Ansari, C.J.
1. The assesses, a public limited company, car-ries on banking business at Mattancherry, and its as sets include some Cochin Government Bonds, whose income are exempt from income, but not from Super or Corporation Tax. The assessee's 'previous years', its book profits for those years, the interest from the tax-free Bonds, the dividend declared in one such year, and the total income assessed by the Income-tax Officer, with the relevant assessment years, can best he shown in the tabular form given in the statement of the case sent to this Court:
Previous year (Calendar year).
Assessment year.
Book profit.
Interest on tax-free Cochin Govt. Bonds Included therein.
Dividend declared.
Total income assessed (Income-tax Officer.)
1950
1951-52
21,018
7,487
6,575
1951
1952-53
21,486
12,120
8,330
1952
1953-54
26,281
18,813
12,532
22,954
This reference arises in the assessment year 1953-54,and the details of Rs. 22,954/- the total income
for the previous year, are: --
Business ......
RS. 2,927/-
Interest on tax-free securities...
Rs. 18,813/-
Other sources ......
Rs. 1,214/-
Rs. 22,954/-
The Income-tax Officer has levied on the income, the super-tax of Rs. 2,510-10-0, which is not 'challenged. The Officer . has further levied on Rs, 12,532/-, as the 'excess dividend', the income-tax at 5 annas, which amounts to Rs. 3916-4-0, and this is claimed not to be legally leviable. It is common ground that the dividend of Rs. 12.532/-for the calendar year 1952, has been declared out of the accumulated profits from 1950 to 1952, and the Income-tax Officer, in levying the income-tax, has relied on Section 2 of the Finance Act, 1953, which section directs application of the first schedule to the Finance Act 1951 for the purpose of the assessment. It follows that the assessment has been according to the provisions of the Finance Act, No. 23 of 1951, and the Income-tax Officer has relied on the following part of paragraph B of the First Schedule to the aforesaid Act:--
On the whole of total income.
Kate Four annasin the rupee.
Surcharge One-twentiethof the rate specified in the proceeding 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 Sub-section (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, it any, exemnt 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 (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 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 assigned to it in Clause (6A) of Section 2 of the Income-tax Act, but any distribution included in that expression, made during the year ending on the 31st day of March, 1952, shall he 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 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 o 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 a company for that year reduced by the rate at which rebate, if any, was allowed on the undistributed profits''.
2. Clearly the object of the legislature in enacting the proviso is to encourage companies not to distribute large part of their profits to the share-holders, by declaring high or excessive dividends. To effect this intention, the legislature has firstly offered companies the rebate, if any company do not distribute as dividend, more than roughly 9 annas of its profit. This rebate is of one anna, and is given where the dividend paid be less than the distributable dividend. To effect this Intention, the legislature has secondly levied a penalty, should companies pay more than the Distributable dividend. Any companies would, in such a case, not only be not entitled' to claim the rebate, and would be liable to pay an additional income-tax as provided in Clause (ii), which enacts that should the dividend declared exceed the statutory amount, the company would become liable to pay additional income-tax in respect of such dividend. The provision relating to excess income-tax, raises the problem of determining the aggregate amount of Income-tax actually borne by the excess dividend, and it is to help the solution of this problem that the explanation has been added. The substance of the aforesaid solution, in the words of the Supreme Court in Rajputana Agencies Ltd. v. Commissioner of Income-tax : [1959]35ITR168(SC) , is as follows:--
'Calculate the amount at the rate of five annas per rupee on the excess dividend and deduct From the amount so determined, the aggregate amount of income-tax actually home by such excess dividend; the balance is the amount of additional income-tax leviable against the company'. It is, therefore, clear that the legislature in providing' a penalty, contemplates some income that has been charged to income-tax, and the assessee's case is that the aforesaid provisions of paragraph B of the Finance Act, 1951, are not attracted, because the dividend that had been distributed, haa come out of what was not liable to income-tax. Before adjudicating on the correctness of the aforesaid argument, we must complete the statement ot the case in the reference. The Income-tax Officer had, in making the assessment, first determined what the excess dividend would be, by reducing the. total income of Rs. 22,954/- by 7 annas in the rupee, which had given the sum of Rs. 10,043/-, and this he deducted from the total income, which shows the balance to be Rs. 12,911/-. From this last amount, he again deducted Rs. 18,813/-, that being the income exempt from tax, and the result was nil. The Officer has, therefore, held that Rs. 12,532/-was the excess dividend, and as it had suffered no tax in respect of the earlier assessment years, the additional income-tax on the whole of Rs. 12,532/-at the rate of 5 annas in the rupee, must be Rs. 8916-4-0. The assessee appealed to the Appellate Assistant Commissioner, who ; held that, as the dividend was less than the total income reduced by 7 annas in the rupee, no additional income-tax was, under the aforesaid provisions of the Finance Act, payable. The department was dissatistied, and appealed to the Appellate Tribunal, which restored the order of the Income-tax Officer. the Tribunal has held that the Appellate Assistant Commissioner's view that income, exempt from tax, ought not to have been deducted from the total income, in addition to the deduction of 7 annas in the rupee, was wrong, as the proviso to the paragraph expressly directs such deduction. The Tribunal has' further held that the provision of an additional income-tax meant that the excess dividend was to be chargeable to income-tax, and the term 'additional income-tax' does not mean that the dividend must be chargeable to the income-tax. The assessee asked for and the following question has been' referred: 'Whether the assessee is liable to pay additional income-tax on the excess dividends set out in paragraph 3 under the provisions of the Finance Act of 1953'?
3. There are several judicial decisions taking the view different from that of the Tribunal. In Elpliinstone Spinning and Weaving Mills Co., Ltd. v. Commissioner of Income-tax Bombay City 1955 25 ITR 811 , it has been held that a condition precedent to the levy of additional income-tax under Clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Finance Act, 1951, in respect of excess dividend distributed by the company, is that there mast be a declaration of dividend by the company out of the profit referred to in the first part of the proviso, i.e., pro fit liable to tax under the Income-tax Act for the year ending on the 31st day of March, 1952.
Consequently, it was held that, if a company had no taxable income at all and paid dividend out of the profits earned in the preceding year or years, additional income-tax could not be levied on the company by reason of the fact that it was paid an excess dividend within the meaning of that expression in the proviso to paragraph B of Part I o the First Schedule to the Finance Act of 1951. Again, in Motipur Zamindari Co. Ltd. V. Commissioner of Income-tax : [1957]32ITR606(Patna) , it has been held that the provisions of the Finance Act should be construed in the context and background of Sections 2, 3 and 4 of the Indian Income-tax Act.
Therefore, the amount of dividend, referred to in paragraph B of Part I of the First Schedule to the Finance Act, 1951, means the amount of dividend paid out of the taxable profit of the company, i.e., profit liable to tax under the Income-tax Act. It is, therefore, clear, that, in order to levy the additional Income-tax of five annas in the rupee on the excess dividend, there must be dividend from income of the previous years to the assessment year ending with March 1953 that had paid income-tax, and, as the dividend has come out o' the income from the Bonds that are free of income-tax, we do not think the assessing authorities were right in taxing Rs. 12,532/- at five annas in the rupee and levying the tax of Rs. 3,916-4-0.
The learned Advocate for the department has not been able to show the grounds on which the aforesaid decisions proceed to be wrong, and we cannot add any fresh reasons of our own in support of the conclusions that had been reached in the aforesaid decisions. Therefore, the assessee is not liable to pay the additional tax on the excess dividend under the provisions of the Finance Act of 1953, and that is our answer to the question referred. Let the aforesaid answer be sent, and the assessee will be entitled to his costs of this reference. The Advocate's fee, we fix at Rs. 100/-.