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TMI Blog1956 (8) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... f dividend fixed by the Legislature, viz. 9 annas in the rupee, and the taxing authority levied a tax at the rate of 5 annas on this amount. The levy was challenged by the assessee on various grounds and the question that has come up before us is whether Parliament has effectively made this levy looking to the provisions contained in the Act. This provision in the Finance Act came up for our consideration in two decisions. The first was in 'Elphinstone Spg. Weaving Mills v. Commr. of Income-tax', (1955) 28 ITR 811 (Bom) (A). That was a case where the company that was sought to be taxed in respect of excess dividend declared by it had no total income at all in the previous year and we held that the provisions of the Act did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act with regard to the levy of this additional tax was to prevent the companies from distributing dividend above the ceiling fixed by the Legislature. If the company distributed less than the ceiling it was given a rebate. If it distributed dividend above the ceiling, then not only it did not get the rebate but it had to pay an additional tax. The contention of Mr. Palkhiwala is that the Finance Act does not lay down any rate in relation to the total income at which this tax can be levied and in having failed to do so it has not effectively levied any charge on total income which would fall within the ambit of S. 3, Income-tax Act. It is not contested that in order that this particular provision in the Finance Act should be effective i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income and when the rate has no relationship with the total income? In order to understand the position it will be per-haps simpler and easier if one were to take one or two illustrations. Parliament may say that an assessee shall pay tax in respect of his total income, which tax shall be ssessed at 50 per cent of the wealth of the wises-see, or Parliament may say that if the assessee's wealth is 5 lakhs or 10 lakhs he will pay tax at a particular rate in relation to his total Income. It will be immediately apparent that in the first case the rate has no relationship to the total income. The tax to be paid is determined by a factor entirely extraneous to the total income. In the latter case, although the rate may fluctuate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, as was suggested by the Advocate General, that Section 3 gives freedom to the Legislature to fix any rate. So long as the charge is on the total income of the previous year, there is no limitation upon the power or the authority of Parliament to fix any rate it pleases. But there is a limitation upon the power of Parliament which is inherent in the nature of the tax which can be imposed under Section 3. If one understands the rate to mean merely the mode of computation of the tax in relation to the total income of the assessee, then undoubtedly the power of Parliament is unlimited. But if rate is understood to mean the fixing of the tax irrespective of the total income and unconnected with the total income, then in our opinion Parl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income. 6. It was also suggested by Mr. Palkhivala --- and perhaps it is not necessary to decide that -- that the rate under Section 3 must not exceed the total income to the assessee. In other words, it is not competent to Parliament to enact that an assessee shall pay more than 16 annas in the rupee on his total income. What is suggested is that the rate must be a proportion of the total income, not a proportion which exceeds the whole of it. There is force in this argument because if Parliament were to enact that an assessee should pay more than 16 annas in the rupee on his total income, a part of the tax would be levied on something which would not be the income of the assessee, and it is pointed out rightly that in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the year in which these profits were charged at a lesser rate, and . we now find that Parliament has actually provided for this in the Finance Act, 1953. Or, finally, it could have provided for a penalty imposed upon a company which transgressed the direction of Parliament that it should not pay dividend beyond a particular ceiling, and as was pointed out in our judgment in (1955) 23 ITR 811 (A), the provision in the Finance Act is in the nature of a penalty: the transgressing company loses the rebate and has to pay tax at a higher rate. But it is obvious that Parliament cannot impose penalty by resorting to Section 3 and purporting to charge the total income of an assessee to income-tax. The ambit of Section 3 is clear and the ambit i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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