9911796707
TMI Blog1978 (6) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration, the assessee paid a dividend at Rs. 6 per share aggregating to Rs. 1,82,250. The provision for the payment of dividend was made in the company's accounts for the year ended March 31, 1960. As per this account to be found along with the balance-sheet, the total profits were shown at Rs. 19,52,096. After making several appropriations, as will be indicated hereafter, the available balance was shown as " nil ". In view of these appropriations and the nil balance, no provision was made for taxes on income and it was expressly mentioned that the dividend of Rs. 6 per share would be paid from the reserve fund accumulated from the profits of the years prior to 1959-60. That this in fact was being done is also apparent from Sch. " A " to the balance-sheet which shows a reduction in the reserve fund from Rs. 8,48,437 to Rs. 6,66,187, the difference being the transfer to profit and loss account of Rs. 1,82,250 for purposes of payment of dividend. It may be mentioned that during the assessment under appeal, i.e., 1961-62, there was a change in law. Prior to this year, under s. 49B the income-tax paid by the company on its profits was deemed to be paid by the company on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable income, the ITO had ignored the provision of Rs. 11,77,364, made by the company for this year to its machinery and building replacement fund, being part of the initial and additional depreciation of the earlier years hitherto not provided. When the matter was carried in appeal to the AAC, he was of the opinion that the ITO was not justified in ignoring this provision in the profit and loss account. In his view, this had to be taken into account and if this was done, the distributable income as calculated in accordance with the Explanation to s. 49BB would amount to Rs. 1,81,644. The result was that dividend to the extent of Rs. 706 was not covered in the view of the AAC by the distributable income of 1960-61, and that would be the amount of dividend on which the company was entitled to relief under s. 49BB. This was on the further footing that the ITO was required to ascertain that this was paid out of income subject to tax in the earlier year. A number of further submissions made by the company in its appeal before the AAC were not accepted by the AAC. The matter was thereafter carried before the Tribunal by the assessee, the department having accepted the conclusions and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion that in section 49BB the reference to 'profit and loss account' is not only reference to profit and loss account of the previous year but reference to the profit and loss account of the earlier years and that the total allowance debited to the profit and loss account of the assessee right from the inception of the company being in excess of the actual allowances made in computing the taxable profits and the relief as claimed should be given to the assessee. " This was because according to the Tribunal the provisions of Explns. I and II are merely illustrative and would not take away or detract from the generality of the provisions enacted in s. 49BB. The Tribunal, accordingly, directed the ITO to check the figures given by the assessee and find out whether the same were correct. He was further directed that if what had been urged was correct, necessary relief should be given to the assessee. It may be mentioned that subsequently there was a miscellaneous application at the instance of the department for correction, inter alia, of the operative order, but the same was rejected as misconceived. The Tribunal has referred the following question of law to us : " Whether, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief under s. 49BB would depend upon the proper interpretation to be put on its provisions. Section 49BB has two sub-sections and there are two Explanations. It read as follows : " 49BB. Relief to company in respect of dividend paid out of Past taxed profits.-(1) Where in respect of any previous year relevant to the assessment year commencing after the 31st day of March, 1960, an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, pays any dividend wholly or partly out of its profits and gains actually charged to income-tax for any assessment year ending before the 1st day of April, 1960, and deducts tax therefrom in accordance with the provisions of section 18, credit shall be given to the company against the income-tax, if any, payable by it on the profits and gains of the previous year during which the dividend is paid, of a sum calculated in accordance with the provisions of sub-section (2), and where the amount of credit so calculated exceeds the income-tax payable by the company as aforesaid, the excess shall be refunded. (2) The amount of income-tax to be given as credit under sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd loss account for 1959-60 : " Your directors are glad to report that the working of the company has been satisfactory. The profits of the year after meeting all charges subject to depreciation for the year and managing agents' commission are determined at Rs. 19,52,096 compared to Rs. 15,95,187 in the previous period of 15 months. Your directors have made the following appropriations : Rs. Rs. Profits as per profit loss account 19,52,096 Appropriations therefrom : To depreciation for the year 3,01,492 To agents' commission 1,67,169 To development rebate reserve For the year 1,19,083 For the earlier years 1,86,988 To machinery building replacement fund (being part of the initial and additional depreciation of earlier years hitherto not provided) 11,77,364 19,52,096 ----------------- Balance NIL ----------------- No provision has been made for taxes on income as the company does not anticipate tax liability on account of the unabsorbed depreciation of earlier years which will be claimed against the profits of the year. Your directors recommended payment of dividend of Rs. 6 per share subject to tax. For this purpose, your di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 083, development rebate reserve for the earlier years Rs. 1,86,888 and machinery and building replacement fund (being part of the initial and additional depreciation of earlier years not provided) Rs. 11,77,364. As the allowance made in the assessment came to Rs. 19,66,471 he held that there was a difference of Rs. 1,81,644 which was required to be added for the purposes of computation of distributable income of the assessee for the year 1960-61 in accordance with the provisions of Expln. II to s. 49BB. It was held further that if the distributable income for the said previous years was in accordance with Expln. II calculated at Rs. 1,81,644 then by reason of Expln. I, the dividend declared shall be deemed to have first come out of this distributable income (to the extent thereof) and only the balance amount, viz., Rs. 706, may be deemed to have come out of the undistributed part of the distributable income for the earlier years which would mean that the assessee would be entitled to relief only in respect of this portion of the dividend. It is in connection with this application of the Explanation that the matter has been referred to the High Court for its opinion in this referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the Explanations. As a matter of fact, the deeming provisions in Expln. I and the method of calculation of distributable income in Expln. II have been provided for to obviate difficulties in calculations and choosing between the alternative contentions as are indicated by the Tribunal in its order. It is, therefore, not possible to accept the first submission advanced on behalf of the assessee that if its case fell squarely within the two sub-sections of s. 49BB, there was no warrant for considering the Explanation further. Similarly, the second argument also advanced for our acceptance, viz., that in the case of an assessee whose income admittedly for the year under consideration, i.e., assessment year 1960-61, was nil, there could not be a notional higher distributable income from which the dividends could have been deemed to have been distributed. This, in our opinion, is begging the question. The fiction enacted by Expln. I and the method of calculation provided in Expln. II are in a sense artificialities which may create a situation which may not exist in fact. But this is the very nature and object of a legal fiction. A state of affairs which does not exist in actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dividends declared are deemed to have come out of the distributable income of the previous year. It is the distributable income of that previous year which is required to be considered and the computation of that distributable income, i.e., distributable income of that previous year which is provided for in Expln. II. In our opinion, the reductions and the increases postulated by Expln. II pertain only to the previous year which is made clear by the opening words of Expln. II itself and when properly understood in this context and read in conjunction with the opening words of Expln. II, it would be quite clear that the calculations of increase provided for in (b) which we have extracted earlier are to be made with reference to the allowance given in the assessment and the provision made in the balance-sheet for that previous year only. If read in the manner approved by the Tribunal, Expln. II would complicate the calculation of distributable income instead of simplifying it. It was also urged by Mr. Kolah that Expln. I and the legal fiction incorporated therein would come into play only if dividends were partly declared out of profits and gains charged to income-tax for any as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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