1966 (4) TMI 18 - SC - Indian Laws

Whether the dividend income of ₹ 11,09,332 received from the Binod Mills was chargeable under the War Profits Tax Ordinance ? Held that - There is no doubt that Ordinance 2002 did purport to add this Explanation to rule 3(2) but it seems to us that if we look at the language of the Explanation it was meant to be an Explanation not only to rule 3(2) but to rule 3(1) also. First, the words the income from investments to be included in the profits of the business under the provisions of this rule are comprehensive and include income from investments both under rule 3(1) and rule 3(2). Secondly, there is no reason why any distinction should have been made between investments mentioned in rule 3(1) and investments mentioned in rule 3(2). Rule 3(1) is general and deals with all investments from profits of all businesses and would include investments mentioned in rule 3(2). Rule 3(2) deals with investments of a certain business, i.e., business which consists wholly or mainly in the dealing in or holding of investments. We have not been able to appreciate why, if Mr. Shroff is right, it was necessary to distinguish between income from investments mentioned in rule 3(1) and income from investments mentioned in rule 3(2). At any rate, the language of the Explanation is quite clear and it seems to us that by the words in rule 3(2) of the First Schedule to the Ordinance, the following shall be added what was really meant was to add the Explanation below rule 3(2). Appeal dismissed

Summary

Issues:
1. Interpretation of the War Profits Tax Ordinance regarding the taxability of dividend income received from a company.
2. Application of the Explanation to rule 3 of Schedule I of the Ordinance.
3. Retroactive effect of subsequent Ordinances amending the Explanation.

Analysis:
The judgment of the Supreme Court pertains to an appeal against the High Court's decision regarding the taxability of dividend income under the Gwalior War Profits Tax Ordinance. The primary issue revolved around whether the dividend income received from Binod Mills was chargeable under the Ordinance. The High Court initially accepted the contention that the dividend income was not linked to the assessee's business and thus not taxable. However, the Supreme Court set aside this decision and remanded the case for further consideration of other contentions raised by the assessees.

The High Court, upon reconsideration, accepted the argument that the dividend income was exempted under the Explanation to rule 3 of Schedule I of the Ordinance. This Explanation excluded income received by way of dividends from a company subject to war profits tax, aiming to prevent double taxation. The court found the language of the Explanation clear and ruled in favor of the assessees, stating that the dividend income need not be included in the taxable income.

Regarding the retroactive effect of subsequent Ordinances amending the Explanation, the Supreme Court analyzed the legislative intent behind Ordinance 2002 and Ordinance 2004. The court concluded that the Explanation applied to the computation of profits for the relevant accounting period, despite Mr. Shroff's contentions to the contrary. The court emphasized that the language of the Explanation encompassed both rule 3(1) and rule 3(2) of the Ordinance, rejecting the argument that it was limited to rule 3(2) only.

In conclusion, the Supreme Court upheld the High Court's decision, ruling that the dividend income was not chargeable under the War Profits Tax Ordinance. The court dismissed the appeal and awarded costs to the assessees, affirming the application of the Explanation and rejecting arguments against its retroactive effect.