C.I.T.,MADURAI vs. T V SUNDARAM IYENGAR & SONS

C.A. No.-011864-011867 - 1996Supreme Court09 April 1975Bench: CHANDRACHUD Y.V.14 pages
For Respondent: A. T. M. SAMPATH
AI SummaryAllowed

What were the facts?

The assessee, T.V. Sundram Iyengar (P) Ltd., had industrial profits of Rs. 1.51 lakhs and non-industrial profits of Rs. 8.43 lakhs. Section 23A of the Indian Income Tax Act, 1922, required distribution of 45% of industrial profits and 60% of non-industrial profits as dividends. The company distributed Rs. 4.20 lakhs as dividends. The Income Tax Officer (ITO) allocated the distributed dividends proportionally to the profits of the two segments and levied additional super-tax on the entire undistributed balance of Rs. 13.21 lakhs. The Appellate Assistant Commissioner confirmed the ITO's order. The Appellate Tribunal held that the company had distributed the statutory dividend for industrial profits and was not liable for additional super-tax on those profits, but upheld the levy on non-industrial profits. The High Court confirmed the Tribunal's view. The Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the High Court and Tribunal were in error. The legal fiction created by Explanation 2 to Section 23A of the Indian Income Tax Act, 1922, is expressly limited to the purpose of applying the statutory percentages separately to the profits of each part of the company's business. It does not mean that the profits of each part should be treated as the total income of the company for all purposes. The Court found that the language of Section 23A(1) and Explanation 2 is clear and distinct. The additional super-tax is a single levy on the "undistributed balance of the total income of the previous year." Therefore, even if there is a shortfall in dividend distribution for a particular segment, the additional super-tax is to be levied on the entire undistributed balance of the company's net income. The Court set aside the High Court's order and allowed the appeal.

What were the issues?

1. Whether, for the purposes of Section 23A of the Indian Income Tax Act, 1922, the profits of the industrial and non-industrial parts of a company's business should be treated as if they were the total income of the company for all purposes, or if the legal fiction created by Explanation 2 is limited to its appointed purpose. (Question of law) Assessee's contention: The High Court and Tribunal were correct in holding that the statutory percentages should be applied separately to the profits of each part, and the fiction created by Explanation 2 should be given its full effect, meaning the penalty could only be imposed on the part where the default occurred. They relied on the principle that penal statutes should be construed strictly in favour of the assessee. Revenue's contention: The High Court and Tribunal erred in their interpretation. The language of Section 23A and Explanation 2 is clear and does not support the assessee's interpretation. The fiction in Explanation 2 is limited to the purpose of applying the statutory percentages separately to each part's profits, and the levy of additional super-tax is on the entire undistributed balance of the total income.

Which sections of the Income-tax Act were involved?

Section 23A

AI-generated summary — verify with the full judgment below

http://JUDIS.NIC.IN SUPREME COURT OF INDIA PETITIONER: C.I.T. MADRAS Vs. RESPONDENT: T. V. SUNDRAM IYENGAR (P) LTD. DATE OF JUDGMENT09/04/1975 BENCH: CHANDRACHUD, Y.V. BENCH: CHANDRACHUD, Y.V. SARKARIA, RANJIT SINGH GUPTA, A.C. CITATION: 1976 AIR 255 1975 SCR 93 1976 SCC (1) 17 CITATOR INFO : F 1983 SC 420 (12) ACT: Indian Income Tax Act. 1922, s. 23 A-Scope of. HEADNOTE: Under Section 23A of the Indian income Tax Act, 1922, if in respect of any previous year the profits and gains distributed as dividends within the 12 months immediately following the expiry of that previous year are less than the statutory percentage of the total income of that previous year as reduced by the amounts mentioned in cls. (a), (b) and (c) and sub-s. (1), the Income Tax Officer shall make an order that the company shall be liable to pay super-tax at the prescribed rate on the undistributed balance of the total income of the previous year. According to Explanation 2, statutory percentage means 45 per cent of the industrial profits and 60 per cent of nonindustrial profits.The explanation further says that the said

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