Case: Cloth Traders Private Limited, Etc Vs. Additional Commissioner of Income Tax, Gujarat-I, Etc

The appeals are preferred by the assessee, namely, Cloth Traders (P) Ltd. against the judgment o f the Gujarat High Court and they relate to the assessment years 1965-66 and 1966-67 when section 85A was in force. The Reference before us have been made directly by the Tribunal under section 257 of the Act in view of the conflict of opinion amongst the High Courts. Out of these References, three are at the instance of the assessees, namely, C. V. Mehta (P) Ltd., M/s. Distributors (Baroda) Pvt. Ltd., and H. K. (Investment) Co. Pvt. Ltd. and one is at the instance of the Commissioner o f Income-tax, Gujarat. They relate to different assessment years: assessment year 1969-70 in case of C. V. Mehta (P) Ltd. and Distributors (Baroda) Pvt. Ltd. and assessment years 1965-66 to 1969-70 in case of H. K. (Investment) Co. Pvt. Ltd. Th e interpretation of both sections 85A and 80M is involved in these References since section 85A with some minor alterations made in it from time to time was in force during the assessment years 1965-66 to 1967-68 and section 80M followed upon it with effect from the commencement of the assessment year 1968-69 as part of Chapter IVA. Though the language of sections 85A and 80M is almost identical, there are some verbal dissimilarities, but as we shall presently point out, they do not make any difference in interpretation so far as the present question is concerned.

Court's reasoning:
We do not think this contention of the Revenue can be sustained if we have regard to the object and purpose for which the words "received by it" were deleted. It is clear from the Notes on clause 31 which subsequently became section 31 of the Finance Act, 1968 tha t the amendments retrospectively deleting the words "received by it" from the opening part of section 99, sub-section (1), clause (iv) and section 85A were made with a view to widening scope of the relief granted under these sections, as it was felt that the presence of these words might render those sections inapplicable in cases where the shares to which the dividend relates are registered in the name of a person other than the assessee and the dividend is, therefore, received, strictly speaking, by such other person and not by the assessee. The object of introducing these amendments was to widen the scope of the tax relief provided under section 99, sub-section (1), clause (iv) and section 85A by making it available to the assessee even though the shares to which the dividend related were registered in the name of a person other than the assessee and not to narrow it down by restricting it to not dividend computed after making deductions allowed under the pro visions of the Act. The omission of the words "received by it" does not, therefore, make any difference in the interpretation of section 99, sub-section (1), clause (iv) and section 85A so far as the present question is concerned. Even after the deletion of the words "received by it", the expressions "any dividend from an Indian company" and "any income by way of dividends from an Indian company" occurring in the opening part of these sections continue to mean the same thing, namely the full amount of dividend derived or moving from an Indian company. The decisions of the Bombay, Calcutta and Madras High Courts interpreting these sections cannot, therefore, be said to be displaced by the retrospective omission of the words "received by it".So far as section 99, sub-section (1), clause (iv) is concerned, we have no doubt that the interpretation placed on this provision by the Bombay, Calcutta and Madras High Courts is correct. The reasoning given by the Bombay High Court in New Great Insurance Co.s case (supra) is unexceptionable and we find ourselves in agreement with it. It is clear on a plain natural construction of the language of this provision that it grants exemption from super-tax in respect of "any dividend from the Indian company" and these last mentioned words cannot mean anything else than the full amount of dividend derived from an Indian company. They cannot obviously mean dividend from an Indian company minus any expense s incurred in earning it, or less any other deduction allowable under the Act. It is no doubt true that the opening part of section 99, sub-section (1) contains the words "the following amounts which are included in his total income", but these wor ds do not have any limitative effect so as to restrict "dividend from an Indian company" in respect of which exemption from super-tax is granted to net dividend computed in accordance with the provisions of the Act and forming part of the total income. It may be noticed that the ememption from supr-tax granted under section 99, sub-section (1) is not only in respect of "dividend from an Indian company" is not referred to in clause (iv), but also in respect of other items of income mentioned i n clauses (i) to (iii) and (v). The Legislature clearly and understandably wanted to provide that the different categories of income mentioned in clauses (i) to (v) should be eligible for exemption from super-tax only if they are included in th e total income and the Legislature could have made such a provision separately in respect of each category of income in the opening part of section 99, sub-section (1), but instead of adopting such legislative device, which would have been both inapt and inelegant, the Legislature chose to use an omnibus expression "the following amounts which are included in his total income", which would cover all the different items of income dealt with in clause (i) to (v). These words were intr oduced merely to provide that the category of income in respect of which exemption from super- tax is claimed must be included in the total income and they were not intended to refer to the quantum of such income included in the total income for e xempting it from supertax: they were descriptive of items of income included in the total income and were not indicative of the quantum of the amounts included under different items in the computation of the total income. It would, therefore , seem that though the exemption from super-tax granted under clause (iv) of sub- section (1) of section 99 would be applicable only if the particular item of income, namely, "dividend from an Indian company" is included in the total income, wha t is exempted is "dividend from an Indian company" which can only mean the full amount of dividend received from an Indian company.This view which we are taking is clearly supported by the decision of this court in Commissioner of Income-tax, Ke rala v. South Indian Bankst ated, the notification is a self-contained one; it provides an exemption from income-tax payable by an assessee on a particular class of income subject to specified conditions. Therefore, there is no scope for controlling the provisions of the notification with reference to section 8 of the Income-tax Act. The expression "interest receivable on income-tax free loans" is clear and unambiguous. Though the point of time from which the exemption works is when it is received withi n the territories of the State of Travancore-Cochin, what is exempted is the interest receivable. "Interest receivable" can only mean the amount of interest calculated as per the terms of the securities. It cannot obviously mean interest receivable minus the amount spent in receiving the same."It may be noted that the last part of this notification provided for inclusion "of such interest", that is, interest in respect of which exemption from tax was granted, in the total income of the assessee and obviously this would have to be done after computation in accordance with the provisions of section 8 of the old Act. But even so, it was held that the exemption from tax was in respect of the entire amount of interest r eceived on the securities. The reasoning adopted in this decision clearly supports the view we are taking in regard to the construction of clause (iv) of sub-section (1) of section 99 and we must hold that the decisions of the Bombay, Calcutta and Mad ras High Courts lay down the correct law on the interpretation of this provision.The next provision we must consider is section 85A which came in the wake of section 99, sub-section (1), clause (iv). This section lays down a c ondition for its applicability in its opening part by using the words "where the total income of an assessee-includes any income by way of dividends from an Indian company". The condition is that the total income must include income by way of div idends from an Indian company. It is only if this category of income from a component part of total income that the provision enacted in the section is attracted and the assessee becomes entitled to rebate on income calculated with reference to the "income soargument is, in our opinion, fallacious. It is based on a misreading of the words "income so included" and ignores the context in which these words occur. If the opening part of the section refers to inclusion of the particular category of income denoted by the words "incom e by way of dividends from an Indian company", the words "so included" cannot have reference to the quantum of the income included, but they must be held T.D. r.f. only to the category of income included, that is, income by way of dividends from an Indian company. The meaning of the section would become clear if we substitute the words "income by way of dividends from an Indian company" for the words "income so included". Then it would be obvious-indeed it would need no argument to hold-t hat the rebate on income tax is to be calculated by applying the average rate of tax to the "income by way of dividends from an Indian company" which can only mean the full amount of dividend received from an Indian company. This was the vie w taken by the Bombay High Court in the New Great Insurance Co.s case and we find ourselves in agreement withdeduction permissible under the section is, therefore, to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. This was the view taken by the Madras High Court in Madras Auto Service v. Income-tax officer Madras(101 I. T. R. 589.) and it meets with our approval. It is true that the Gujarat High Court has taken a contrary view in Cloth Traders Pvt. Ltd. v. Commr . Of Income-tax, Gujarat, which is the subject matter of Civil Appeals Nos. 117 and 118 of 1975, but we think it proceeds on an erroneous interpretation of the language of section 80M, sub-section (1). It wrongly construes the words "such income" to be referable to the quantum of income includible in the gross total income, overlooking the fact that the opening words in the section, namely, "where the gross total income of an assessee-includes any income by way of dividends from a domestic company" refer only to the inclusion of the category of income by way of dividend from a domestic company and they are not indicative of the quantum of the income included in the gross total income. It is true that on this view the deduction in respect of the income by way of dividends from a company falling within cl. (a) of sub-section (1) of s. 80M may exceed the quantum of such income included in the gross total income, but that possibility is indeed contemplated and taken care of by section 80A, sub-section (2) which provides that the aggregate amount of the deductions shall not in any case exceed the gross total income of the assessee.We may point out that even though the consistent view taken by t he Bombay, Madras and Calcutta High Courts in regard to the interpretation of section 99, sub-section (1), clause (iv) was that the exemption From super-tax under that provision was admissible in respect of the full amount of dividends received from an Indian company and A was not limited to the dividend income computed accordance with the provisions of the Act and forming part of total income and the same view was taken by the Bombay High Court in the New Great Insurance Co. case (supra) in regard to the interpretation of s. 85A which contained the opening words "where the total income of an assessee- includes any income by way of dividends from an Indian company", similar to the opening words in sub-section (1) of section 80M and the Madras High Court also placed the same interpretation on section 80M, sub-section ( 1 ) in Madras Auto Service case (supra), the legislature did not choose to make any amendment in the language of sec tion 80M, sub- section (1) with a view to setting at naught this judicial interpretation. If the legislature was of the view that the deduction should not be in respect of the full amount of dividends received from a domestic company, but it should only be in respect of the amount of dividends computed after deducting allowable expenditure, we have no doubt that the legislature would have amended section 80M, sub-section (1) and made its intention quite clear. The legislature in fact amended section 80M several times in respect of other matters subsequent to the decision of the Bombay High Court in the New Great Insurance Co.s case and the decision of the Madras High Court in the Madras Auto Services case, but it did not choose to amend the language employed in s. 80M, sub-s.(1) for the purpose of overriding the interpretation placed by the courts. This would seem to indicate legislative recognition of the interpretation placed by the courts on s. 85A and s. 80M and it is a circumstance, though not of much weight, which lends support to the view we are taking in regard to the interpretation of s.appears on a plain reading of these secions that the deduction admissible is in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act. Vide Madras Auto Service case (supra) and Additional Commissioner of Income Tax v. Isthmian India Maritime P. Ltd.((1978) 1131. T. R. 570 (Mad.)). We derive considerable support for our view from the analogy of these sections.