Bombay High Court
Atul Drug House Ltd. vs Commissioner Of Income-Tax on 14 January, 1993
Equivalent citations: [1995]216ITR584(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT
Mrs. Sujata Manohar J.
1. For the assessment year 1968-69, the applicant (hereinafter referred to as "the assessee") declared a total dividend of Rs. 6,90,000. This dividend was in excess of ten per cent. of the share capital of the company on the first day of the previous year which was Rs. 30,00,000. Therefore, the excess dividend so declared amounted to Rs. 3,90,000. Such excess dividend entailed an additional income-tax under the provisions of the Finance Act, 1968. The Income-tax Officer, however, failed to take note of this fact at the time of the assessment proceedings. He thereupon initiated rectification proceedings under section 154 of the Income-tax Act, 1961. The assessee resisted the proceedings. The assessee contended that the declaration of dividend of Rs. 6,90,000 was out of profits which were exempted from tax under section 80J of the Income-tax Act, 1961, and hence no additional income-tax was leviable on the excess dividend declared by the assessee. The Income-tax Officer, however, in the rectification proceedings, brought the excess dividend to tax by levying additional income-tax at the rate of 7.5 per cent. amounting to Rs. 29,250. This levy has been upheld by the Tribunal. Hence, at the instance of the assessee, the following three questions are referred to us under section 256(1) of the Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding the what the Income-tax Officer rectified was an error apparent from the record coming within section 154 of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, there was any excess dividend declared by the assessee-company which attracted clause I(B) of Paragraph F of Part I of the First Schedule to the Finance Act, 1968 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that additional income-tax was payable in respect of the dividend declared and paid out of profits exempt under section 80J of the Income-tax Act, 1961 ?"
2. In this connection, the relevant provisions of the Finance Act, 1968, are as follows :
"THE FIRST SCHEDULE (see section 2) PART I Paragraph F
3. In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), -
Rates of income-tax I. In the case of a domestic company -
(A) (1) where the company is a company in which the public are substantially interested, -
(i) in a case where the total income 45 per cent. of the total
does not exceed Rs. 50,000 income;
(ii) in a case where the total 55 per cent. of the total
income exceeds Rs. 50,000 income;
(2) where the company is not a company
in which the public are substantially
interested, -
(i) in the case of an industrial
company -
(1) on so much of the total income 55 per cent.;
as does not exceed Rs. 10,00,000
(2) on the balance, if any, of the 60 per cent;
total income
(ii) in any other case 65 per cent. of the total
income; and
(B) in addition where the company is -
(i) a company in which the public
are substantially interested, or
(ii) a company as is referred to in
clause (iii) of sub-section (2) or clause
(a) or clause (b) of sub-section (4) of
section 104 of the Income-tax Act, or
(iii) such a company as is exempt
from the operation of section 104 of the
said Act by a notification issued under
the provisions of sub-section (3)
of that section,
on so much of total income as 7.5 per cent.
does not exceed the relevant amount
of distributions of dividends by the
company
4. Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000, shall not exceed the aggregate of -
(a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and
(b) 80 per cent. of the amount by which its total income exceeds Rs. 50,000.
Explanation 1. - In clause (B), the expression 'the relevant amount of distributions of dividends' means the aggregate of the following amounts, namely :-
(a) the amount, if any, by which the 'relevant amount of distributions of dividends' by the company as computed in accordance with explanation 1 to item I of Paragraph F of Part I of the First Schedule to the Finance (No. 2) Act, 1967 (20 of 1967), exceeds its total income (reduced by the amount of capital gains, if any, relating to capital assets other than short-term capital assets included therein) assessable for the assessment year commencing on the 1st day of April, 1967; and
(b) so much of the amount of the dividends, other than dividends on preference shares, declared or distributed by the company during the previous year as exceeds ten per cent. of its paid-up equity share capital as on the 1st day of the previous year."
Thus, Paragraph F of Part I of Schedule I to the Finance Act, 1968, prescribes rates of income-tax in respect of the total income of a domestic company. Sub-Paragraph I(B) prescribes an additional income-tax of 7.5 per cent. on a certain portion of the total income of the company. The relevant provision, for our present purposes, provides that this 7.5 per cent. of additional income-tax is to be levied on so much of the total income as does not exceed "the relevant amount of distributions of dividends" by the company. This obscure phrase "the relevant amount of distributions of dividends by the company" is explained in Exploitation 1. The Explanation sets out what this clause means. It means the aggregate of the two amounts which are set out in sub-clauses (a) and (b) of that Explanation. We are concerned with sub-clause (b). This refers to so much of the amount of the dividend (excluding dividend on preference shares), declared or distributed by the company which exceeds ten per cent. of its paid-up equity share capital on the first day of the previous year. Therefore, in the present case, the relevant amount of distribution of dividend by the company will refer to the sum of Rs. 3,90,000 which is arrived at by deducting from the total dividends declared by the company during the assessment year, viz. Rs. 6,90,000 a sum of Rs. 3,00,000 which is ten per cent. of the paid-up equity share capital of the company which was Rs. 30,00,000 at the relevant date. Therefore, under Paragraph I (B), additional income-tax of 7.5 per cent. is attracted in the present case on so much of the total income of the assessee-company as does not exceed Rs. 3,90,000. The recomputed income of the company for the relevant assessment year is Rs. 22,74,197. Out of this total income, therefore, additional income-tax is payable at the rate of 7.5 per cent. on Rs. 3,90,000. This is on a plain reading of the relevant provisions of the Finance Act, 1968, which are underlined above.
5. It was, however, contended by the assessee that the additional income-tax is levied on the excess dividend declared by the company. Since this excess dividend is exempt from payment of income-tax under section 80J of the Income-tax Act, 1961, no additional income-tax can be levied on the dividend. The argument, however, proceeds on a wrong basis, namely, that the additional income-tax is levied on excess dividend. Paragraph I(B), however, clearly provides that the additional income-tax is levied not on the excess dividend declared by the company, but on a portion of the total income of the company. This portion of the total income has to be determined with reference to the excess dividend declared by the company. The income-tax, however, is not levied on such excess dividend. The income-tax is levied on so much of the total income as does not exceed the excess dividend. For example, if in a given case, the total income of the company happens to be less than the excess dividend so declared, the additional income-tax would be levied only on the total income and not on the full amount of the excess dividend. This is where clause (a) of Explanation 1 would come into the picture. It provides that if the relevant amount of distributions of dividends for any given assessment year exceeds its total income, the excess amount can be added-to the relevant amount of excess dividend in the following assessment year for the purpose of determining the quantum of total income on which additional income-tax is to be levied in the subsequent assessment year. The question, there-fore, as to whether the dividend was declared out of any amount exempted under section 80J of the Income-tax Act, 1961, or not, does not have any relevance.
6. We would also like to refer in this connection to the provisions of the Income-tax Act, 1961. Under section 2(45) of the Income-tax Act, 1961, "total income" is defined to mean the total amount of income referred to in section 5, computed in the manner laid down. Section 5 defines "scope of total income". Chapter III which follows thereafter deals with "incomes which do not form part of total income". After the total income is determined in accordance with these provisions Chapter VI-A provides for certain deductions which can be made in computing the total income. Section 80A which is the first section in Chapter VI-A provides that in computing the total income of the assessee, there shall be allowed from his gross total income, deductions specified in sections 80C to 80U. Therefore, a deduction under section 80J is an additional deduction from the total income of the assessee. The profits which are exempted under section 80J, therefore, form a part of the total income of the company as defined in section 2(45). But these are deducted under section 80J for the purposes of levy of income-tax. Therefore, for the purpose of levy of additional income-tax, we have to look to the total income of the assessee. Only the extent of such total income on which additional income-tax has to be levied has to be determined with reference to Explanation 1, sub-Paragraph I(B) of Paragraph F of the Finance Act, 1968.
7. In this connection, we may refer to the decision of the Madras High Court in the case of Madurai District Central Co-operative Bank Ltd. v. Third ITO [1969] 73 ITR 479. In that case the Madras High Court held that merely because the business income of a co-operative society was exempt from tax under section 81 of the Income-tax Act, 1961, the income did not cease to be a part of the total income of the assessee for the previous year. Because, before exemption from tax is claimed, the income with reference to which the claim is made must necessarily be part of the total income of the previous year. The same ratio would apply to profits which are exempted from tax under section 80J of the Income-tax Act, 1961.
8. Our attention was drawn in this connection to a decision of the Supreme Court in the case of CIT v. Jalgaon Electric Supply Co. Ltd. [1960] 40 ITR 184. The decision of the Supreme Court, however, is based on an interpretation of the Finance Act of 1949 and the Finance Act of 1950. The scheme of both these Acts was somewhat different. Under Paragraph B of Part 1 of the Third Schedule to the Finance Act, 1949, the additional income-tax was payable if the dividends in excess of the limit fixed by the Legislature were paid in any year. The additional income-tax was payable on the excess dividends calculated at a different rate, but allowing for the tax already paid. The Act provided that the excess dividend shall be deemed to be out of the while or such portion of the undistributed profits of one or more years preceding the previous year as would be just sufficient to cover the amount of the excess dividend and the excess dividends which were so deemed to be the undistributed profits of each of the previous years were deemed to have borne the tax. The Supreme Court said that the fictions which have been introduced postulate that there should be undistributed profits of one or more years immediately preceding the previous year. Where there are no profits of any preceding year or years, the fiction would fail and the method of calculation would also, therefore, fail. Hence, in such a case additional income-tax would not be payable.
9. The Finance Act, 1968, does not introduce any such fiction. Explanation 1 as set out above, merely provides a method of calculating the portion of the total income on which additional income-tax is payable. Therefore, the ratio of the Supreme Court judgment will not have any application to the present case. Similarly, the ratio of the decision of the Supreme Court in the case of CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. [1960] 40 ITR 189 which lays down that the additional income-tax charged in respect of dividends distributed in excess of the specified limit as set out in the First Schedule to the' Finance Act, 1951, is not a valid charge, also will not apply. As the Supreme Court observed in that case, under section 3 of the Income-tax Act, income-tax is a tax on the income of the previous year. It would not cover something which is not the income of the previous year, or made fictionally so. In that case the Supreme Court held that the Finance Act of 1951 did not levy any additional tax on the total income; because what was actually taxed was never a part of the total income of the previous year. Such is not the case here. The additional income-tax under the Finance Act, 1968, is levied on a part of the total income of the assessee. Levy of such tax is in consonance with the provisions of the Income-tax Act.
10. It is also contended by the assessee that the rectification proceedings under section 154 of the Income-tax Act, 1961, could not have been instituted in the present case. Not applying the provisions of the Finance Act, 1968, regarding levy of additional income-tax is not a mistake apparent on the record. This contention also does not appeal to us. The Income-tax Officer had clearly made a mistake in overlooking the provision relating to additional income-tax under the Finance Act, 1968, while making his assessment. This is a mistake which is apparent on the record. He has, therefore, rightly resorted to the proceedings under section 154 to rectify this mistake. The facts, in the present case, are not in dispute at all. There is no dispute that the dividend of Rs. 6,90,000 exceeds ten per cent. of the equity share capital of the company on the relevant date by a sum of Rs. 3,90,000. There is also no dispute that this excess dividend is declared out of profits which are exempted under section 80J of the Income-tax Act, 1961. The only dispute is whether the additional income-tax is attracted in such a case. In this dispute, the contention of the assessee, in our view, is without any merit looking to the language of the Finance Act of 1968 and its provision relating to the levy of additional income-tax. As we have pointed out earlier; the Income-tax Officer has rightly rectified the mistake under the provisions of section 154. In the case of ITO v. Asok Textiles Ltd. [1961] 41 ITR 732, the Supreme Court has held that the language used in section 154 is wider than under Order XLVII, rule 1 of the Civil Procedure Code. It is open to the Income-tax Officer to examine the record including the evidence and if he discovers any mistake he is entitled to rectify the error; and the error which can be corrected may be an error of fact or of law. In the present case, no argument is necessary in order to decide whether additional income-tax is attracted or not. The Income-tax Officer had clearly made a mistake in overlooking the provisions of the Finance Act, 1968, a mistake which is apparent from the record itself.
11. In the above case before the Supreme Court also, the company had declared excess dividend as a result of which it had become liable to pay additional income-tax. But this fact was overlooked by the Income-tax Officer in the original assessment. The Supreme Court said that this error can be rectified under section 154.
12. Our attention was also drawn to a Full Bench decision of the Gujarat High Court in the case of Sarangpur Cotton Manufacturing Co. Ltd. v. CIT [1985] 152 ITR 251. The Gujarat High Court was concerned with Schedule I, Part I, Paragraph F, item I(B) of the Finance Act, 1967. These provisions are similar to the provisions with which we are concerned. For the relevant assessment year, the income-tax Officer omitted to take into account the liability of the assessee to pay additional tax at 7.5 per cent. as the company had declared excess dividend. When the Income-tax Officer discovered the omission, he initiated rectification proceedings under section 154 of the Income-tax Act, 1961. The Gujarat High Court held that as there were no disputes regarding the figures and the calculations, this was a mistake which could be rectified under section 154 of the Income-tax Act, 1961. The same position is taken by the Supreme Court in the case of T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50. The Supreme Court, however, said that a mistake apparent on the record must be an obvious and a patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. Such is not the present case. The mistake is obvious and patent.
13. It has lastly been submitted by the Department that question No. 3 does not arise out of the order of the Tribunal. We, however, find that throughout the rectification proceedings the contention of the assessee has been that excess dividends have been declared and paid out of the profits exempted under section 80J of the Income-tax Act, 1961. This is referred to in the statement of the case also. Hence, this contention of the Department does not have any merit.
14. In the premises, we answer the questions referred to us as follows :
Question No. 1 is answered in the affirmative and in favour of the Revenue.
Question No. 2 is answered in the affirmative and in favour of the Revenue.
Question No. 3 is somewhat misleading because it assumes that additional tax as payable in respect of the dividends declared and paid out of the profits exempted under section 80J of the Income-tax Act, 1961. For the reasons which we have set out earlier, the additional income-tax is payable to the extent laid down in item I(B) of Paragraph F of Part I of the First Schedule to the Finance Act, 1968, on a portion of the total income of the assessee. For the reasons which we have set out above, the Tribunal was correct in holding that the additional income-tax was payable on a portion of the total income determined with reference to excess dividends declared and paid out of profits exempted under section 80J of the Income-tax Act, 1961.
15. The questions are answered accordingly.
16. No order as to costs.