1960 (5) TMI 4 - SC - Income Tax

Whether additional income-tax has been legally charged under clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1951, as applied to the assessment year 1953-54, by the Indian Finance Act, 1953, read with section 3 of the Indian Income-tax Act ? Held that - Even if one considers the dividends as having come out of the profits of preceding years, they do not become the income of the relevant previous year, and unless the Finance Act expressly laid down that it should be taxed as part of the total income, the purpose is not achieved. Indeed, the Finance Act continues to say that the tax shall be on the total income, as defined in the Indian Income-tax Act and as determined under that Act. It is impossible to say that the additional income-tax was properly laid upon the total income, because what was actually taxed was never a part of the total income of the previous year. The High Court was right in answering the question, which it had framed, in the negative. Appeal dismissed.

Summary

Issues:
1. Interpretation of provisions of the Indian Income-tax Act regarding additional income-tax on excess dividends.
2. Compatibility of the Finance Act with the Indian Income-tax Act.
3. Legal basis for the imposition of additional income-tax on dividends exceeding the prescribed limit.

Analysis:
The case involved an appeal against the High Court of Bombay's judgment in a reference under section 66(1) of the Indian Income-tax Act. The appellant, the Commissioner of Income-tax, contested the imposition of additional income-tax on excess dividends by the Income-tax Officer for the assessment year 1953-54. The Finance Act, 1953, applied the Finance Act, 1951, with modifications, and the dispute centered around the compatibility of these provisions with the Indian Income-tax Act.

The High Court consolidated the questions raised into one main issue: whether the additional income-tax was legally charged under the Finance Act provisions as applied to the assessment year 1953-54. The High Court answered this question in the negative, emphasizing that the Finance Act's provisions went beyond the scope of the Indian Income-tax Act. The High Court held that the Finance Act's imposition of additional tax on accumulated profits of previous years lacked a legal basis under section 3 of the Income-tax Act, which defines the liability to tax on the total income of the previous year.

The judgment highlighted that the Finance Act failed to integrate the excess dividends into the total income of the relevant previous year for taxation purposes. Despite deeming the dividends to be sourced from profits of preceding years, the Finance Act did not explicitly include them in the total income, as required by the Income-tax Act. The court emphasized that income-tax is levied on income of the previous year and cannot extend to amounts not constituting the income of the relevant assessment year.

Ultimately, the Supreme Court upheld the High Court's decision, affirming that the additional income-tax on excess dividends was not properly imposed under the provisions of the Finance Act. The court concluded that the Finance Act's failure to align the excess dividends with the total income of the relevant previous year rendered the additional tax legally unsound. Consequently, the appeal was dismissed, and the appellant was ordered to bear the costs incurred in the proceedings.