1969 (9) TMI 35 - HC - Income Tax

Business taken over by govt. - reduction of capital - reduction of share capital has not produced an income on which a super-tax can be attached nor is it a dividend within the meaning of the Income-tax Act or Paragraph D of the Finance (No. 2) Act 1957

Issues Involved:
1. Whether the Tribunal was right in holding that the rebate of super-tax was allowable to the assessee under clause (iii) of the first proviso to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act of 1957.
2. If the answer to the first question is in the negative, whether the Tribunal was right in holding that no withdrawal of rebate granted by the first proviso to Paragraph D of Part II of the Finance (No. 2) Act of 1957 was justified under clause (i) of the second proviso to the said paragraph.

Issue-wise Detailed Analysis:

Issue 1: Rebate of Super-tax Allowable
The Tribunal held that the rebate of super-tax was allowable to the assessee under clause (iii) of the first proviso to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act of 1957. The facts of the case indicated that the assessee, a private limited company, had reduced its share capital from Rs. 3,84,000 to Rs. 96,000 and distributed cash to shareholders. The Income-tax Officer considered this distribution as dividend to the extent of accumulated profits amounting to Rs. 97,399 and deemed it as declared dividend under section 2(6A)(d) of the Income-tax Act. The Appellate Assistant Commissioner upheld this view, but the Tribunal found that the rebate under clause (iii) applied to the assessee as it was not a company in which the public were substantially interested. The Tribunal concluded that the second proviso for withdrawal of rebate applied only to companies entitled to rebate under clause (i) or (ii) of the first proviso, which were public companies. The High Court, however, emphasized that the primary condition for allowing rebate was the levy of super-tax on the total income of the company. The Court held that this condition was not satisfied as the reduction of share capital did not produce an income liable to super-tax, nor was it a dividend within the meaning of the Income-tax Act or Paragraph D of the Finance (No. 2) Act, 1957. Consequently, the Tribunal was not right in holding that any rebate of super-tax was allowable.

Issue 2: Withdrawal of Rebate
Given the negative answer to the first issue, the second issue concerned whether the Tribunal was right in holding that no withdrawal of rebate granted by the first proviso to Paragraph D of Part II of the Finance (No. 2) Act of 1957 was justified under clause (i) of the second proviso. The High Court found that clause (i)(a) of the proviso in Paragraph D of the Finance (No. 2) Act, 1957, was not satisfied. Since the primary condition for levying super-tax was not met, the question of withdrawal of rebate did not arise. The High Court concluded that the Tribunal's finding on this issue was also incorrect.

Conclusion:
The High Court answered both questions in favor of the revenue, holding that the Tribunal erred in its interpretation and application of the relevant provisions of the Finance (No. 2) Act, 1957. The reduction of share capital did not produce an income liable to super-tax, and therefore, the rebate of super-tax was not allowable, nor was there any justification for the withdrawal of such rebate. The assessee did not appear to contest the reference, and there was no order as to costs.

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