1979 (2) TMI 27 - HC - Income Tax

Summary

Issues Involved
1. Whether the dividends received by the assessee-company from Standard Mills Co. Ltd. and Sassoon Spinning and Weaving Co. Ltd. are entitled to super-tax rebate at the rate of 50% as dividends from subsidiary companies.
2. Whether the assessee-company was entitled to the deduction of legal expenses.

Detailed Analysis

Issue 1: Super-tax Rebate on Dividends from Subsidiary Companies

Background and Facts:
The assessee-company, M/s. Mafatlal Gagalbhai & Co. Private Ltd., received dividends from Standard Mills Co. Ltd. and Sassoon Spinning and Weaving Co. Ltd. for the assessment years 1962-63 and 1963-64. The assessee-company's direct holding in these companies did not exceed 50% of the issued equity capital. However, with its subsidiaries, it held more than 50% of the equity capital in both companies. The assessee-company claimed a super-tax rebate at the rate of 50% under the Finance (No. 2) Act, 1962, and the Finance Act, 1963. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this claim based on Explanation II to Paragraph D of the said Finance Acts, which defined a subsidiary company as one in which the assessee-company held more than half the nominal value of the equity share capital.

Tribunal's Decision:
The Tribunal upheld the ITO and AAC's decision, stating that the definition in Explanation II should be applied instead of the broader definition in the Companies Act, 1956.

Arguments:
- Assessee's Argument: The assessee contended that the word "holding" in Explanation II should include direct or indirect holding. It argued that the definition in the Companies Act should govern the interpretation, and the Explanation II was merely a deeming provision to restore the pre-1960 definition of a subsidiary company.
- Revenue's Argument: The revenue argued that Explanation II provided a specific definition for the Finance Act, 1962, and should be applied exclusively.

Court's Analysis:
The court examined the legislative history and the changes in the Companies Act and the Finance Acts. It considered whether Explanation II was a deeming provision or a definition. The court concluded that Explanation II provided a precise definition of a subsidiary company for the purposes of the Finance Act, 1962, and not merely a deeming provision. The court rejected the argument that the definition in the Companies Act should apply and held that only direct holding in equity capital should be considered.

Conclusion:
The court upheld the Tribunal's decision and answered Question No. 1 in the negative, in favor of the revenue. The dividends received by the assessee-company were not entitled to the super-tax rebate at the rate of 50%.

Issue 2: Deduction of Legal Expenses

Background and Facts:
The second question concerned the deduction of legal expenses incurred by the assessee-company.

Agreement:
Counsel for both parties agreed that this question should be answered in favor of the assessee-company based on the Supreme Court's decision in CIT v. Birla Cotton Spinning & Weaving Mills Ltd. [1971] 82 ITR 166.

Conclusion:
The court answered Question No. 2 in the negative and in favor of the assessee-company, allowing the deduction of legal expenses.

Final Order
The court ordered that the assessee-company must pay the costs of the reference to the Commissioner of Income-tax, as the principal controversy (Question No. 1) was decided in favor of the revenue.