1975 (12) TMI 4 - SC - Income Tax

Capital Employed - company was not required under the law to deduct at source tax from the dividends which they were declaring to the shareholder - company was entitled to an appropriate certificate from the Income-tax Officer u/s 197(3). The appeals are therefore dismissed and the impugned orders are set aside. The company will be entitled to approach the Income-tax Officer for such appropriate certificates u/s 197(3) as may be admissible on proper computation under the relevant rules

Summary

Issues Involved:
1. Entitlement to the benefit of section 80K of the Income-tax Act, 1961.
2. Interpretation of section 80J and section 80K of the Income-tax Act, 1961.
3. Applicability of section 80A(2) in relation to deductions under Chapter VI-A.
4. Validity of the Income-tax Officer's refusal to issue a certificate under section 197(3).

Issue-wise Detailed Analysis:

1. Entitlement to the Benefit of Section 80K of the Income-tax Act, 1961:
High Court Judgment:
The primary issue was whether shareholders of the company were entitled to the benefit of section 80K. The company, Coromandel Fertilisers Ltd., sought a certificate under section 197(3) to avoid tax deduction at source on dividends, arguing that dividends should qualify for deduction under section 80K. The Income-tax Officer denied this request, leading to the writ petitions. The High Court concluded that shareholders were entitled to the benefit under section 80K, as the company was entitled to deductions under section 80J, even if such deductions were not actually allowed due to unabsorbed depreciation and business losses.

Supreme Court Judgment:
The Supreme Court upheld the High Court's view, emphasizing that section 80K allows shareholders to claim deductions if the company is "entitled to a deduction under section 80J," regardless of whether the deduction was actually allowed in the assessment year. The Supreme Court clarified that the entitlement to deduction under section 80J suffices for shareholders to claim benefits under section 80K.

2. Interpretation of Section 80J and Section 80K of the Income-tax Act, 1961:
High Court Judgment:
Section 80J provides for a deduction of 6% of the capital employed in a new industrial undertaking. The High Court noted that even if there were no taxable profits due to carried-forward depreciation and losses, the company was still "entitled to deduction under section 80J." This entitlement was sufficient for shareholders to claim deductions under section 80K.

Supreme Court Judgment:
The Supreme Court elaborated on the differences between the old section 15C of the 1922 Act and the new sections 80J and 80K. The Court highlighted that section 80K's phrase "entitled to a deduction under section 80J" introduces a new concept, not requiring an actual deduction but merely the entitlement. This interpretation ensures that shareholders can claim deductions even if the company carries forward the deduction to future years.

3. Applicability of Section 80A(2) in Relation to Deductions under Chapter VI-A:
High Court Judgment:
The High Court did not explicitly address section 80A(2) in its judgment, focusing instead on the entitlement under section 80J and its implications for section 80K.

Supreme Court Judgment:
The Supreme Court addressed the appellants' argument that section 80A(2) limits deductions to the gross total income of the assessee, implying that no deduction should be allowed if there is no assessable income. The Court rejected this argument, stating that section 80K's provision for "entitlement" to deduction under section 80J allows shareholders to claim benefits even if the company does not have assessable income in the relevant year.

4. Validity of the Income-tax Officer's Refusal to Issue a Certificate under Section 197(3):
High Court Judgment:
The High Court quashed the Income-tax Officer's order refusing the certificate under section 197(3), holding that the shareholders were entitled to the benefit of section 80K and, consequently, the company was entitled to the certificate.

Supreme Court Judgment:
The Supreme Court affirmed the High Court's decision, stating that the company was not required to deduct tax at source from the dividends and was entitled to the certificate under section 197(3). The Court directed the company to approach the Income-tax Officer for the appropriate certificates based on proper computation under the relevant rules.

Conclusion:
The Supreme Court dismissed the appeals, affirming the High Court's judgment that the shareholders were entitled to the benefit of section 80K, and the company was entitled to a certificate under section 197(3). The Court clarified the interpretation of sections 80J and 80K, emphasizing the concept of "entitlement" to deductions, and rejected the applicability of section 80A(2) to deny the benefits under section 80K.