Commissioner of Income-tax, (Central), Calcutta Vs. Asiatic Textiles Ltd. - Court Judgment

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direct taxation - capital loss sections 23a and 23a (1) of income tax act, 1922 - assessee-company suffered loss on account of depreciation in value of shares held by it in certain company - dividend not declared due to loss suffered - income-tax officer under section 23a (1) levied additional super-tax - assistant commissioner observed that loss incurred was capital loss - no profits in relevant years and not reasonable to expect assessee-company to declare any dividend in view of capital loss incurred - canceled order of income tax officer - apex court confirmed decision of assistant commissioner. - [k. subba rao,;raghubar dayal;j.r. mudholkar; r.s. bachawat and; v. ramaswami, jj.] the appellant was paying a tax at the rate of one anna per--unit weight of cotton, under s. 66(1)(b) of the central provinces municipalities act. 1922, from 1936. in all 1941 the rate of tax was increased to 4 as. in 1952, the appellant filed a suit for recovery of the excess,tax paid within 3 years of the date of suit. it was contended that after the coming into force of s. 142a of the government of india act, 1935, on 1st april 1939, till 25th january 1950, a tax in excess of rs. 50 per annum could not be imposed by the respondent, and, after the coming into force of the constitution the upper limit of the tax was raised to rs. 250 per annum under art. 276 of the constitution; and that as the appellant was already paying more than this amount per year even at the rate of one anna, the enhanced rate of 4 annas was illegal. the trial court decreed the suit for recovery from the municipal committee of excess tax paid by the appellant within 3 years of the date of suit but on appeal, the high court held that the suit was bad for non- compliance with the requirements of s. 48 of the act, according to which a suit for anything done or purported to be done under the act shill be instituted only after the expiration of 2 months after serving a written notice and within six months from the date of the accrual of the alleged cause of action. in its appeal to this court, the appellant contended that it was a case of recovery of an illegal tax and therefore, a, claim for its refund fell outside the provisions of s. 48. the respondent contended that (i) since the ban was not upon the rate of tax but upon the excess collection thereof, the collection of a tax above the constitutional limit was not without jurisdiction but only illegal or irregular and therefore, the suit would be in respect of a matter "purported to be done under the act" and the provision of s. 48 would apply, and (ii) on the basis of raleigh investment company ltd. v. governor. general in council, (74 i.a. 50) the suit was barred by s. 84(3) of the act, which enacts that no objection shall be taken to any assessment in any other manner than is provided in the act. held (per k. subba rao, j. r. mudholkar and v. ramaswami jj.): (i) since the respondent had no authority to levy a tax beyond what s. 142a of the government of india act, 1935, or what art. 276 permitted, the assessment proceedings were void in so far as they purported to levy a tax in excess of the permissible limit and authorise. its collection, and the assessment order would be no answer to the suit for the recovery of the excess amount, and therefore, the suit was maintainable. [522g-h] the constitution is the fundamental law of the land and it is unnecessary to provide in any law that anything done in disregard of the constitution is prohibited, such a prohibition has to be read into every enactment, and where such prohibition exists or can be implied, anything done or purported to be done by an authority must be regarded as wholly without jurisdiction, and is not entitled to a protection of the law under colour of which that act was done. [512a-b; 516b-c] poona city municipal corporation v. dattatraya nagesh deodhar.[1964] 8 s.c.r. 178, followed. (ii)a tax can be recovered only if it is "payable" and it would be payable only after it is assessed. it is therefore futile to contend that the ban placed by s. 142a of the government of india act and art. 276 of the constitution, extends only to recoveries and not to an earlier stage. [513g] it is true that the respondent had jurisdiction to recover an amount up to the constitutional limit. but it cannot be contended that merely because of this, the recovery by the respondent of an amount in excess of the constitutional limit was only irregular or at the worst illegal. where power exists to assess and recover a tax up to a particular limit and the assessment or recovery of anything above that amount is prohibited, the assessment or recovery of an amount in excess is wholly without jurisdiction. to such a case, the statute under which action was purported to be taken can afford no protection. indeed, to the extent that it affords protection it would be bad. but it is the duty of the court to so construe it as to avoid rendering the provision unconstitutional, that is, to construe s. 48 as affording protection only if what was done was something which could legally have been done by the respondent but was wrongly done by it, and reject a construction which will invalidate the provision. [515b; 516b-h] (iii)the appellant's suit could not be barred even if s. 84(3) of the act is interpreted in the same way as the privy council interpreted s. 67 of the income-tax act, in the raleigh investment co.'s case. unlike the income-tax act the act does not provide a machinery for making a claim for refund or repayment on the ground of the un- constitutionality of the levy, and the jurisdiction of the civil court in cases of refund is not taken away. even in the class of cases to which the provisions of ss. 83 and 85 of the act, which are the only provisions providing a machinery under the act for challenging an assessment, apply, they cannot be said to provide a sufficiently effective remedy to an assessee. a reference to the high court is only at the discretion of the appellate or revisional authority and the person aggrieved has no right to move the high court. besides, in the raleigh investment co.'s case, the expression "assessment made under this act was given too wide a construction, because, it is difficult to appreciate how taking into account an ultra vires provi- sion, which in law must be regarded as not being a part of the act at all, will make the assessment as one under the act. [517g; 518b, f, h; 519a-b; 520d-f; 521h] the exclusion of the jurisdiction of the civil court is not to be readily inferred but such exclusion must either be -explicitly expressed or clearly implied. one of the corollaries flowing from the principle that the constitution is the fundamental law is that the normal remedy of a suit will be available for obtaining redress against the violation of a constitutional provision. moreover the provisions of art. 265 of the constitution preclude the levy or collection of a tax except by authority of law, which means only a valid law. there was no corresponding provision in the various acts for the governance of india which preceded the constitution and the decision in the raleigh investment co.'s case was given in that context. further under art. 226, the constitution has provided a remedy to a citizen to obtain redress in respect of a tax levied or collected under an invalid law, and this remedy will not be affected by any provision like s. 67 of the income-tax act, or s. 84(3) of the act. [520g-h; 521c-e] thus, when the question merely is whether the assessment had been made according to law, the respondent having jurisdiction over the subject matter and the assessee, the provisions of s. 84(3) may be a bar to a suit. but, where the question raised is as to the jurisdiction of the respondent to proceed against the assessee, and levy on or collect from him an amount in excess of that permitted by the constitution, the matter would be entirely out of the bar of that provision. [522e-g] per raghubar dayal and bachawat, jj. (dissenting): the appellant's suit for the recovery of the tax realized in excess of rs. 250 a year was rightly dismissed, as the correctness of the assessment of the tax could not be challenged by a suit in a civil court in view of s. 84(3) and as the provisions of s. 48, requiring the giving of notice to the respondent and the institution of the suit within a certain period, had not been complied with. [534h; 535a-b] the suit was in essence a suit for, first, modifying the amount assessed and then to decree the payment of the amount held to have been paid in excess of the tax as modified by the court. but the act of assessing the tax or the consequential act of collecting the amount cannot be broken up into two acts, one, upto the legal limit and the other in excess of it. the act of assessment or of collection therefore was an act done by the respondent under the provisions of the act, though it acted wrongly in assessing the tax at an excessive figure, and consequently in collecting an amount in excess of that which could have been legally collected. the suit was therefore fully covered by s. 48 and had to be dismissed. [526e-h] in view of s. 84(3), exclusive jurisdiction to determine the correctness of the amount assessed is given to the authorities mentioned in s. 83. the result is that no other authority can enter into the question of the correctness of the assessment on grounds of law or fact, and therefore the appellant's suit was barred from the cognizance of the civil court. [527g] raleigh investment co. ltd. v. governor-general in council, l.r. 74 i.a. 50 and firm of illuri subbayya chetty & sons v. state of andhra pradesh, [1964] 1 s.c.r. 752, followed. poona city municipal corporation v. dattatraya nagesh deodhar, [1964] 8 s.c.r. 178, distinguished. - where the income-tax officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by- (a) the amount of income-tax and super-tax payable by the, company in respect of its total income, but excluding the amount of any super-tax payable under this section; and (c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the banking companies act, 1949; the income-tax officer shall, unless he is satisfied that, having regard to the 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, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of fifty per cent in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments and at the rate of thirty-seven per cent 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 as reduced by the amounts, if any, referred to in clause (a), clause (b) or 13. for the reasons mentioned above, these appeals fail and they are dismissed with costs.k.s. hegde, j.1. these appeals by certificate arise from the decision of the calcutta high court in income-tax reference no. 16 of 1964 on its file. therein the high court was considering a reference made by the income tax appellate tribunal 'b' bench calcutta under section 66(1) of the indian income tax act, 1922-to be hereinafter referred to as 'the act'. the question of law which was referred for the opinion of the high court reads thus:whether on the facts and in the circumstances of the case, the tribunal was justified in holding that in view of the capital loss of rs. 12,00,000/-suffered by the assessee on account of depreciation in the value of the shares of messrs. elphinstone mills ltd. payment of any dividend at all during any of the two relevant accounting years would have been unreasonable ?2. the assessment years with which we are concerned in these appeals are 1955-56 and 1956-57, the corresponding accounting years being the years ending on june 30, 1954 and june 30, 1955.3. the assessee is a limited company doing business as selling agents of a textile mill. for the assessment year 1955-56 the assessee was assessed on a total income of rs. 1,61,089/-and taxes paid were rs. 69,973/-leaving a distributable balance of rs. 91,116/-. according to the profit & loss account, however, the company suffered a net loss of rs. 11,63,874/-and this was due to the loss of rs. 12,00,000/-on account of depreciation in the value of shares held by the company in elphinstone mill ltd. of bombay. the income-tax authorities disallowed an amount of rs. 11,88,000/-out of this loss on the ground that it relates to the price paid for the shares purchased for the sake of acquiring the managing agency of the elphinstone mills ltd. the tribunal upheld the disallowance on the ground that the amount of rs. 11,88,000/was a loss relating to shares held by the company in its investment account. the company however, did not declare any dividend for the year in question. the income tax officer in exercise of his powers under section 23 a(1) levied additional super-tax @ /4/-per rupee on the distributable surplus of rs. 91,116/-. in so doing he ignored the loss in the value of the shares in elphinstone mills ltd.4. for the assessment year 1956-57 the total income assessed was rs. 1,07,429/-and the taxes payable thereon were rs. 46,668/-leaving a distributable surplus of rs. 60,761/-. in this year also the company did not declare any dividend because of the loss referred to earlier. the income-tax officer, however, again invoked the provisions of section 23a(1) and levied additional super-tax @ /4/-per rupee on the surplus of rs. 60,761/-.5. in appeal, the asstt. commissioner took the view that the loss incurred by the company was a capital loss. but all the same as there was no commercial profits in the relevant accounting years it was not reasonable to expect the assessee company to declare any dividend in respect of those years in view of the capital loss incurred and he, therefore, cancelled the orders of the income-tax officer under section 23a(1).6. aggrieved by the order of the appellate assistant commissioner, the department appealed to the tribunal. the tribunal agreed with the conclusions reached by the appellate assistant commissioner. it held that under the circumstances the directors were justified in not declaring any dividend in respect of the profits that had accrued in the accounting years.7. at the instance of the commissioner, the tribunal submitted to the high court of calcutta the question of law set out by us earlier. the high court answered that question in favour of the assessee.8. the tribunal-the final fact finding authority has come to the conclusion that the assessee had incurred a capital loss of rs. 12,00,000/-as a result of the depreciation of the value of the shares of elphinstone mills ltd. the question is whether that was a relevant circumstance for not declaring any dividend. the further question is whether the directors of the assessee-company acted as prudent businessmen in refraining from declaring any dividend. section 23a(1) of the act reads:where the income-tax officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by-(a) the amount of income-tax and super-tax payable by the, company in respect of its total income, but excluding the amount of any super-tax payable under this section;(b) the amount of any other tax levied under any law for the time being in force on the company by the government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income; and(c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the banking companies act, 1949;the income-tax officer shall, unless he is satisfied that, having regard to the 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, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of fifty per cent in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments and at the rate of thirty-seven per cent 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 as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any,9. whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. the income-tax officer can step in under section 23a(1) only if the directors unjustifiably refrain from declaring dividend. if the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the income-tax officer to constitute himself as a super-director. as observed by this court in commissioner of income-tax, west bengal, v. gangadhar bannerjee and co. (pvt.) ltd. : [1965]57itr176(sc) the income-tax officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of section 23a of the act does not assess any income to tax. he only does what the directors should have done putting himself in their place. though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. the reasonableness or unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. the income-tax officer must take an overall picture of the financial position of the business. he should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective approach.10. on the facts found by the tribunal, there can be hardly any doubt that the assessee had suffered a capital loss of rs. 12,00,000/-. in our opinion, in view of the said loss, any reasonable body of directors of a company would have done just what the directors of the assessee company did. we think, that the income-tax officer took an erroneous view of the scope of section 23a(1).11. mr. mitra, learned counsel for the department contended that the assessee had not in fact incurred any loss though the value of the shares had gone down in the market. as the assessee was still in possession of those shares, there was still a possibility of avoiding the anticipated loss. hence there was no occasion to take note of the depreciation in the value of the shares in the matter of declaration of dividends. this is an unacceptable contention. the directors of a company will be justified in taking things as they stand and not befool themselves in the wild hope that the value of the shares may come up again. they are expected to act as hard headed businessmen. they are not expected to gamble with the future of the concern. the question is not whether the value of the shares may not go up in future but whether the directors were justified in not declaring dividends in view of the loss incurred. the income-tax officer overlooked the fact the directors were naturally more interested in the stability of their concern rather than in increasing the tax payable to the government.12. before the high court, it appears to have been urged-mr. mitra rightly did not press that plea-that the loss incurred being a capital loss the same cannot be taken into consideration in the application of section 23a (35 i.t.r., 290). this very contention was examined and rejected by the judicial committee in commissioner of income-tax v. williamson diamonds ltd. 35 i.t.r., 290. in that case their lordships were considering the scope of section 21(1) '(consolidation) ordinance, 1950 of tanganyika.' that provision corresponds very closely to section 23a(1) of the act. dealing with the scope of that provision, their lordships observed:it does not follow from what has been said that capital losses should not be taken into account by the commissioner. two matters are mentioned specifically in the words which give him a direction the first is 'losses' (as interpreted above) and the second is 'smallness of profit.' the commissioner is directed to come to a decision upon the question whether 'the payment of a dividend or a larger dividend than that declared' is unreasonable.the form of the word used no doubt lends itself to the suggestion than regard should be paid only to the two matters mentioned, but it appears to their lordships that it is impossible to arrive at a conclusion as to reasonableness by considering the two matters mentioned isolated from other relevant factors. moreover, the statute does not say 'having regard only' to losses previously incurred by the company and to the smallness of the profits made. no answer which can be said to be in any measure adequate, can be given to the question 'unreasonableness' considering these two matters only. their lordships are of the opinion that the statute by the words used while making sure that 'losses and smallness of profit' are never lost sight of require all matters relevant to the question of unreasonableness to be considered capital loss, if established is one of them.' we respectfully agree with these observations.13. for the reasons mentioned above, these appeals fail and they are dismissed with costs. one hearing fee.