Appeal No 427 of 1957
Appeal from the judgment and order dated September 9 1955 of the Bombay High Court in Income tax Reference No 31X of 1954
KN Rajagopal Sastri and D Gupta for the appellant
N A Palkhivala section N Andley and J B Dadachanji for the respondents and intervener
955 1960
May 4
The Judgment of the Court was delivered by HIDAYATULLAH J
The High Court of Bombay in a reference under section 661 of the Indian Income tax Act by the Income tax Appellate Tribunal Bombay was referred the following two questions for decision 1 Whether the assessee Company was liable to pay additional income tax  and 2 If the answer to question No 1 is in the affirmative whether the levy of the additional income tax is ultra vires The High Court answered the first question in the negative and in the circumstances left the second question unanswered
This appeal is against the judgment and order of the High Court on a certificate granted by it
The Commissioner of Income tax is the appellant and the Elphinstone Spinning and Weaving Mills Co Ltd Bombay the assessee Company is the respondent
The facts may now be stated briefly
For the assessment year 1951 52 the previous year being the calendar year 1950 the assessee Company was found to have incurred a loss of Rs 219848 and was thus adjudged to be not liable to income tax
In that year the assessee Company had made profits but the depreciation allowance under the Income tax Act came to Rs 784063 thus converting the profit into loss for income tax purposes
In the same year the assessee Company declared dividends mounting to Rs 329062
The Income tax Officer treated this amount as excess dividend  and levied additional income tax as provided in Paragraph B of Part I of the First Schedule to the Indian Finance Act 1951
This additional income tax was computed to be Rs 41132 12 0
The contention of the assessee Company that it was not liable to pay additional incometax was not accepted by the Tribunal but the High Court on an examination of the relevant provisions and the scheme of the Indian Income tax Act and the Finance Act 1951 held that it was sound
Hence this appeal by the Commissioner of Income tax
We are concerned with the Finance Act 1951 and Paragraph B of the First Schedule reads 956 B
In the case of every company Rate Surcharge On the whole of Four annas one twentieth total income in the of the rate rupee specified in the preceding 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 1952 has made the prescribed arrangements for the declaration and payment within the territory of India excluding the State of Jammu and Kashmir of the dividends payable out of such profits and has deducted super tax from the dividends in accordance with the provisions of subsection 3D or 3E of section 18 of the 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 1952 and no order has been made under sub section 1 of section 23A of the Income tax Act a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess ii Where the amount of dividends referred to in clause 1 above exceeds the total income as reduced by seven annas in the rupee and by the amount if any exempt from income tax there shall be charged on the total income an additional income tax equal to the sum if any by which the aggregate amount of income tax actually borne by such excess hereinafter referred to as the excess dividend  falls short of the amount calculated at the rate of five annas per rupee on the excess dividend
For the purposes of the above proviso the expression  dividend  shall have the meaning assign ed to it in clause 6A of section 2 of the Income tax Act but any distribution included in that expression 957 made during the year ending on the 31st day of March 1952 shall be deemed to be a dividend declared in respect of the whole or part of the previous year
For the purposes of clause ii of the above proviso the aggregate amount of income tax actually borne by the excess dividend shall be determined as We follows i the excess dividend shall be deemed to be out of the whole or such portion of the undistributed profits of one or more years immediately preceding the previous year as would be just sufficient to cover the amount of the excess dividend and as have not likewise been taken into account to cover an excess dividend of a preceding year ii such portion of the excess dividend as is deemed to be out of the undistributed profits of each of the said years shall be deemed to have borne tax a if an order has been made under sub section 1 of section 23A of the Income tax Act in respect of the undistributed profits of that year at the rate of five annas in the rupee and b in respect of any other year at the rate applicable to the total income of the company for that year reduced by the rate at which rebate if any was allowed on the undistributed profits
 The contention of the assessee Company was that inasmuch as there was no income at all which was taxable the words OD the total income lid not apply to it and no additional income tax could be charged
The Tribunal interpreted the Paragraph to cover even a case where there was a loss holding that even a loss may be a total income  because if total income had to be computed in the manner laid down in the Indian Income tax Act the total income might be a negative figure
The Tribunal also held that inasmuch as excess dividend were to be deemed to have come out of the undistributed profits of the preceding year or years and such undistributed profits ere available the assessee Company was liable
The High Court did not accept those reasons and reluctantly held for reasons which may not be detailed at the present 124 958 moment that the assessee Company did not come If within the letter of the law however much the intention might have been to impose an additional income tax under such circumstances
The Commissioner now contends that the High Court ought to have read the Paragraph B as modified by the intention or to have treated it as an independent charging Section
The liability to tax is imposed not by the Finance Act but by the Indian Income tax Act
Section 3 of the latter Act is the charging section and it provides that the tax should be collected at such rate or rates on the total income as laid down in any Central Act
The Finance Act is an annual Act prescribing the rate or rates
We are concerned with the Finance Act 1951
Section 2 of the Finance Act prescribes the rates of income tax by its First Schedule and by the seventh subsection of that section provides For the purposes of this section and of the rates of tax imposed thereby the expression total income  means total income as determined for the purposes of income tax or super tax as the case may be in accordance with the provisions of the Income tax Act  It is thus clear from this that if there is no income there is no question of applying a rate to the  total income  and no income tax or super tax can possibly result
The Commissioner however relies upon the proviso to Paragraph B of the First Schedule and says that the tax is imposed on excess dividend and if excess dividend is paid out the liability to tax must arise
The proviso was framed to discourage the paying of large dividends quite disproportionate to the income
For this purpose A ceiling was laid down
That ceiling was nine annas in the rupee of the total income reduced by any portion of that income which was exempt from income tax
If only nine annas in the rupee from the income were paid as dividend there were no consequences in law
If however the dividends paid amounted to less a rebate of one anna in the rupee in the tax was given
This was provided by the first part of the proviso
There was 959 however a provision for enhanced tax
in the second part which worked the other way round
Where the dividend distributed exceeded the total income as reduced by seven annas in the rupee there was charged on the total income an additional income tax equal to the sum if any by which the aggregate amount of income tax actually borne by such excess We
hereinafter referred to as the  excess dividend  falls short of the amount calculated at the rate of five annas per rupee on the excess dividend
In simpler language there was a rebate of one anna on anything saved from 916th of the total income and there was an extra payment of one anna on the amount paid in excess of it
The income tax in either event was payable on the total income and the additional incometax on the excess dividends
Now the difficulty arises in applying this proviso
Where there is a total income and there is a payment of dividend either more or less than the limit fixed one can easily find the figures by which the total income as reduced exceeds or falls short of the dividends and the additional tax that has to be paid
But when the total income is a negative figure and no tax on the total income is levied the words of the second part of the Paragraph total income  profits liable to tax  dividends payable out of such profits  and  an additional income tax  cease to have the meaning they were intended to convey
The Commissioner contends that some of these words may be ignored as being surplusage or a drafting error and refers to rulings in which such a course was adopted
The first case he relies on is Curtis vs Stovin 1
In that case the words of the statute were  It shall be lawful for either party to the action to apply to a judge of the High Court  to order such action to be tried in any court in which the action might have been commenced or in any court convenient thereto  The word  court  was defined as  county court  in that statute
Lord Esher MR held that the words should be extended to mean  in any county court in which if it had been a county court action the action 1 960 might have commenced
The ambiguity which would have otherwise arisen was removed by taking aid from the alternative clause  or in any court convenient there to which referred to locality and it was said that the first clause meant a county court in the district of which the parties resided or in which one of them resided
In that case however there were determinative words helping construction
It is to be noticed that Lord Esher M R also warned against doing by construction what only a legislature could do by enactment in the following words  It is no doubt very easy for a judge to say that be is introducing words into an Act only by way of construing it while he is really making a new Act
 The words  if it had been a county court action  which were read as implicit in the section were necessary to give a sensible meaning consistent with the intention expressed by other clear words
The above case was applied and followed in Commissioner of Income tax vs Teja Singh1 which is next relied upon
In that case the construction if literally made was apt to make one section nugatory
This Court laid down that a construction which leads to such a result must if that is possible be avoided 
It however quoted also the observations of Lord Dunedin in Whitney vs Commissioners of Inland Revenue 2 that  A statute is designed to be workable and the interpretation thereof by a court should be to secure that object unless crucial omission or clear direction makes that end unattainable
 The next case relied upon is Special Commissioners of Income tax vs Linsleys Ltd 3
It dealt with an obvious drafting error
Section 682 of the English Finance Act1952 contained a reference to Paragrapha of the proviso to sub section
2 of section 262 of the Incometax Act 1952 and the section went on to say of that Paragraph parenthetically  which relates to the deductions allowable in computing the actual income from all sources of an investment company in relation to which a direction is in force under sub section I of 1 SC 2  11o
3 961 that section
As a summary of Paragraph a it was entirely wrong and misleading
Since the Paragraph was there for every one to read the draftsman s summary of it in the brackets was not accepted
Lord Reid observed  The difficulty does not arise from the enacting words but from the words in brackets which purport to describe the proviso to Section 2622 of the Income Tax Act 1952
Those words could well be held to support the view of the Court of Appeal but they seem to me to be a misdescription of the proviso to Section 2622
This is one of the places where 1 think that obscurity has resulted from a failure of the draftsman to anticipate a case like the present as I have said a very natural failure
In fact the proviso merely deals with the deductions to be allowed in computing actual income
But the words in brackets in Section 882 refer to deductions in computing actual income of a company in relation to which a direction is in force  under Section 2621
It would seem that these words have crept in because the draftsman assumed that a direction would always be given automatically in the case of an investment company and did not realise that a computation must first be made to determine whether the company has in fact any actual income
Whether that be the true explanation or not I cannot regard the presence of these words in brackets which are mere description as of much weight in comparison with the other considerations to which I have referred
 If the section was there its meaning could be taken from the words used there and not from a description of what it enacted put parenthetically in another statute
The case cited is hardly in point
The last case cited is Commissioners of Inland Revenue vs South Georgia Co Ltd 1
The words of a proviso there construed ran as follows  Provided that where the said gross relevant distributions exceed the profits computed without abatement and including franked investment income 1 962 the net relevant distributions shall be  section 342 of the English Finance Act 1947
The word  including gave some difficulty
In the Court of Session the word was equated to  adding  correcting as it was felt a drafting inaccuracy
In the House of Lords however this change was not accepted and a meaning was found
The learned counsel for the respondent on the other hand relies upon the observations of Rowlatt J in The Cape Brandy Syndicate vs The Commissioners of Inland Revenue 1 to the effect that in a taxing measure one can only look at the language since there is no room for an intendment
He also refers to the speech of Lord Simonds in Wolfson vs Commissioners of Inland Revenue 2 where the following passage occurs at p 169  It was urged that the construction that I favour leaves an easy loophole through which the evasive taxpayer may find escape
That may be so but I will repeat what has been said before
It is not the function of a court of law to give to words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which had the Legislature thought of it would have been covered by appropriate words
It is the duty of the Court to give to the words of this Sub section their reasonable meaning and I must decline on any ground of policy to give to them a meaning which with all respect to the dissentient Lord Justice I regard as little short of extravagant
It cannot even be urged that unless this meaning is given to the Section it can have no operation
On the contrary given its natural meaning it will bring within the area of taxation a number of cases in which by a familiar device tax had formerly been avoided The learned counsel contends that the artificial construction should not be resorted to in this case
There is no doubt that if the words of a taxing statute fail then so must the tax
The Courts cannot except rarely and in clear cases help the draftsman by a favourable construction
Here the difficulty is not one of inaccurate language only
It is really this 1  366 2  169
963 that a very large number of taxpayers are within the words but some of them are not
Whether the enactment might fail in the former case on some other ground as has happened in another case decided to day is not a matter we are dealing with at the moment
It is sufficient to say here that the words do not take in the modifications which the learned counsel for the appellant suggests
The word  additional  in the expression additional income tax  must refer to a state of affairs in which there has been a tax before
The words charge on the total income  are not appropriate to describe a case in which there is no income or there is loss
The same is the case with the expression profits liable to tax 
The last expression  dividends payable out of such profits  can only apply when there are profits and not when there are no profits
It is clear that the legislature had in mind the case of persons paying dividends beyond a reasonable portion of their income
A rebate was intended to be given to those who kept within the limit and an enhanced rate was to be imposed on those who exceeded it
The law was calculated to reach those persons who did the latter even if they resorted to the device of keeping profits back in one year to earn rebate to pay out the same profits in the next
For this purpose the profits of the earlier years were deemed to be profits of the succeeding years
So far so good
But the legislature failed to fit in the law in the scheme of the Indian Income tax Act under which and to effectuate which the Finance Act is passed
The legislature used language appropriate to income and applied the rate to the  total income 
Obviously therefore the law must fail in those cases where there is no total income at all and the Courts cannot be invited to supply the omission made by the legislature
It is quite possible that the legislature did not con template the imposition of tax in circumstances such as these and we are not prepared to read the proviso without the words on the total income  or after modifying this and other expressions
The High Court has given adequate reasons to show that these words are quite inappropriate where the total income if it 964 can be described as income at all is a loss
The imposition of the additional
income tax is conditioned by the existence of income and profits to the total of which income the rate is made applicable
Unless some other amount not strictly income is by law deemed to be income see for example McGregor  Balfour Ltd vs Commissioner of Income tax 1 we cannot improve the existing law by deeming it to be so by our interpretation
The Commissioner next contends that the proviso speaks of excess dividends which means that dividends in excess of the permissible limits have been paid
He sayS that where the income is nit or a negative figure whatever is paid is excess dividend and indeed the Tribunal also felt that the excess dividends in this case were more because of the loss sustained
This argument has a familiar ring It is really that  you can have more than nothing 
Reference was made in this connection to Commissioners of Inland Revenue vs South Georgia Co Ltd 2 where Lord Simonds observed at p 736  Upon this proviso interpreted in the light of Paragraph of the Schedule as amended the Crown makes a very simple case upon the undisputed figures the gross relevant distributions were pound 181000 and the profits including franked investment income were nil I may interpolate that the reference to abatement may throughout be disregarded  therefore the net relevant distribution must be the excess of pound 181000 over nil ie pound 181000 nothing has to be brought in under a  of the proviso for there were no profits
 Reliance was also placed upon the observations at p 737 ibid where it was observed  The learned Dean of Faculty on behalf of the Respondents urged in support of the construction that he invited your Lordships to adopt that it was really meaningless to speak of a nil profit or of adding something to it and this plea found favour with the Lord President
As I understood it this was only relevant if the view was accepted that there were two separate operations and not a single 1 1950 SC 2 1958 965 computation
In the view which I take therefore it does not arise but I think it right to say that I see no impropriety of language in peaking of a nil profit where the question is whether any or what profit has been made
And the answer would be equally valid in the case of an exact balance or of a loss
 These passages were used in the other case decided today in which there were no profits of the previous years
There is however this difficulty that there the tax was laid on the net relevant distribution and it was conceded that no charge could be imposed if the proviso was inapplicable see p 736
The provisions of Paragraph 7 of the Schedule as amended by section 32 of the English Finance Act 1947 were entirely different and the proviso to section 342 of the English Act was held applicable
The scheme of the provisions we are interpreting is entirely different
Reliance was also placed upon Rajputana Agencies Ltd vs Commissioner of Income tax 1 but we find nothing there to support the appellant s case
Similarly in McGregor and Balfour Ltd vs Commissioner of Income tax1 the words were held to be apt  to impose a charge 
It is obvious enough that unless they were so or unless the Act covered the instant cases the tax must fail
The gist of the matter is not the possibility of an arithmetical calculation as in the English case
The rate in the proviso is applicable to the total income  though after the application of a simple arithmetical calculation
The total income  however is still the total income as determined for the purpose of incometax and in the case of businesses the rules require that the total income shall not include the depreciation allowance
By the application of those rules if the total income ceases to exist the second paragraph of the proviso as it is worded ceases to be workable
All the four expressions to which we have referred earlier cease to have natural meaning and the Com missioner is again driven to contend that we must delete the offending words or suitably modify them
This we are not prepared to do because the intention might well have been not to comprehend such cases
1 125 2 SC 966 The Commissioner next contends that we may treat this as an independent charging section and give effect to it
The proviso is to Paragraph B in the First Schedule of the Finance Act and the Schedule only imposes a rate of tax and this rate either by itself or with rebate or with additional tax at a higher rate has to be applied to the total income
The extra tax under the second part of the proviso though called an additional tax is only the difference between the tax charged at one rate and the tax subsequently chargeable at another rate
The function of the proviso is thus to prescribe varying rates for varying circumstances and it deals with rate or rates first and last and not with chargeability to tax which is the subjectmatter of section 3 of the Income tax Act
There are no words here making the excess dividend into income or subjecting it to tax independently of the charge to tax on the total income
We are thus unable to treat the proviso as an independent charging section
In this view of the matter no useful purpose will be served by referring to those cases noted by this Court in Commissioner of Income tax vs Calcutta National Bank Ltd 1 where a schedule which went beyond the purpose for which it was enacted was given effect to
The proviso here was framed to lay down the rates and has done no more
It remains to consider two other arguments which were addressed to us on behalf of the Commissioner
The first pointed out an anomaly that if there was a total income of even one rupee the proviso could be made applicable according to its terms but not if the income was nil or negative
The Commissioner contended that such an anomaly should be avoided and that the proviso should be interpreted in such a way as to take in all the kinds of cases
Our answer to this is much the same as was given by the learned Chief Justice of the Bombay High Court
The learned Chief Justice observes  There seems to be no logic there seems to be no reason nor principle why a distinction should be made between the cases of two such companies
But if life is not logic income tax is much less so 1 967 and it is clear that we cannot impose tax upon a subject by implication or because we think that the object of the legislature was a particular object
 We respectfully agree with the learned Chief Justice that though the interpretation we have placed upon the proviso might lead to some anomalies it is for the legislature to avoid the anomalies which according to us spring not from our interpretation but from the language employed
The second argumeint is that the proviso itself states that the excess dividend shall be deemed to be out of the undistributed profits of one or more years immediately preceding the previous year and that the fiction makes the profits take the place of total income for purposes of tax
In our opinion the fiction cannot be carried further than the purpose for which it has been put in the statute
The Income tax Act creates an assessment year and a corresponding previous year
Assessment to tax in any assessment year can only be in respect of the profits of the immediately preceding previous year
All that the fiction does is to bring profits of back years into the immediately preceding previous years so that the requirements of the Income tax law may be complied with
As we have already stated this fiction cannot be carried further than what it is intended for it cannot be used to make these profits take the place of total income which did not exist in the previous year and to which the rate is to be applied under the terms of the proviso
We do not accept both the arguments and agree with the High Court in the answer given to the first question
As pointed out by the High Court the second question does not survive after the first question is answered against the Department
In the result the appeal fails and will be dismissed width costs
Appeal dismissed


Summary:
The appellant in the first case C A No 8856 and the respondents in the other two cases C As
Nos 91  92 of 1958 were shipping companies carrying goods by sea from one port to another
They carried goods of the opposite parties by ships to their places of destination but failed to deliver the whole of the goods consigned
In the suits brought by the owners of the goods for compensation the main question related to the interpretation of the 3rd clause of para
6 of article III in the Schedule to the Indian Carriage of Goods by Sea Act 1925 XXVI Of 1925 which runs thus  In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after the delivery of the goods or the date when the goods should have been delivered 
In the first case the Madras High Court expressed the opinion that the above clause did not provide for the extinction of the consignor s right to claim compensation but merely prescribed a rule of limitation
It also held that the term in the bill of lading requiring that the claim for compensation should be made within one month from the date of arrival of the vessel was repugnant to Rule 8 to article III of the Schedule and was void
The Bombay High Court held that article 1116 dealt with all cases of loss or damage whether the loss or damage was caused by the deterioration of the goods or by their non delivery and further that the words  the loss or damage  included any loss or damage caused to the consignee in respect of his claim for compensation from the shipping company
If also held that the goods should have been delivered as soon as they were landed
On appeal by special leave Held that the word  loss  in cl 3 para
6 of article III in the schedule to the Indian Carriage of Goods Act 1925 meant and included any loss caused to a shipper or consignee by reason of the inability of the ship or the carrier to deliver part or whole of the goods to whatever reason such failure might be due
Spens and another vs The Union Mayine Insurance Co Ltd 3 Common Pleas 427 distinguished 821 Sandeman  Sons vs Tyzack and Branfoot Steamship Co Ltd  referred to
The words discharged from liability were intended to mean and did mean that the liability had totally disappeared and not only that the remedy as regards the liability had disappeared
The date when the goods should have been delivered for the purpose Of cl 3 para
6 of article III of the Act was the date when the ship by which the goods were carried left the port of delivery
The stipulation in the bill of lading requiring claim for compensation being made within one month from the date of arrival of the ship was null and void