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TMI Blog1972 (7) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... -7-1972 - Judge(s) : CHANDRACHUD., KOTVAL. JUDGMENT The judgment of the court was delivered by KOTVAL C.J.-The judgment in this income-tax reference shall also govern the disposal of I. T. Reference No. 9 of 1971 and I. T. Reference No. 97 of 1971. These three references involve the same point and substantially raise the same question. They were also argued together. The respondents in each of the these three references are insurance companies doing general insurance business and each of these companies derived an income which consists of dividends arising out of their investments. These dividends are received from Indian companies. The short question is whether the dividend income received by the three respondent-companies is wholly exempt from super-tax either under the provisions of section 99(1)(iv) (as it then stood) of the Income-tax Act, 1961, or under section 85A of the said Act. In Income-tax Reference No. 9 of 1971, the respondent-assessee has also claimed exemption under the provisions of section 85 and section 235 of the same Act in respect of dividend income. In each of the cases the department has claimed that exemption no doubt can be allowed but not upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : They took the ratio of the total expenses to the total income of each company and applied that ratio to the total amount of the dividends earned and reduced the figure of the dividends earned in the same ratio that the total expenses bore to the total income. The three assessees, therefore, appealed to the Income-tax Tribunal and in each of the cases the Income-tax Tribunal has held that whether it is section 99(1)(iv) or section 85A the wording of the sections clearly indicates that it is the full amount of the dividends that is exempt from super-tax. The relevant portion of section 99 (as it then stood) with which we are concerned is as follows : "99. Income not chargeable to super-tax.--(1) Super-tax shall not be payable by an assessee in respect of the following amounts which are included in his total income .......... (iv) if the assessee is a company, any dividend received by it from an Indian company, subject to the provisions contained in the Fifth Schedule." (Underlining is ours.) This was the provision in force until the levy of super-tax was abolished and section 85A was brought into force on the 1st April, 1965. Section 85A, therefore, though it makes the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dividend income must be received by the assessee from an Indian company ; and (4) that the exemption is subject to the provisions of the Fifth Schedule. We shall show a little later that the requirements of section 85A are similar except that it includes a case of a company which has made the prescribed arrangements for the declaration and payment of dividends within India, which of course does not apply to the facts of any of the cases before us. Now in all the three cases in the present reference there is no dispute that the amounts of the dividends which we have mentioned above were dividends in fact and were received from Indian companies. We stress this point here because it was argued at one stage on behalf of the department that these are no longer dividends but have merged in the stream of "total income" and must be treated only as part of the total income. That the amounts were dividends and nothing else is shown by the statement of the case, paragraph 2, in the cases of the New Great Insurance Co. Ltd. where it is stated that "In the course of the said previous year the assessee was in receipt of a sum of Rs. 3,49,952 by way of dividend from other companies" and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he gross dividend received by the assessee qualifies for exemption under section 99. Nothing moreover turns upon the qualifying clause at the end of the sub-section "subject to the provisions contained in the Fifth Schedule." The 5th Schedule grants exemption from super-tax in respect of certain dividends by the following words of paragraph I "super-tax shall not be payable by a company in respect of any dividend which is assessable for the assessment year commencing on the 1st day of April, 1962, and for the subsequent assessment years ....." The argument is that paragraph I of the Fifth Schedule uses the words "dividend which is assessable" and that gives the clue to the meaning of the words "any dividend received" in clause (iv) of section 99(1). Now, no doubt, clause (iv) is made subject to the provisions of the Fifth Schedule, but the Fifth Schedule does not make any provision for the subject dealt with in section 99(1)(iv). The exemption which the Fifth Schedule grants is on quite a different basis from the exemption granted by section 99(1)(iv) and the companies qualified to earn that exemption are also quite different. The provisions of the Fifth Schedule were intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng more or less than that and "dividend received" cannot obviously imply dividend received minus the expenses, but, secondly, the expression "total income" is defined in section 2(45) of the Act as meaning "the total amount of income referred to in section, computed in the manner laid down in this Act." (Underlining is ours). Thus "total income" is defined as the amount "computed in the manner laid down in this Act" and, therefore, we must once again turn to the provisions of the Act in order to ascertain what is "total income." The definition, therefore, refers back to section 99(1)(iv) or section 85A and does not advance the argument any further. Then it was urged that if this is to be the interpretation then the words in the opening clause "amounts which are included in his total income" would be deprived of all meaning. We do not think that that would be the effect. When we consider the provisions of section 99, particularly clauses (i) to (iv) of sub-section (1) of section 99, each of these clauses provides for a different item of exemption, again with the object of preventing double taxation of the same amount and the consequent hardship. In clause (i) the case contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em of income, expenses involved in earning it must be deducted. It was said to be a concomitant of the earning of dividends which is an integral part of the business of an insurance company. In this respect reference was made to several provisions of the Insurance Act, 1938, particularly to sections 27, 27A, 28, 28A and 28B and section 30 and to the Form "F" in the Third Schedule to the Insurance Act. By virtue of these provisions in the Insurance Act it was said that investment and earning of dividends is part and parcel of the business of insurance and, therefore, the dividends received are merely a business receipt and if so, before such a receipt can be allowed in income-tax, proportionate expenses attributable to such a receipt must be deducted. This question was never raised or agitated before any of the authorities nor it seems has the Tribunal in any of the cases dealt with. Moreover, it is not a fact stated in any part of the three statements of the case that one of the businesses of the assessees was investment or earning of the dividends. We doubt that the provisions of the Insurance Act which were referred to also lead to such a conclusion. Indeed section 27 and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian company is taxable in its hands as its profits and having once borne that tax, it was considered inequitable to have the same amount bear tax a second time in the hands of the shareholder in the shape of dividend which he receives. It was considered that such a burden may result in companies not investing in the shares of other companies and hence it was decided to grant this exemption. The interpretation which we have put upon the words of clause (iv) of section 99(1) is consonant with that object. The view which we have taken is also borne out by some of the authorities which were cited before us. In Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd., a Division Bench of this court was concerned to interpret the Notification No. 47 dated 9th December, 1933, under section 66(1) of the Indian Income-tax Act in which exemption was granted from super-tax in the following words : "So much of the income of any investment trust company as is derived from dividends paid by any other company which has paid or will pay super-tax in respect of the profits out of which such dividends are paid is exempt from super-tax." It will be noticed that in that notification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence between the notification which their Lordships were construing in that case and the notification before us, except that whereas the words used in section 99(1)(iv) are "any dividend received" the words used in that notification were "interest receivable". For the purposes of the point before us the difference between the words "receivable" and "received" can hardly make any difference. The very provisions of section 99(1)(iv) came up for construction before a Division Bench of the Calcutta High Court in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd., and the identical contention as is raised before us was raised before the Calcutta High Court. The department, there desired to deduct an amount of Rs. 21,326 which was said to be the interest paid to various parties on moneys borrowed in connection with investments in shares. After considering the provisions of section 99 the Division Bench held at page 77 as follows : "....... it is manifest, in our opinion, that under section 99, super-tax shall not be payable by an assessee in respect of the 'amounts' of 'any dividend received by it'. Therefore, it means the amount of dividend received by the assessee. It cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be on the whole of the dividend received from an Indian company. What we have said above is sufficient to decide the questions referred in Income-tax References Nos. 60 of 1971 and No. 97 of 1971, and a part of the question referred in Income-tax Reference No. 9 of 1971. In the latter reference the question referred mentions two other sections, namely, section 85 and section 235 of the Act, and again poses the question whether, on the facts and in the circumstances of the case, the relief under those sections should be calculated on the gross dividend income or on the dividend income as reduced by proportionate management expenses. Section 84 as it then stood before it was omitted by the Third Schedule to the Finance (No. 2) Act, 1967, with effect from 1st April, 1968, granted exemption from income-tax to certain newly established industrial undertakings or hotels and section 85 made similar provision for dividends received by shareholders from such new industrial undertakings or hotel business and it provided as follows : "Subject to any rules that may be made by the Board in this behalf, income-tax shall not be payable by a shareholder in respect of so much of any dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits assessed to agricultural income-tax, reduced by the amount of refund, if any, allowed to him by the State Government ........" Here again, the reference is to the case of a company paying to its shareholder a dividend out of its profits and gains and, therefore, no argument would be sustainable that it is the net income or total income of the assessee that is exempt so that any deductions for expenditure would be allowable. The exemption then is clearly in favour of the full dividend paid by the company out of its profits and gains to the extent specified. Under section 235 also, therefore, we must hold that subject to these provisions the dividend which is exempt under that section is the gross dividend and not the net dividend minus the expenditure. In the result we answer the questions referred in each of the three references as follows: Income-tax Reference No. 60 of 1971 Question : Whether, on the facts and in the circumstances of the case, the assessee was entitled to rebate on gross dividends or on the net dividends, i.e., gross dividend after deducting proportionate management expenses ? Answer : The assessee was entitled to a rebate on the gross divide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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