1975 (4) TMI 1 - SC - Income Tax

High Court was, therefore, in error in holding that the profits of the two parts of the company s business should be treated as if they were the total income of the company for all purposes. In taking this view, the High Court overlooked the concluding words of Explanation 2 by reason of which the legal fiction has to be limited to its duly appointed purpose

Issues Involved:
1. Liability of the assessee-company to pay additional super-tax under Section 23A of the Indian Income-tax Act, 1922.
2. Apportionment of dividends between industrial and non-industrial profits.
3. Determination of additional super-tax on undistributed profits.

Detailed Analysis:

1. Liability of the Assessee-Company to Pay Additional Super-Tax:
The primary issue is whether the assessee-company is liable to pay additional super-tax under Section 23A of the Indian Income-tax Act, 1922. Section 23A stipulates that if the dividends distributed by a company within twelve months following the expiry of the previous year are less than the statutory percentage of the total income, the company shall be liable to pay additional super-tax. The statutory percentage is defined as 45% for industrial profits and 60% for non-industrial profits.

2. Apportionment of Dividends Between Industrial and Non-Industrial Profits:
The company argued that it had declared dividends equally from industrial and non-industrial profits. However, the Income-tax Officer allocated the dividends in proportion to the profits of the two segments. The Tribunal rejected both the department's and the company's methods and held that the company must be deemed to have distributed dividends equal to 45% of industrial profits. The High Court confirmed this view, stating that it was open to the assessee to apportion the dividends in such a way as to conform to Section 23A requirements for one segment, with the other segment attracting additional super-tax.

3. Determination of Additional Super-Tax on Undistributed Profits:
The Supreme Court examined whether the dividends distributed should be apportioned between industrial and non-industrial profits in the same ratio as the respective profits. The Court held that the language of Explanation 2 of Section 23A is clear and requires that dividends be "similarly apportioned" with reference to the amounts of profits attributable to the two segments. Therefore, the dividends must be split in the same ratio as the industrial and non-industrial profits.

The Court found that the company's total distributable profits were Rs. 17,41,814, with Rs. 3,36,504 from industrial profits and Rs. 14,05,310 from non-industrial profits. Forty-five percent of industrial profits amounted to Rs. 1,51,426, and 60% of non-industrial profits amounted to Rs. 8,43,186. The company should have distributed Rs. 9,94,612 as dividends but distributed only Rs. 4,20,640. This amount, when apportioned, resulted in a shortfall in both segments, making the company liable for additional super-tax on the entire undistributed balance.

The Court rejected the hypothetical illustration used by the High Court to demonstrate potential injustice, stating that if the statutory percentage is met, there is no violation of Section 23A. The Court also dismissed the argument that unequal taxes on profits of the two segments could lead to unreal situations, affirming that the method specified in Section 23A must be followed.

Conclusion:
The Supreme Court set aside the High Court's order, concluding that the company is liable to pay additional super-tax on the entire undistributed balance of its distributable profits. The Court emphasized that the statutory percentages must be applied separately to the profits of the two segments, and the dividends must be apportioned accordingly. The judgment clarifies the interpretation of Section 23A, ensuring that companies cannot avoid additional super-tax by manipulating dividend distribution. The appeals were allowed with costs.

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