1955 (10) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Income-tax Officer to invoke Section 35 of the Indian Income-tax Act.
2. Applicability of the concept of "excess dividend" under the Indian Finance Act, 1951.
3. Justification for the rate of additional income-tax levied.
4. Levy of penal interest under Section 18A(8) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income-tax Officer to invoke Section 35 of the Indian Income-tax Act:
The petition challenged the rectification proceedings initiated by the Income-tax Officer under Section 35 of the Indian Income-tax Act. The court noted that Section 35 allows for rectification of mistakes apparent on the record. It was emphasized that the section has limited application and cannot enable the income-tax authorities to revise or review an order generally. The court held that the applicability of the proviso in item B of Part I of the First Schedule of the Indian Finance Act, 1951, to particular sets of facts is a complex question and not apparent on the face of the record. Therefore, the necessary foundation for invoking Section 35 was not established by the Income-tax authorities. Consequently, the rectification proceedings were deemed lacking in jurisdiction and unsustainable.

2. Applicability of the concept of "excess dividend" under the Indian Finance Act, 1951:
The court examined the provisions of the Finance Act relied upon by the Department. The Finance Act (XXIX of 1952) did not bring any change in the financial structure from the previous year, thus requiring reference to the Finance Act (XXIII of 1951). The court explained that the proviso in item B of Part I of the First Schedule of the Finance Act was intended to encourage companies to reinvest profits rather than distribute them as dividends. However, the application of the proviso depends on the declaration of dividends payable out of specific profits. In this case, the court found it impossible to definitively say whether the "excess dividends" were paid out of taxable profits of the year of assessment. Therefore, the imposition of additional tax on the footing that there was "excess dividend" declared and paid was without legal justification.

3. Justification for the rate of additional income-tax levied:
The first rectification levied additional income-tax on "excess dividend" at the rate of 1 anna in the rupee. The second rectification increased this rate to 5 annas in the rupee. The court noted that the increase in the rate was arbitrary and unjustified. Furthermore, the second rectification was a second attempt at rectification, which is not permissible under Section 35. The court held that the second rectification order to the extent it increased the rate was unjustified.

4. Levy of penal interest under Section 18A(8) of the Indian Income-tax Act:
The second rectification also included the levy of penal interest under Section 18A(8) for failure to pay advance tax under Section 18A(3). The court noted that the question of whether the assessee could anticipate the accrual of assessable income within a particular time is a question of fact. The court found that the unexpected profits mentioned in the assessment order could not have been anticipated by the assessee. Therefore, the levy of penal interest was unsustainable. The court emphasized that the excess taxation resorted to at the second stage in the rectification proceedings was a total abuse of process and not justifiable.

Conclusion:
The court concluded that the rectification proceedings initiated by the Income-tax Officer were lacking in jurisdiction and could not stand. The orders in revision passed by the Commissioner of Income-tax confirming the rectification orders were also unsustainable. Consequently, the court granted a writ of certiorari quashing the rectification proceedings and awarded costs to the petitioner. The petition was allowed.