COMMISSIONER OF INCOME TAX, MADRAS vs. M/S. P. S. S. INVESTMENTS (P) LTD.

CIVIL APPEAL No. 1853/1971Supreme Court[1977] 2 S.C.R. 7809 November 1976Bench: 2 JudgesAuthor: HANS RAJ KHANNA, V.R. KRISHNA IYER B8 pages
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What were the facts?

The assessee, M/s. P. S. S. Investments (P) Ltd., declared a dividend of Rs. 99,000 for the previous year ending December 31, 1957, relevant to the assessment year 1958-59. The Income-tax Officer calculated super-tax considering the entire dividend income. The assessee contended that the dividend was partly out of profits earned in prior years and that the rebate reduction should only consider the proportionate part of the dividend declared in 1957 which came from other income assessed in assessment year 1957-58. The Appellate Assistant Commissioner accepted this in principle but calculated a higher proportionate dividend. The Appellate Tribunal dismissed the Department's appeal. The High Court, on reference, answered questions in favour of the assessee. The Commissioner of Income-tax appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that for computing the reduction in rebate under Paragraph D of Part II of the First Schedule to the Finance Act, 1958, the position of profits and gains as it existed in the previous year should be taken into account, and not in years prior to that. The Court reasoned that Clause (iii) of the Explanation introduces a fiction regarding the amount of dividends deemed to have been distributed, and this fiction operates only within the limits of the statute. The language of the clause requires taxing authorities to consider the company's total income and profits and gains other than capital receipts, reduced by certain allowances, only in the previous year (the year of distribution). The fact that profits accrued in earlier years and included tax-exempt portions is not of much relevance. The Court modified the High Court's answer to question 1, answering it in the negative. No arguments were made on question 2, so it was not decided by the Supreme Court.

What were the issues?

1. Whether, for computing the reduction in rebate under Paragraph D of Part II to the First Schedule to the Finance Act, 1958, the composition of profits of the year from which the dividend was declared should be looked into, and not profits from prior years. - Assessee's contention: The dividend should be apportioned based on profits earned in prior years, and rebate reduction should only consider the proportionate part of the dividend from other income assessed in the previous year. - Revenue's contention: Dividends distributed during the accounting year should be the sole basis for calculating super-tax and rebate, ignoring profits earned in prior years. 2. Whether the Appellate Tribunal was right in law in holding that the paid-up capital of the assessee company should be proportionately reduced for the purpose of reducing the rebate in Corporation Tax. - No arguments were addressed by either side on this issue before the Supreme Court.

Which sections of the Income-tax Act were involved?

Section 66(1)

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A B c D E F G 7 ii COMMISSIONER OF INCOME TAX, MADRAS v. M/S. P. S. S. INVESTMENTS (P) LTD.

November 9, 1976 [H. R. KHANNA AND V. R. KRISHNA IYER, JJ.] Finance Act, 1958, First Schedule Part IT, Explanation (iii) to par11- graph D-Calculation of rebate in computation of Super-tax, whether profits earned during previous year to be taken into account.

The Income-tax officer took into account the respondent's entire dividend income of the year ending December 30, 1957, while calculating the super-tax payable by it for the assessment year 1958-59. Jn appeal against the computa- tion the respondent contended before the Appellate Assistant Commissioner that the dividend-income included profits earned during the previous years, and that rebate should be reduced only with reference to the propartionate part of the dividend declared during 1957 which had come out of the other income assessed to income-tax. and super-tax in the assessment year 1957-58. The respondent's contention was accepted in pninciple.

The Department's appeal was dismis.e<i by the Appellate Tribunal.

The matter was then referred to the High Court under section 66 ( 1) of the Indian Income T

The order continues below.

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