1963-VIL-45-MAD-DT
Equivalent Citation: [1964] 52 ITR 763, [1963] 50 ITR . (Sh. N.) 35
MADRAS HIGH COURT
Tax Case No 152 of 1961
Dated: 09.08.1963
COMMISSIONER OF INCOME-TAX, MADRAS
Vs
SUNDARAM & COMPANY PRIVATE LTD
S. Ranganathan, for the Appellant
R. Venkataraman, for the Respondent
Bench
JAGADISAN AND SRINIVASAN, JJ.
JUDGMENT
JAGADISAN J.-
The Income-tax Appellate Tribunal, Madras Bench, has at the instance of the Commissioner of Income-tax, Madras, referred the following questions to this court under section 66(1) of the Indian Income-tax Act:
"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 section 34(1)(b) under rule 27 of the Appellate Tribunal Rules?
3. Whether the setting aside of the assessment made under section 34(1)(b) was correct in law?"
The assessee is a private limited company doing business as buying agents of Sri Meenakshi Mills Ltd., Madurai. In respect of the assessment year 1956-57 relevant to the accounting year 1955-56 (April 1, 1955, to March 31, 1956) its total income was assessed by the Income-tax Officer at Rs 5,69,396. The assessment order was made on March 29, 1957. During the year ended March 31, 1956, it had declared dividends of Rs 4,32,325. Under the Finance Act of 1956 it was entitled to a gross rebate of four annas per rupee in the computation of the super-tax payable. But this rebate had to be reduced in accordance with the Finance Act taking into account bonus shares or dividends distributed in excess of six per cent. of the paid-up capital. The relevant statutory provisions relating to super- tax rate under the Finance Act of 1956 are as follows:
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Rate |
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"The First Schedule: Part II, D. In the case of every company On the whole of total income |
Six annas and nine pies in the rupee. |
Provided that--.....
(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;......
(the assessee company admittedly falls within this clause)
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 hereunder:
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on the amount representing the face value of any bonus shares or the amount of any bonus issued to its shareholders, 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. |
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(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 dividends in excess of six per cent. of its paid-up capital, not being dividends payable at a fixed rate-- |
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On that part of the said dividends which exceeds 6 per cent. but does not exceed 10 percent. of the paid-up capital; |
at the rate of two annas per rupee. |
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On that part of the said dividends which exceeds 10 per cent. of the paid-up capital; |
at the rate of three annas per rupee; |
Without going into the details of the above provisions we may state that, broadly speaking, the rebate of four annas permissible under clause (ii) of the proviso is liable to be reduced at a particular rate, two annas or three annas per rupee if the company had distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid-up capital.
For the assessment years 1946-47 to 1951-52 the Income-tax Officer had passed orders under section 23A of the Act on March 18, 1952, deeming that a sum of Rs 3,54,716 was distributed as dividends. These amounts were adjusted in the assessee's books of accounts in the accounting year 1955-56 by crediting the shareholders' accounts. A sum of Rs 26,600 was distributed in the accounting year by the assessee to avoid the application of section 23A for 1952-53, 1953-54 and 1954-55. Another sum of Rs 51,000 included in the dividend distribution of the year was unconnected with the provisions of section 23A.
The Income-tax Officer found that the proviso (ii)(b) of paragraph D(iii) of the Finance Act, 1956, was not properly applied in making the assessment for the year in question and that the assessee, therefore, obtained excessive tax relief. Consequently, he issued notice under section 34(1)(b) of the Act with a view to reopen the completed assessment. The assessee contended that section 34(1)(b) was not applicable, that it had not obtained any "excessive relief" as viewed by the Income-tax Officer and that dividends deemed to have been distributed in pursuance of orders under section 23A in respect of a number of earlier years have merely been adjusted during the year of account in a consolidated manner and that such adjustment could not be caught by the proviso under clause D of the Finance Act, 1956. The officer, however, overruled these objections of the assessee and reduced the rebate of four annas granted at the time of the first assessment by applying the proviso to the Finance Act. This reduction of rebate was applied by the officer in respect of a sum of Rs 4,32,325 which, according to the officer was the deemed distribution of dividend as per the provisions of section 23A. The assessee preferred an appeal before the Appellate Assistant Commissioner. It raised objections that the proceedings under section 34 of the Act were without jurisdiction and that, in any event, the rebate of four annas should not have been reduced in respect of the entire sum of Rs 4,32,325. The Appellate Assistant Commissioner overruled the objection that section 34 would not be attracted taking the view that the granting of the rebate at the rate of four annas would amount to excessive relief having been obtained by the assessee. He, therefore, justified the proceedings under section 34(1)(b) of the Act. On the merits of the case the Appellate Assistant Commissioner was of the opinion that the Income-tax Officer was not justified in withdrawing the rebate in respect of dividends amounting to Rs 3,54,716 as these amounts were only distributed during the year ending March 31, 1956, in consequence of orders of the Income-tax Officer under section 23A of the Act. In respect of the sum of Rs 26,600 the Appellate Assistant Commissioner held that it was distributed in the year in question to get out of the operation of section 23A and that, therefore, there were grounds for reducing the rebate. In regard to the balance of Rs 51,000 the view of the appellate authority was that it had nothing to do with the provisions of section 23A and that, therefore, the officer was right in withdrawing the rebate in respect of the distribution of that dividend. In the end he granted relief to the assessee in respect of a sum of Rs 3,54,716 but refused relief as regards the sum of Rs 77,600 (Rs. 26,000 plus Rs 51,000).
There was a further appeal, not at the instance of the assessee who was apparently satisfied with the order of the Appellate Assistant Commissioner but at the instance of the department. The contention urged by the department was that the Appellate Assistant Commissioner wrongly interfered with the order of the Income-tax Officer in regard to the reduction of rebate pertaining to Rs 3,54,716. The assessee raised the objection before the Tribunal that section 34 proceedings were entirely without jurisdiction and that, therefore, the order of the Appellate Assistant Commissioner in so far as it was favourable to it was right. On behalf of the department it was contended before the Tribunal that the assessee was not competent to raise the objection of the non-applicability of section 34 of the Act as it had not filed an independent appeal against the adverse finding of the Appellate Assistant Commissioner holding that this provision was applicable. The Tribunal held that it was open to the assessee to raise the point because of rule 27 of the Tribunal Rules to which we shall refer a little later. The Tribunal accepted the plea of the assessee that section 34 was not applicable and consequently dismissed the appeal by the department. Dealing with the objection of the assessee that section 34 was not applicable the Tribunal observed as follows:
"In our opinion, this is not a case which will fall within any situations for which the provisions of section 34 have been designed. It is clearly not a case where any income has been the subject of excessive relief......The relief originally granted was out of the tax otherwise computable and not from the assessed income, though it was a ratio thereof."
Questions Nos. 1 and 2 are really overlapping. The real questions which are raised by the department in this reference are two-fold: (1) whether the Tribunal was right in applying rule 27 of the Tribunal Rules and permitting the assessee to contend that the proceedings under section 34 initiated by the Income-tax Officer were wholly bad, and (2) whether the view of the Tribunal holding section 34(1)(b) was not applicable is in conformity with law.
We shall first deal with the point whether it was competent to the assessee to urge before the Tribunal that section 34 was not applicable at all to the facts and circumstances of the case without filing an independent appeal calling in question the correctness of the view taken by the Appellate Assistant Commissioner as regards this matter. The powers of the Appellate Tribunal in deciding appeals before it are to be found in section 33 of the Act. The relevant portion of section 33 may now be extracted.
"33. (3) An appeal to the Appellate Tribunal shall be in the prescribed form and shall be verified in the prescribed manner, and shall, except in the case of an appeal referred to in sub-section (2), be accompanied by a fee of one hundred rupees."
(Sub-section (2) refers to the right of the Commissioner to prefer an appeal.)
"33. (4) The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner."
The words "such orders thereon" clearly indicate that the Tribunal's power is to be exercised on matters or questions raised before it either by the assessee or by the department. Rules relating to the Appellate Tribunal framed in pursuance of sub-section (8) of section 5A of the Indian Income-tax Act provide for the procedure to be followed by the Tribunal in hearing and disposing of appeals. We need refer only to rules 12 and 27. Rule 12 reads:
"The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth, in the memorandum of appeal but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule:
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground."
Rule 27 is as follows:
"The respondent, though he may not have appealed, may support the order of the Appellate Assistant Commissioner on any of the grounds decided against him."
The appellant has no right to urge any ground not set forth in the memorandum of appeal. But it would be open to the Tribunal to grant him leave to raise additional grounds. So far as the Tribunal is concerned, it would not be fettered in its decision by confining to the grounds set forth in the memorandum of appeal or even to those taken by the appellant with the leave of the Tribunal. So long as the principles of natural justice are not violated and the affected person is afforded an opportunity to be heard the Tribunal can dispose of the appeal in its own light. But of course the Tribunal should not act arbitrarily or capriciously but should adopt judicial standards. For example, questions of fact which had not been mooted or discussed or investigated by the Income-tax Officer or by the Appellate Assistant Commissioner should not be gone into at the stage of the appeal before the Tribunal. It would of course be open to the Tribunal to remand the proceedings for fresh ascertainment of facts. The substance of rule 12 is this. The appellant can only urge grounds either set forth in the memorandum of appeal or subsequently taken with the leave of the Tribunal, but the Tribunal's powers to decide the appeal are not subject to any such restrictions. Turning to rule 27 which permits the respondent before the Tribunal to support the order of the Appellate Assistant Commissioner on any of the grounds decided against him, it seems to be clear that this is a right conferred upon him. The Tribunal has no discretion to deprive the respondent of the benefit of this rule. It is an enabling provision which the respondent can avail himself of in order to retain the benefit which has accrued to him from the order appealed against.
The rule that a respondent before the court or Tribunal can justify and support the decision in his favour not merely on grounds favourably decided but also on other grounds held against him by an authority whose decision is challenged on appeal is nothing peculiar to the procedure before the Income-tax Appellate Tribunal. A similar provision is found in the Civil Procedure Code. Order XLI, rule 22, Civil Procedure Code, states:
"(1) Any respondent, though he may not have appealed from any part of the decree, may not only support the decree on any of the grounds decided against him in the court below, but take any cross-objection to the decree which he could have taken by way of appeal............"
The reason for such a rules is obvious. If the final outcome of a decision is favourable to a person it would not matter to him how and by what reasoning the decision is arrived at so long as it is not challenged by his adversary. But, if it is attacked he must be in a position to support it on every ground he urged before the deciding authority whether or not it found favour. If he were not given that amount of freedom he would be a victim of wrong reasons. This would be unjust in the extreme. If rule 27 had not been enacted there would still have been scope for invoking the principle underlying that rule in the name of natural justice. The true rule is that an appeal is a continuation of the original proceeding and that rights of parties cannot be defeated by the form of the order but by the actual decision.
Learned counsel for the department contends that it would not be open to a respondent to travel outside the scope of the subject-matter of the appeal under the guise of invoking rule 27. This contention is unexceptionable and we do not think that the learned counsel for the assessee disputed it. But then, what is the subject-matter of an appeal? The answer is simple. The subject-matter is that which the Tribunal or the appellate court is called upon to decide and to adjudicate. The subjectmatter cannot be identified with the grounds raised either by the appellant or by the respondent. In the present case the subject-matter of the appeal before the Tribunal was the reduction of tax rebate in respect of Rs 3,54,716. It is impossible to contend that the subject-matter of the appeal lay within a narrower limit and that it was the question whether the Appellate Assistant Commissioner was right in not allowing reduction of rebate on the ground mentioned by him. The assessee had obtained relief before the Appellate Assistant Commissioner to a particular extent. And this was objected to by the department in the appeal before the Tribunal. The applicability of section 34 of the Act was a general question raised by the assessee even before the Appellate Assistant Commissioner. It cannot be said that it became debarred from raising the question over again before the Tribunal because of the fact that it did not choose to file an appeal against other portions of the order of the Assistant Commissioner which was unfavourable to it. The scope of section 34 was a ground which was decided against the assessee before the Appellate Assistant Commissioner and we do not see how the assessee is precluded from relying upon rule 27 and urging that ground before the Tribunal with a view to support only that portion of the Appellate Assistant Commissioner's order which was favourable to it.
The decision of this court in V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 I.T.R. 377, 395 is relied upon by the learned counsel for the department in support of the contention that the subject-matter of the appeal is confined only to the grounds of appeal raised on behalf of the appellant. We have no doubt that this decision is not authority for the position contended. The decision in that case was that where an appeal was only against part of an order the appellate authority would have no jurisdiction to interfere with the other part which does not form the subject of the appeal. Ramachandra Iyer J., as he then was, after referring to the provisions of the Act and the Rules framed thereunder, observed thus:
"The aforesaid rules, including the power to remand, would be governed by the provisions of section 33(4), and, therefore, the jurisdiction of the Tribunal would be circumscribed by the subject-matter of the appeal--the subject-matter of the appeal being that contained in the original grounds of appeal, together with such other grounds as may be raised by the assessee by leave of the Tribunal. As the right of the respondent is only to support the order of the Appellate Assistant Commissioner on other grounds, it would follow that the Tribunal would have no jurisdiction to pass an order, so as to permit a ground to be raised by the respondent which, if allowed, would make the position of the appellant worse than what it was before."
The principle underlying this decision is that the Tribunal has no power to enlarge the scope of the appeal before it by permitting either the appellant or the respondent to urge grounds which would have the effect of destroying the finality of that portion of the order of the original authority which had not been appealed against by either of the parties. But this does not mean that the respondent should be denied the opportunity of supporting a decision in his favour which has come up on appeal on a ground decided against him by the authority whose decision is challenged.
We would like to refer to two decisions of the Bombay High Court on this question of the scope of appellate power of the Tribunal and the right of the respondent to support the decision on grounds decided against him. In J.B. Greaves v. Commissioner of Income-tax [1963] 49 I.T.R. 107 the Bombay High Court held, following two decisions of that court, New India Life Assurance Co. Ltd. v. Commissioner of Income-tax [1957] 31 I.T.R. 844 and Commissioner of Income-tax v. Hazarimal Nagji & Co. [1962] 46 I.T.R. 1168, that the subject-matter of an appeal is confined to grounds specifically raised in the memorandum of appeal, the new grounds raised by the appellant with the previous permission of the Tribunal and the grounds urged by the respondent in support of the decree passed in his favour, even though the decision of the court, against which the appeal is filed, is against him. The learned judges of the Bombay High Court observed that this is a general rule and that the position of the Appellate Tribunal is the same as a court of appeal under the Civil Procedure Code and that its powers are identical with the powers enjoyed by the appellate court under the Code. At page 124 it is observed as follows:
"Now, a respondent in an appeal is undoubtedly entitled to support the decree which is in his favour on any grounds which are available to him, even though the decision of the lower court in his favour may not have been based on those grounds. A respondent, unless he has filed an appeal himself or filed cross-objections in the appeal filed by his opponent, will not be entitled to challenge that part of the lower court's decree which is against him, and the appellate court will have no power or jurisdiction to permit him to do so..............
It thus follows that the subject-matter of appeal would get confined to the limits of the grounds specifically raised in the memorandum of appeal, the new grounds raised by the appellant with the previous permission of the Tribunal and the grounds urged by the respondent in support of the decree passed in his favour, even though the decision of the court, against which the appeal is filed, is against him."
In Pokhraj Hirachand v. Commissioner of Income-tax [1963] 49 I.T.R. 293 the same principle is reiterated.
We would like to disentangle the subject-matter of the appeal from the grounds upon which the appeal is raised or upon which the respondent would like to rely. As stated already the subject of an appeal is an item of dispute or controversy between the department and the assessee in regard to a particular question. Properly speaking, the subject of a tax appeal is the relief sought by the assessee and objected to by the department. The grounds are only missiles employed by the combatants to achieve their respective desired ends. It would not be possible to circumscribe the subject of the appeal by taking into account the rival contentions or the reasons or the grounds which are put forward either by the department or by the assessee. We have no doubt that in the light of the principles laid down by this court in V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 I.T.R. 377 and also of the principle of the Bombay decision referred to above and on the principles which we have ourselves set forth, the Tribunal acted rightly in permitting the assessee to raise the question of the applicability of section 34 before it. Questions Nos. 1 and 2 raised in this reference will, therefore, be answered against the department and in favour of the assessee.
The third question referred raises the applicability of section 34(1)(b) of the Act. In order to apply this provision the department should establish that income, profits or gains chargeable to income-tax have escaped assessment, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or that excessive loss or depreciation allowance has been computed. The department concedes that in the present case there has been no escapement of assessment or under-assessment or that excessive loss or depreciation allowance had been computed at the original assessment. It is however urged that the facts establish either an assessment at too low a rate or that income, profits or gains have been made the subject of excessive relief. The Appellate Assistant Commissioner was inclined to take the view that the assessee obtained excessive relief in the first assessment by reason of the improper application of the provisions of the Finance Act, 1956. The reasoning of the Assistant Commissioner is in these terms:
"Inasmuch as the income, profits or gains received excessive relief by the Income-tax Officer notwithstanding the rebate to the extent of tax payable on account of excessive distribution of dividends distributed in the year, I hold that the action of the Income-tax Officer under section 34(1)(b) was justified."
The conclusion of the Tribunal which did not agree with this viewpoint of the Appellate Assistant Commissioner is certainly broad-based. The Tribunal states that the case would not fall within any of the conditions prescribed under section 34(1)(b) for the reopening of an assessment. The Tribunal is emphatic in stating that the income of the assessee has not been the subject of "excessive relief". It seems to be further of the opinion that there has been no assessment at "too low a rate" because the relief of rebate originally granted under the Finance Act was out of the tax computable and from the assessed income. The Tribunal observes:
"The relief originally granted was out of the tax otherwise computable and not from the assessed income, though it was a ratio thereof."
So far as we are able to gather from this passage of the order of the Tribunal, it seems to us, that the Tribunal's view is reduction of rebate as provided for under the second proviso of clause (b) of Part II of the Finance Act of 1956 is not a matter pertaining to the rate of taxation.
The question whether the assessee had obtained excessive relief during the first assessment need not be taken up for a detailed consideration by us as we are of opinion that the provisions of section 34(1)(b) can be properly applied to the present case on the ground that the first assessment was at too low a rate. We may however point out that it would be very difficult for the department to sustain the position that the assessee obtained undue benefit by way of "excessive relief" as the expression "relief" under the Act in respect of income, profits or gains is referable to various kinds of reliefs afforded to the assessee under sections 15B, 15C, 49A, 49B, 49C, 46D and 60: (See Simplex Mills Ltd. v. P.S. Subramanyam, Income-tax Officer*. This decision has been affirmed by the Supreme Court in [1963] 48 I.T.R. 182).
The question for consideration is whether a wrong allowance of rebate, to which the assessee was not entitled, by the Income-tax Officer in the first instance would not amount to the assessee having been subject to tax at "too low a rate". The rate of taxation regarding income-tax and super-tax is prescribed annually by the Finance Act which is a Central enactment. Section 3 of the Income-tax Act provides that:
"3. Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year..........in respect of the total income of the previous year of every individual, Hindu undivided family, company, etc."
Section 55 deals with the levy of super-tax and that reads as follows:
"55. In addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, company,........... an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by a Central Act."
In the present case we are concerned with the levy of super-tax. We have already set out the relevant provision of the Finance Act, 1956. Schedule I, Part II of that Act is headed "Rates of Super-tax". Clause D sets out the rate, in the right hand column, at six annas and nine pies in the rupee. The first proviso enacts that a rebate at the rate of four annas per rupee of the total income shall be allowed in the case of any company which satisfied condition (a) but not condition (b), of the preceding clause.
The learned counsel for the assessee does not dispute that the rebate allowed to the assessee company under the first proviso is a rebate of the rate of taxation and that therefore the super-tax that should be levied in respect of the company's income coming within the proviso would be at the general rate less the rebate of four annas per rupee granted. But the learned counsel would however submit that the operation of the second proviso has no bearing on the question of any rate of taxation. There is hardly any substance in this contention. The second proviso enacts that the amount of the rebate to which the assessee becomes entitled under the first proviso shall be reduced at a particular rate. It must be noted that the whole scheme of levy of super-tax as regards companies mentioned in clause D of the Finance Act of 1956 is one which ultimately bears upon the rate of taxation. The computation of tax at various rates would depend upon the nature of the company, the dividends distributed, the bonus shares issued and other matters referred to in the enactment. It would be impossible to hold that the scheme is one which partly relates to the rate of taxation and partly relates to an ad hoc reduction of the tax depending upon the measure of distributed dividends or the issue of bonus shares. There is nothing in the language of the second proviso to lend support for the contention that the reduction of rebate permissible under the first proviso is a mere tax diminution and is not a lessening of the rate of tax. If the allowance of rebate means quite plainly the levy at a smaller rate of tax, the reduction of the allowance would lead to the incidence of a larger rate. Disparity or difference in two tax assessments may not conclusively establish different tax rates. But that would be cogent evidence to indicate strongly that it has been occasioned by levels of tax rate being different. The distinction between liability to pay different amounts of tax and the liability to pay different rates of tax is of course real and not a mere refinement. There can however 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 contention urged on behalf of the assessee that the scope of the second proviso is only reduction of rebate and that is increase of tax amount and not increase of tax rate cannot be supported particularly in view of the decision of the Supreme Court in Rajputana Agencies v. Commissioner of Income-tax [1959] 35 I.T.R. 168; [1959] Supp. 1 S.C.R. 142. In that case the assessee company had declared a dividend of Rs 30,000 out of which Rs 15,159 was held to be excess dividend. The company's total income was assessed under the Finance Act, 1951, read with section 2 of the Finance Act, 1952. As the company carried on its business in Saurashtra, then a Part B State, it obtained rebate under paragraph 6(iii) of the Part B States (Taxation Concessions) Order, 1950. The Income-tax Officer determined the additional income-tax payable by the appellant at the rate of 44 pies in the rupee on the excess dividend as after the allowance of the rebate under the Order, the income-tax on the company's total income worked out at 16 pies in the rupee. The company contended that the rebate allowed under the Part B States (Taxation Concessions) Order should not be taken into consideration for the purpose of determining the tax payable on excess dividend and that the rate at which the excess dividend should be taxed was the difference between five annas in the rupee and the rate prescribed by the Finance Act, 1951, in regard to the company's total income. It was held that the "rate applicable to the total income of the company" in sub-clause (b) and clause (ii) of the Explanation, read with clause (ii) of the proviso to paragraph B of Schedule I of the Finance Act, 1951, referred not to the rate prescribed by the Act for the relevant year generally in reference to incomes of companies, but to the rate actually applied in a given case and that, therefore, the rate at which the appellant company was liable to pay additional income-tax on the excess dividend was the difference between five annas in the rupee and 16 pies in the rupee at which the company had in fact paid income-tax in the relevant year. The following passage in the judgment of his Lordship Gajendragadkar J. seems to lay down the guiding principle which should govern us in deciding the present case:
"Besides, in construing the words 'the rate applicable' we must bear in mind the context in which they are used. The context shows that the said words are intended to explain what should be taken to be 'the tax actually borne'. If the legislature had intended that the tax actually borne should in all cases be determined merely by the application of the rate prescribed for companies in general, the Explanation given by the material clause would really not have been necessary. That is why, in our opinion, the context justifies the construction which we are inclined to place on the words 'the rate applicable'."
Succinctly stated, the department's contention is this. Looking at the substance of the matter, it is fairly clear that at the original assessment the assessee, having obtained a rebate of four annas without suffering reduction as per the terms of the Finance Act, was really assessed at too low a rate. If the provisions of the Finance Act had been properly applied and the necessary reduction in the amount of rebate had been granted, the assessee would have had to bear a greater burden of tax. The difference in the burden of tax between the first assessment, which was regardless of the application of the second proviso to the Finance Act, and the second assessment, which brought to bear the second proviso, is not merely a difference of the amount of tax payable but a difference in the rate of taxation. In this view of the matter we have no doubt that the Tribunal was not right in holding that the proceedings under section 34(1)(b) were not warranted. On the assumption that the grant of rebate without reduction was not proper compliance with the provisions of the Finance Act, 1956, the income, profits and gains of the assessee have been assessed to tax at too low a rate, and sufficient grounds exist to provide jurisdiction for proceedings under section 34(1)(b). This is all that we can say at the present moment. We are not called upon to say whether there should or should not be a reassessment. The scope of the question now referred to us is only as regards the validity of initiation of proceedings under section 34(1)(b).
Mr. R. Venkataraman, learned counsel for the assessee, raises the contention that the department cannot apply section 34(1)(b) of the Act on the ground of a previous assessment at too low a rate in view of the terms of the notice issued to the assessee at the time of the initiation of the proceedings. A copy of the section 34 notice has been placed before us and that shows that in the view of the Income-tax Officer the ground available to him for reopening the assessment was that the income, profits or gains of the assessee has been the subject of excessive relief. The other grounds, (a), (b), (c) and (e), in the form of the notice have been struck out. But that question regarding the power of the Income-tax Officer whether, having issued a notice under section 34 on one of the grounds mentioned in section 34(1)(b), it should be open to him to call in aid other grounds available to him and which actually emerge at the time of the proceedings themselves, is not now properly before us. That question does not arise from the order of the Tribunal. Whether it would be open to the assessee to raise the point before the Tribunal when the matter is again taken up for consideration by it for disposal of the case on the merits is a question upon which we do not express any opinion.
The Tribunal has disposed of the appeal merely on the ground that section 34(1)(b) was not applicable. We have now held that that view is not correct. It will be open to the Tribunal to take back the appeal on its file after receipt of this reference and dispose it of in accordance with law.
Questions Nos. 1 and 2 are answered against the department and question No. 3 is answered in favour of the department. There will be no order as to costs.
Questions answered accordingly.