Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME TAX,BOMBAY
Vs.
RESPONDENT:
THE ELPHINSTONE SPINNING ANDWEAVING MILLS LTD.
DATE OF JUDGMENT:
04/05/1960
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
DAS, S.K.
KAPUR, J.L.
CITATION:
1960 AIR 1016
CITATOR INFO :
R 1960 SC1022 (6)
R 1960 SC1182 (8)
D 1961 SC 699 (8)
R 1968 SC 623 (26)
R 1975 SC1282 (17)
R 1979 SC1495 (12)
RF 1989 SC 516 (40)
ACT:
Income-tax-Assessee incurring loss but paying dividends-
Additional income-tax, liability to pay-Construction of
taxing statute-Income-tax Act, 1922 (XI of 1922), s. 3-
Finance Act, 1951 (23 Of 1951), First Schedule, Paragraph B.
HEADNOTE:
The assesses had made profits during the assessment year
1951-52 but after deduction of the depreciation allowance it
was found to have incurred a loss for income-tax purposes.
In the same year the assesses declared dividends. The
Income-tax Officer treated this amount as ’excess dividend’
and levied additional income-tax as provided in paragraph B
of Part I of the First Schedule to the Indian Finance Act,
1951. The assesses contended that inasmuch as there was no
income at all which was
954
taxable the words " on the total income " in paragraph B did
not apply to it and no additional income-tax could be
levied. The appellant, relying on the proviso to paragraph
B, contended that additional income-tax was imposed on
excess dividend and if excess dividend was paid out, the
liability to tax arose:
Held, that the assessee was not liable to pay additional
incometax. The liability to tax was imposed by S. 3 of the
Income-tax Act and the Finance Act merely laid down the
rates at which tax was to be levied on the total income. If
there was no income there was no question of applying a rate
to the " total income " and no income-tax or super-tax could
possibly result. The word " additional " in the expression
"additional income-tax " implied that there was a tax
before. The expressions " charge on the total income " and
" profits liable to tax " in paragraph B contemplated only
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those cases where there was income and not cases where there
was loss. Consequently the expression " dividends payable
out of such profits " could only apply when there were
profits and not when there were no profits. The imposition
of additional income-tax was conditioned by the existence of
income and profits. The legislature used language
appropriate to income and applied the rate to the " total
income ". Where there was no total income the law could not
apply and the courts could not be asked to supply the
omission made by the legislature or to delete or to modify
any words. If the words of a taxing statute failed then so
did the tax. The courts could not, except rarely and in
clear cases, help the draftsman by a favourable construc-
tion.
Curtis v. Stovin, (1889) 22 Q.B. 513, Commissioner of
Incometax v. Teja Singh, [1959] 35 I.T.R. 408 S.C., Whitney
v. Commissioners of Inland Revenue, (1925) 10 I.C. 88,
Special Commissioners of Income Tax v. Linsleys, Ltd.,
(1958) 37 T.C. 677 and Commissioners of Inland Revenue v.
South Georgia Co. Ltd. (1958) 37 T.C. 725, distinguished.
The Cape Brandy Syndicate v. The Commissioners of Inland
Revenue,(1620) 12 T.C. 358 and Wolfson v. Commissioners of
Inland Revenue,(1949) 31 T.C. 141, referred to.
The proviso to paragraph B prescribed varying rates for
varying circumstances; it dealt with rates alone and not
with the chargeability to tax. There were no words in this
proviso making the excess dividend into income or subjecting
it to tax independently of the charge to tax on the total
income.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 427 of 1957.
Appeal from the judgment and order dated September 9, 1955,
of the Bombay High Court in Income-tax Reference No. 31/X of
1954.
K.N. Rajagopal Sastri and D. Gupta, for the appellant.
N. A. ˜Palkhivala, S. N. ˜Andley and J. B. Dadachanji, for
the respondents and intervener.
955
1960. May 4. The Judgment of the Court was delivered by
HIDAYATULLAH J.-The High Court of Bombay in a reference
under s. 66(1) of the Indian Income-tax Act by the Income-
tax Appellate Tribunal, Bombay, was referred the following
two questions for decision:
(1) Whether the assessee Company was liable to pay
additional income-tax ? and
(2) If the answer to question No. 1 is in the affirmative,
whether the levy of the additional income-tax is ultra vires
The High Court answered the first question in the negative
and in the circumstances, left the second question
unanswered. This appeal is against the judgment and order
of the High Court on a certificate granted by it. The
Commissioner of Income-tax is the appellant, and the
Elphinstone Spinning and Weaving Mills Co. Ltd., Bombay (the
assessee Company) is the respondent.
The facts may now be stated briefly. For the assessment
year 1951-52 (the previous year being the calendar year
1950), the assessee Company was found to have incurred a
loss of Rs. 2,19,848 and was thus adjudged to be not liable
to income-tax. In that year, the assessee Company had made
profits, but the depreciation allowance under the Income-tax
Act came to Rs. 7,84,063, thus converting the profit into
loss for income-tax purposes. In the same year, the
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assessee Company declared dividends &mounting to Rs.
3,29,062. The Income-tax Officer treated this amount as
’excess dividend’ and levied additional income-tax as
provided in Paragraph B of Part I of the First Schedule to
the Indian Finance Act, 1951. This additional income-tax
was computed to be Rs. 41,132-12-0. The contention of the
assessee Company that it was not liable to pay additional
incometax was not accepted by the Tribunal, but the High
Court, on an examination of the relevant provisions and the
scheme of the Indian Income-tax Act and the Finance Act,
1951, held that it was sound. Hence this appeal by the
Commissioner of Income-tax.
We are concerned with the Finance Act, 1951, -and Paragraph
B of the First Schedule reads:
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B. In the case of every company-
Rate Surcharge
On the whole of Four annas one-twentieth
total income in the of the rate
rupee specified in
the preceding
column:
Provided that in the case of a company which, in respect of
its profits liable to tax under the Income-tax Act for the
year ending on the 31st day of March, 1952, has made the
prescribed arrangements for the declaration and payment
within the territory of India excluding the State of Jammu
and Kashmir, of the dividends payable out of such profits,
and has deducted super-tax from the dividends in accordance
with the provisions of subsection (3D) or (3E) of section 18
of the Act-
(i) Where the total income, as reduced by seven annas in
the rupee and by the amount, if any, exempt from income-tax,
exceeds the amount of any dividends (including dividends
payable at a fixed rate) declared in respect of the whole or
part of the previous year for the assessment for the year
ending on the 31st day of March, 1952, and no order has been
made under sub-section (1) of section 23A of the Income-tax
Act, a rebate shall be allowed at the rate of one anna per
rupee on the amount of such excess;
(ii) Where the amount of dividends referred to in clause (1)
above exceeds the total income as reduced by seven annas in
the rupee and by the amount, if any, exempt from income-tax,
there shall be charged on the total income an additional
income-tax equal to the sum, if any, by which the aggregate
amount of income-tax actually borne by such excess
(hereinafter referred to as ’the excess dividend’) falls
short of the amount calculated at the rate of five annas per
rupee on the excess dividend.
For the purposes of the above proviso, the expression ’
dividend’ shall have the meaning assign ed to it in clause
(6A) of section 2 of the Income-tax Act, but any
distribution included- in that expression,
957
made during the year ending on the 31st day of March, 1952,
shall be deemed to be a dividend declared in respect of the
whole or part of the previous year.
For the purposes of clause (ii) of the above proviso, the
aggregate amount of income-tax actually borne by the excess
dividend shall be determined as We, follows:-
(i) the excess dividend shall be deemed to be out of the
whole or such portion of the undistributed profits of one or
more years immediately preceding the previous year as would
be just sufficient to cover the amount of the excess
dividend and as have not likewise been taken into account to
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cover an excess dividend of a preceding year;
(ii) such portion of the excess dividend as is deemed to be
out of the undistributed profits of each of the said years
shall be deemed to have borne tax,-
(a) if an order has been made under sub-section (1) of
section 23A of the Income-tax Act, in respect of the
undistributed profits of that year, at the rate of five
annas in the rupee, and
(b) in respect of any other year, at the rate applicable to
the total income of the company for that year reduced by the
rate at which rebate, if any, was allowed on the
undistributed profits."
The contention of the assessee Company was that inasmuch as
there was no income at all which was taxable, the words "OD
the total income" (lid not apply to it and no additional
income-tax could be charged. The Tribunal interpreted the
Paragraph to cover even a case where there was a loss
holding that even a loss may be a total income’, because if
total income had to be computed in the manner laid down in
the Indian Income-tax Act, the total income might, be a
negative figure. The Tribunal also held that inasmuch as
excess dividend,,; were to be deemed to have come out of the
undistributed profits of the preceding year or years and
such undistributed profits ",ere available,, the assessee
Company was liable. The High Court did not accept those
reasons, and reluctantly held, for reasons which may not be
detailed at the present
124
958
moment, that the assessee Company did not come (If within
the letter of the law, however much the intention might have
been to impose an additional income-tax under such
circumstances. The Commissioner now contends that, the High
Court ought to have read the Paragraph B as modified by the
intention or to have treated it as an independent charging
Section.
The liability to tax is imposed not by the Finance Act but
by the Indian Income-tax Act. Section 3 of the latter Act
is the charging section, and it provides that the tax should
be collected at such rate or rates on the total income as
laid down in any Central Act. The Finance Act is an annual
Act prescribing the rate or rates. We are concerned with
the Finance Act, 1951. Section 2 of the Finance Act
prescribes the rates of income-tax by its First, Schedule,
and by the seventh subsection of that section provides:
"For the purposes of this section and of the rates of tax
imposed thereby, the expression ’total income’ means total
income as determined for the purposes of income-tax or
super--tax, as the case may be, in accordance with the
provisions of the Income-tax Act... "
It is thus clear from this that if there is no income, there
is no question of applying a rate to the ’ total income’ and
no income-tax or super-tax can possibly result. The
Commissioner, however, relies upon the proviso to Paragraph
B of the First Schedule, and says that the tax is imposed on
excess dividend and if excess dividend is paid out, the
liability to tax must arise.
The proviso was framed to discourage the paying of large
dividends quite disproportionate to the income. For this
purpose, A ceiling was laid down. That ceiling was nine
annas in the rupee of the total income reduced by any
portion of that income which was exempt from income-tax. If
only nine annas in the rupee from the income were paid as
dividend, there were no consequences in law. If, however,
the dividends paid amounted to less, a rebate of one anna in
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the rupee in the tax was given. This was provided by the
first part of the proviso. There was,
959
however, a provision for enhanced tax. in the second part,
which worked the other way round. Where the dividend
distributed exceeded the total income as reduced by seven
annas in the rupee, there was charged on the total income an
additional, income-tax equal to the sum, if any, by which
the aggregate amount of income-tax actually borne by such
excess We. (hereinafter referred to as the " excess dividend
") falls short of the amount calculated at the rate of five
annas per rupee on the excess dividend. In simpler
language, there was a rebate of one anna on anything saved
from 9/16th of the total income, and there was an extra
payment of one anna on the amount paid in excess of it. The
income-tax, in either event, was payable on the total income
and the additional incometax on the excess dividends.
Now, the difficulty arises in applying this proviso. Where
there is a total income and there is a payment of dividend
either more or less than the limit fixed, one can easily
find the figures by which the total income as reduced
exceeds or falls short of the dividends and the additional
tax that has to be paid. But when the total income is a
negative figure and no tax on the total income is levied,
the words of the second part of the Paragraph ’total income
’, ’profits liable to tax’, ’dividends payable out of such
profits’ and ’ an additional income-tax’, cease to have the
meaning they were intended to convey. The Commissioner
contends that some of these words may be ignored as being
surplusage or a drafting error, and refers to rulings in
which such a course was adopted. The first case he relies
on is Curtis v. Stovin (1). In that case, the words of the
statute were:
" It shall be lawful for either party to the action... to
apply to a judge of the High Court ... to order such action
to be tried in any court in which the action might have been
commenced, or in any court convenient thereto... "
The word " court " was defined as " county court " in that
statute. Lord Esher, M.R., held that the words should be
extended to mean " in any county court in which, if it had
been a county court action, the action
(1) (1889) 22 Q. B. 513.
960
might have commenced". The ambiguity which would have
otherwise arisen was removed by taking aid from the
alternative clause " or in any court convenient there-to"
which referred to locality, and it was said that the first
clause meant a county court in the district of which the
parties resided, or in which one of them resided. In that
case, however, there were determinative words helping
construction. It is to be noticed that Lord Esher, M. R.,
also warned against doing by construction what only a
legislature could do by enactment, in the following words:
" It is, no doubt, very easy for a judge to say that be is
introducing words into an Act only by way of construing it,
while he is really making a new Act. " The words " if it
had been a county court action " which were read as implicit
in the section were necessary to give a sensible meaning
consistent with the intention expressed by other clear
words.
The above case was applied and followed in Commissioner of
Income-tax v. Teja Singh(1), which is next relied upon. In
that case, the construction, if literally made, was apt to
make one section nugatory. This Court laid down that "a
construction which leads to such a result must, if that is
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possible, be avoided ". It, however, quoted also the
observations of Lord Dunedin in Whitney v. Commissioners of
Inland Revenue (2) that:
" A statute is designed to be workable, and the
interpretation thereof by a court should be to secure that
object, unless crucial omission or clear direction makes
that end unattainable. "
The next case relied upon is Special Commissioners of
Income-tax v. Linsleys Ltd. (3). It dealt with an obvious
drafting error. Section 68(2) of the English Finance
Act,1952, contained a reference to Paragraph(a) of the
proviso to sub-s. (2) of s. 262 of the Incometax Act, 1952,
and the section went on to say of that Paragraph
parenthetically " which relates to the deductions allowable
in computing the actual income from all sources of an
investment company in relation to which a direction is in
force under sub-section I of
(1) [1959] 35 I.T.R. 408 S.C. (2) (1925) 10 T.C. 88, 11o.
(3) (1958) 37 T. C. 677.
961
that section". As a summary of Paragraph (a), it was
entirely wrong and misleading. Since the Paragraph was
there for every one to read, the draftsman’s summary of it
in the brackets was not accepted. Lord Reid observed:
" The difficulty does not arise from the enacting words but
from the words in brackets which purport to describe the
proviso to Section 262(2) of the Income Tax Act, 1952.
Those words could well be held to support the view of the
Court of Appeal, but they seem to me to be a misdescription
of the proviso to Section 262(2). This is one of the places
where 1 think that obscurity has resulted from a; failure of
the draftsman to anticipate a case like the present-as I
have said, a very natural failure. In fact the proviso
merely deals with the deductions to be allowed in computing
actual income. But the words in brackets in Section 88(2)
refer to deductions in computing actual income of a company
in relation to which a direction is in force’ under Section
262(1). It would seem that these words have crept in
because the draftsman assumed that a direction would always
be given automatically in the case of an investment company
and did not realise that a computation must first be made to
determine whether the company has in fact any actual income.
Whether that be the true explanation or not, I cannot regard
the presence of these words in brackets, which are mere
description, as of much weight in comparison with the other
considerations to which I have referred."
If the section was there, its meaning could be taken from
the words used there and not from a description of what it
enacted, put parenthetically in another statute. The case
cited is hardly in point.
The last case cited is Commissioners of Inland Revenue v.
South Georgia Co. Ltd. (1). The words of a: proviso there
construed, ran as follows:
" Provided that where the said gross relevant distributions
exceed the profits computed without abatement and including
franked investment income,
(1) (1958) 37 T.C. 725.
962
the net relevant distributions shall be..." (S. 34(2) of the
English Finance Act, 1947).
The word " including "gave some difficulty. In the Court of
Session, the word was equated to " adding " correcting, as
it was felt, a drafting inaccuracy. In the House of Lords,
however, this change was not accepted and a meaning was
found.
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The learned counsel for the respondent, on the other hand,
relies upon the observations of Rowlatt, J., in The Cape
Brandy Syndicate v. The Commissioners of Inland Revenue (1)
to the effect that in a taxing measure one can only look at
the language since there is no room for an intendment. He
also refers to the speech of Lord Simonds in Wolfson v.
Commissioners of Inland Revenue (2), where the following
passage occurs at p. 169:
" It was urged that the construction that I favour leaves an
easy loophole through which the evasive taxpayer may find
escape. That may be so; but I will repeat what has been
said before. It is not the function of a court of law to
give to words a strained and unnatural meaning because only
thus will a taxing section apply to a transaction which, had
the Legislature thought of it, would have been covered by
appropriate words. It is the duty of the Court to give to
the words of this Sub-section their reasonable meaning and I
must decline on any ground of policy to give to them a
meaning which, with all respect to the dissentient Lord
Justice, I regard as little short of extravagant. It cannot
even be urged that unless this meaning is given to the
Section it can have no operation. On the contrary, given
its natural meaning it will bring within the area of
taxation a number of cases in which by a familiar device tax
had formerly been avoided." The learned counsel contends
that the artificial construction should not be resorted to
in this case.
There is no doubt that if the words of a taxing statute
fail, then so must the tax. The Courts cannot, except
rarely and in clear cases, help the draftsman by a
favourable construction. Here, the difficulty is not one of
inaccurate language only. It is really this
(1) (1920) 12 T.C. 358, 366,
(2) (1949) 31 T.C. 141, 169.
963
that a very large number of taxpayers are within the words
but some of them are not. Whether the enactment might fail
in the former case on some other ground (as has happened in
another case decided to-day) is not a matter we are dealing
with at the moment. It is sufficient to say here that the
words do not take in the modifications which the learned
counsel for the appellant suggests. The word ’ additional ’
in the expression ’additional income-tax’ must refer to a
state of affairs in which there has been a tax before. The
words ’charge on the total income’ are not appropriate to
describe a case in which there is no income or there is
loss. The same is the case with the expression ’profits
liable to tax’. The last expression ’ dividends payable out
of such profits’ can only apply when there are profits and
not when there are no profits..
It is clear that the legislature had in mind the case of
persons paying dividends beyond a reasonable portion of
their income. A rebate was intended to be given to those
who kept within the limit and an enhanced rate was to be
imposed on those who exceeded it. The law was calculated to
reach those persons who did the latter even if they resorted
to the device of keeping profits back in one year to earn
rebate to pay out the same profits in the next. For this
purpose, the profits of the earlier years were deemed to be
profits of the succeeding years. So far so good. But the
legislature failed to fit in the law in the scheme of the
Indian Income-tax Act under which and to effectuate which
the Finance Act is passed. The legislature used language
appropriate to income, and applied the rate to the ’ total
income’. Obviously, therefore, the law must fail in those
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cases where there is no total income at all, and the Courts
cannot be invited to supply the omission made by the
legislature.
It is quite possible that the legislature did not con-
template the imposition of tax in circumstances such as
these, and we are not prepared to read the proviso without
the words on the total income’ or after modifying this and
other expressions. The High Court has given adequate
reasons to show that these words are quite inappropriate,
where the total income, if it
964
can be described as income at all, is a loss. The
imposition of the additional. income-tax is conditioned by
the existence of income and profits, to the total of which
income the rate is made applicable. Unless some other
amount, not strictly income, is by law deemed to be income
(see for example, McGregor & Balfour Ltd. v. Commissioner of
Income-tax (1)), we cannot improve the existing law by
deeming it to be so by our interpretation.
The Commissioner next contends that the proviso speaks of
excess dividends, which means that dividends in excess of
the permissible limits have been paid. He sayS that where
the income is nit or a negative figure, whatever is paid is
excess dividend, and indeed, the Tribunal also felt that the
excess dividends in this case were more because of the loss
sustained. This argument has a familiar ring, It is really
that " you can have more than nothing ".
Reference was made in this connection to Commissioners of
Inland Revenue v. South Georgia Co. Ltd. (2) where Lord
Simonds observed at p. 736:
" Upon this proviso, interpreted in the light of Paragraph
"of the Schedule as amended, the Crown makes a very simple
case: upon the undisputed figures the gross relevant
distributions were pound 181,000, and the profits including
franked investment income were nil (I may interpolate that
the reference to abatement may throughout be disregarded) :
therefore the net relevant distribution must be the excess
of pound 181,000 over nil, i.e., pound 181,000: nothing has
to be brought in under (a’ of the proviso, for there were no
profits."
Reliance was also placed upon the observations at p. 737
(ibid) where it was observed :
,,The learned Dean of Faculty on behalf of the Respondents
urged, in support of the construction that he invited your
Lordships to adopt, that it was really meaningless to speak
of a nil profit or of adding something to it, and this plea
found favour with the Lord President. As I understood it,
this was only relevant if the view was accepted that there
were two separate operations and not a single
(1) (1950] 36 I.T.R. 65 S.C.
(2) [[1958] 37 T.C. 725
965
computation. In the view which I take, therefore, it does
not arise, but I think it right to say that I see no
impropriety of language in ,;peaking of a nil profit where
the question is whether any or what profit has been made.
And the answer would be equally valid in the case of an
exact balance or of a loss."
These passages were used in the other case decided today, in
which there were no profits of the previous years. There
is, however, this difficulty that there the tax was laid on
the net relevant distribution, and it was conceded that no
charge could be imposed if the proviso was inapplicable (see
p. 736). The provisions of Paragraph 7 of the Schedule as
amended by s. 32 of the English Finance Act, 1947, were
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entirely different, and the proviso to s. 34(2) of the
English Act was held applicable. The scheme of the
provisions we are interpreting is entirely different.
Reliance was also placed upon Rajputana Agencies Ltd. v.
Commissioner of Income-tax (1), but we find nothing there to
support the appellant’s case. Similarly, in McGregor and
Balfour Ltd. v. Commissioner of Income-tax(1), the words
were held to be apt ’ to impose a charge’. It is obvious
enough that unless they were so or unless the Act covered
the instant cases, the tax must fail.
The gist of the matter is not the possibility of an
arithmetical calculation as in the English case. The rate
in the proviso is applicable to the ’total income ’ though
after the application of a simple arithmetical calculation.
The ’total income’, however, is still the total income as
determined for the purpose of incometax, and in the case of
businesses, the rules require that the total income shall
not include the depreciation allowance. By the application
of those rules if the total income ceases to exist, the
second paragraph of the proviso, as it is worded, ceases to
be workable. All the four expressions to which we have
referred earlier cease to have natural meaning, and the Com-
missioner is again driven to contend that we must delete the
offending words or suitably modify them. This we are not
prepared to do, because the intention might well have been
not to comprehend such cases.
(1) [1959] 35 I.T.R. 168.
125
(2) [1959] 36 I.T.R. 65 S.C.
966
The Commissioner next contends that we may treat this as an
independent charging section and give effect to it. The
proviso is to Paragraph B in the First Schedule of the
Finance Act, and the Schedule only imposes a rate of tax and
this rate, either by itself or with rebate or with
additional tax at a higher rate, has to be applied to the
total income. The extra tax under the second part of the
proviso, though called an additional tax, is only the
difference between the tax charged at one rate and the tax
subsequently chargeable at another rate. The function of
the proviso is thus to prescribe varying rates for varying
circumstances, and it deals with rate or rates, first and
last, and not with chargeability to tax, which is the
subjectmatter of s. 3 of the Income-tax Act. There are no
words here making the excess dividend into income or
subjecting it to tax independently of the charge to tax on
the total income. We are thus unable to treat the proviso
as an independent charging section. In this view of the
matter, no useful purpose will be served by referring to
those cases noted by this Court in Commissioner of Income-
tax v. Calcutta National Bank Ltd. (1), where a schedule
which went beyond the purpose for which it was enacted was
given effect to. The proviso here was framed to lay down
the rates, and has done no more.
It remains to consider two other arguments, which were
addressed to us on behalf of the Commissioner. The first
pointed out an anomaly that if there was a total income of
even one rupee, the proviso could be made applicable
according to its terms but not if the income was nil or
negative. The Commissioner contended that such an anomaly
should be avoided, and that the proviso should be
interpreted in such a way as to take in all the kinds of
cases. Our answer to this is much the same as was given by
the learned Chief Justice of the Bombay High Court. The
learned Chief Justice observes:
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" There seems to be no logic, there seems to be no reason
nor principle why a distinction should be made between the
cases of two such companies. But if life is not logic,
income-tax is much less so,
(1) [1959] 37 I.T.R. 171.
967
and it is clear that we cannot impose tax upon a subject by
implication or because we think that the object of the
legislature was a particular object." We respectfully agree
with the learned Chief Justice that though the
interpretation we have placed upon the proviso might lead to
some anomalies, it is for the legislature to avoid the
anomalies which, according to us, spring not from our
interpretation but from the language employed.
The second argumeint is that the proviso itself states that
the excess dividend shall be deemed to be out of the
undistributed profits of one or more years immediately
preceding the previous year, and that the fiction makes the
profits take the place of total income for purposes of tax.
In our opinion, the fiction cannot be carried further than
the purpose for which it has been put in the statute. The
Income-tax Act creates an assessment year and a
corresponding previous year. Assessment to tax in any
assessment year can only be in respect of the profits of the
immediately preceding previous year. All that the fiction
does is to bring profits of back years into the immediately
preceding previous years, so that the requirements of the
Income-tax law may be complied with. As we have already
stated, this fiction cannot be carried further than what it
is intended for; it cannot be used to make these profits
take the place of total income, which did not exist in the
previous year and to which the rate is to be applied under
the terms of the proviso.
We do not accept both the arguments, and agree with the High
Court in the answer given to the first question. As pointed
out by the High Court, the second question does not survive,
after the first question is answered against the Department.
In the result, the appeal fails, and will be dismissed width
costs.
Appeal dismissed.
968