THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY vs. THE KHATAU MAKANJI SPINNING AND WEAVING CO. LTD., BOMBAY.

CIVIL APPEAL No. 303/1958Supreme Court[1960] 3 S.C.R. 87304 May 1960Bench: 3 JudgesAuthor: S.K. DAS, J.L. KAPUR, M. HIDAYATULLAH S.C.R. SUPREME COURT REPORTS8 pages
AI SummaryDismissed

What were the facts?

The Commissioner of Income-tax (appellant) appealed a High Court decision concerning the assessment year 1953-54 for the respondent assessee-company. The Income-tax Officer levied additional income-tax on excess dividends declared by the company, amounting to Rs. 1,87,691. The levy was calculated at 5 annas per rupee, after deducting income-tax borne by previous year's profits at 4 annas per rupee, a 5% surcharge, and a rebate of 1 anna per rupee as per the Finance Act, 1953. The Income-tax Tribunal held that these excess dividends were deemed to be paid from undistributed profits of the earlier year ending June 30, 1951, on which a rebate was given. The Tribunal referred questions to the High Court, which consolidated them into a single question regarding the legality of the additional income-tax charge. The High Court answered this question in the negative, and the Commissioner appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in answering the question in the negative. The Court reasoned that the Finance Act provides that tax is levied on the "total income" as defined and determined under the Indian Income-tax Act. The additional income-tax was not properly levied on the total income because what was actually taxed was never a part of the total income of the previous year, nor was it deemed to be so. The Finance Act's fiction, which deemed excess dividends to be out of undistributed profits of preceding years, did not, by itself, make those profits part of the total income of the previous year under assessment. Unless the Finance Act expressly stipulated that these profits should be taxed as part of the total income, the purpose of the levy was not achieved. The Court affirmed that income-tax is a tax on the income of the previous year, and it cannot cover something that is not the income of that year or fictionally made so. The appeal was dismissed.

What were the issues?

1. Whether additional income-tax has been legally charged under Clause (ii) of the proviso to paragraph B of Part I of the First Schedule to the Indian Finance Act, 1951, as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with Section 3 of the Indian Income-tax Act? Assessee's Contention (as inferred from High Court's reasoning and Supreme Court's affirmation): The Finance Act, in providing for additional income-tax on accumulated profits of previous years, went beyond the purpose for which it is enacted annually and could not stand independently without the support of Section 3 of the Indian Income-tax Act. The Finance Act had 'misfired' as it did not resort to legislative methods that would conform to its intended object, such as treating excess dividends as notional income or providing for rectification of assessments. Revenue's Contention (as inferred from the appeal): The additional income-tax was legally charged under the relevant provisions of the Finance Act, read with the Income-tax Act, as the excess dividends were deemed to be paid out of undistributed profits of earlier years.

Which sections of the Income-tax Act were involved?

Section 3,Section 23A,Section 18

AI-generated summary — verify with the full judgment below

-----;- 3 S.C.R. SUPREME COURT REPORTS 873 THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY v. THE KHATAU MAKANJI SPINNING AND WEAVING CO. LTD., BOMBAY. (S. K. DAS, J. L. KAPUR and M. HrnAYATULLAH, JJ.)

Income-tax-Additional Income-tax-Total income-Method of computing-Indian Income-tax Act, r922 (II of r922), s. 3-The Indian Finance Act, I953 (XIV of r953).

The Income-tax Officer found that in the assessment year r953-54 the respondent assessee-company had declared excess dividends amounting to Rs. l,87,691 and he levied additional income-tax on it at 5 annas in the rupee after deducting income- tax borne by the profits of the previous year at 4 annas per rupee, a surcharge of 5 per cent. less rebate of one anna in the rupee as allowed by the Finance Act, 1953· The Income-tax Tribunal held that the excess dividends were deemed to be paid out of undistributed profits of the earlier year ending June 30, 1951 on which a rebate of one anna in the rupee was given in the assessment year 1952-53. It further observed that additional income-tax was also a tax on income, and that the Finance Act could say that the tax would be payable on the income of any year preceding the

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