1963 (10) TMI 38 - HC - Income Tax

Issues Involved:
1. Interpretation of "paid up capital" under the Finance Act, 1956.
2. Classification of preferred ordinary shares.
3. Applicability of Section 35 of the Income-tax Act, 1922.
4. Necessity of specific notice for modification of interest under Section 18A(6).

Detailed Analysis:

1. Interpretation of "paid up capital" under the Finance Act, 1956:
The central issue revolves around the interpretation of "paid up capital" as defined in the Explanation to Paragraph D of Part II of the First Schedule to the Finance Act, 1956. The relevant portion of the Explanation states: "The expression 'paid up capital' means the paid up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on 31st day of March, 1957."

The court had to determine whether the preferred ordinary shares, which carried a fixed dividend rate of 4% together with the right to share in dividends with ordinary shareholders, should be excluded from the "paid up capital" for the purpose of calculating the rebate. The court concluded that preferred ordinary shares do not carry a fixed rate of dividend as they are not entitled to a fixed dividend rate in all circumstances, unlike preference shares which carry a fixed cumulative preferential dividend.

2. Classification of preferred ordinary shares:
The petitioner company had issued three kinds of shares: preference shares, ordinary shares, and preferred ordinary shares. The character and nature of the preferred ordinary shares were in dispute. Article 4 of the articles of the company specified that preferred ordinary shares had a right to a 4% dividend, but only if there were sufficient profits after paying the preference shareholders.

The court noted that the preferred ordinary shares are a sub-class of equity shares with some priority over other equity shares but do not fall under the category of preference shares that carry a fixed rate of dividend. Therefore, the preferred ordinary shares should not be excluded from the "paid up capital" for the purpose of calculating the rebate under the Finance Act, 1956.

3. Applicability of Section 35 of the Income-tax Act, 1922:
The Income-tax Officer had invoked Section 35 of the Income-tax Act, 1922, to rectify what was considered a clerical mistake in the assessment. The court held that the provisions of the Finance Act of 1956 were mandatory and had not been inadvertently given effect to. Therefore, the mistake was apparent from the record, justifying the invocation of Section 35. The court referenced a similar view taken in A.H. Wheeler and Co. v. Income-tax Officer, Allahabad, and the Supreme Court decision in M.K. Venkatachalam, Income-tax Officer v. Bombay Dyeing and Manufacturing Co. Ltd., to support this conclusion.

4. Necessity of specific notice for modification of interest under Section 18A(6):
The petitioner contended that no specific notice was given before the interest under Section 18A(6) was modified by an order under Section 35. The court found that a general notice under Section 35 was given, which included the notice for enhancement of the assessment. Consequently, the enhancement of penal interest was deemed consequential and did not require a separate specific notice. However, since the excess dividend was recalculated, the penal interest would also be reduced proportionately.

Conclusion:
The court allowed the writ petition in part, quashing the order of the Income-tax Officer to the extent that it determined the excess dividend incorrectly. The correct figure of excess dividend was determined to be Rs. 8,92,500 instead of Rs. 12,07,500. Consequently, the penal interest would also be reduced proportionately. The petition was partly allowed, with no order as to costs.

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