1958 (10) TMI 7 - SC - Income Tax

Whether the expression at the rate applicable to the total income of the company as appearing in sub-clause (b) of clause (ii) to the second explanation to proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act 1952 means the rate at which a company s total income is actually assessed or the rate prescribed by the respective Finance Acts without taking into consideration the rebate allowed in the respective years in accordance with the provisions of the Part B States (Taxation Concessions) Order 1950 ? Held that - We accordingly hold that the rate applicable in sub-clause (b) of clause (ii) of the explanation read with clause (ii) of the proviso to paragraph B of Schedule I of the Act means the rate actually applied in a given case. On this construction the rate at which the appellant is liable to pay the additional income-tax would be the difference between the rate of five annas and the rate of sixteen pies in a rupee at which the appellant has in fact paid income-tax in the relevant year. That is to say the additional income-tax is leviable at the rate of forty-four pies in a rupee. Appeal dismissed.

Summary

Issues Involved:
1. Determination of the rate at which additional income-tax is to be charged on excess dividend.
2. Interpretation of the expression "at the rate applicable to the total income of the company" in the context of the Indian Finance Act, 1952.

Detailed Analysis:

1. Determination of the Rate at Which Additional Income-Tax is to be Charged on Excess Dividend:
The appellant, a private limited company, was assessed to income-tax and super-tax by the Income-tax Officer on a total income of Rs. 26,385 for the assessment year 1952-53. The appellant declared a dividend of Rs. 30,000, out of which Rs. 15,159 was considered excess dividend. Consequently, additional income-tax was determined at forty-four pies in a rupee on the excess dividend, amounting to Rs. 3,473-15-0. The appellant contested this determination, leading to appeals before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, both of which upheld the original assessment with minor modifications. The primary issue for the Supreme Court was the correct interpretation of the rate at which additional income-tax on the excess dividend should be computed.

2. Interpretation of the Expression "at the Rate Applicable to the Total Income of the Company":
The core issue revolved around the interpretation of the phrase "at the rate applicable to the total income of the company" as mentioned in sub-clause (b) of clause (ii) to the second explanation to the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1952. The appellant argued that this phrase referred to the rate prescribed by the Finance Act without considering any rebates allowed under the Part B States (Taxation Concessions) Order, 1950. Conversely, the respondent contended that the rate should reflect the actual rate at which the company's income was assessed, inclusive of any rebates.

The Supreme Court examined the provisions of the Finance Act, 1951, as applied to the assessment year 1952-53, and the relevant clauses of the Part B States (Taxation Concessions) Order, 1950. The Order provided for rebates on income accruing in Part B States, which affected the effective rate of tax on the appellant's income. The Court noted that the rebate allowed under the Order meant that the tax levied on the appellant was not at the Indian rate but at a reduced rate after accounting for the rebate.

The Court emphasized that the expression "at the rate applicable to the total income of the company" should be understood in the context of the actual rate applied to the company's income after considering all statutory provisions, including any rebates. The Court rejected the appellant's argument for a strict and literal interpretation of the phrase, noting that such an interpretation would ignore the context and the purpose of the statutory provisions.

The Court held that the rate applicable must be the rate actually applied, considering any rebates allowed. This interpretation was consistent with the legislative intent to impose additional income-tax on excess dividends to discourage companies from declaring excessively high dividends and to encourage reinvestment of profits into the business. The Court concluded that the additional income-tax should be computed at the rate of forty-four pies in a rupee, reflecting the difference between the prescribed rate of five annas per rupee and the actual rate of sixteen pies in a rupee at which the appellant's income was assessed.

The Supreme Court affirmed the High Court's decision, which had upheld the interpretation that the rate applicable to the total income of the company meant the rate actually assessed, inclusive of any rebates. The appeal was dismissed with costs.

Conclusion:
The Supreme Court's judgment clarified that the rate at which additional income-tax on excess dividends should be computed is the actual rate applied to the company's income, considering any rebates allowed under relevant statutory provisions. This interpretation aligns with the legislative intent to regulate dividend distribution and encourage reinvestment of profits. The appeal was dismissed, and the High Court's decision was upheld.