Appeal No 303 of 1958
Appeal from the judgment and order dated August 3 1956 of the Bombay High Court in Incometax Reference No 10 of 1956
K N Rajagopal Sastri and D Gupta for the appellant
N A Palkhivala section N Andley J B Dadachanji and Rameshwar Nath for the respondents
May 4
The Judgment of the Court was delivered by HIDAYATULLAH J
This is an appeal against the judgment and order of the High Court of Bombay dated August 3 1956 in a reference under section 66 1 of the Indian Income tax Act by the Appellate Tribunal Bombay
The Tribunal referred four questions for the decision of the High Court
The High Court did not answer the first question because it was not pressed and answered the remaining in the negative after modifying them
It has certified this case as fit for appeal to this Court and hence this appeal
The Com missioner of Income tax Bombay City is the appellant and the Khatau Makanji Spinning and Weaving Co Ltd Bombay the assessee Company is the respondent
The assessee Company has its year of account ending June 30 every year
At the close of the account year 1951 it carried forward profits amounting to Rs 30680
In that year it appears it had earned a rebate by declaring dividends below the limit fixed by the Finance Act
For the account year 1952 its book profits were Rs 2867235 less allowances for depreciation and tax
After these and other sundry adjustments the balance available for distribution was Rs 502915
It may be pointed out that the Incometax Officer on processing the income found the total income to be Rs 526681
For the account year 1952 the assessee Company declared dividends amounting to Rs 478950 and carried forward the balance of Rs 23965
We are concerned with the assessment year 1953 54 and the Finance Act 1953 is applicable
That Finance 875 Act applied the Finance Act 1951 with some changes
The Finance Act 1953 with the modifications will be referred to briefly hereinafter as the Finance Act
The Income tax Officer found that the assessee Company had declared excess dividends amounting to Rs 187691
He calculated additional income tax on it at 5 annas in the rupee after deducting income tax borne by the profits of the previous year at 4 annas per rupee a surcharge of 5 per cent
less rebate of one anna in the rupee as allowed by the Finance Act
This additional tax amounted to Rs 21115 4 0
The appeals of the assessee Company under the Income tax Act failed
The Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of earlier year ending June 30 1951 amounting to Rs 660720 on which a rebate of 1 anna in the rupee was given in the assessment year 1952 53
Tile Tribunal observed that additional incometax was also a tax on income and that the Finance Act could say that the tax would be payable on the income of any year preceding the previous year
The Tribunal however referred four questions to the High Court of which the first need not be quoted because it was abandoned before the High Court
The other questions were  ii If the answer to question No 1 is in the negative whether the said provisions go beyond the ambit and scope of the Indian Income tax Act  iii Whether additional income tax can be levied assessed and recovered under the provisions of the Indian Income tax Act  iv Whether at any rate the additional incometax has been legally charged under the Indian Finance Act 1953 read with the Indian Incometax Act The High Court compressed the three questions into one and it reads  Whether additional income tax has been legally charged under clause ii of the proviso to paragraph B of Part 1 of the
First Schedule to the Indian Finance Act 1951 as applied to the assessment year 1953 54 by the Indian Finance Act 1953 read with Section 3 of the Indian Income tax Act 876 This question was answered by the High Court in the negative
In the opinion of the High Court section 3 of the Indian Income tax Act lays down the liability to tax and it puts the tax on the total income of the previous year
The method of computing this total income is also to be found in the Finance Act
The Finance Act merely provides the rate applicable to the income so found
According to the High Court the Finance Act in providing that additional income tax should be paid upon the accumulated profits of the previous years goes beyond the purpose for which the Central Act is passed every year and cannot stand by itself without the support of section 3 of the Indian Income tax Act
The High Court held that the Finance Act had  misfired  because it did not resort to legislation which would have conformed to the object for which the Finance Act was passed every year
The learned Chief Justice who delivered the judgment of the High Court stated that there were several methods open to the legislature to achieve that purpose but that it had not resorted to any of them
This is what the learned Chief Justice observed  The Legislature could have achieved this object by one of three methods
It could have treated the excess dividend declared by the company as a notional income and made it apart of the total income of the previous year
It could have provided for rectification of the assessment of the year in which these profits were charged at a lesser rate and we now find that Parliament has actually provided for this in the Finance Act 1956
Or finally it could have provided for a penalty imposed upon a company which transgressed the direction of Parliament that it should not pay dividend beyond a particular ceiling 
The ambit of Section 3 is clear and the ambit is that the tax to be levied must be a tax on income and the power of Parliament is equally clear and that is to fix the rate at which income tax is to be charged upon the total income of the previous year of the assessee
In our opinion the provision of the Finance Act travels beyond the ambit of Section 3 and if Parliament 877 has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend
 It may be pointed out that before the High Court it was conceded that in order that the provisions of the Finance Act might be effective the Finance Act had to come within the scope of section 3 of the Incometax Act
The point that was argued here was that it was not necessary to look only to section 3 of the Indian Income tax Act but also to the provisions of the Finance Act through which Parliament could impose a new tax if it so pleased
Other arguments involved modifications of language suitable to sustain the tax independently of section 3 of the Indian Income tax Act a procedure which we do not think is open for reasons which we have given in Civil Appeal No 427 of 1957 decided today
These modifications which were suggested involve a recasting of the entire relevant paragraph of the Finance Act to make it independent of section 3 of the Indian Income tax Act a course which is only open to a legislature and not to a Court
We need not give all the modifications suggested because in our opinion the words of the Finance Act must be given their due meaning and must be construed as they stand
The learned Chief Justice with respect very rightly pointed out that the Income tax Act puts the tax on income or something which it deems to be income
In other words the tax deals with income and income only
It further provides that this tax shall be collected at a particular rate on the total income for which provision shall be made in an yearly Central Act
The Finance Act also follows the same scheme and lays down the rate at which the tax is to be collected
In the Finance Act the tax is laid on the total income but two provisos modify the rate under certain circumstances
We may at this stage read the relevant provision Part 1 First Schedule 878 B
In the case of every company Rate
Surcharge
On the whole of Four annas One twentieth of total income
in the rupee
the rate 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 1953 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 1953 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 i 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 chargeable 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  excess dividend  falls short of the amount calculated at the rate of five annas per rupee on the excess dividend
For the purpose of clause ii of the above proviso the aggregate amount of income tax actually borne by the excess dividend shall be determined as follows  879 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
 By the first Proviso a rebate of one anna per rupee is given to a company which pays dividends less than 9 annas in the rupee out of its profits
By the second Proviso the rebate disappears and an additional income tax has to be paid on dividends in excess of that limit paid in the year
The explanation says that  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 
This fiction as we have already pointed out provides only that the dividends shall be deemed to be out of the profits not of the previous year under assessment but of some other years
What the Finance Act fails to do is to make them  total income  so as to take in the rate which is prescribed for the total income in the Proviso
Unless the Finance Act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment the purpose of the Act clearly fails
Income tax is a tax on income 880 of the previous year and it would not cover something which is not the income of the previous year or made fictionally so
The Finance Act could have gone further as pointed out by the learned Chief Justice in the extract quoted and made the profits a part of the total income of the previous year under assessment but it did not do so
The Finance Act could have also resorted to some other fiction which might conceivably have met the case but it has failed to do so
Even if one considers the dividends as having come out of the profits of preceding years they do not become the income of the relevant previous year and unless the Finance Act expressly laid down that it should be taxed as part of the total income the purpose is not achieved
Indeed the Finance Act continues to say that the tax shall be on the total income as defined in the Indian Income tax Act and as determined under that Act
It is impossible to say that the additional income tax was properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year
For these reasons we are of opinion that the High Court was right in answering the question which it had framed in the negative
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The Income tax Officer found that in the assessment year 1953 54 the respondent assessee company had declared excess dividends amounting to Rs 187691 and he levied additional income tax on it at 5 annas in the rupee after deducting incometax borne by the profits of the previous year at 4 annas per rupee a surcharge of 5 per cent
less rebate of one anna in the rupee as allowed by the Finance Act 1953
The Income tax Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of the earlier year ending June 30 1951 on which a rebate of one anna in the rupee was given in the assessment year 1952 53
It further observed that additional income tax was also a tax on income and that the Finance Act could say that the tax would be payable on the income of any year preceding the previous year
The Tribunal however referred three questions to the High Court which the High Court compressed into one as below   Whether additional income tax has been legally charged under Clause ii of the proviso to paragraph B of Part 1 of the First Schedule to the Indian Finance Act 1951 as applied to the assessment year 1953 54 by the Indian Finance Act 1953 read with section 3 of the Indian Income tax Act  The High Court held that section 3 of the Indian Income tax Act put the liability to tax on the total income of the previous year or what can be deemed to be income
The Finance Act provided the rate applicable to the income so found and a method of computing the total income
The Finance Act in providing that additional income tax should be paid upon the accumulated profits of the previous years went beyond the purpose for which the Finance Act was passed every year and the Finance Act could not stand by itself without the support Of section 3 of the Indian Income tax Act
On appeal by the Commissioner of Income tax on certificate of the High Court Held that the High Court was right in answering the ques tion framed by it in the negative
The Finance Act provided that the tax should be levied on the  total income  as defined in and determined under the Indian Income tax Act
The Additional income tax was not properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year nor deemed to be so 874