1976 (11) TMI 4 - SC - Income Tax

Whether the Tribunal was correct in holding that for computing the reduction in rebate under para. D of part II to the first Schedule to the Finance Act, 1959 and 1958 in the composition of profits as the year from which the dividend had been declared should be looked into and that the paid-up capital should be proportionately reduced for the purpose of reducing the rebate in corporation tax - question is answered in negative - revenue s appeal is accepted

Summary

Issues Involved:

1. Computation of reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1958 and 1959.
2. Proportionate reduction of paid-up capital for the purpose of reducing the rebate in corporation tax.

Issue 1: Computation of Reduction in Rebate

The primary issue was whether, for computing the reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1958 and 1959, the composition of profits of the year from which the dividend had been declared should be looked into. The matter related to the assessment years 1958-59 and 1959-60 of a private limited company. The company declared a dividend of Rs. 99,000 in the previous year ending on December 31, 1957, with a paid-up capital of Rs. 1,65,000 and a total income of Rs. 73,255.

The Income-tax Officer computed the super-tax payable by the assessee, taking into account the excess dividend declared. The assessee objected, arguing that the dividend was declared out of the profits of the previous year ending December 31, 1956, and should be apportioned between capital gains and other income. The Appellate Assistant Commissioner accepted the principle but computed a higher proportionate dividend. The Tribunal upheld this view, stating that the "previous year" referred to the year out of which the dividends were declared.

The High Court supported the assessee's view, emphasizing a realistic approach to the quantum of rebate, considering the year in which profits were earned rather than the year of distribution. The Supreme Court, however, disagreed, emphasizing the language of clause (iii) of the Explanation in Paragraph D of Part II of the First Schedule to the Finance Act, 1958. The Court held that the taxing authorities should consider the company's total income and profits and gains other than capital receipts in the previous year alone, not earlier years. Thus, the Court modified the High Court's answer and concluded that for computing the reduction in rebate, the position of profits and gains as it existed in the previous year should be taken into account.

Issue 2: Proportionate Reduction of Paid-Up Capital

The second issue involved whether the paid-up capital of the assessee-company should be proportionately reduced for the purpose of reducing the rebate in corporation tax. The Appellate Assistant Commissioner retained the paid-up capital at Rs. 1,65,000 as per the balance sheet without apportionment based on taxed and non-taxed income. No specific arguments were addressed before the Supreme Court on this issue. Consequently, the Supreme Court did not modify the High Court's answer to this question.

Conclusion:

The Supreme Court accepted the appeals, set aside the judgment of the High Court, and answered the first question in the negative, indicating that the computation of reduction in rebate should consider the position of profits and gains in the previous year alone. The parties were directed to bear their own costs in the Supreme Court and the High Court.