1978 (6) TMI 4 - HC - Income Tax

Issues Involved:
1. Entitlement to relief under Section 49BB of the Indian Income-tax Act, 1922.
2. Interpretation and application of Explanations I and II to Section 49BB.
3. Calculation of distributable income for the purpose of relief under Section 49BB.

Detailed Analysis:

1. Entitlement to Relief under Section 49BB:
The primary issue was whether the assessee was entitled to relief under Section 49BB of the Indian Income-tax Act, 1922, for the dividend declared in the financial year ending March 31, 1960. The assessee claimed relief on the basis that the dividend of Rs. 1,82,250 was declared out of profits already charged to income-tax before April 1, 1960.

The Tribunal initially accepted the assessee's contention that the dividend was paid from the reserve fund accumulated from prior years' profits. However, the Commissioner challenged this, arguing that the relief under Section 49BB was not applicable due to the deeming provisions in Explanations I and II.

2. Interpretation and Application of Explanations I and II to Section 49BB:
Explanation I introduces a legal fiction, deeming that dividends are first paid out of the distributable income of the previous year, and only the balance, if any, from earlier years' undistributed income. Explanation II defines "distributable income" and includes adjustments for income-tax, super-tax, other taxes, charitable contributions, and allowances not accounted for in the profit and loss account.

The Tribunal held that the reference to the profit and loss account should include all years from the company's inception, not just the previous year. This interpretation was challenged by the Commissioner, who argued that only the previous year's accounts should be considered.

The High Court disagreed with the Tribunal, stating that the statutory scheme under Section 49BB, including Explanations I and II, must be read as an integrated provision. The Court held that the reductions and increases specified in Explanation II pertain only to the previous year, not to all years since the company's inception.

3. Calculation of Distributable Income:
The Income Tax Officer (ITO) initially calculated the distributable income for the assessment year 1960-61 as Rs. 13,58,908, ignoring the provision of Rs. 11,77,364 for machinery and building replacement. The Appellate Assistant Commissioner (AAC) revised this to Rs. 1,81,644, considering the provision.

The Tribunal directed the ITO to verify the assessee's figures and provide relief if correct. However, the High Court clarified that the calculation of distributable income should consider only the previous year's accounts, as per Explanation II.

The High Court concluded that the dividend declared and paid out of the previous year's fictional distributable income (Rs. 1,81,644) would not qualify for relief under Section 49BB. Only the balance amount of Rs. 706, deemed paid out of earlier taxed profits, would qualify for relief.

Conclusion:
The High Court held that the assessee was entitled to relief under Section 49BB only to the extent of Rs. 706, as the remaining dividend amount was deemed paid out of the previous year's fictional distributable income. The integrated statutory scheme of Section 49BB and its Explanations must be applied, considering only the previous year's accounts for calculating distributable income. The parties were directed to bear their own costs.

← Previous Next →