dividends-Deduction-Whether to be
1nade with reference to full an1ounl of dividend received or dividend computed i11
accordance with the prvvisions of the Act -Section SOAA- ~Vhether retrospect iv~
in operation.
Constitution of India 1950, Artice 141:
Supreme Court-Declaration of/aw-To be certain, definite and correctJndicial decisions-Continuity anJ consistency-Essentiality-Pointed out-Earlier
ruling of Co,,,rt-Manifest!y wrong, proreeds upon mistaken assumption with
regard to exi3tence or continuance of statutory provision, contrary to another
decision of Court-Doctrine of stare decisis-No bar to
over~ruling such
decision-Decision of Court in fiscal n1atters-Jnterference in exceptionaf casesNecessity of.
Interpretation of Statutes :
F
Statutory prol'ision-Meaning
of-Interpretation on
earlier statutory
G
H
provision In different language arid structurally different-Reference lo and reliance
on-Whether permissible.
Words and Phrases-Meaning of:
'Such income by way of di'lidendJ'-Meaning of-Section SOM lnroff1e Tax
Act 1961.
The earliest provision granting exemption from super tax in respect of
inter-corporate dividend 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 super
tax:
DJStRIBUTORS (BARODA) LTD. V. UNION
779
(i) So much of the income of any investment trust company as is
derived from dividends paid by any other company 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 CITv. Industrial, investment Trust Co. Ltd.
(1968) 671.T.R. 437. The High Court guided by a decision of this Court in
CITv. South India Bank (1966) 59 !TR 763 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 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 computed under Section 12 of the Act.
A provision of a similar kind granting exemption from super tax in
respect of certuin specified categories of inter-corporate dividend was introduced as Section 56A of the Income Tax Act 1922 by the Finance Act,
1953.
When the Indian Income Tax Act. 1922 was 1epealed and the Income
Tax Act, 1961 was enacted with effect from 1st April, 1902, Section 99, subsection (i) was introduced in the new Act exempting certain categories of
income from super tax and one such category was that set out in clause (iv) of
Section 99 sub-section (1) which read as follows :
'·99. (I) Super-tax shall not be 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."
This provision continued in force upto Ist March, 1965 subject to a
minor inconsequential amendment made by the Finance Act, .1964.
This provision did not come up for interpretation before this Court only
in Cloth Traders Case, but it came to be considered by some of the High
Courts.
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The three High Courts of Bombay, Calcutta and Madras C./.Tv. New
Great Insurance Company Ltd. (1963) 90 !TR 348, C.l.T. v. Darbhangha Marketing Company Ltd. 1971 80 !TR 72 and Madras Auto Service v. I.T.0. (1975)
101 I. T.R .. 589] on a const~uct1on of clause (1v) of sub~section (I) of section 99,
t

## Text

_Characters 0–39,781 of 85,756. This is a partial read: ask again with offset=39781 for what follows._

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778
[Y.V.
DISTRIBUTORS (BARODA) PVT. LTD.
v.
UNION OF INDIA AND TWO ORS.
July 1, 1985
CHANDRACHUD, C.J., BHAGWATI, AllAR8NDRA NATH
SEN, D.P. MADON AND M.P. THAKKAR, JJ]
Income Tax Act 1961 Sections 80M(J) and 80A.,4 :
income by way of inturcorporate dividends-Deduction-Whether to be
1nade with reference to full an1ounl of dividend received or dividend computed i11
accordance with the prvvisions of the Act -Section SOAA- ~Vhether retrospect iv~
in operation.
Constitution of India 1950, Artice 141:
Supreme Court-Declaration of/aw-To be certain, definite and correctJndicial decisions-Continuity anJ consistency-Essentiality-Pointed out-Earlier
ruling of Co,,,rt-Manifest!y wrong, proreeds upon mistaken assumption with
regard to exi3tence or continuance of statutory provision, contrary to another
decision of Court-Doctrine of stare decisis-No bar to
over~ruling such
decision-Decision of Court in fiscal n1atters-Jnterference in exceptionaf casesNecessity of.
Interpretation of Statutes :
F
Statutory prol'ision-Meaning
of-Interpretation on
earlier statutory
G
H
provision In different language arid structurally different-Reference lo and reliance
on-Whether permissible.
Words and Phrases-Meaning of:
'Such income by way of di'lidendJ'-Meaning of-Section SOM lnroff1e Tax
Act 1961.
The earliest provision granting exemption from super tax in respect of
inter-corporate dividend 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 super
tax:
DJStRIBUTORS (BARODA) LTD. V. UNION
779
(i) So much of the income of any investment trust company as is
derived from dividends paid by any other company 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 CITv. Industrial, investment Trust Co. Ltd.
(1968) 671.T.R. 437. The High Court guided by a decision of this Court in
CITv. South India Bank (1966) 59 !TR 763 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 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 computed under Section 12 of the Act.
A provision of a similar kind granting exemption from super tax in
respect of certuin specified categories of inter-corporate dividend was introduced as Section 56A of the Income Tax Act 1922 by the Finance Act,
1953.
When the Indian Income Tax Act. 1922 was 1epealed and the Income
Tax Act, 1961 was enacted with effect from 1st April, 1902, Section 99, subsection (i) was introduced in the new Act exempting certain categories of
income from super tax and one such category was that set out in clause (iv) of
Section 99 sub-section (1) which read as follows :
'·99. (I) Super-tax shall not be 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."
This provision continued in force upto Ist March, 1965 subject to a
minor inconsequential amendment made by the Finance Act, .1964.
This provision did not come up for interpretation before this Court only
in Cloth Traders Case, but it came to be considered by some of the High
Courts.
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The three High Courts of Bombay, Calcutta and Madras C./.Tv. New
Great Insurance Company Ltd. (1963) 90 !TR 348, C.l.T. v. Darbhangha Marketing Company Ltd. 1971 80 !TR 72 and Madras Auto Service v. I.T.0. (1975)
101 I. T.R .. 589] on a const~uct1on of clause (1v) of sub~section (I) of section 99,
took th~ view that the entJCe amount of dividend received by the assessee from
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~n .1ndd1and~?dmpda~y was exempt from super tax and the exemption was not
1m1te to 1v1 en income computed in accordance wi'th the p
· ·
f h
.
rov1s1ons o
t e
Act and formmg part of the total income.
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780
SUI'REME COURT REPoRTS
[ J 98S) SUPPL. S.C.8..
Section 99 sub-section (i) remained in force only upto the close of the
assessment year 1964-65 and by an amendment made by the Finance Act,
1965, Section 99 sub-section (1 \was omitted and chapter IVA and se<..tion 85A
were introduced in the present Act with effect from Ist April, 1965. Chapter
IV A comprised section 80A to 80D providing for certain specified deductions
to be made in computing total income, while Section 85A provided for
deduction of tax on incorporate dividends.
This Section was also considered by the Bombay High Court in
New
Great Insurance Company's Ca1e. The High Court observed that except for
some minor verbal changes, section SSA was almost in the same terms as
section 99 sub:section (1) clause (iv), the only real difference being that the
exemption granted under section 99 sub-section (i) clause (iv) was in regard to
super-tax, while lhe deduction allowed under section 85A WJS in regard to
income tax, and held that under section 85A 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 the provisions of the Act in computing 'total income'
The spate of legislative changes did not come to an end with the enactment of section gsA. The Original Chapter VIA and certain other sections
including section 85A were deleted from the present Act by Finance (No 2)
Act, 1967 with effect from Ist April, 1968 and replaced by the new Chapter
VIA which contains a fasciculus of sections from s. 80A to s. 80VV. Section
SOA sub-section (1) provides that in computing the total income of an
assessee there shall be allowed from his gross total income, in accordance
with and subject to the provisions of Chapter VIA the deduction specified in
Section
SOC to Section 80VV
and
sub-section (2)
of that
Section
imposed t? ceiling on such deductions by enacting that the aggregate amount
of such deduction shall not in any case, exceed the gross total income of the
assessee. The expression "gross total income" is defined in clause (V) of
Section SOB to mean the total income computed in accordance with the
provisions of the Act before n1aking any deduction under Chapter VIA or under
Section 2SOD. : ection SOM is the new section which corresponds to the
repealed Section 85A
~nd it provides for deduction in respect of certain
categories of inter-corporate dividends, Several amendments were 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 the Finance Act, 1968 was that the
words "received by it" occurring in sub-section (1) of Section SOM
were
omitttd with effect from Ist April, 1968, so that right from the date of its
enactment, section SOM sub-section (1) was to be read as if the words "receivt"d
by it" were not in the opening part of that provision.
Petitioner No. 1 was incorporated as a Limited Company and Petitioner
No. 2 a Director and shareholder therein. Petitioner No 1 received dividends
on shares held by it in different domestic companies and paid interest
on monies borrowed for the purpose of investment in such shares.
In
the course of its assessment for the assesment years 1970-71 up to
1980~81,
DISTRIBUTORS (BARODA) LTD. v, UNION
781
Petitioner No.1 claimed that the deduction permissible under Section SOM
must be calculated with reference to the full amount of dividends received by
Petitioner No. l from the domestic companies and not with reference to the
dividends as computed in accordance with the provisions of the Income Tax
Act, 1961. The assessments of Petitioner No. 1 were actually completed on
the basis of his claim and the view taken by this Court in Cloth Traders Case
in regard to the construction of Section SOM. The Revenue preferred appeals
against such assessments and these appeals were pending at different stages at
the time of filing the Writ Petition.
The Petitioner No. l was entitled to succeed in the appeals as well as in
the original assessments which were pending before the different authorities, so
long as the decision in Cloth Traders Case stood unaflected by any constitu·
tionally valid legislative amendment.
However, with a view to overriding the decision in the Cloth Traders
case with retrospective effect, Parliament enacted Section 80AA and since this
section was deemed to have been introduced in the Income Tax Act, 1961 with
effect from Tst April, 1968, and it provided that the deduction required to be
allowed under Section SOM shall be computed not with reference to the gross
amount of dividend received by the assessee from a domestic company
but with reference to the dividend income as computed in accordance with the
provisions of the Act, the claim of petitioner No. 1 for deduction on the basis
of the full amount of dividend received by it from domestic companies was
liable to be rejected and deduction could be allowed to Petitioner ~No. 1 only
with reference to the dividend income computed in accordance with the
provision of the A ct.
The introduction of Section 80AA thus had the effect of enhancing the
tax liability of Petitioner No. l and the petitioners filed a Writ Petition
challenging the Constitutional validity of Section 80AA on the ground that
it enhanced the tax burden with retrospective effect going back for a period of
almost 12 years and consequently imposed an unreasonable restriction on the
right of petitioner No. 1 to carry on its business in breach of Article 19 (J) (g)
of the Constitution.
Dismissing the writ petition,
HELD-(By the Court)
I. The deduction envisaged by sub-section (I) of Section 80M is
required to be made with reference to the income by way of dividends
computed in accordance with the provisions of the Income Tax Act and not
with reference to the full amount of dividend received by the assessee.
[802F, 809A]
2. Section 80AA in its retro~pective operation is merely declaratory of
the law as it always was since !st April, 1968 and no complaint can validly b~
!Dade against it. (807E, 809D]
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SUPREME COURT REPORTS
(1985] SUPPL. S,C.R.
Cloth Traders Ltd. v. Additional Commissioner of Income Tax, 118 ITR
A
243, over-ruled and Can1bey Electrical Supply Industrial Co. Ltd. v. Commissioner
of Income-Tax, (1970) 113 84, approved.
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(Per Chandrachud C.J., P.N. Bhagwati, D.P. Madon and M.P.
Thakkar, JJ).
The Inquiry is not whether the view taken by the Bombay High Court
in New Great Insurance Company's case is correct.
Jt must be conceeded that
it has been held to be correct in the decision in Cloth Traders Case
However
another view in regard to the interpretation of Section 85A is
possible.
It is
not at all unreasonable to construe the words "income so included .. as
meaning the quantum of income by way of dividends included in the total
income of the assessee. These words in the context in which they occur have
obviously reference to quantum of the income by way of dividends to which
the average rate of income tax is to be applied
That quantum is defined by
these words and in order to determine it, the question is what is the income by
way of dividends included in the total income and the answer can only be that
is income computed in accordance with the provisions of the Act. It is not
necessary to consider whether the construction placed on Section 85A by the
Bombay High Court in New Great Insurance Company Case is correct or not,
because interpretation of Section SSA is not concerned. It is section SOM
which has to be construed and this section, is materially different from Section
85A. Section SOM cannot be construed in the light of the interpretation placed
on its predecessor section by the Bombay High Court particularily when
Section SOM is admittedly worded differently from its predecessor section.
Section SOM must be construed on its own language and its true interpretation
arrived at according to the plain natural meaning of the words used by the
Legislature. [795 D -HJ
2. Section SOM is the new Section which corresponds to the repealed
Section 85A and it provides for deduction in respect of certain categories of
intercorporate dividends. It is the interpretation of this section which consti·
tutes the subject-matter of controversy between the parties. [796 DJ
3. What is the object behind grant of relief under Section SOM. The
main object of the relief under Section SOM is to avoid taxation once again in
the hands of the receiving con1pany of the amount which has already borne full
tax in the hands of the paying company. Now when an an1ount by way of
dividend is received by the assessee from the paying company the full amount
of such dividend would have suffered tax, in the assessment of the paying
company in order to encourage inter-company investinents.
Ia order to
encourage investments the Legislature intended that this amount should not
bear tax once again in the hands of the assessee either its entirety or to a
specified extent. But the amount by way of dividend which would otherwise
suffer tax in the hands of the assessee, would be the amount computed in
accordance with the provisions of the Act and not the full amount re:eived
from the paying company. Therefore, it is reasonable to assume that in
enacting Section 80~1 the Legislature intended to grant relief with reference to
the amount of dividend computed in accordance with the provisions of the Act
and not with reference to the full amount of dividend received from the paying
DISTRIBUTORS (BARODA) LTD. v. UNION
783
company. The Legislature could certainly be attributed the intention to
prevent double taxation but not to provide an additional benefit which would
go beyond what is required for saving the amount of dividend from taxation
once again the hands of the assessee. (799 A-BJ
4. Section SOM
sub~section (l) opens with the words "where the gross
total income of an assessee ............ includes any income by way of dividends
from a domestic company" and proceeds to say that in such a case, there shall
be allowed in computing the total income of the assessee, a deduction ''from
such income by way of dividends" of an amount equal to the whole of such
income or 60% of such income as the case may be, depending on the nature
of the domestic company from which the income by way of dividends is
received. The opening words describe the condition which must be fulfilled in
order to attract the applicability of the provision contained in sub-section (1)
of Section SOM. The condition is that the gross totol income of the assessee
must include income by way of dividends from a domrstic company
"Gross
total incon1e" is defined in Section SOB clause (VJ to mean "total income
computed in accordance with the provisions of the Act before making any
deduction under Chapter VIA or under Section 280D". Income by way of
dividends from a domestic company included in the gross total income would
therefore obviously be income computed in accordance with tht: provisions of
the Act, that is after deducting interest on monies borrowed for earning such
income. If income by way of dividends from a domestic company computed
in accordance with the provisions of the Act is included in the gross total
income, or in other words, forn1 part of the gross total income,the conditions
specified in the opening part of sub-section (1) of Section SOM would be
full:fllled and the provision enacted in that sub-section would be attracted.
[7990-SOOCj
5. The words ''such income by way of dividends" must have reference
to the income by way of dividends mentioned earlier and that would be income
by way of dividends from a domestic company which is included in the gross
total income. Consequently, in order to determine what is "such income by
way of dividends", the question to be asked is what is the income by way of
dividends from a domestic company included in the grocis totol income and
that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to apprecia1e how, when
interpreting the words "such income by way of dividends" a dichotomy can be
made between the category of income and the quantum of the income by way
of dividends so included. [800H-80IC]
6. There is also another strong indication in the language of sub-section
(I) of Section SOM which clearly compels taking the view that the deduction
envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the prO\'isions of the
Act and not with referrence to the full amount of dividend re1:eived by the
assessee. The indication was also unfortunately lost sight of by the Court in
Cloth T1aders case presumably because it was not brought to the attention of
the Court. The Court observed in Cloth Traders case that the whole of the
income by way of dividends fro1n a domestic company or 60% of such income
ps tho same may be, would l>e deductible from the gross total income for
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SUPREME COURT REPORTS
[1985) SUPPL. s.c.R.
striving at the total income of the assessee. This observation appears to have
been made under some misapprehension, because what sub-section (1) of
Section 80M required is that the deduction of the whole or a specified percentage must be made from "such income by way of dividends" and not from the
gross total income.
Now when in computing the total income of the assessee.
a deduction has to be made from ''such income by way of dividends" it is
elementary that ''such income by way of dividends" from which deduction has
to be made must be part of gross total income. It is difficult to see how the
language of this part of sub-section (1) of Section SOM can possibly fit in it if
"such income by way of dividends" were interpreted to mean that full amount
of dividend received by the assessee. The full amount -. of dividend received by
the assessee would not be included in the gross total income
what would be
included would only be the amount of dividend as comput~d in accordance
with the provisions of the Act. If that be so it is difficult to appreciate how for
the purpose of con1puting the total income from the gross total income any
deduction should be required to be made from the full amount of the dividend.
The deduction required to be made for computing the total io<:ome from the
gross total income can only be from the amount of dividend computed in
accordance with the provisions of the Act which would be forming part of the
gross total income. Whatever might have been the interpretation placed
on
clause (iv) of sub-section (1) of Section 99 and Section 85A the correctness of
which is not in issue, so far as sub-section ( ) of Section F0!\-1: is concerned, the
deduction required to be allowed under that provision is liable to be calculated
with reference to the amount of dividend computed in accordance with the
provisions of the Act and forming part of the gross total income and not with
reference to the full amount of dividend received by the assessee. (801G-802FJ
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7. Structurally there is hardly any difference between Section SOE subF
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section (I) and Section SOM sub·section (I) and the reasoning which appealed
to the Court in the interpretation of sub-section (I) of Section SOE in Cambay
Electric Supply Industrial Company Ltd. v. C.1.T. must apply equally in the
interpretation of sub-section (1) of Section SOM. (803 B]
8. Ordinarily this Court would be reluctant to overturn a decision
given by a Bench of this Court, Cecause it is essential that there should be
continuity and consistency in judicial decisions, and Jaw should be certain and
definite. It is almost as important that the law should be settled correctly.
But there may be circumstances where public interest demands that th~
previous decision be reviewed and reconsidered. The doctrine of stare decisis
should not deter the Court from overruling an earlier decision, if it is satisfied
that such decision is manifestly wrong or proceeds upon a mistaken
assumption in regard to the existence or continuance of a statutory provision or is
contrary to another decision of theC ourt. [805G-806A]
9. There are over-riding considerations which compel reconsideration
and review of the decision in Cloth Traders Case. In the first place, the decision
in Cloth Traders case was rendered by this Court on 4th May, 1979 and immediately thereafter, with in afew months, Parliament introduced Section
SOAA with retrospective effect from Ist Apnl, 1968 with a view to over-riding
lhe interpretation placed on Section SOM in Cloth Traders case.
fhe decision
)
DISTRIBUTORS (BARODA) LTD. v. UNION
785
in Cloth Traders case did not therefore hold the field for a period of more than a
few months and it could not be said that any assessee was misled into acting
A
to its detriment on the basis of that decision. There was no decision of this
Court in regard to the interpretation of sub-section (1) of Section SOM prior
to the decision in Cloth Traders case and there was therefore no authoritative
pronouncement of this Court on this question of interpretation on which an
assessee could claim to rely for making its fiscal arrangements. Another
circun1stance which makes is necessary to reconsider and review the decision in
B
Cloth Trcders Case. is the decision in Comboy Electric Supply Company case.
The decision in Cloth Traders case is inconsislent with that in Cambay Electric
Supply Company's case
Both cannot siand together. If one is correct, the
other n1ust logically be wrong and vice-versa. It is therefore necessary to
resolve the conflict between these two decisions and harmonise the law and
that necessiatates an inquiry into the correctness of the decision in Cloth
Traders Case, and having considered and reviewed the decision in Cloth Traders
C
case come to the conclusion that the decision in Cloth Traders Case is erroneous
and must be over turned. [806C-807D]
(Per A.N. Sen, J. concurring)
The authority and jurisdiction of a larger Bench of this Court to over·
D
ride and over-rule any decision of a smaller Bench cannot be questioned.
IIowever, a decision of this Court on any fiscal legislation involving the
question of financial benefit and liability should not normally
be interfered
with and should be interfered with only in very rare cases. On the basis of
the decision of this Court on any fiscal legislation and any matter involving
financial arrangements and adjustments, parties are entitled to arrange their
:financial affairs and in fact they so arrange and adjust the financial affairs on
E
the basis of the law laid down by this Court. Unsettling a position settled by
the decision of this Court may lead to the confusion and re-suit in financial
instability, causing serious prejudice not only to the parties concerned but
also to the economic growth of the country as a whole. {808 C·E]
2. If on interpretation of any provision of any fiscal legislation two
views may be reasonably possible, a larger Bench of this Court may not
interfere with a view taken by a smaller Bench by this Court mainly on the
ground that the other view appears to the larger Bench to be the better view
and may commend itself to the larger Bench. If, howeuer, a decision of the
smallar Bench has necessarily to interfere with the decision, as this Court will
not permit a wrong decision to operate as good law of the land. {808 FJ
ORIGINAL JURBDICT!ON: Writ Petition No. 2043 of 1981.
Under Article 32 of the Constitution of India
G
K.H. Kaji and M.N. Shroff for the Petitioners.
H
K. Parasaran, Attorney Gener~! and J(.S. Gwumoorthy for the
~espondents,
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SUPREME COURT REPORTS
[19S5] SUPPL. s.c.R.
The following Judgments were delivered
BHAGWATI, J. This writ petition raises an interesting question
of construction of Section SOM of the Income Tax Act, 1961. Thls
question would appear to be concluded in favour of the assessee by
the decision of this Court in Cloth Traders Limited v. Additional
Commissioner of Income Tax, l lS ITR 243, but the correctness of
the view taken in that case has been challenged in the present writ
petition. Since the decision in Cloth Traders Case (supra) was given
by a Bench of three Judges, it is obvious that its validity can be
canvassed before this Bench which consists of five Judges. If thls
Bench too takes the same view in regard of the construction of
Section SOM as that taken in C/ath Traders case (supra), it would
become necessary to consider the question of constitutional validity
of Section SOAA which was introduced in the Income Tax Act, 1961
by Section 12 of the Finance (No. 2) Act 19SO with a view to overriding with retrospective effect the comtruction placed on Section
SOM by this in Clath Traders case (supra). If on the other hand, this
Bench disagrees with the view taken in Cloth Traders case (supra)
and hold that even before the introduction of Section SOAA, Section
SOM, on a true interpretation of its language, meant exactly what
Section 80AA now retrospectively declares it to mean, no question of
constitutional validity of Section 80AA would arise since Section
80AA would then be merely declaratory of the law as it always was
and would not be imposing any new tax burden with retrospective
effect. The first question that we must therefore consider is as to what
is the true construction of Section 80M unaided by the subsequent
legislative interpretation imposed upon it by the enactment of Section
80AA : do we affirm the view taken in Cloth Traders case (supra)
or do we dissent from it.
We have given our most anxious consideration to this question,
particularly since one of us, namely, P.N. Bhagwati, J. was a party
to the decision in Cloth Traders case (supra). But having regard to
various considerations to which we shall advert indetail when we
examine the arguments advanced on behalf of the parties, we are
compelled to reach the conclusion that Cloth Traders case must be
regarded as wrongly decided.
The view taken in that case in regard
to the construction of Section SOM must be held to be erroneous
and it must be corrected. To perpetuate an error is no heroism.
To rectify it is the compulsion of judicial conscience. In this we
derive comfort and stren~th frail\ the wise (Ind inspirin~ words of
DISTRIBUTORS (BARODA) LTD. v. UNION (Bhagwatt, J.)
787
Justice Bronson in Pierce v. De/ameter A.M.Y. at page lS: "a Judge
ought to be wise enough to know that he is fallible therefore ever·
ready to learn: great and honest enough to discard all mere pride of
opinion and follow truth wherever it may lead : and courageous
enough to acknowledge his errors".
We may begin our discussion by referring to the legislative
history of the provision enacted in Section SOM but before we do so,
a brief statement of facts may help to provide the back-drop against
which the question of construction of Section SOM arises for conside·
ration.
Petitioner No. 1 was incorporated as a limited company on
10th November 1941 under the Baroda Companies Act, 1918 and at
all materiol times it carried on business of an investment company.
Petitioner No. 2 is a Director and shareholder of Petitioner No. I.
Throughout the material period with which we are concerned in this
writ petition, Petitioner No. 1 received dividends on shares held by it
in different domestic companies and paid interest on monies borro·
wed for the purpose of investment in such shares. In the course of
its assessments for the assessment years 1970-71 upto
1980-81,
Petitioner No. 1 claimed that the deduction permissible under Section
SOM must be calculated with reference to the full amount of dividends received by Petitioner No. 1 from domestic companies and not
with reference to the dividend income as computed in accordance
with the provisions of the Income Tax Act, 1961.
This claim was
liable to succeed if the view taken in Cloth Traders case (supra) in
regard to the con >!ruction of Section SOM was correct and some of
the assessments of Petitioner No. l were actually completed on the
basis that this claim was justified. The Revenue preferred appeals
against such assessments and these appeals were pending at different
stages at the time of filing of the present writ petition.
The assessments for some of the assessment years were also pending before the
Income tax Officer.
So long as the decision in Cloth 1ruders case
(supra) stood unaffected by any Constitutionally valid legislative
amendment, Petitioner No. 1 was entitled to succeed in the appeals
as well as in the original assessments which were pending conside·
ration before different authorities. But with a view to overrinding
the decision in Cloth Traders case (supra) with retrospective effect,
Parliament enacted Section SOAA and since this section was deemed
to have been introduced in tho Income Tax Act, 1961 with effect
from 1st April, 1968 and it provided that the deduction require!i to
be allowed under Section SOM shall be computed not with reference
to the gross amou11t of dividend received by the assessee from a
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domestic Company but with reference to the dividend income as
computed in accordance with the provisions of the Act, the claim of
petitioner No. I for deduction on the basis of the full amount of
dividend received by it from domestic companies was liable to be
rejected and deduction could be allowed to petitioner no. 1 only with
reference to the dividend income computed in accordance with the
provision of the Act. The introduction of Section SOAA thus had
the effect of enhancing the tax liability of petitioner No. 1 and the
petitioners accordingly filed the present writ petition challenging the
constitutional validity of Section 80AA on the ground that it enhanced the tax burden of petition No. I with retrospective effect going
b.ack for a period of almost 12 years and thus imposed unreasonable
restriction on the right of petitioner No. l to carry on its business in
breach of Article 19(l)(g) of the Constitution.
We may first set out the history of the legislation preceding
the enactment of Section SOM, since considerable reliance was placed
on this history both in the decision in Cloth Traders case (supra) as
also in the course of the arguments in the present writ petition. The
earliest provision granting exemption from 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 super tax- (i) so much of the income of any
investment trust company as is derived from dividmds
paid by any other company 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 C.J. r. v. Industrial Investment Trust
Co. Ltd. (1968) 67 I.T.R. 437 and the question was whether the
dividend income exempted from super tax 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 the Act,
i.e. 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"
1>eca11se "the notification mus( be regarded as a self-contained
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b1STRIBUTORS (BARODA) LTD. v. UNION (Bhagwati, J.)
7s9
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
notification 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. It may be noticed, and this aspect was emphasised by
the Bombay High Court, that what was exempted from super tax
under the notification was "so much of the income of any investment
trust company as is derived from dividends paid by any
other
company" and there was no reference to 'total income' in the notification nor was any indication given in the notification that the
income derived from dividends which was sought to be exempted
from super tax was dividend income forming part of 'total income'
and that is why the Bombay High Court came to the conclusion that
the dividend income exempted under the notification was the entire
income by way of dividend received by the assessee and not the
dividend income as computed in accordance with the provisions of
the Act.
The High Court of Bombay in taking this view in Industrial
Investment Trust Company's case was guided by the decision of this
Court in C.I.T. v. South Indian Bank (1966) 59 l.T.R. 763. Since
the decision in South Indian Bank case (supra) is the only decision
of this Court respecting an allied provision prior to the decision in
Cloth Traders case (supra), it is necessary to refer to it in some
detail in order to see whether it really supports the conclusion reached
in Cloth Traders case (supra). The question which arose in South
Indian Bank case (supra) was in regard to the true interpretation of
a notification issued by the Central Government under Section 60A
of the Indian Income Tax Act, 1922.
This notification was subsequent in point of time to the notification which came to be
considered by the High Court of Bombay in the Industrial Investment
Trust Company's case, hut it came up for construction before this
court earlier in South Indian Bank case (supra). This notification was
in the following terms :
"No income-tax shall be payable by ao assessee on
the interest received on the following income-tax free
loans issued by the former Government of Tranvancore or
by the former Government of Cochin, provided that such
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interest is received within the territories of the State of
Travancore Cochin and is not brought into any other part
of the taxable territories to which the said Act applies.
Such interest shall, however, be included in the total
income of the assessee for the purpose of section 16 of
the Indian Income-tax Act, 1922 ......... "
The argument of the Revenue was that the exemption from income
tax granted under this notification was in respect of interest receiv·
able on securities minus the expenses incurred in earning it and not
in respect of the entire amount of interest because it was only that
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amount of interest arrived at after computation in accordance with
Section 8 of the old Act which was includible in the total income and
liable to bear tax and the exemption from the tax could, therefore
only be in respect of such amount. This argument was negatived by
the court and it was pointed out by Subba Rao, J. that (p. 766) :
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" ..... this notification does not refer to the provision
of section 8 of the Income-tax Act at all. It gives a total
exemption from income-tax to an assessee in respect of
the interest receivable on income-tax free loans mentioned
therein. It gives that exemption subject two conditions,
namely, (i) that the interest is received within the territories of the State of Travancore-Cochin, and (ii) that it is
not brought to any other part of the taxable territories.
Jt includes the said exempted interest in the total income
of the assessee for the purpose of section 16 of the
Income·tax Act.
Shortly stated, the notification is a self·
contained one; it provides an exemtion from income-tax
payable by an assessee on a particular class of income
subject to specified conditions. Therefore, there is no
scope for controlling the provisions of the notification
with reference to section 8 of the Income tax Act. The
expression 'interest receivable on income-tax free loans' is
clear and unambigous. Though the point of time from
which the exempiion works is when it is received within
the territories of the State of Travancore-Cochin, what is
exempted is the interest reeeivable. 'Interest receivable'
can only mean the amount of interest calculated as per
the terms of the securities. It cannot obviously mean
interest receivable minus the amount spent in receiving the
same."
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nisTRIBUTORS (BARODA) LTD. v. UNION (Bhagwati j,)
791
It will be noticed that the entire basis of the judgment of the Court
was that the notification was a self-contained one and it gave
exemption from income tax in respect of interest receivable on certain
categories of income tax free loans, without any reference to 'total
income, or to "the provisions of section 8 of the Income tax Act at
all." That is why the judgment pointed out that there was no scope
for controlling the provisions of the notification with reference to
section 8 of the Income Tax Act and proceeded to hold that what
was exempted from income tax under the notification was "interest
receivable" that is, "the amount of interest calculated as per the
terms of the securities" without deduction of the "amount spent in
receiving the same". There was nothing in the notification to indicate
that what was sought to be exempted was the amount of interest
included in the ·total income'.
Thereafter a provision of a similar kind granting exemption
from super tax in respect of certain specified categories of inter·
corporate dividends was introduced as Section 56 in the Indian
Income Tax 1922 by the Finance Act, 1953. It is however not
necesslfY to make any detailed reference to this provision since there
is no decided case which has considered thi.s provision or expressed
any opinion upon it.
When the Indian Income Tax Act 1922 was repealed and the
Income Tax Act 1961 was enacted with effect from !st April, 1962,
section 99 sub-section (i) was introduced in the new Act exempting
certain categories of income from super tax and one such category
was that set out in clause (iv). Section 99 sub-section (I) clause (iv)
read as follows :
"99. (I) Super-tax shall not be 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."
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This provision continued in force upto !st March, 1965 subject to a
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minor inconsequential amendment made by the Finance Act 1964.
Now this provision did not at any time come up for interpretation
before this Court prior to the decision in Cloth Traders case but it
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did came to be considered by some of the High Courts. The question
in regard to the interpretation of this provision which arose before
the High Court of Bombay in C.l.T. v. New Great Insurance
Company Ltd. (1963) 90 l.T.R. 348 was 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'.