1989-VIL-559-BOM-DT

Equivalent Citation: [1990] 185 ITR 6, 88 CTR 94

BOMBAY HIGH COURT

Date: 08.09.1989

COMMISSIONER OF INCOME-TAX

Vs

CENTRAL BANK OF INDIA LIMITED

BENCH

Judge(s)  : T. D. SUGLA., C. MUKHERJEE., S. P. BHARUCHA 

JUDGMENT

The judgment of the court was delivered by

S. P. BHARUCHA J. -This is a reference made at the instance of the Revenue, under the provisions of section 256(1) of the Income-tax Act, 1961. It raises, in regard to the assessment year 1967-68, the following question :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the average rate of income-tax should be worked out with reference to the total income of the company as reduced by the amount of capital gains, for the purpose of computing the relief admissible under section 85A on its inter-corporate dividend for the assessment year 1967-68 ?"

The reference comes to be heard by a Bench of three judges because the Division Bench which had earlier heard it was of the view that the Division Bench judgment might require reconsideration.

The Appellate Assistant Commissioner having passed an order in regard to the income-tax assessment of the assessee-company for the assessment year in question, the Income-tax Officer bad to give effect to it. In so doing, the Income-tax Officer restricted the deduction given to the assessee-company under section 85A in the sum of Rs. 10,70,796. This was because he included in the computation of the assessee-company's total income for the purpose its long-term capital gains. He rejected the assessee-company's submission that long-term capital gains should not be taken into account in determining the average rate of income-tax for the purposes of working out the deduction under section 85A. In appeal from the Income-tax Officer's order, the Appellate Assistant Commissioner followed two decisions of the Income-tax Appellate Tribunal and directed the Income-tax Officer to grant the deduction by excluding, for the purpose of calculation of the average rate of income-tax, long-term capital gains from the assessee-company's total income, The Revenue preferred an appeal against the Appellate Assistant Commissioner's decision to the Tribunal. The Tribunal followed an earlier order in which it had been held that the context in which the words "average rate of income-tax" had been used in section 85A required that the average rate should be considered independently of section 2(10). Average rate of tax for the purposes of section 85A should be taken to be the rate arrived at by dividing the total amount of income-tax chargeable on the total income, as reduced by the amount of capital gains, by the total income, as reduced by the amount of the capital gains.

Section 85A deals with deduction of tax on inter-corporate dividends, and reads thus:

"85A. Deduction of tax on inter-corporate dividends. Where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for any assessment year of so much of the amount of income-tax calculated at the average rate of income-tax, on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of twenty-five per cent. thereof :

Provided that in the case of a company which has not made the prescribed arrangements for the declaration and payment of dividends within India and whose total income includes any income by way of dividends received by it from an Indian company which is not such a company as is referred to in section 108 and which is mainly engaged in the business, of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule the amount of income-tax deductible under this section shall be so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of fifteen per cent. thereof.

Explanation.-For the purposes of this section, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income."

Section 2(10) defines the average rate of income-tax to mean the average rate arrived at by dividing the amount of income-tax calculated on the total income by such total income. "Income" is defined by section 2(24) to include, inter alia, "any capital gains chargeable under section 45".

In Birla Bombay P. Ltd. V. CIT [1980] 121 ITR 142, this court considered the interpretation to be placed upon section 85A. It held that the provision was clear. It provided for a deduction from the income-tax which an assessee-company was liable to pay. For the purposes of calculating the deduction, the average rate of income-tax was first required to be ascertained. After it had been ascertained, it had to be applied to the assessee-company's inter-corporate dividend income and the deduction to be allowed was equivalent to the difference between this figure and 25 per cent. of the inter-corporate dividend. There was, it was said, no warrant for ignoring the definition of "average rate of income-tax" found in section 2(10). This was the view which had also been taken by the Calcutta High Court in ITO v. Raleigh Investment Co. Ltd. [1976] 102 ITR 616.

The decision in Birla Bombay P. Ltd. [1980] 121 ITR 142 (Bom) was followed, though without discussion, by this court in CIT v. Braithwaite and Co. [1986] 159 ITR 772.

Mr. Dalvi, learned counsel for the assessee-company, submitted that the average rate for the purposes of section 85A was not as defined in section 2(10) but was the average rate which was computed with reference to total income excluding capital gains. This was because the average rate for the purposes of section 85A had to be computed with reference to the rate prescribed by the Finance Acts whereas the rate in respect of income by way of capital gains was, in so far as companies were concerned, prescribed by the Income-tax Act itself (section 115).

Section 85A applies where the total income of an assessee-company includes any income by way of dividends received by it from an Indian company or from a company which has made the prescribed arrangements for the declaration and payment of dividends within India. It entitles the assessee-company to a deduction. The deduction is equivalent to the amount of income-tax on the income by way of such dividends calculated at the average rate of income-tax applicable to the assessee-company less 25 per cent. of such dividend income. To compute the quantum of the deduction, the average rate has to be worked out. It has to be worked out by dividing the amount of income-tax calculated on the total income of the assessee by the total income (section 2(10)). "Income" under section 2(24) includes any capital gains chargeable under section 45. We see no warrant for assigning to the words "average rate of income-tax" or the word "income" any meaning other than that set out in sections 2(10) and 2(24), respectively. Whether the rate is set out in the Finance Acts or in the Income-tax Act itself does not appear to us to be at all relevant in the context of the computation of the deduction under section 85A.

Mr. Dalvi submitted that, so interpreted, there was an anomaly in section 85A inasmuch as different assessee-companies would be charged to income-tax at different rates depending upon the nature of their capital gains, as provided by section 115. He submitted that we must take account of the fact that the intention of section 85A was to prescribe a flat rate of income-tax of 25 per cent. on inter-corporate dividends. He submitted that the intention was to be achieved by excluding capital gains for the purpose of calculating the average rate of income-tax.

Our attention was drawn by Mr. Dalvi, in the context of these submissions, to the judgment of the Supreme Court in K. P. Varghese v. ITO[1981] 131 ITR 597. The Supreme Court was concerned with the interpretation of section 52(2). Literally interpreted, it said, the provision suggested that the Legislature had imposed a liability to tax on an assessee who was bound by law to carry out his contractual obligation to sell his property at the agreed price and honestly carried out the contractual obligation. It would be strange if obedience to the law should attract the levy of tax on income which had neither arisen to the assessee nor had been received by him. There were situations where it would be absurd and unreasonable to apply section 52(2) according to its strict literal construction. The court, therefore, had to eschew literalness in the interpretation of section 52(2) and try to arrive at an interpretation which avoided any absurdity and made the provision rational and sensible. It was well-settled that where a plain, literal interpretation of a statutory provision produced manifestly absurd and unjust result which could never have been intended by the Legislature, the court could modify the language used by the Legislature or even "do some violence" to it so as to achieve the obvious intention of the Legislature and produce a rational construction. It could also in such a case read into the statutory provision a condition which, though not expressed, was implicit as constituting the basic assumption underlying the statutory provision. Having regard to these rules of interpretation, a fair and reasonable construction had to be placed upon section 52(2), namely, that a condition should be read into it that it would apply only where the consideration for the transfer of the property was understated or, in other words, that the assessee had actually received a larger consideration for the transfer than what was declared in the instrument of transfer and it would have no application in the case of a bona fide transaction where the full value of the consideration for the transfer was correctly declared by the assessee.

In the first place, section 85A does not prescribe a rate of tax. There is, therefore, no question of different assessee-companies being charged to tax at different rates thereunder. It provides for a deduction to be worked out in the manner we have set out. That the quantum of the deduction would vary with the nature of the capital gains by the assessee-company concerned is neither an anomaly nor unjust nor absurd. The ratio of the judgment in Varghese's case [1981] 131 ITR 597 (SC) has no application to a case such as this.

There being no ambiguity in section 85A, there is no warrant for resort to the external aids of interpretation suggested by Mr. Dalvi, namely, the Notes on Clauses of the Finance Bill, 1965, which introduced section 85A, and the Memorandum explaining its provisions.

Mr. Dalvi then drew our attention to the Explanatory Notes to the Finance Act, 1965, issued under Circular No. 3-P dated, October 11, 1965. It is not disputed that this circular was issued by the Central Board of AO Direct Taxes under the provisions of section 119. It is, as it states (paragraph 3), meant to explain the substance and bring out the salient features of the important provisions relating to income-tax in the Finance Act, 1965. The paragraph therein relevant to section 85A reads thus:

"19. In view of the merger of super tax with income-tax, the Finance Act, 1965, has introduced a new section 85A with effect from April 1, 1965, providing, in substance, that income-tax will be chargeable on the inter-corporate dividends referred to above at the rate of 25 per cent. ( 15 per cent. in the types of cases referred to in paragraph 18). This will be achieved by granting a rebate, to the company receiving the dividends, of that part of the income-tax calculated on the dividends at the average rate of income-tax applicable to the company's total income which exceeds the amount of income-tax calculated on the dividends at the above-mentioned rate of 25 per cent. or 15 per cent. as the case may be."

A similar Circular No. 4-P was issued on July 21, 1966, in regard to the Finance Act, 1966. The relevant clause therein upon which Mr. Dalvi relied is clause 32, which reads thus :

"32. A company receiving dividends from any domestic company is entitled, under section 85A, to a rebate of income-tax which has the effect of limiting the tax on such dividends to a specified percentage of the dividends. In a case where the recipient of the dividend is a foreign company (i.e., a company other than an Indian company which has not made the prescribed arrangements for the declaration and payment of dividends within India), and the dividends have been paid by an Indian company in which the public are not substantially interested and which is mainly engaged in the generation or distribution of electricity or construction, manufacture or production of any of the articles or things specified in the Fifth Schedule to the Income-tax Act, the tax on the dividends is limited to 15 per cent. thereof. In all other cases, the tax on inter-corporate dividends received from any domestic company is limited to 25 per cent. thereof. The Finance Act, 1966, has not made any change in these effective rates of tax in respect of such inter-corporate dividends."

Mr. Dalvi relied upon the judgment in Varghese's case [1981] 131 ITR 597 (SC) and the two other judgments of the Supreme Court cited therein. He submitted that the circulars were binding upon the officers of the Revenue and they required that income-tax on inter-corporate dividends should be levied only at the rate of 25 per cent.

In Varghese's case [1981] 131 ITR 597, the Supreme Court dealt with a circular dated July 7, 1964, issued by the Central Board of Direct Taxes relating, inter alia, to section 52(2). The circular referred to the two conditions that had to be satisfied before the provisions of section 52(2) could be applied. It gave directions to the Income-tax Officers in regard to how the provisions should be applied; for example, that Income-tax Officers should give the assessee a reasonable opportunity to be heard. It referred to the speech made by the Finance Minister in the Lok Sabha when the provisions were being debated where he stated that section 52(2) was not aimed at bona fide transactions. Despite this circular, it was found that section 52(2) had been invoked in cases where the transaction was honest and bona fide and there was no understatement of the consideration. The Central Board of Direct Taxes, therefore, issued another circular on January 14, 1974, and instructed the Income-tax Officers to bear in mind the assurance of the Finance Minister that the provisions would not be invoked in the case of bona fide transactions. The Supreme Court held that these circulars were binding upon the Revenue even though they were riot in accord with the literal interpretation of section 52 and departed or deviated therefrom. That circulars of the Central Board of Direct Taxes issued under section 119 and analogous provisions of the earlier Income-tax Acts were binding upon the officials of the Revenue had been decided by the Supreme Court's judgments in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913. In Navnit Lal's case [1965] 56 ITR 198 (SC) the vires of a provision in the Indian Income-tax Act, 1922, was challenged. In upholding the constitutionality thereof, the Supreme Court took into account a circular issued by the Central Board of Revenue which directed officials of the Revenue to act in such manner that past transactions, which would normally have attracted the stringent provisions that were challenged, were substantially granted exemption from the operation thereof. The Supreme Court held that (at p. 203) "a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act . . .". In the case of Ellerman Lines Ltd. [1971] 82 ITR 913 (SC), the circular of the Central Board of Direct Taxes instructed the taxing authorities to take into consideration an investment allowance granted by the authorities in the U. K. in computing the taxable income of British shipping companies. The Supreme Court noted here that it had been held in Navnit Lal's case [1965] 56 ITR 198 (SC) that the concerned circular, though it deviated from the provisions of the Act, was binding on the Income-tax Officer.

Before we deal with the two circulars that were relied upon by Mr. Dalvi, we must note the provisions of section 119 as they stood at the relevant time. All officers and persons employed in the execution of the Act were thereby obliged to "observe and follow the orders, instructions and directions of the Board". It is pertinent to note also that the circulars concerned in Navnit Lal's case [1965] 56 ITR 198 (SC), Ellerman Lines Ltd.'s case [1971] 82 ITR 913 (SC) and Varghese's case [1981] 131 ITR 597 (SC), were, in terms, instructions given to officials of the Revenue.

Now, the first sentence of paragraph 19 of the circular explaining the provisions of the Finance Act, 1965, states that, in view of the merger of super-tax and income-tax, section 85A has been introduced "providing, in substance, that income-tax will be chargeable on the inter-corporate dividends referred to above at the rate of 25 per cent.". The words "in substance" therein must be noted. The material portion of the second, and ultimate, sentence of the paragraph reads thus :

"This will be achieved by granting a rebate to the company receiving the dividends, of that part of the income-tax calculated on the dividends at the average rate of income-tax applicable to the company's total income which exceeds the amount of income-tax calculated on the dividends at the above-mentioned rate of 25 per cent. ."

The mechanism of how income-tax must be charged on intercorporate dividends is set out in this sentence of paragraph 19. Clearly, therefore, the two sentences of the paragraph have to be read together. The mechanism set out in this sentence, which the officials of the Revenue would be bound to follow, is the very mechanism that is provided by section 85A. Read as a whole, therefore, paragraph 19 does not require officials of the Revenue to levy income-tax on inter-corporate dividends only at the rate of 25 per cent.

This brings us to paragraph 32 of the circular explaining the provisions of the Finance Act, 1966. The sentences therein relevant to the controversy before us are the first, the penultimate and the ultimate sentences. The first sentence says that a company receiving dividends from any domestic company is entitled, under section 85A, to a rebate of income-tax which has the effect of limiting the tax on such dividends to a specified percentage of the dividends. The penultimate sentence says that income-tax on inter-corporate dividends received by a company other than a foreign company from any domestic company is limited to 25 per cent. thereof and the ultimate sentence says that the Finance Act, 1966, had not made any change in the effective rates of tax in respect of inter-corporate dividends. The understanding of the Board, as suggested by these sentences, appears to be that section 85A has the effect of limiting the tax on inter-corporate dividends to a specified percentage thereof and that, in the case of intercorporate dividends received from a domestic company, it is limited to 25 per cent. We agree with the submission of Mr. Jetley, learned counsel for the Revenue, that no part of paragraph 32 can be read as being an order, instruction or direction, which it has categorically to be if it is to bind the officials of the Revenue. Furthermore, the paragraph states that the Finance Act, 1966, which it explains, has not made any change in section 85A. Implicitly, therefore, it refers to the earlier circular explaining the Finance Act, 1965, paragraph 19 whereof we have already analysed.

We are, in the circumstances, unable to accept the submission that income-tax on inter-corporate dividends can be levied by the officials of the Revenue only at the rate of 25 per cent. thereof.

In the result, the question posed to us is answered in the negative and in favour of the Revenue.

There shall be no order as to costs.

 

 

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.