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TMI Blog1975 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e : " 23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by-- (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of spy super-tax payable under this section ; (b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income ; and (c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 ; the Income-tax Officer shall, unless he is satisfied that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,20,640 only, claiming that the dividend was declared equally out of the profits of the industrial and non-industrial activities. Thus, the profits which were available for distribution but which were not distributed came to Rs. 13,21,174. The Income-tax Officer, while making the assessment, allocated the dividends declared by the company to the industrial and non-industrial segments in the same proportion as the profits of the two segments bore to the total profits of the company. By this method, out of the total dividend of Rs. 4,20,640 declared by the company, a sum of Rs. 81,264 was treated as dividends declared out of industrial. profits while a sum of Rs. 3,39,376 was treated as dividends, declared out of non-industrial profits. Holding that under section 23A, the company was liable to distribute by way of dividends a sum of Rs. 1,51,426 out of industrial profits and a sum of Rs. 8,43,186 out of non-industrial profits, the Income-tax Officer levied additional super-tax on the entirety of the undistributed balance of the total income, that is to say, on Rs. 13,21,174. The Appellate Assistant Commissioner having rejected the appeal, the company carried the matter in a furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany for the assessment year 1957-58 ? " The second question on which the High Court called for a reference may seem to suggest that under the judgment of the Tribunal the company was held not liable to pay additional super-tax in respect of any portion of its profits. That is not so. The Tribunal held that the company was not liable to pay additional super-tax on its industrial profits but was liable to pay it on non-industrial profits. The High Court confirmed the Tribunal's view. It held that there was no justification in Explanation 2 for the apportionment of dividends in the ratio which the industrial profits bear to non-industrial profits, that it was open to the assessee to apportion the dividends in such a way as to conform to the requirements of section 23A in respect of one of the two segments of its business and that the profits of the other segment only would attract the incidence of additional super-tax. The High Court demonstrated the absurdity of the contrary view with the help of a hypothetical illustration. We are concerned in these appeals with the true construction of section 23A as recast by Finance (No. 2) Act of 1957. The section, in so far as relevant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of both the segments. All the same, it would be necessary to examine that question also as the High Court has held that the liability to pay the additional super-tax must be restricted to the undistributed profits of that segment only, in respect of which the default has occurred. On the first question, the language of Explanation 2 is clear and admits of no doubt or difficulty. It requires by its express terms that, for the purposes of sub-section (1), the amount of dividends must be " similarly apportioned ". But counsel for the respondent urged that since the Explanation does not refer to any apportionment at all, the words " similarly apportioned " cannot be ascribed any rational meaning and it would, therefore, be open to the company to apportion the dividends 50 : 50 to the profits of the two segments. Relying on Words and Phrases Legally Defined by Saunders, volume V, page 79, where it is stated that, the word "similar " is an ambiguous word, it was submitted that the benefit of an ambiguity in a taxing statute must go to the, assessee and, the company would be free to make a convenient apportionment of dividends so as to attract the least incidence of the additional s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up in two parts, industrial and non-industrial. According to Burrow's Words and Phrases, volume 1, page 217, to " apportion " means " split up ". It is, therefore, impossible to accept the respondent's contention that though Explanation 2 requires that dividends should be similarly apportioned, it would be open to the company to make any convenient division of the dividends distributed by it. According to the Shorter Oxford English Dictionary, 3rd edition, volume 1, page 87, to " apportion " is " to assign as a proper portion ". An assignment as a proper portion of the dividends would mean an assignment in the same or similar ratio as the respective profits of the two segments bear to the total profits of the company. It is thus not open to the company to split up and apportion the dividends to the profits of the two segments in such manner as it finds convenient or thinks fit. The company's freedom to apportion the dividends is conditioned by the ratio which the profits of the two segments bear to the total profits. The total distributable profits of the company came to Rs. 17,41,814 out of which the industrial profits are Rs. 3,36,504 and the non-industrial profits are Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no violation of section 23A. That section applies only if the profits and gains distributed as dividends ...are less than the statutory percentage of the total income... as reduced... If the dividends have to be apportioned in the ratio of profits of the two segments, the taxes have also to be similarly apportioned, for Explanation 2 speaks of " the amount of dividends and taxes also being similarly apportioned ". A " similar " apportionment of taxes, it is urged by the respondent, may in practice lead to impossible and unreal situations since the taxes on the profits of the two segments may be unequal as in the case of a newly established industrial undertaking which, in respect of its industrial income, may enjoy a tax concession. There is no merit in this contention. The method specified in section 23A has to be worked out according to its scheme and it is no answer to the obligation to apportion the dividends and taxes, that taxes levied on the profits of the two segments are unequal or are leviable on a different basis. Thus, the High Court and the Tribunal were wrong in holding in favour of the assessee on the first of the two questions whice we have framed for conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... super-tax on the entire balance of distributable profits it has to be borne in mind that, section 23A is clearly penal in nature ; for, in the circumstances, mentioned therein, if a private company fails to distribute by way of dividends the statutory percentage of its distributable profits, it becomes liable to pay, apart from the sum determined as payable by it on the basis of the assessment under section 23, super-tax at 50 per cent. or 37 per cent., as the case may be, on the undistributed balance of its distributable profits. In the first place, this provision being penal, the burden would lie on the revenue to prove that the conditions laid down by the section are satisfied (Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd.). Secondly, penal statutes have to be construed strictly in the sense that if there is a reasonable interpretation which will avoid the penalty, that interpretation ought to be adopted : " When the legislature imposes a penalty, the words imposing it must be clear and distinct " [(Willis v. Thorp)--see also Craies on Statute Law, sixth edition, pages 529-530]. It is contended on behalf of the respondent that the language of section 23A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is thus expressly limited to the purposes of sub-section (1) and there is no justification for pursuing the fiction to its logical conclusion so as to permit it to operate beyond the limited purpose of sub-section(1). Under the scheme contained in section 23A, where a company has a composite business it is necessary at the outset to find out the profits attributable to the two parts of its business. The statutory percentages as prescribed by Explanation 2 have then to be applied separately to the profits of the two parts. By reason of the fiction created by Explanation the profits of each part have for this purpose, and this purpose alone, to be treated as if they were the total income of that part of the company's business. By sub-section (1), the company becomes liable to pay additional super-tax if the dividends distributed by it are " less than the statutory percentage of the total income ". Explanation 2 creates the fiction that for the purposes of sub-section (1) the income of the respective parts is to be regarded as the total income of each part so that the statutory percentages can be applied separately to the income of each part. The fiction operates in this limited fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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