1993 (1) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was justified in holding that the Income-tax Officer rectified an error apparent from the record under section 154 of the Income-tax Act, 1961.
2. Whether there was any excess dividend declared by the assessee-company attracting clause 1(B) of Paragraph F of Part I of the First Schedule to the Finance Act, 1968.
3. Whether additional income-tax was payable in respect of the dividend declared and paid out of profits exempt under section 80J of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Rectification under Section 154 of the Income-tax Act, 1961
The Tribunal held that the Income-tax Officer (ITO) rectified an error apparent from the record under section 154 of the Income-tax Act, 1961. The court confirmed this by stating that the ITO had clearly made a mistake in overlooking the provision regarding additional income-tax under the Finance Act, 1968, during the original assessment. This oversight constituted a mistake apparent on the record, justifying the initiation of rectification proceedings under section 154. The court referenced the Supreme Court's decision in ITO v. Asok Textiles Ltd. [1961] 41 ITR 732, which upheld the broader scope of section 154, allowing the ITO to rectify errors of both fact and law.

Issue 2: Excess Dividend Attracting Additional Income-tax
The court examined the relevant provisions of the Finance Act, 1968, particularly Paragraph F of Part I of Schedule I, which prescribes an additional income-tax of 7.5% on the "relevant amount of distributions of dividends." This term is clarified in Explanation 1, sub-clause (b), which refers to dividends exceeding 10% of the paid-up equity share capital on the first day of the previous year. In this case, the assessee declared a total dividend of Rs. 6,90,000, exceeding the 10% threshold by Rs. 3,90,000. Therefore, the additional income-tax was applicable to this excess amount. The court emphasized that the additional tax is levied on a portion of the total income determined with reference to the excess dividend, not directly on the excess dividend itself.

Issue 3: Additional Income-tax on Dividends from Exempt Profits
The assessee argued that since the excess dividend was declared from profits exempt under section 80J of the Income-tax Act, 1961, no additional income-tax should be levied. However, the court rejected this argument, clarifying that the additional income-tax is levied on a portion of the total income, not directly on the exempt profits. The court explained that under section 2(45) of the Income-tax Act, "total income" includes all income before deductions under Chapter VI-A, which includes section 80J. Thus, for the purpose of additional income-tax, the total income must be considered, and the exempt status of the profits under section 80J is irrelevant. The court referenced the Madras High Court's decision in Madurai District Central Co-operative Bank Ltd. v. Third ITO [1969] 73 ITR 479, which supported this interpretation.

Conclusion:
The court answered all three questions in the affirmative and in favor of the Revenue. It confirmed that the ITO had rectified an error apparent from the record, that the excess dividend declared by the assessee attracted additional income-tax under the Finance Act, 1968, and that additional income-tax was payable on a portion of the total income determined with reference to the excess dividend, regardless of the exemption under section 80J. The court dismissed the assessee's contentions and upheld the Tribunal's decision. No order as to costs was made.