Commissioner Of Income-Tax v. Orkay Silk Mills Pvt. Ltd.

Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 104 of the Income-tax Act, 1961, were not applicable to the assessee-company for the assessment year 1976-77?”

2. The facts of the case relevant for deciding the controversy in this reference, briefly stated, are as follows:

3. Orkay Knitting Industries Pvt. Ltd. amalgamated with the asscssee-company with effect from July 1, 1975. The amalgamation was approved by this court by order dated October 16, 1975, subject to the terms of the said order and the scheme of amalgamation attached thereto. As a result, Orkay Knitting Industries Pvt. Ltd. merged with the assessee-company with effect from July 1, 1975. However, despite the amalgamation of Orkay Knitting Industries Pvt. Ltd. with the assessee-company with effect from July 1, 1975, the Income-tax Officer passed an order under section 104 of the Income-tax Act on the said company on March 31, 1977, levying additional tax of Rs. 1,07,955 for the assessment year 1976-77 relevant to the previous year ending June 30, 1975. This order of the Income-tax Officer was set aside by the Commissioner of Income-tax (Appeals) on the ground that the said company having been amalgamated with the assessee-company with effect from July 1, 1975, the assessment of the amalgamating company after that date was illegal. The order of the Commissioner of Income-tax-(Appeals) was also affirmed by the Income-tax Appellate Tribunal. The Income-tax Officer thereupon initiated proceedings under section 104 of the Act against the assessee-company which had undertaken to discharge the liabilities of the amalgamating company as per the scheme of amalgamation and levied additional tax under section 104 of the Act in respect of the undistributed profits of the amalgamating company in the previous year relevant to the assessment year 1976-77. This order of the Income-tax Officer was challenged by the assessee before the Commissioner of Income-tax (Appeals) on the ground that the liability under section 104 of the Act did not exist on the date of the amalgamation, i.e, July 1, 1975, because the order under section 104 of the Act was passed in respect of the income of the amalgamating company for the period prior to the date of amalgamation, i.e, period ending June 30, 1975, on the basis of the amendment made by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. The case of the assessee was that the law as amended with effect from April 1, 1976, was not applicable to the assessment of the income of the company which was amalgamated with the assessee-company with effect from July 1, 1975. This submission of the assessee did not find favour with the Commissioner of Income-tax (Appeals) who was of the opinion that the liability of the amalgamating company for the previous year ending June 30, 1975, had to be determined on the basis of the law as it stood on the first day of the relevant assessment year, i.e, April 1, 1976. Admittedly, the amalgamating company was liable to additional tax as per the law applicable to assessment for the assessment year 1976-77. The Commissioner of Income-tax (Appeals), therefore, upheld the order of the Income-tax Officer under section 104 of the Act.

4. The assessee appealed to the Income-tax Appellate Tribunal against the above order of the Commissioner of Income-tax (Appeals). The Tribunal, following the decision of the Calcutta High Court in CIT v. Bombay Photo Stores Pvt. Ltd., [1970] 76 ITR 84, held that additional tax could not be levied in respect of the income of the previous year ending June 30, 1975, by applying the law in force with effect from April 1, 1976. Hence, this reference at the instance of the Revenue. We have heard learned counsel for the parties. There is no dispute about the fact that section 104 of the Act, which provides for levy of additional income-tax on undistributed profits of companies in which the public are not substantially interested, did not apply to industrial companies, that is Indian companies whose business consisted mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power. There is no dispute about the fact that the amalgamating company, Orkay Knitting Industries Pvt. Ltd., was an industrial company and by virtue of Sub-section (4) of section 104 of the Act, as inserted by the Finance Act, 1964, with effect from April 1, 1964, the provisions of section 104 of the Act did not apply to its profits. Sub-section (4) of section 104 reads as under:

“(4) Without prejudice to the provisions of section 108, nothing contained in this section shall apply to—

(a) an Indian company whose business consists wholly or mainly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power;

(b) an Indian company, the value of whose capital assets, being machinery or plant (other than office appliances or road transport vehicles), as shown in its books on the last date of the relevant previous year is fifty lakhs of rupees or more.

Explanation.— For the purposes of clause (a) of this sub-section, the business of a company shall be deemed to consist mainly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included in its total income for the relevant previous year is not less than fifty-one per cent, of such total income.”

5. The above sub-section (4) was, however substituted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, by the following:

“(4) Without prejudice to the provisions of section 108, nothing contained in this section shall apply to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India.”

6. Thus, by the above amendment which came into force with effect from April 1, 1976, the exemption earlier granted on April 1, 1964, to industrial companies and certain other companies was withdrawn with effect from April 1, 1976, and confined only to foreign companies. The only controversy that arises for our consideration is whether for determining the liability of the assessee for the previous year relevant to the assessment year 1976-77, section 104 of the Act as amended with effect from April 1, 1976, will apply or the provision as it stood during the previous year would apply. This controversy, in our opinion, is no more res integra. It is well settled now that though the subject of charge under the Income-tax Act is the income of the previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied. Reference may be made in this connection to the decision of the Supreme Court in CIT v. Isthmian Steamship Lines, [1951] 20 ITR 572 where it was observed (page 577):

“It will be observed that we are here concerned with two datum lines: (1) the 1st of April, 1940, when the Act came into force, and (2) the 1st of April, 1939, which is the date mentioned in the amended proviso. The first question to be answered is whether these dates are to apply to the accounting year or the year of assessment. They must be held to apply to the assessment year, because in income-tax matters the law to be applied is the law in force in the assessment year unless otherwise stated or implied, the first datum line, therefore, affected only the assessment year of 1940-41, because the amendment did not come into force till the 1st April, 1940. That means that the old law applied to every assessment year up to and including the assessment year 1939-40.”

7. Reference may also be made to the decision of the Supreme Court in Karimtharuvi Tea Estate Ltd. v. State Of Kerala, [1966] 60 ITR 262, wherein it was held (page 264):

“Now, it is well-settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force.”

8. In view of the above, it is clear that for determining the liability of the assessee-company in respect of the income of the amalgamating company for the previous year ending 30th June, 1975, the law applicable on the first day of assessment year 1976-77, i.e, 1st April, 1976, would apply and not the law applicable during the previous year. In view of the above, the question referred to us is answered in the negative and in favour of the Revenue.

9. The reference is disposed of accordingly with no order as to costs.