Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Vazir Sultan Tobacco Co. Ltd. on 11 February, 1992
Equivalent citations: [1995]212ITR624(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. At the request of the Commissioner of Income-tax, A. P. I., Hyderabad, the Income-tax Appellate Tribunal, Hyderabad, referred the following questions under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, amounts standing under 'capital redemption reserve' are includible in computing the capital base ?
2. Whether, on the facts and in the circumstances of the case, gross dividends are deductible in arriving at the chargeable profits but not the net dividends ?"
2. In so far as the first question is concerned, it is represented by learned counsel for the parties that it is covered by the judgment of this court in the case of the assessee for an earlier year in CIT v. Vazir Sultan Tobacco Co. Ltd. . The question is, therefore, answered in favour of the assessee and against the Revenue.
3. Regarding the second question it would be useful to refer to the facts giving rise to this question. The assessee-company receives what is commonly known as intercorporate dividends. For the assessment years 1978-79 and 1979-80, the assessee sought deduction of the gross amount of dividends received by it from other companies in computing chargeable profits under the Companies (Profits) Surtax Act, 1964 (for short, "the Surtax Act"). The Income-tax Officer did not accept the contention and allowed the deduction of only net dividends. On appeal by the assessee, the Commissioner of Income-tax (Appeals) accepted the assessee's claim for deduction of the gross dividends. Dissatisfied with the order passed by the Commissioner of Income-tax (Appeals), the Commissioner filed an appeal before the Tribunal, which was dismissed and at the instance of the Revenue the abovesaid questions were referred for our opinion.
4. The profits of the assessee-company are assessable under the Surtax Act. Section 4 of the said Act provides that on the from the 1st day of April, 1964, surtax shall be charged on every company for every assessment year in respect of so much of its chargeable profits of the previous year or years which exceed the statutory deduction, at the rate specified in the Third Schedule. The chargeable profits under the Surtax Act have to be computed in accordance with the Rules (hereinafter referred to as "the Surtax Rules") contained in the First Schedule. Rule 1(viii) of the Surtax Rules is relevant for our purpose and it will be apt to read the said provision here :
"RULES FOR COMPUTING THE CHARGEABLE PROFITS In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :
1. Income, profits and gains and other sums falling within the following clause shall be excluded from such total income, namely :-
(viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India."
5. Before embarking upon an interpretation of this rule, it would be useful to keep in mind the principles laid down by the Supreme Court in Distributors (Baroda) Pvt. v. Union of India . In that case, their Lordships of the Supreme Court were construing the provisions of sections 80A(2), 80AA and 80M of the Income-tax Act, 1961. Their Lordships observed (at page 130) :
"It is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different."
6. The principle governing deduction of inter-corporate dividends with reference to section 80M of the Income-tax is elucidated thus (at page 134) :
"Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting section 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed with the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee."
7. Now, keeping in view the above principles, we shall read the rule under consideration.
8. A perusal of the rule, extracted above, shows that income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India has to be excluded from the total income of the company in computing the chargeable profits of the previous year. In other words, the total income computed for the previous year has to be adjusted by excluding income received by way of dividends from any Indian company. This takes us to the moot point whether the amount of gross dividends or the net dividends, received by the assessee-company, has to be excluded. In arriving at the total income of a company including the income under the head "Dividends", we have to see what went into the computation. Is it the net amount of dividend after allowing the deductions permissible under the Income-tax Act or is it the gross dividends ? While calculating the total income the amount of net dividend was added and that is what is required to be adjusted.
9. It is open to the Legislature to provide for deduction of gross dividends or net dividend or any portion of gross or net dividend. The intention of the Legislature is to be found in the expression of the rule. The rule says that the total income has to be adjusted by excluding the dividends. Naturally what has to be excluded is the amount which has gone into computation and not the amount which is over and above the quantum taken into computation for purposes of arriving at the total income. The Supreme Court has observed that the intention which could be attributed to the Legislature is avoidance of double taxation and that it is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. Therefore, on a consideration of the language of the abovesaid rule 1(viii), we are clear in our mind that the real intention of the rule-making authority is to see that the amount of dividends which has already suffered tax should not be taxed again. The gross amount of dividend has already suffered tax. Now, for the second time that whole amount is not taken into consideration, but only the amount of net dividend computed in accordance with the provisions of the Income-tax Act, is taken in arriving at the total income. Therefore, the whole amount cannot be said to be suffering tax for the second time. It is only that portion of the dividend which has gone into computation for purposes of arriving at the total income which would be suffering tax. It is for this reason that the net amount alone is liable to be excluded for purposes of arriving at the total income exigible to tax under the Surtax Act.
10. Sri Ratnakar, learned counsel for the assessee, strenuously contends, relying on the judgment in Mohan Meakin Breweries Ltd. v. CIT (No. 2) , that the gross dividends should be excluded. In that case, a Division Bench of the Himachal Pradesh High Court observed that they would have been inclined to take the view taken by the Gujarat High Court in CIT (Addl.) v. Cloth Traders (P.) Ltd. , had they been called upon to interpret section 85A of the Income-tax Act, 1961, which was the subject-matter of consideration before the Gujarat High Court; but as they were concerned with rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act and the language in that provision was different from section 85A of the Income-tax Act, 1961, therefore, they took the view that the total income computed for that year under the Income-tax Act had necessarily to be adjusted by exclusion of net dividend and not gross dividend. Shri Ratnakar, however, contends that because the judgment of the Gujarat High Court in CIT (Addl) v. Cloth Traders (P.) Ltd. which was dissented from by the High Court of Himachal Pradesh, has been reversed by the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT , the amount of gross dividend should be held as deductible. We are afraid, we cannot accept the contention of learned counsel for the assessee. Firstly, because the judgment of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT was itself reversed by the Supreme Court subsequently in Distributors (Baroda) Pvt. Ltd. v. Union of India and, secondly, because the Gujarat High Court on interpretation of the very same provision which falls for our consideration, came to the conclusion that it is only the net dividends that are excludible for purposes of computing the income under rule 1(viii) of the Surtax Act.
11. We may also refer to the judgment of a Division Bench of the Calcutta High Court in CIT v. Hindustan Gum and Chemicals Ltd. , wherein the same provisions of the Surtax Act fell for consideration of that court. After considering the judgment of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT and Distributors (Baroda) Pvt. Ltd. v. Union of India (SC), the learned judges came to the conclusion that the assessee drawing dividend from an Indian company was not entitled to exclusion of gross dividend amounts and only the net dividend, after deduction of the amount allowed under section 80M of the Income-tax Act, 1961, would be deductible. The judgment of the Calcutta High Court was followed by a Division Bench of the Kerala High Court in CIT v. Kil Kotagiri Tea and Coffee Estates Ltd. . In the said case also the very same provision of the Surtax Act, viz., rule 1(viii) of the First Schedule was under consideration of the learned judges. In answering the question whether the Tribunal was right in law in holding that the entire dividend was to be excluded from the income assessed in rule 1(viii) of the First Schedule, the learned judges answered the question in the negative holding that whatever has not been included, cannot be excluded and the amount of dividends which is included in the total income after allowing all permissible deductions including the deduction under section 80M of the Income-tax Act, can only be excluded.
12. Learned counsel next contends that the Explanation to rule 1(viii) of the Surtax Act was added by the Finance Act of 1981, with effect from April 1, 1981, and, therefore, it must be understood that the law before the insertion of the Explanation must have been different. This contention is untenable.
13. There is no doubt that the Explanation was inserted from April 1, 1981, and it provides that the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VI-A, the amount of such income or profits and gains should be computed as aforesaid as reduced by the amount of such deduction. In other words, the Explanation provides that what is deductible in computing the income under different categories mentioned in the different clauses of rule 1, is only the net income. This does not mean that the Explanation lays down a different criterion than what is contained in the different clauses of rule 1 of Schedule I. The Explanation is only declaratory of the meaning of the clauses and the rule. Further, in Distributors (Baroda) Pvt. Ltd. v. Union of India , section 80AA of the Income-tax Act 1961, which was inserted with retrospective effect from April 1, 1968, was questioned before the Supreme Court as unconstitutional on the ground of enhancing tax liability of the petitioner therein with retrospective effect, going back for a period of 12 years; it is also attacked as unreasonable and violative of the right of the petitioner to carry on its business infringing article 19(1)(g) of the Constitution of India. The Supreme Court held the impugned section declaratory of law and in that view of the matter their Lordships did not go into the question of the constitutional validity of the said provision. Our view also finds support from the judgment of our High Court in CIT v. Andhra Bank Ltd. , wherein a Division Bench of this court observed that rule 1 in the First Schedule should be considered as declaratory.
14. From the above discussion it follows that the Tribunal was not right in allowing the amount of gross dividend from the total income for purposes of computing the income under rule 1(viii) of the Surtax Act. We answer the above question in the negative, that is in favour of the Revenue and against the assessee.
15. The R. C. is accordingly answered. No costs.