1971 (8) TMI 43 - HC - Income Tax

Assessee, Financial Corporation constituted under the State Financial Corporations Act - State Government guarantees minimum dividend to the shareholders of assessee-company - taxability of such divided paid by govt. - whether, Tribunal was justified in holding that the amount to be taken for purposes of reduction in rebate on corporation tax under the Finance Act of 1964 is only Rs. 2,09,076.46 and not Rs. 3,50,000

Issues Involved:
1. Determination of the amount for purposes of reduction in rebate on corporation tax under the Finance Act of 1964.
2. Interpretation of "dividend" in the context of the Finance Act, 1964, and its implications on tax rebate.
3. Applicability of Section 205 of the Companies Act, 1956, in defining "dividend".
4. Impact of Section 43 of the State Financial Corporations Act on the tax treatment of subventions.

Detailed Analysis:

1. Determination of the Amount for Purposes of Reduction in Rebate on Corporation Tax:
The primary issue was whether the amount to be considered for the reduction in rebate on corporation tax should be Rs. 2,09,076.46 (excluding the subvention) or Rs. 3,50,000 (including the subvention). The Tribunal held that the amount for the reduction should be Rs. 2,09,076.46, which was the profit available for dividend distribution, excluding the subvention from the State Government.

2. Interpretation of "Dividend" in the Context of the Finance Act, 1964:
The court examined whether the term "dividend" in Part II of the First Schedule of the Finance Act, 1964, includes the subvention paid by the State Government. The Tribunal upheld the assessee's plea that the reduction in the rebate should only apply to the dividend distributed from the profits of the assessee, excluding the subvention. The court noted that Section 2(22) of the Income-tax Act provides an inclusive definition of "dividend" but is not exhaustive for interpreting the term in the Finance Act, 1964.

3. Applicability of Section 205 of the Companies Act, 1956:
The revenue relied on Section 205 of the Companies Act, 1956, which allows dividends to be paid out of profits or moneys provided by the government under a guarantee. The court acknowledged that this provision supports the revenue's interpretation but emphasized that a closer examination reveals that only dividends paid out of the assessee's profits should suffer a reduction in the rebate.

4. Impact of Section 43 of the State Financial Corporations Act:
Section 43 of the State Financial Corporations Act states that sums paid by the State Government under a guarantee should not be treated as the income, profits, or gains of the Financial Corporation. The court highlighted that the subvention of Rs. 1,40,923.54 paid by the State Government does not form part of the assessee's total income for income-tax or super-tax purposes. Therefore, the reduction in the rebate should only apply to the profits of the assessee, which are liable to tax under the Income-tax Act.

Conclusion:
The court concluded that the reduction in the rebate should only be on the sum of Rs. 2,09,076.46, which represents the profits of the assessee set apart for dividend distribution, excluding the subvention paid by the State Government. The question was answered in the affirmative, in favor of the assessee and against the department. No order as to costs was made.

← Previous Next →