# THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY v. THE KHATAU MAKANJI SPINNING AND WEAVING CO. LTD., BOMBAY - **Citation:** [1960] 3 S.C.R. 873 - **Court:** Supreme Court of India - **Decided:** 1960 - **Case number:** Civil Appeal No. 303 of 1958 - **Bench:** S. K. Das, J. L. Kapur, M. HrnAYATULLAH - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-bombay-city-v-the-khatau-makanji-spinning-and-1903 - **Pages:** 8 ## Headnote Income-tax-Additional Income-tax-Total income-Method of computing-Indian Income-tax Act, r922 (II of r922), s. 3-The Indian Finance Act, I953 (XIV of r953). The Income-tax Officer found that in the assessment year r953-54 the respondent assessee-company had declared excess dividends amounting to Rs. l,87,691 and he levied additional income-tax on it at 5 annas in the rupee after deducting incometax borne by the profits of the previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of one anna in the rupee as allowed by the Finance Act, 1953· The Income-tax Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of the earlier year ending June 30, 1951 on which a rebate of one anna in the rupee was given in the assessment year 1952-53. It further observed that additional income-tax was also a tax on income, and that the Finance Act could say that the tax would be payable on the income of any year preceding the previous year. The Tribunal, however, referred three questions to the High Court which the High Court compressed into one as below :- " Whether additional income-tax has been legally charged under Clause (ii) of the proviso to·paragraph B of Part I of the First Schedule :to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with s. 3 of the Indian Income-tax Act?" The High Court held that s. 3 of the Indian Income-tax Act put the liability to tax on the total income of the previous year or what can be deemed to be income. The Finance Act provided the rate applicable to the income so found and a method of computing the total income. The Finance Act in providing that additional income-tax should be paid upon the accumulated profits of the previous years went beyond the purpose for which the Finance· Act was passed every year, and the Finance Act could not stand by itself without the support of s. 3 of the Indian Income-tax Act. On appeal by the Commissioner of Income-tax on certificate of the High Court : Held, that the High Court was right in answering the question framed by it, in the negative. The Finance Act provided that the tax should be levied on the " total income" as defined in and determined under the Indian Income-tax Act. The Additional income-tax was not properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year, nor deemed to be so. May 4. I960 Commissioner of Income-tax, Bombay City v. Khatau Makanji Spinning& Weaving Co. Ltd. H idayalullah j. 874 SUPREME COURT REPORTS [1960] ## Text -----;- 3 S.C.R. SUPREME COURT REPORTS 873 THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY v. THE KHATAU MAKANJI SPINNING AND WEAVING CO. LTD., BOMBAY. (S. K. DAS, J. L. KAPUR and M. HrnAYATULLAH, JJ.) Income-tax-Additional Income-tax-Total income-Method of computing-Indian Income-tax Act, r922 (II of r922), s. 3-The Indian Finance Act, I953 (XIV of r953). The Income-tax Officer found that in the assessment year r953-54 the respondent assessee-company had declared excess dividends amounting to Rs. l,87,691 and he levied additional income-tax on it at 5 annas in the rupee after deducting incometax borne by the profits of the previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of one anna in the rupee as allowed by the Finance Act, 1953· The Income-tax Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of the earlier year ending June 30, 1951 on which a rebate of one anna in the rupee was given in the assessment year 1952-53. It further observed that additional income-tax was also a tax on income, and that the Finance Act could say that the tax would be payable on the income of any year preceding the previous year. The Tribunal, however, referred three questions to the High Court which the High Court compressed into one as below :- " Whether additional income-tax has been legally charged under Clause (ii) of the proviso to·paragraph B of Part I of the First Schedule :to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with s. 3 of the Indian Income-tax Act?" The High Court held that s. 3 of the Indian Income-tax Act put the liability to tax on the total income of the previous year or what can be deemed to be income. The Finance Act provided the rate applicable to the income so found and a method of computing the total income. The Finance Act in providing that additional income-tax should be paid upon the accumulated profits of the previous years went beyond the purpose for which the Finance· Act was passed every year, and the Finance Act could not stand by itself without the support of s. 3 of the Indian Income-tax Act. On appeal by the Commissioner of Income-tax on certificate of the High Court : Held, that the High Court was right in answering the question framed by it, in the negative. The Finance Act provided that the tax should be levied on the " total income" as defined in and determined under the Indian Income-tax Act. The Additional income-tax was not properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year, nor deemed to be so. May 4. I960 Commissioner of Income-tax, Bombay City v. Khatau Makanji Spinning& Weaving Co. Ltd. H idayalullah j. 874 SUPREME COURT REPORTS [1960] CIVIL APPELLATE JURISDICTION: Civil Appeal No. 303 of 1958. Appeal from the judgment and order dated August 3, 1956, of the Bombay High Court in Incometax Reference No. 10of1956. K. N. Rajagopal Sastri and D. Gupta, for the appellant. N. A. Palkhivala, S. N. Andley, J. B. Dadachanji and Rameshwar Nath, for the respondents. 1960. May 4. The Judgment of the Court was delivered by HIDAYATULLAH, J.-This is an appeal against the judgment and order of the High Court of Bombay dated August 3, 1956, in a reference under s. 66 (1) of the Indian Income-tax Act by the Appellate Tribunal, .Bombay. The Tribunal referred four questions for the decision of the High Court. The High Court did not answer the first question because it was not pressed, and answered the remaining in the negative, after modifying them. It has certified this case as fit for appeal to this Court, and hence this appeal. The Commissioner of Income-tax, Bombay City, is the appellant, and the Khatau Makanji Spinning and Weaving Co. Ltd., Bombay, (the assessee Company), is the respondent. The assessee Company has its year of account ending June 30 every year. At the close of the account year 1951, it carried forward profits amounting to Rs. 30,680. In that year, it appears it had earned a rebate by declaring dividends below the limit fixed by the Finance Act. For the account year 1952 its book profits were Rs. 28,67,235 less allowances for depreciation and tax. After these and other sundry adjustments, the balance available for distribution was Rs. 5,02,915. It may be pointed out that the Incometax Officer on processing the income found the total income to be Rs. 5,26,681. For the account year 1952, the assessee Company declared dividends amounting to Rs. 4, 78,950 and carried forward the balance of Rs. 23,965. We are concerned with the assessment year 1953-54, and the Finance Act, 1953, is applicable. That Finance .. r 3 S.C.R. SUPREME COURT REPOHTS 875 Act applied the Finance Act, 1951, with some changes. The Finance Act, 1953, with the modifications will be referred to briefly, hereinafter, as the Finance Act. The Income.tax Officer found that the assessee Company had declared excess dividends amounting to R.:i. 1,87,691. He calculated additional income-tax on it at 5 annas in the rupee after deducting income-tax horne by the profits of the previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of one anna in the rupee as allowed by the Finance Act. This additional tax amounted to Rs. 21,115-4-0. The appeals of the assessee Company under the Income-tax Act failed. The Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of earlier year ending June 30, 1951, amounting to Rs. 6,60,720 on which a rebate of 1 anna in the rupee was given in the assessment year, 1952-53. The Tribunal observed that additional incometax was also a tax on income, and that the Fina.nee Act could say that the tax would be payable on the income of any year preceding the previous year. The Tribunal, however, referred four questions to the High Court, of which the first need not be quoted because it was abandoned before the High Court. The other questions were: "(ii) If the answer to question No. 1 is in the negative whether the said provisions go beyond the ambit and scope of the Indian Income-tax Act? (iii) .Whether additional income-tax can be levied, assessed and recovered under the provisions of the Indian Income-tax Act ? (iv) Whether at any rate the additional incometax has been legally charged under the Indian Finance Act, 1953, read with the Indian Incometax Act?" The High Court compressed the three questions into one, and it reads : · "Whether additional income-tax has been legally charged under clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with Section 3 of the lndia.u Inc9me.-ta.x .Act r Commissioner of Income~tox, Bomboy Cily v. Khatau Makanji Spinning& Weaving Co. Ltd. Hidayalullah ]. 876 SUPREME COURT REPORTS [1960] zy6o This question was answered by the High Court in the negative. Commisoion" of In the opinion of the High Court, s. 3 of the Indian Ir.come-tax, Bombay City Income-tax Act lays down the liability to tax, and it v. puts the tax on the total income of the previous year. Khatau Makanji The method of computing this total income is also to ::,pinning& . . . Weaving Co. Ltd. be found m the Fmance Act. The Fmance Act merely provides the rate applicable to the income so found. Hidayatullah J. According to the High Court, the Finance Act in providing that additional income-tax should be paid upon the accumulated profits of the previous years goes beyond the purpose for which the Central Act is passed ever,y year, and cannot stand by itself without the support. of s. 3 of the Indian Income-tax Act. The High Court held that the Finance Act had 'misfired', because it did not resort to legislation which would have conformed to the object for which the Finance Act w'as passed every year. The learned Chief Justice, who delivered the judgment of the High Court, stated that there were several methods open to the legislature to achieve that purpose but that it had not resorted to any of them. This is what the learned Chief Justice observed: "The Legislature could have achieved this object by one of three methods. It could have treated the excess dividend declared by the company as a notional income and made it a part of the total income of the previous year. It could have provided for rectification of the assessment of the year in which these profits were charged at a lesser rate, and we now find that Parliament has actually provided for this in the Finance Act, 1956. Or, finally, it could have provided for a penalty imposed upon a company which transgressed the direction of Parliament that it should not pay dividend beyond a particular ceiling ... The ambit of Section 3 is clear and the ambit is that the tax to be levied must be a tax on income and the power of Parliament is equally clear and that is to fix the rate at which income-tax is to be charged upon the total income of the previous year of the assessee. In our opinion, the provision of the Finance Act travels beyond the ambit of Section 3, a,nd if Parli11ment ) 3 S.C.R. SUPREME COURT REPORTS 877 has done so then no effective charge can be made on the total income of the previous year of the Commissioner of assessee under the provisions of the Finance Act Income-ta:<, which deals with additional tax on excess di viBombay City dend." v. Khalau Makanji It may be pointed out that before the High Court w:f'v~~;;c~.6Lttl. it was conceded that in order that the provisions of the Finance Act might be effective, the Finance Act had to come within the scope of s. 3 of the Incometax Act. The point that was argued here was that it was not necessary to look only to s. 3 of the Indian Income-tax Act but also to the provisions of the Finance Act, through which Parliament could impose a new tax, if it so pleased. Other arguments involved modifications of language suitable to sustain the tax independently of s. 3 of the Indian Income-tax Act, a procedure which we do not think is open, for reasons which we have given in Civil Appeal No. 427 of 1957, decided today. These modifications, which were suggested, involve a re-casting of the entire relevant paragraph of the Finance Act to make it independent of s. 3 of the Indian Income-tax Act, a course which is only open to a legislature and not to a Court. We need not give all the modifications suggested, because, in our opinion, the words of the Finance Act must be given their due meaning, and must be construed as they stand. The learned Chief Justice, with respect, very rightly pointed out that the Income-tax Act puts the tax on income or something which it deems to be income. In other words, the tax deals with income and income only. It further provides that this tax shall be collected at a particular rate on the total income for which provision shall be made in an yearly Central Act. The Finance Act also follows the same scheme, and lays down the rate at which the tax is to be collected. In the Finance Act, the tax is laid on the total income, but two provisos modify the rate under certain circumstances. We may at this stage read the relevant provision (Part I, First Schedule): Hidayatullah J. Commissioner of lt.iecime~tax, BOmbay City v. Khatau· M akanji Spinning& Weaving Co. Ltd. .Hidayatullah J. -878 SUPREME COURT REPORTS [1960] " B. In the case of every companyRate. Surcharge. ·On the whole of Four annas One-twentieth of total income. in the rupee. the rate specifierl in the preceding column: Provided that in the case of a company which, in respect of its profits liable to tax under tho Income-tax Act for the year ending on the 31st day of March, 1953, has made the prescribed arrangements for the declaration and payment within the territory of India excluding the State of Jammu and Kashmir, of the dividends payable out of such . profits, and has deducted super-tax from the divi- .