Rajputana Agencies Ltd vs Commissioner Of I. T., Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 91 of 1957

Decision Date: 09/10/1958

Coram: P.B. Gajendragadkar, A.K. Sarkar

In the matter titled Rajputana Agencies Ltd. versus Commissioner of Income Tax, Bombay, decided on 9 October 1958, the Supreme Court of India, with Justice P. B. Gajendragadkar presiding and Justice A. K. Sarkar also on the bench, addressed a dispute concerning the assessment of a private limited company incorporated in Saurashtra. The company, Rajputana Agencies Ltd., was assessed for the assessment year 1952‑53 on a total income of Rs 26,385. According to the statutory rate prescribed in paragraph 8 of the Income‑Tax Act, the tax rate applicable to its total income was four annas per rupee. However, because of the provisions contained in the Part B States (Taxation Concession) Order, 1950, the actual rate at which the tax was levied on the company was reduced to sixteen pies per rupee, which is equivalent to one‑quarter of an anna.

The appellant had declared a dividend amounting to Rs 30,000. Of this dividend, Rs 15,159 was determined by the Assessing Officer to be in excess of the statutory limit permissible under the Act. The excess dividend was therefore subject to an additional income‑tax liability. The principal issue before the Court was the rate that should be applied to compute this additional tax. Clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Finance Act, 1951, which was applicable to this case, stipulated that the additional income‑tax on the excess dividend must equal the shortfall between the aggregate amount of income‑tax actually borne by the excess dividend and the amount that would have been calculated at the rate of five annas per rupee on that excess dividend.

Further, sub‑clause (b) of clause (ii) to the second explanation to the proviso to paragraph B provided that the aggregate amount of income‑tax actually borne by the excess dividend should be determined “at the rate applicable to the total income of the company.” The appellant argued that this phrase referred to the rate prescribed by paragraph 8 of the Act—four annas per rupee—and not to the reduced rate that had been practically applied under the concession order. Based on that interpretation, the company claimed that the additional tax on the excess dividend should be calculated at the lower rate of one anna per rupee.

The Court examined the language of the provision and held that the expression “rate applicable to the total income of the company” denoted the rate that was actually applied to the company’s total income for the relevant year, rather than the statutory rate fixed in the Act. Accordingly, the Court concluded that the appropriate rate for computing the additional tax was the rate by which the actual assessment rate (sixteen pies per rupee) fell short of the rate of five annas per rupee, which worked out to forty‑four pies per rupee. Consequently, the Court affirmed that Rajputana Agencies Ltd. was correctly charged at the rate of forty‑four pies per rupee for the excess dividend, and it was liable to pay the additional income‑tax calculated on that basis.

The Court noted that the expression “to the rate prescribed by the Act for the relevant year generally in reference to incomes of companies” was discussed in the earlier decision of Elphinstone Spinning and Weaving Mills Co. Ltd. v. Commissioner of Income‑tax, Bombay City, reported in 1955 28 I.T.R. 81. The present matter concerned Civil Appeal No. 91 of 1957, which was filed against the judgment and order dated 29 March 1956 of the Saurashtra High Court at Rajkot, issued in Civil Reference No. I of 1955. Counsel for the appellant presented arguments on behalf of Rajputana Agencies Ltd., while counsel for the respondent represented the Commissioner of Income‑tax. The appeal was heard on 9 October 1958 and the judgment was delivered by Justice Gajendragadkar.

The factual background was that the appellant, Rajputana Agencies Ltd., a private limited company located at Lavanpur, was assessed for the assessment year 1952‑53, which corresponded to the Marwadi year ending in October 1951. The Income‑tax Officer of the Morvi Circle assessed the company’s total income at Rs 26,385 and therefore levied income‑tax and super‑tax on that amount. The company had declared a dividend of Rs 30,000. The officer held that Rs 15,159 of that dividend constituted excess dividend. Consequently, the officer calculated additional tax on the excess dividend at the rate of forty‑four pies in a rupee, resulting in an additional tax liability of Rs 3,473‑15‑0. This assessment order was dated 25 November 1952.

The appellant filed an appeal before the Appellate Assistant Commissioner of Income‑tax at Rajkot. That appellate authority reduced the additional tax liability to Rs 2,084‑12‑0 in an order dated 29 August 1953. The appellant subsequently appealed this reduced assessment to the Income‑tax Appellate Tribunal in Bombay. The tribunal affirmed the appellate authority’s order on 27 November 1954. Thereafter, the appellant invoked section 66(1) of the Income‑tax Act and moved the appellate tribunal for further relief. The tribunal, by an order dated 25 April 1955, referred two questions to the Saurashtra High Court for determination. The present appeal before this Court concerns the second of those two questions.

The question framed by the tribunal asked whether the phrase “at the rate applicable to the total income of the company” occurring in sub‑clause (b) of clause (ii) to the second explanation to the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1952, should be interpreted to mean the rate at which the company’s total income is actually assessed, or alternatively the rate prescribed by the Finance Act without accounting for any rebate allowed under the Part B States (Taxation Concessions) Order, 1950 (referred to as the Order). Section 2 of the Finance Act, 1952, made clear that the provisions of section 2 of, and the First Schedule to, the Finance Act, 1951, were to apply to the assessment year 1952‑53 with the necessary year‑wise substitutions, thereby bringing the material provisions of the Finance Act, 1951, into consideration for this case.

Section 2 of the Finance Act, 1952, was intended to apply to income‑tax and super‑tax for the financial year 1952‑53 in the same manner as it applied to those taxes for the financial year 1951‑52, with the sole alteration that wherever the years 1950, 1951 and 1952 appeared in the provisions, they were to be replaced respectively by 1951, 1952 and 1953. Consequently, the dispute in the present proceedings ultimately concerned the substantive provisions of the Finance Act, 1951, which the judgment thereafter refers to simply as “the Act”. The High Court, by its judgment delivered on 29 March 1956, answered the question framed by the tribunal and held that the expression “ at the rate applicable to the total income of the company ” meant the rate at which the company’s total income was actually assessed. Following that decision, the appellant applied to the High Court for a certificate under Article 133(1)(c) of the Constitution read with section 66A(2) of the Income‑Tax Act, seeking a certification that the matter was fit for appeal to this Court. The certificate was granted, and on its basis the present appeal was instituted before this Court. The only issue that the Court was asked to consider concerned the proper construction of the expression “ at the rate applicable to the total income of the company ” as it appears in the relevant provision of the Act.

The appellant did not dispute that it was liable to pay the additional income‑tax imposed under clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Act; rather, the dispute centred on the rate at which that additional tax should be computed. In the relevant assessment year, the appellant had paid income‑tax on its total income at the rate of sixteen pies in a rupee, a rate that was determined according to the computation prescribed in paragraph 6 of the Order. The appellant argued that the rebate to which it was entitled under the Order was irrelevant for determining the rate applicable to the additional tax. In contrast, the respondent contended that the additional tax must be calculated at the rate at which the appellant’s income had actually been assessed, and therefore the rebate granted under the Order must be taken into account when fixing that rate. For the sake of clarity, it is necessary to refer to the provisions of the Order under which the appellant, as a company carrying on business in Saurashtra, had obtained a rebate. By that Order, the Central Government exercised the powers conferred by section 60A of the Income‑Tax Act to grant exemptions, reduce the rate of tax and make other modifications. The Order applied to the Part ‘B’ states, which comprised all Part ‘B’ states except the State of Jammu and Kashmir.

In the year 1949‑50, sub‑clause (3) of paragraph 5 defined the State assessment year 1949‑50 as the assessment year that began on any date between 1 April 1949 and 31 December 1949. The Court noted that it was not required to consider the remaining provisions of that paragraph. Paragraph 6(iii) was the provision that applied to the case at hand. The effect of paragraphs 6(1), (ii) and (iii) was explained as follows: for the portion of income, profits and gains that accrued or arose in any State other than the States of Patiala and East‑Punjab States Union and Travancore‑Cochin, the tax was to be computed in two ways. First, the tax was to be calculated at the Indian rate of tax, and second, the tax was to be calculated at the State rate of tax that was in force immediately before the appointed day. If the amount of tax computed under the Indian rate (sub‑clause (a) of clause 1) was less than or equal to the amount of tax computed under the State rate (sub‑clause (b) of clause 1), then the tax payable was the amount computed under the Indian rate. Conversely, if the tax calculated under the Indian rate exceeded the tax calculated under the State rate, the excess was to be allowed as a rebate against the Indian‑rate tax, and the reduced Indian‑rate amount became the tax payable. Accordingly, under sub‑clause (iii) the tax levied on the appellant was not simply the amount computed at the Indian rate; it represented the difference between the Indian‑rate calculation and the State‑rate calculation, with the excess being deducted as a rebate. In other words, the Indian rate prescribed by the Act did not alone determine the tax liability for the relevant year.

The Court observed that it was well known that when various Part ‘B’ States were merged with adjacent States or Provinces and became taxable territories under the Income‑tax Act, the Indian rate of tax was introduced in phases, and rebates on a graduated scale were allowed to assessors under the provisions of the Order. It was accepted as common ground that the appellant had been entitled to, and had actually received, a rebate under sub‑clause (iii) of paragraph 6 of the Order, resulting in his total income being taxed at a rate of sixteen pies in a rupee. The point for determination, the Court said, was whether that rebate should be taken into account in fixing the rate at which the additional income‑tax was to be imposed on the appellant under the relevant provisions of the Act. The Court then turned to the relevant statutory provisions, beginning with Section 3 of the Income‑tax Act, which is the charging section and provides that when any Central Act provides that income‑tax shall be charged for any year at any rate or rates, the tax at that rate or those rates shall be charged for that year in accordance with, and subject to, the provisions of this Act in respect of the total income of the previous year of the assessee.

Section 3 of the Income‑tax Act stipulated that tax for a particular year must be levied, in accordance with, and subject to the provisions of, this Act, on the total income of the assessee for the preceding year. Consequently, when the tax authority assesses income‑tax on the assessee’s total income, the rate to be applied is the one prescribed by the Act for that fiscal year. Section 2 further provided that, except as modified by subsections (3), (4) and (5), income‑tax shall be charged at the rates specified in Part I of the First Schedule. Sub‑section (7) clarified that, for the purposes of this section and the rates it contains, the term “total income” means the total income determined under the Act for either income‑tax or super‑tax, as the situation requires. Accordingly, the Court turned to the First Schedule to discover the rate applicable to the appellant. Paragraph B of that Schedule deals specifically with companies and states that, for every company, the tax on the whole of total income is levied at the rate of four annas in a rupee. A proviso follows paragraph B, and the clause requiring interpretation in the present appeal appears in the explanation to clause (ii) of that proviso. The proviso addresses a company which, with respect to its profits liable to tax for the relevant year, has made the prescribed arrangements for declaring and paying dividends within the territory of India, excluding the State of Jammu and Kashmir, and has deducted the super‑tax from those dividends in accordance with sub‑section (3D) or (3E) of section 18. In this context the proviso sets out two alternatives. First, sub‑clause (i) provides that where the total income, after being reduced by seven annas in a rupee and by any amount exempt from income‑tax, exceeds the amount of any dividends (including fixed‑rate dividends) declared for the whole or part of the previous year for the assessment year ending on 31 March 1951, and where no order has been made under subsection (1) of section 23A, a rebate of one anna per rupee is allowed on the excess amount. Second, sub‑clause (ii) states that where the amount of dividends declared under clause (i) exceeds the total income reduced by seven annas in a rupee and any exempt amount, an additional income‑tax is to be charged on the total income equal to the shortfall, if any, between the aggregate tax actually borne on that excess dividend and the tax that would have been payable at a rate of five annas per rupee on the excess dividend.

It was apparent that the legislature had introduced the proviso with the purpose of urging companies to retain a portion of their earnings for reinvestment in the business rather than to allocate overly large portions of profit to shareholders by declaring dividends that were unreasonably high. To give effect to this purpose, the legislature offered companies an inducement in the form of a tax rebate. According to the provision, a company that distributed dividends not exceeding roughly nine annas for every rupee of profit that was identified as distributable qualified for a rebate of one anna, and the rebate was available to the extent that the dividend actually paid was less than the amount classified as distributable. Conversely, when a company paid a dividend that exceeded the specified distributable amount, it was not entitled to claim any rebate; instead, the company became liable to pay an additional income‑tax as mandated in clause (ii) of the proviso. In other words, the legislative intention was that companies should declare a reasonable dividend that would attract capital investment, while simultaneously ensuring that part of the profit was retained within the industry rather than being distributed excessively. The rebate provision was therefore crafted to promote this balanced approach. The Court observed that, besides the rebate the appellant had already received under the relevant order, the appellant would also have been eligible for the rebate under paragraph B, sub‑clause (1) of the proviso, had the dividend it declared not exceeded the prescribed distributable limit. Because the appellant’s dividend did exceed that limit, the appellant was consequently required to pay additional income‑tax on the excess dividend in accordance with clause (ii) of the same proviso. Clause (ii) states that the appellant shall be charged on its total income an additional tax equal to the amount, if any, by which the aggregate tax actually borne by the excess dividend falls short of the tax computed at the rate of five annas per rupee on that excess dividend. This clause raised the issue of how to determine the aggregate tax actually borne by the excess dividend, and to resolve this, an explanatory note was added. The explanation specified that, for the purposes of clause (ii), the aggregate tax shall be ascertained by first deeming the excess dividend to have arisen out of the whole or a portion of the undistributed profit of one or more years immediately preceding the previous year, to the extent necessary to cover the excess amount, and that such portion shall not have been previously used to cover an excess dividend of an earlier year.

Clause (ii) of the proviso provides that the part of the excess dividend which is deemed to arise from the undistributed profits of each relevant year shall be treated as having borne tax in two different situations. First, if an order has been issued under sub‑section (1) of section 23A of the Income‑tax Act with respect to the undistributed profits of that particular year, the tax is deemed to have been paid at the rate of five annas in the rupee. Second, for any other year, the tax is deemed to have been paid at the rate that is applicable to the total income of the company for that year, after reducing that rate by the amount of any rebate that may have been allowed on the undistributed profits. Clause (1) of the explanation defines what is to be regarded as the excess dividend and sets out the method of its determination. Clause (ii) then specifies how the portion of the excess dividend, deemed to be drawn from the undistributed profits of each of the years mentioned, is to be treated as having borne tax. Sub‑clause (a) of clause (ii) deals with cases where a section‑23A order exists and the tax rate of five annas per rupee applies. The present appeal does not concern sub‑clause (a). The matter before the Court is sub‑clause (b) of clause (ii) of the explanation to the proviso to paragraph B, which is the portion that requires determination in the instant proceedings.

The appellant argues that the expression “at the rate applicable to the total income” should be understood to refer to the rate prescribed by paragraph B of the Act, rather than the rate that was in fact levied on the company’s income. The High Court rejected this contention, holding that the appellant’s interpretation was erroneous. The appellant maintains that, because fiscal statutes must be strictly construed, the words “at the rate applicable to the total income of the company” should be given a literal meaning. In contrast, the Court notes the observation of Maxwell that modern decisions tend to narrow the distinction between a strict construction and a beneficial one. The term “rate applicable” may therefore be understood in two ways: either as the statutory rate set out in paragraph B, or as the rate that was actually applied after taking into account the relevant statutory provisions. The ordinary grammatical meaning of “applicable” is “capable of being applied” or “appropriate.” Determining which rate is appropriate requires consideration of all pertinent provisions of the statute. Consequently, the Court is inclined to interpret the phrase as referring to the rate that was in fact applied to the total income of the company for the relevant year. When the clause is read in its entirety and each word is given its plain grammatical meaning, the construction does not present any difficulty. It follows that the reference to “the rate applicable” must be understood as the rate that actually applied to the company’s total income for the year in question.

In this portion of the judgment the Court explained that the phrase “the rate applicable” referred to the particular rate which had actually been applied to the taxable income of the company for the year in question, and not to the general rate that the statute prescribed for all companies in that year. Accordingly, when the department sought to calculate the total income‑tax that was really borne by an excess dividend, it had to consider the rate that had been used in the specific assessment of the company’s income for that year. The Court emphasized that the interpretation of “the rate applicable” could not be detached from the surrounding context, because the surrounding words were intended to clarify what should be understood as “the tax actually borne.” If the legislature had meant that the tax actually borne should always be measured by the generic rate prescribed for companies, the detailed explanation contained in the clause would have been unnecessary. Therefore, the Court found that the context supported a construction in which “the rate applicable” meant the actual rate in force for the particular assessment.

The Court further pointed out that sub‑clause (b) itself reinforced this meaning, because it required that the relevant rate be reduced by the rate of any rebate allowed on undistributed profits. To work out the rate under sub‑clause (b), it was necessary to account for the rebate that might have been granted to the company under element (1) of the proviso to paragraph B. Consequently, the rate could not simply be the rate prescribed in paragraph B; it had to be that prescribed rate less the rebate rate specified in the proviso. This demonstrates that, in such situations, “the rate applicable” meant the rate obtained after deducting the rebate from the statutory rate. The Court concluded that, at least in these instances, the words signified the rate that was actually applied. If this interpretation was correct for those cases, it must also apply universally, because the same words could not be given two different meanings within the same clause. The Court also observed that the provision concerning additional income‑tax was intended as a penalty for paying dividends beyond the statutory distributable limit. The prescribed method for computing the additional tax required first calculating the amount at the rate of five annas per rupee on the excess dividend and then deducting from that amount the tax actually borne, as determined by the rate actually applied.

The Court observed that, for the purpose of computing the additional tax, the first step was to determine the aggregate amount of income‑tax that had actually been borne by the excess dividend; the balance after that calculation was identified as the amount of additional income‑tax that could be levied against the company. The Court then noted that, under the prescribed method, if the rebate allowed by clause (1) of the proviso to paragraph B must be deducted from the rate prescribed, it would be difficult to understand why a rebate granted under paragraph 6(iii) of the Order should be treated differently and not also be deducted. Accordingly, the Court held that the expression “rate applicable” in sub‑clause (b) of clause (ii) of the explanation, read together with clause (ii) of the proviso to paragraph B of Schedule I of the Act, must be interpreted to mean the rate that was actually applied in the particular case. Applying that construction, the Court explained that the rate at which the appellant was liable to pay the additional income‑tax would be the difference between the statutory rate of five annas per rupee and the rate of sixteen pies per rupee at which the appellant had in fact paid income‑tax for the relevant year. In other words, the additional income‑tax would be payable at a rate of forty‑four pies per rupee. The Court further referred to the judgment of the High Court of Saurashtra, which had approved the decision of the Bombay High Court in Elphinstone Spinning and Weaving Mills Co., Ltd. v. Commissioner of Income‑tax, Bombay City (1). In that earlier case, Chief Justice Chagla C. J. and Justice Tendolkar had held that where a company had no taxable income for the assessment year 1951‑52 but paid dividends out of profits earned in earlier years, the company could not be subjected to additional income‑tax on the ground that it had paid an excess dividend within the meaning of the proviso to paragraph B of Part I of the Act. The present appeal did not concern that specific aspect. However, the learned judges in the earlier case had also interpreted the words “rate applicable” to signify the rate actually applied, and the Court found that observation supportive of the view adopted by the Saurashtra High Court in the present matter. Consequently, the appeal was dismissed with costs, and the order of dismissal was affirmed.