1969 (4) TMI 19 - HC - Income Tax

Export - withdrawal of certain rebates - whether examination of the composition of profits of the year from which the dividend has been declared is necessary for the purposes of computing the reduction in rebate

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. Proportional reduction of the paid-up capital for the purpose of reducing the rebate in corporation tax.

Issue-Wise Detailed Analysis:

1. Computation of Reduction in Rebate:
The core issue revolves around whether the composition of profits from which dividends are declared should be considered for computing the reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1958 and 1959. The assessee, a private limited company, argued that the dividends declared during the relevant years were out of profits from the previous year ending December 31, 1956. The Appellate Assistant Commissioner accepted this contention, finding that the total income of the company was classifiable under different heads such as capital gains and other income assessed to tax. The Tribunal upheld this view, leading to the referral of questions to the High Court.

The revenue contended that the year of distribution of dividends should be considered for calculating the super-tax, emphasizing the distinction between "declared" and "distributed" dividends as per the Finance Acts. However, the court noted that distribution follows declaration and is based on profits earned in previous years. The court concluded that the year in which profits were earned should be the basis for computing the rebate, not the year of distribution. Therefore, the Tribunal was correct in considering the composition of profits from which dividends were declared.

2. Proportional Reduction of Paid-Up Capital:
The second issue concerned whether the paid-up capital of the assessee-company should be proportionately reduced for the purpose of reducing the rebate in corporation tax. The court examined the relevant provisions of the Finance Act, 1958, which defined "paid-up capital" as the capital on the first day of the previous year relevant to the assessment year. The court reasoned that the paid-up capital during the assessment year should not be the basis for determining the rebate. Instead, it should be the paid-up capital as of the first day of the previous year when the profits arose.

The court emphasized that distribution of dividends is a ministerial act following the declaration, which is based on profits earned in previous years. Therefore, the paid-up capital relevant for the rebate computation should be that of the year when the profits were earned. The Appellate Assistant Commissioner and the Tribunal were correct in their approach, and the court agreed with their view.

Conclusion:
The High Court affirmed the Tribunal's decisions, holding that the composition of profits from which dividends were declared should be considered for computing the rebate, and the paid-up capital should be proportionately reduced based on the year when the profits were earned. Both questions in both tax cases were answered in the affirmative and against the department. The petitions for review were dismissed, as the omission to bring a particular authority to the court's notice was not deemed a proper ground for review.