1975 (4) TMI 135 - SC - Income Tax

Summary

Issues Involved:

1. Whether the assessee-company is liable to pay additional super-tax under Section 23A of the Income-tax Act, 1922.
2. The method of apportioning dividends between industrial and non-industrial profits.
3. The applicability of the statutory percentage to the profits of the two segments.
4. The scope and interpretation of Explanation 2 to Section 23A.
5. The extent of the company's liability for additional super-tax on undistributed profits.

Detailed Analysis:

1. Liability to Pay Additional Super-tax:
The primary issue was whether the assessee-company was liable to pay additional super-tax under Section 23A of the Income-tax Act, 1922. The company had a composite business involving both industrial and non-industrial activities. The Income-tax Officer had levied additional super-tax on the undistributed balance of the total income, arguing that the company had not distributed the statutory percentage of its profits as dividends. The Tribunal and the High Court had held that the company was not liable to pay additional super-tax on its industrial profits but was liable on its non-industrial profits.

2. Method of Apportioning Dividends:
The company contended that it had declared dividends equally from industrial and non-industrial profits. However, the Income-tax Officer apportioned the dividends in the same ratio as the profits of the two segments bore to the total profits. The Tribunal rejected both the company's and the Department's methods, eventually holding that the company must be deemed to have distributed dividends equal to 45% of its industrial profits. The Supreme Court held that the language of Explanation 2 required dividends to be "similarly apportioned" in the ratio of the respective profits of the two segments.

3. Applicability of Statutory Percentage:
The statutory percentage for industrial profits was 45%, and for non-industrial profits, it was 60%. The Supreme Court clarified that these percentages must be applied separately to the profits of the two segments as if those profits were the total income of the company in relation to each segment. The company's total distributable profits were Rs. 17,41,814, with industrial profits at Rs. 3,36,504 and non-industrial profits at Rs. 14,05,310. The company should have distributed Rs. 9,94,612 as dividends but only distributed Rs. 4,20,640.

4. Scope and Interpretation of Explanation 2:
Explanation 2 to Section 23A required that the statutory percentages be applied separately to the profits of the two segments and that dividends and taxes be "similarly apportioned." The Supreme Court rejected the respondent's contention that the company could freely apportion dividends. The Court emphasized that the apportionment must follow the ratio of the respective profits of the two segments.

5. Extent of Liability for Additional Super-tax:
The Supreme Court addressed whether the company was liable to pay additional super-tax on the undistributed balance of non-industrial profits only or on the entire undistributed balance of its distributable profits. The Court held that the additional super-tax must be levied on the entire undistributed balance of the net income of the company. The fiction created by Explanation 2 was limited to the purposes of determining the statutory percentage and did not extend to the imposition of the penalty.

The Supreme Court concluded that the High Court and the Tribunal erred in their interpretation. The company was liable to pay additional super-tax on the entire undistributed balance of its distributable profits. The appeal was allowed, and the order of the High Court was set aside.