Appeal No 21
of 1962
Appeal by special leave from the judgment and order dated September 23 1958 of the Bombay High Court in IT Reference No 87 of 1957
HN Sanyal Additional Solicitor General of India N D Karkhanis and R N Sachthey for the appellant
AV Viswanatha sastri J B Dadwhanji O C Mathur and Ravindra Narain for the respondent 768 1962
October 25
The judgment of the Court was delivered by SHAH J
For the year of account ending March 31 1955 Afco Private Ltd a private limited company earned a total income which was finally computed in assessment proceedings by order of the Income tax Tribunal at Rs 49843 
The company declared a dividend of Rs 117121 on July 13 1955 and before the close of the year of assessment 1955 56 declared an additional dividend of Rs5612  thereby distributing in the aggregate dividend which was not less than 60 of the total income reduced by the income tax and super tax payable by it
The company then claimed rebate at the rate of one anna in the rupee on the amount computed according to Schedule 1 Part 1 Item B read with section 2 of the Finance Act 15 of 1955
The Income tax Officer and the Appellate Assistant Commissioner rejected the claim because in their view the claimant was a company to which the provisions of section 23A of the Income tax Act could not be made applicable
In appeal the Income tax Appellate Tribunal Bombay  reversed the order of the Income tax authorities
The Tribunal opined that the expression cannot be made applicable in Item B of Part 1 of Schedule 1 of Finance Act 15 of 1955 must be read in conjunction with section 23A of the Income tax Act and the benefit of rebate provided by the Finance Act 1955 cannot be denied to a Private Company if the conditions prescribed in section 23A1 are fulfilled
The following question referred by the Tribunal to the High Court of judicature at Bombay was answered in the affirmative  Whether on the facts and in the circumstances of the case the assessee company having distributed dividends of over 60 of the company s total income less income tax and super tax payable thereon is entitled to the rebate of 769 1 anna per rupee on the undistributed balance of profits as provided in clause 1 of the proviso to item B of Part 1 of the 1st Schedule to the Finance Act of 1955  By the Finance Act 15 of 1955 Schedule 1 Item B read with section 2 of the Act rates of tax were prescribed in the case of companies
Item B providedthat in the case of every company Rate surcharge on the whole of total income Four annas one twen in the tieth of rupee the rate specified in the pre ceeding column
Provided that in the case of a company which in respect of its profits liable to tax under the Income tax Act for the year ending on the 31st day of March 1956 has made the prescribed arrangements for the declaration and payment within the territory of India of the dividends payable out of such profits and has deducted super tax from the dividends in accordance with the provisions of sub section 31 of section 18 of that Act i where the total income as reduced by seven annas in the rupee and by the amount if any exempt from income tax exceeds the amount of any dividends including dividends payable at a fixed rate declared in respect of the whole or part of the previous year for the assessment for the year ending on the 31st day of March 1956 and the company is a corn any to which the provisions of section 23A of the Income tax Act cannot be made applicable a rebate 770 shall be allowed at the rate of one anna per rupee on the amount of such excess  iix x x x By section 23A1 of the Income tax Act at the material time the Income tax Officer was authorised to order a company to pay super tax at the rate of eight annas in the rupee in the case of a company whose business consisted wholly or mainly in the dealings in or holding of investments and at the rate of four annas in he rupee in the case of any other company on the undistributed balance of the total income of the previous year that is to say on the total income reduced by the amounts of income tax and super tax and any other tax payable under any law in excess of the amounts allowed in computing the income and in the case of Banking companies in addition to the taxes funds actually transferred to a reserve fund and the dividends actually distributed if any where in respect of any previous year the profits and gains distributed as dividend by the company within the twelve months immediately following the expiry of that previous year were less than 60 of the total income of the company of that year as reduced by the amounts aforesaid unless the Income tax Officer was satisfied that having regard to 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
It is manifest that the order under section 23A1 would excluding certain procedural conditions be ordinarily made if the company has distributed by way of dividend within the twelve months immediately following the expiry of the accounting year less than the prescribed percentage of the total income as reduced by the amount of taxes paid in the case of non Banking Companies and reserve fund in addition thereto in the case of Banking Companies 771 By the first paragraph of sub section
9 of section 23 A it is provided that Nothing contained in this section shall apply to any company in which the public are substantially interested or to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year
 This clause is followed by two explanations
Explanation 1 in so far as it is material to this case provides  Explanation 1 For the purposes of this section a company shall be deemed to be a company in which the public are substantially interested a x x x x b if it is not a private company as defined in the Indian Companies Act 1913 VII of 1913 and i x x x x ii x x x x iii x x x x Explanation 2 x x x x Section 23A was enacted to prevent evasion of liability to pay super tax by shareholders of certain classes of companies taking advantage of the disparity between the rates of super tax payable by individuals and by the companies
The rates of super tax applicable to companies being lower than the highest rates applicable to individual assessees to prevent individual assessees from avoiding the higher incidence of super tax by the expedient of transferring to companies the sources of their income and thereby securing instead of dividends the benefit of the profits of the company the Legislature had by Act XXI of 1930 as modified by Act VII of 1939 enacted a special 772 provision in section 23A investing the Income tax Officer with power in certain contingencies prescribed in the section to order that the undistributed balance of the assessable income reduced by the amount of taxes and the dividends shall be deemed to have been distributed at the date of the general meeting
By the Finance Act 15 of 1955 section 23A 1 was amended and the Income tax Officer was directed to make an order that the Company shall be liable to pay super tax oil the undistributed balance at the rates prescribed under the section
But by virtue of sub
section 9 of section 23A the or der can be made only in respect of a company in which the public are not substantially interested or of a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year and by cl
b of the first explanation thereto a private company as defined in the Indian Companies Act 1913 is not a company in which the  public are substantially interested
It is therefore competent to the Income tax Officer to pass an order under section 23A 1 if the conditions thereof are fulfilled directing payment of super tax by a private company at the rates prescribed by the Finance Act 15 of 1955 on its undistributed balance
To reduce the rigour of this provision the Legislature has provided for inducement in the form of rebate on the difference between nine annas in every rupee of the total net income and the amount of dividend declared to companies which have declared dividends so as not to attract the application of an order under section 23A
But that benefit is admissible only in favour of companies to which the provisions of section 23A of the Act cannot be made applicable
The Income tax authorities held that the expression company to which the provisions of section 23A of the Income tax Act cannot be made applicable  is descriptive of a class of companies against which in no circumstances can an order under section 23A of the 773 Indian Income tax Act be made and private limited companies being companies in respect of which an order under section 23A of the Income tax Act can be made if the conditions prescribed relating to distribution of dividend are fulfilled the benefit of rebate is not admissible in their favour
The Tribunal and the High Court held that the expression  cannot be made applicable only refers to a state of affairs in which having regard to the circumstances an order under section 23k of the Indian Income tax Act cannot be made
In our judgment the Income tax Appellate Tribunal and the High Court were right in so holding
The Legislature has used the expression cannot be made applicable which clearly means that the applicability of section 23A depends upon an order to be made by the Income tax Officer and not upon any exclusion by the provisions of the Act
Before an order can be made under section 23A of the Income tax Act the Income tax Officer has to ascertain i whether the company conforms to the description in sub section
9 of section 23A if it does  the lncome tax Officer has no power to make an order  and ii if the company is not one which falls within cl
9 of section 23A whether having regard to inadequacy of the declaration of dividend an order for payment of super tax should not because of the losses incurred by the company in the earlier years or to the smallness of the profits in the previous year be made
Satisfaction of the Income tax Officer as to the existence of several conditions prescribed thereby even if the company is one which does not fall within sub section
9 of section 23A is a condition of the making of the order
The language used by the Legislature clearly indicates that it is only when an order under section 23A will not having regard to the circumstances  be justified that the right to obtain rebate under the Finance Act 15 of 1955 is claimable
The Legislature has not enacted that the benefit of rebate is admissible only to companies against which the order under sub section
1 of section 23A can never be made
774 The Legislative history as disclosed by the earlier Finance Acts supports this interpretation of the relevant provision
In the Finance Acts prior to 1955 rebate under Part I of the 1st Schedule Item B was admissible if the company had in respect of profits liable to tax under the Indian Income tax Act made the prescribed arrangements for declaration and payment of dividends payable out of the profits and had deducted super tax from the dividends in accordance with section 183D  3E where the total income reduced by seven annas in the rupee  and the amount exempt from income tax exceeded the amount of any dividends declared and no order had been made under sub section
1 of section 23A of the Income tax Act
The right to rebate arose under those Finance Acts if no order under section 23A was made
The Income tax Officer had therefore to decide even before completing the assessment of the company whether the circumstances justified the making of an order under section 23A and unless an order under section 23A was made the assessee became entitled automatically to the rebate of one anna in the rupee
Such a provision led to delay in the disposal of assessment proceedings and caused administrative inconvenience
It appears that the Legislature modified the scheme of granting rebate in enacting the Finance Act of 1955 with a view to simplify the procedure and avoid delays and not with the object of depriving the private limited companies as a class of the benefit of rebate which was permissible under the earlier Acts
Counsel for the Income tax Commissioner invited our attention to the Finance Acts of 1956 and 1957 and contended that the Legislature in dealing with the right to rebate under Part II relating to the rates of super tax used phraseology which restricted the right of rebate only to public companies
Ie must be noticed that even under the Finance Act of 1955 by Part II of Schedule 1 item D a rebate of three annas per rupee of the total income was to bf 775 allowed to companies in respect of profits liable to tax under the Income tax Act for the year ending March 31 1956 if the company had made prescribed arrangements for payment of dividend payable out of profits and for reduction of super tax from dividends in accordance with the provisions of sub section
3D of section 18 of the Act and the company was a public company with a total income not exceeding Rs 25000 
This provision was slightly modified in the Finance Act of 1956 where the rebate admissible was at the rate of five annas in the rupee other condition being fulfilled if the company was a public company with total income not exceeding Rs 25000to which the provisions of section 23A could not be made applicable
Under the Finance Act of 1957 rebate was admissible in favour of companies referred to in sub section
9 of section 23A of the income tax Act with total income not exceeding Rs 25000 
 All these provisions about rebate were enacted in prescribing the rates of super tax
In the Finance Act of 1955 the Legislature in dealing with the right of rebate under Part I prescribing rates of income tax made it admissible in respect of companies to which provisions of section 23A of the Income tax Act could not be made applicable whereas under Part II prescribing rates of super tax rebate was made admissible in respect of public companies having income not exceeding the prescribed amount and rebate at a lower rate where the income exceeded the prescribed limit
If it was intended by the Legislature to exclude private limited companies from the benefit of rebate the Legislature would have adopted the same phraseology as was used in that Act in dealing with the rebates in prescribing rates of super tax
The legislative history instead of supporting the case of the Income tax Department yields inference against their interpretation
We are therefore of the view that the High Court was right in holding that the company was 776 entitled to the rebate claimed by it
The appeal therefore fails and is dismissed with costs
Appeal dismissed


Summary:
For the year of account ending March 31 1955 the appellant a private limited company earned a total income of Rs 49843
The company declared a  dividend of Rs 11712 on July 13 1955 and before the close of the year of assessment 1955 55 declared an additional dividend of Rs 5612 thereby distributing in the aggregate dividend which was not less than 767 60 of the total income reduced by the income tax and supertax payable by it
The company then claimed rebate at the rate of one anna in the rupee on the amount computed according to Sch 1 Part 1 Item B read with section 2 of the Finance Act 1955
The Income tax authorities rejected the claim on the ground that the expression company to which the provisions of section 23A of the Income tax Act cannot be made applicable in the provision of law aforesaid in the Finance Act 1955 on which the appellant company relied referred to a company against which in no circumstances could an order under section 23A be made and private limited companies being companies in respect of which an order under section 23A could be made if the conditions prescribed relating to distribution of dividend were fulfilled the benefit of rebate was not admissible in favour of the appellant company
The Appellate Tribunal and the High Court took the view that the benefit of a rebate provided by the Finance Act could not be denied to a private company if the conditions prescribed in section 23A1 of the Income tax Act were fulfilled because according to their view the expression can not be made applicable only refers to a state of affairs in which having regard to the circumstances an order tinder section 23A could not be made
Held that the appellant company was entitled to the rebate claimed by it
The expression to which the provisions of section 23A of the Income tax Act can not be made applicable in Sch 1 Part 1 Item B of the Finance Act 1955 meant that the appli cability of section 23A of the Income tax Act depended upon an order to be made by the Income tax Officer and not upon any exclusion by the provisions of the Act
It was only when an order under section 23A would not having regard to the circumstances bejustified that the right to obtain rebate under the Finance Act was claimable