Full Judgment Text
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PETITIONER:
SUNDARAM & COMPANY (P.) LTD. MADURAI
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
25/04/1967
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
RAMASWAMI, V.
CITATION:
1968 AIR 124 1967 SCR (3) 798
ACT:
Income-tax Act, 1922 (11 of 1922), ss. 34(1)(b), 66-Finance
Act, 1956, proviso 2, Paragraph D-Notice to reopen
assessment on the ground of "excessive relief" but reduction
of rebate on super tax on the ground "assessed at too low a
rate"-Duty to enquire whether proceedings validly initiated-
"Rate" in s. 34(1) if means fraction of total income-
Reference-Duty to decide all aspects of the question of law
referred even though not specifically argued before the
Tribunal.
HEADNOTE:
The Income-tax Officer issued a notice to the assessee for
reopening the assessment for the year 1956-57 on the ground
that "excessive relief" within the meaning of s. 34(1)(b) of
the Income-tax Act, 1922 had been granted to the assessee.
Rejecting the contention of the assessee that the income had
not been the subject of "excessive relief" and therefore the
proceedings were unauthorised and that the amount deemed to
have been distributed under orders under s. 23A could not be
taken into consideration for the purpose of reducing the
rebate of super-tax admissible under proviso 2 to paragraph
D of the Finance Act, 1956, the Income-tax Officer ordered
that the rebate of super-tax granted be reduced. The
Appellate Assistant Commissioner held that only a part of
the amount of dividend deemed to have been declared by the
assessee could be taken into consideration in withdrawing
the rebate of super-tax. On appeal by the Commissioner, the
Tribunal held that the case of the assessee did not fall
within any of the situations contemplated by s. 34(1) (b),
but confirmed the order of the Appellant Assistant
Commissioner. On the question "whether the setting aside of
the assessment under s. 34(1) (b) was correct in law" the
High Court was of the opinion that the claim of the
department to initiate proceedings under s. 34(1)(b) on the
ground that excessive relief was allowed could not be
sustained, but held that the proceedings under the section
could be initiated on the ground that the income profits and
gains of the asses-see were " assessed at too low a rate".
The High Court did not ’record its decision on the plea of
the assessee that in a proceeding to re-assess income
initiated on a notice that income had been subject to
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"excessive relief", the Income-tax Officer was incompetent
to re-assess income on the footing that income was assessed
at too low a rate. In appeal to this Court the assessee
contended that (i) the High Court was in error in enlarging
the scope of the enquiry and entering upon a question never
mooted before the Tribunal and (ii) by the use of the
expression "assessed at too low a rate" it was intended that
the jurisdiction of the Income-tax Officer would be
attracted only when the wrong fraction had been applied in
the determination of super-tax and not when the computation
of tax depended on other factors.
HELD : (i) The case must be remanded to the High Court to
determine whether the proceedings were validly initiated on
the notice issued against the asscssee. [807B]
799
The scope of the enquiry arising out of the arguments before
the Tribunal was not whether the assessment was proper, but,
whether the Income-tax Officer was in the circumstances of
the case competent to initiate the proceeding under s. 34(1)
(b) of the Income-tax Act for bringing to tax the excessive
-rebate granted to the assessee. The question referred to
the High Court had to be reframed accordingly- The question,
as framed by the Tribunal, though defective, included that
enquiry. The High Court was, therefore, bound to decide all
aspects of that question and it was wrong in making the
assumption that because a particular aspect of the question
of law raised was not specifically argued before the
Tribunal the High Court could not deal with it. [S02D-E;
806F-H; 807A-B]
P. S. Sutbramanyan, Income-tax Officer, Companies Circle I
(1) and Anr. v. Simplex Mills Ltd. 48 I.T.R. 182 (S.C.),
referred to.
(ii) The High Court was right in holding that the rebate of
tax and the reduction of such rebate were essentially
matters of measure or Standards of rate. The expression
rate in s. 34(1) does not mean a fraction of total income;
it is often used in the sense of standard or measure.
Provided the tax is computable by the application of a
prescribed standard or measure, though not directly related
to taxable income, it may be said that the tax is computed
at a certain rate. The aim and object of the Finance Act,
1956, is to prescribe the standard or measure of income-tax
or super-tax, and an assessee escaping some of its
provisions and failing to pay the full measure of tax is
"assessed at too low a rate". [806B-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2453 of 1966.
Appeal from the judgment and order dated August 9, 1963 of
the Madras High Court in T.C. No. 152 of 1961.
R. Venkatram and R, Ganapathy Iyer, for the appellant.
B. Sen and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Shah, J. In Sundaram & Company (Private) Ltd.-hereinafter
called "the Company"-the public are not substantially
interested within the meaning of S. 23A of the Indian
Income-tax Act, 1922. In dealing with the assessment of
income of the Company for the assessment years 1946-47 to
1951-52, the Income-tax Officer, Central Circle, Madras,
passed orders under s. 23A of the Income-tax Act, 1922, and
directed that the total income of the Company as determined
in the years of assessment less tax payable be deemed to
have been distributed amongst the shareholders of the
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Company as on the relevant dates of the General Body
Meetings. The following table sets out the relevant details
800
Assessment Amount of divi- Date of order passed
year. dend deemed to under s. 23A deeming
have been dec- dividend to have
been declared.
lared.
1946-47 46,563 March 18,1952
1947-48 43,959 - do-
1948-49 47,829 - do-
1949-50 97,875 - do-
1950-51 92,591 - do-
1951-52 25,899 March 30, 1955
3,54,716
On July 7, 1955 the Company in a general meeting resolved
that the amount of Rs. 3,54,716/- which was under the orders
of the Income-tax Officer deemed to have been distributed as
;dividend amongst the shareholders pursuant to orders under
s. 23A of the Income-tax Act, be distributed as dividend to
the shareholders, and in pursuance of that resolution
proportionate part of the dividend due to each shareholder
was credited to his account.
The Income-tax Officer completed the assessment of the
Company for the year 1956-57 and determined Rs. 5,69,396/as
its total income. The Income-tax Officer computed the
supertax payable by the Company under the Finance Act, 1956,
at the rate of six annas and nine pies in the rupee of the
total income and granted a rebate at the rate of four annas
in the rupee in accordance with the provisions of Cl. D
proviso (i) (b) & (ii) ,of the Schedule to that Act.
Sometime thereafter the Income-tax Officer being of the
opinion that excessive relief had been granted to the
Company within the meaning of S. 34 (1) (b) of the Income-
tax Act, issued a notice on January 31, 1959 for reopening
the assessment for the year 1956-57. The Company filed its
return of income in compliance with the notice and contended
that the proceedings commenced by the, Income-tax Officer
were unauthorised, because the income of the Company had not
been the subject of "excessive relief" within the meaning of
S. 34(1)(b), and that actual distribution of dividends
already deemed to have been distributed in accordance with
the orders passed under s.’23A cannot be taken into
consideration for the purpose of reducing the rebate of
super-tax admissible under the proviso 2 to Paragraph D of
the Finance Act, 1956. The Income-tax Officer rejected the
contentions and ordered that the rebate of super-tax to the
extent of Rs. 80,978/- be withdrawn.
In appeal to the Appellate Assistant Commissioner it was
held that in the circumstances of the case, assessment could
be reopened under S. 34(1) (b) on the ground that the income
had’ been made the subject of "excessive relief", but only
Rs. 77,600/and not the whole amount of Rs. 3,54,716/- which
was deemed to be distributed under orders under s. 23A could
be taken into
801
consideration as dividend distributed by the Company during
the previous year relevant to the assessment year 1956-57.
The Commissioner of Income-tax appealed to the Income-tax
Appellate Tribunal. He, contended that in the circumstances
of the case the amount of Rs. 3,54,716/- was liable to be
taken into consideration for the purpose of withdrawing the
rebate of supertax admissible under the Finance Act, 1956.
The Tribunal held that the case of the Company "did not fall
within any of the situations contemplated by s. 34(1)(b)"
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and the Company’s income had not been the subject of
excessive relief as the rebate of super-tax originally
granted was out of the tax otherwise computable and not from
the assessed income. But the Tribunal confirmed the order
of the Appellate Assistant Commissioner directing that Rs.
77,600/- be taken into account in withdrawing rebate of
super-tax.
The Tribunal then referred three questions to the High Court
of Judicature at Madras :
"1. Whether the Tribunal was justified in disposing of ’the
appeal as it did.?
2. Whether the Tribunal was right in law in entertaining the
assessee’s contention relating to the applicability, of s.
34(1) (b) under Rule 27 of the Appellate Tribunal Rules ?
3. Whether the setting aside of ’the assessment under
s. 3 4 (I ) (b) was correct in law ? "
The High Court decided in favour of the Company on the first
two questions. In considering the third question the High
Court observed that the plea of the Company that re-
assessment proceedings under s. 34 (I) (b), on the ground of
"excessive relief cannot be initiated, must be accepted.
The Court then proceeded to consider whether allowance of
rebate to which the assessee was not entitled, did not
amount to assessing income at too low a rate, and observed
that "there can be no question that the rebate of tax rate
and a reduction of such rebate is essentially the arithmetic
of rate. Reading however the provisions of the Finance Act,
1956, as a whole in the perspective that its chief aim and
object is to prescribe the rate of income-tax and super-tax,
it seems to us that an assessee escaping some of its
provisions and failing to pay the full measure of tax is
assessed at too low a rate". The High Court accordingly
held that proceedings under s. 34(1) (b) could be initiated
when rebate in the payment of super-tax was -ranted to the
assessee without reducing it in the circumstances set out in
the second proviso to Part 11 of the First Schedule
Paragraph D in the Finance Act, 1956, on the ground that the
income, profits and gains of the Company were assessed to
tax
802
at too low a rate. The High Court answered the third
question in favour of the Commissioner. Against the order
passed by the High Court on the third question, this appeal
is preferred by the, Company. The Commissioner of Income-
tax has not challenged the correctness of the decisions on
Questions I & 2.
We are unable to agree with counsel for the assessee that
the first question raised an enquiry not only as to the
correctness of the procedure followed by the Tribunal, but
also to the right of the Income-tax Officer to initiate a
proceeding under S. 34(1) (b) to bring to tax rebate which
was not reduced. In terms, the first question relates to a
matter of procedure : and in the answer recorded to that
question it is not implied that the Income-tax Officer had
no power to initiate the proceeding under S. 3 4 ( 1 ) (b).
The third question raised by the Tribunal was defective.
The true scope of the enquiry arising out of the argument
before the Tribunal was not whether the order of assessment
was proper. but whether the proceeding for re-assessment was
properly initiated under S. 34(1) (b). That is how the High
Court also understood the question. We therefore re-frame
the question as follows :
"Whether the Income-tax Officer was in the
circumstances of the case competent to
initiate the proceeding under s. 34 (I) (b) of
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the Indian Income-tax Act for bringing to tax
the excessive rebate granted to the assessee
?"
Section 34(1) (b) of the Indian Income-tax Act, as it stood
at the relevant time, provided
"If-
(a)
(b) notwithstanding that there has been no
omission or failure as mentioned in clause (a)
on the part of the assessee, the Income-tax
Officer has in consequence of information in
his possession reason to believe that income,
profit% or gains chargeable to income-tax have
escaped assessment for any year, or have been
under-assessed, or assessed at too low a rate,
or have been made the subject of excessive
relief under this Act or that excessive loss
or depreciation has been computed,
he may in cases falling under clause (a) at
any time and in cases falling under clause (b)
at any time within four years of the end of
that year, serve on the assessee, or, if the
assessee is a company, on the principal
officer
803
thereof, a notice containing all or any of the
requirements which may be included in a notice
under subsection (2) of section 22 and may
proceed to assess or reassess such income,
profits or gains or recompute the loss or
depreciation allowance; and the provisions of
this Act shall, so far as may be, apply
accordingly as if the notice were a notice
issued under that sub-section
It was held by the High Court of Bombay in P. S. Subraman-
yan, Income-tax Officer, Companies Circle I (1) Bombay and
Another v. Simplex Mills Ltd.(1) that "the relief referred
to in s. 34(1) (b) of the Income-tax Act, 1922, can only be
such relief as is granted to the assessee by reason of his
income, profits and (rains being chargeable to tax. It is,
therefore, referable to the various kinds of relief afforded
to the assessee under the Act in respect of his income,
profits and gains, such, for instance, as are granted under
ss. 15A, 15C, 49A, 49B, 49C, 49D and 60 of the Act." This
Court affirmed the judgment of the Bombay High Court in P.
S. Subramanyan, Income-tax Officer, Companies Circle I (1)
and Another v. Simplex Mills Ltd. 2 In Simplex Mills(2) case
advance tax paid by the assessee for the assessment year
1952-53 was found refundable and the Income-tax Officer
allowed interest on the tax paid under s. 18A(5) of the
Incometax Act, 1922, as it then stood. The Act was amended
by the Income-tax (Amendment) Act, 1953, with retrospective
effect from April 1, 1952, and it was found that interest
allowed to the Company was excessive. The Income-tax
Officer then initiated a proceeding under s. 34 (1 ) (b) to
reassess the tax on the ground that income for that year had
been under-assessed and had been made the subject of
excessive relief. The Bombay High Court rejected the claim
of the Income-tax Officer, and this Court held that the
original assessment could not be reopened under s. 34,
because it could not be said either that there was under-
assessment of the income, or that excessive relief was
granted. In the light of that judgment, the High Court
opined that the claim of the Department to initiate a
proceeding under s. 34(1) (b) on the -round that excessive
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relief was allowed could not be sustained. But the High
Court held that a proceeding for reassessment could be
initiated on the ground that income had been assessed at too
low a rate. Counsel for the Company contends that the High
Court was in error in proceeding to enlarge the scope of the
enquiry and in entering upon a question which was never
mooted before the Tribunal.
Section 2 of the Finance Act, 1956, provides insofar as it
is material, that :
(1) 48 I.T.R. 980.
(2) 48 1.T.R. 182 (S. C.)
804
.lm15
"Subject to the provisions of sub-sections (2), (3), (4) and
(5), for the year beginning on the 1st day of April, 1956,-
(a) income-tax shall be charged at the rates specified in
Part I of the First Schedule.........
(b) rates of super-tax shall, for the purposes of section
55 of the Indian Income-tax Act, 1922 (XI of
1922) . . ., be those specified in Part 11 of the
First Schedule.................
Part 11 of the First Schedule specifies the rates of super-
tax.
Clause D provides :
"In the case of every company-
on the whole of total income
Rate
Six annas and nine
pies in the rupee.
Provided that-
(i)
(ii) a rebate at the rate of four annas per
rupee of the total income shall be allowed in
the case of any company which satisfies
condition (a), but not condition (b) of the
preceding clause; and
(iii)
Provided further that-
(i) the amount of the rebate under
clause (i) or clause (ii), as the case may be,
of the preceding proviso shall be reduced by
the sum, if any, equal to the amount or the
aggregate of the amounts, as the case may be,
computed as here-
under :-
(a) on the amount representing the face
value of any bonus shares or the amount of any
bonus issued to its share-holders during the
previous year with a view to increasing the
paid-up capital, except to the extent to which
such bonus shares or bonus have been issued
out of premiums received in cash on the issue
of its shares; and at the rate of two annas
per rupee.
805
(b) in addition, in the case of a Company
referred to in clause (ii) of the preceding
proviso which has distributed to its
shareholders during the previous year divi-
dends in excess of six per cent of its paid-up
capital, not being dividends payable at a
fixed rate-
on that part of the said divi-......at the
rate
dends which exceeds 6 per cent. of two
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annas
but does not exceed 10 per per
rupee.
cent. of the paid-up capital;
on that part of the said divi- at the
rate of’
dends which exceeds 10 per cent three
annas
of the paid-up capital; per
rupee.
Paragraph-D read with s. 2(b) of the Finance Act, 1956 fixes
the rate of super-tax payable by Companies for the purpose
of s. 55 of the Indian Income-tax Act. From the super-tax
declared payable, in certain conditions rebate is granted,
and that rebate is also related to the total income of the
assessee. By the second proviso, part of the rebate may be
withdrawn, if the Company has in the previous year issued
bonus shares or bonus or has distributed dividend in excess
of six per cent. of its paid-up capital. The super-tax and
the rebate admissible are both related to the total income,
whereas the reduction of rebate is related to the face value
of the bonus shares or of the value of bonus or the amount
of dividends distributed. Super-tax payable by a Company is
therefore determined as a fraction of the total income,
reduced by a percentage of the value of the bonus shares or
bonus or dividends distributed.
Counsel for the Company contends that the expression "too
low a rate" used in s. 34(1) (b) must, having regard to the
context in which the expression is used and in the scheme of
the Indian Income-tax Act, be regarded merely as the
fraction which determines tax liability of the assessee, but
when in computing super-tax liability, the Income-tax
Officer has after determining the amount by applying the
fraction to reduce the resultant by reference to a factor
unrelated to total income, it cannot be said that tax is
charged at a certain rate. Counsel says that the
Legislature has not used the expression "assessed at too low
an amount" but the expression used is "assessed at too low a
rate" therefore says counsel for the Company the
jurisdiction of the Income-tax Officer will be attracted
only when the wrong fraction
806
has been applied in the determination of super-tax, and not
when the computation of tax depends on other factors.
We are unable to accept this contention. The assumption
that the expression "rate" has been used in s. 34(1) as
meaning -a fraction of total income is, in our judgment, not
warranted. By the use of the expression "rate" in the
context in which it occurs, undoubtedly a relation between
the taxable income and the tax charged is intended, but the
relation need not be of the nature -of proportion or
fraction. The expression "rate"’ is often used in the sense
of a standard or measure. Provided the tax is computable by
the application of a prescribed standard or measure, though
not directly related to taxable income, it may be called tax
computed at a certain rate. We agree with the High Court
that the rebate of tax and the reduction of such rebate are
essentially matters of measure or standards of rate. The
chief aim and object of the Finance Act, 1956, is to
prescribe the standard or measure of income-tax and super-
tax and it seems that an assessee escaping some of its
provisions, and failing to pay the full measure -of tax is
assessed at too low a rate.
But the view we have taken is not sufficient to dispose of
the appeal. It may be recalled that the question arising
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out of the order of the Tribunal was about the competence of
the Income-tax Officer, to initiate proceedings under S. 34
(I) (b). It is true that it was not argued before the
Tribunal on behalf of the Company that on the notice served
by the Income-tax Officer proceedings for reassessment could
only be initiated on the ground that income had been the
subject of excessive relief, and not on any other ground.
But the Company did contend that the initiation of the
reassessment proceeding was invalid, and the plea, that the
initiation was invalid because the notice was defective was
only tin aspect of the plea raised by the Company. The
question is -originally raised by the Tribunal, and as
reframed by us, includes that enquiry.
Counsel for the Company did argue before the High Court that
in a proceeding to reassess income initiated on a notice
that income has been subject to excessive relief, the
Income-tax Officer was incompetent to reassess income on the
footing that income was assessed at too low a rate, but the
High Court did not record their decision on that plea : they
merely suggested that it will be open to the Company to
raise the question when the matter is again taken up for
consideration. If however the question arising out of the
order of the Tribunal was, as correctly pointed out by the
High Court, one about the "validity of initiation of
proceeding under s. 34(1) (b)", the High Court was bound to
decide all aspects of that question raised before them,
before recording an answer : if they did not, the Tribunal
would
807
be powerless to enter upon an enquiry of any other aspect of
the question after answer to the question is recorded by the
High, Court. We are unable to agree with the assumption
made by the High Court that because a particular aspect of
the question of law raised was not specifically argued
before the Tribunal, the High Court cannot deal with that
aspect.
We are, in the state of the record before us, unable to
record an answer to the question, and the case must be
remanded to the High Court to determine whether the
proceedings were validly initiated on the notice issued
against the Company. The notice which was served upon the
Company is not included in the paper book prepared for use
in this Court. The notice must of necessity be part of the
record of the Income-tax Officer, even if it be not on the
record of the Tribunal. It will be open to the High Court,
in determining the contention raised by the Company, to call
for a supplementary statement of the case relating to the
form and contents of the notice and the validity thereof
from the Tribunal. After receiving the supplementary state-
ment, if any, the High Court will proceed to dispose of the
third question in the light of the reasons set out by us in
this judgment.. Costs of this appeal will be costs in the
High Court.
Y.P. Appeal remanded.
SupCI/67-8
808