Citation Codes

Equivalent Citations

citation codes

Case Number

149 of 1965

Judges

Mr. Justice Sankar Prasad Mitra
Mr. Justice Sabyasachi Mukherji

Acts

Section 66(1) of the Indian Income-tax Act, 1922.
Corporation Act, 1956 (XXXI of 1956),-- (i)
Income-tax Act and the Finance Act
provisions of the Finance Act, 1959,
INCOME TAX ACT
SECTION 55 INCOME TAX ACT
section 18A 28,964.10 Super-tax
Income-tax Act and Finance Act
Indian Income-tax Act, 1922,
Finance Act, 1958 (XI of1958),
Finance Act of 1956.
FINANCE ACT 1958
Finance Act, 1959,
Finance Act, 1956,
Finance Act, 1957.

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Smart Summary

Structured Summary of the Provided Legal Opinion

Factual and Procedural Background

This is a reference under Section 66(1) of the Indian Income-tax Act, 1922 concerning the assessment year 1959-60 (with the previous year ending 31 August 1958). The Income-tax Officer (ITO), while making assessments for earlier years, found that the assessee had issued bonus shares amounting to Rs. 3,58,800 and had declared dividends amounting to Rs. 44,944 for the year 1956-57. Applying the Finance Act of 1956, the ITO computed gross corporation tax and allowed a rebate at a stated rate but reduced that rebate in respect of the bonus shares and excess dividend; this produced, as assessed by the ITO, no unabsorbed reduction in rebate of Rs. 20,219.37 for that year.

For 1957-58 the ITO computed a rebate under the Finance Act, 1957 and determined an unabsorbed reduction of rebate of Rs. 8,731.10 after taking earlier years into account. For 1958-59 the assessee had a net loss (Rs. 37,046) such that the question of set-off of rebate did not arise. For assessment year 1959-60 the ITO's working (set out in the opinion) showed a computation of super-tax and rebate which included treating an amount of Rs. 8,731.10 as an unabsorbed reduction of rebate, resulting in the conclusion that no super-tax was payable after adjustments.

The assessee objected to the application of the reduction of rebate by Rs. 8,731.10. The Appellate Assistant Commissioner decided against the assessee. Before the Tribunal the assessee argued that the Finance Act had no competence to provide for levy of tax with reference to declaration of dividend on bonus shares in an earlier year; the department argued that the Tribunal was incompetent to consider the vires of the Finance Acts. The Tribunal rejected the department's jurisdictional contention but declined to decide the issue of vires, and on the merits held in favour of the assessee, reasoning (in part) that because the assessee had a loss in 1958-59 there was no reduction of super-tax applicable to the company in that year, and therefore the unabsorbed reduction would have been exhausted and could not reduce the rebate in 1959-60.

The following questions were referred to the High Court (as recorded in the opinion):

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, Sub-clause (a) of Clause (i) of the second proviso to Paragraph D of Part II of the Finance Act, 1959 has been validly enacted?
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the rebate of super-tax in full under the provisions of the Finance Act, 1959, without reducing it by the sum of Rs. 8,731.10?
Three principal controversies framed in the reference (as elaborated in the opinion):
1. whether the sum of Rs. 8,731.10 is deductible from the rebate under Sub-clause (a) of Clause (i) of the second proviso to Paragraph D of Part II of the Schedule to the Finance Act, 1959;
2. whether the Tribunal or the High Court or the Supreme Court in a reference under the Income-tax Act can go into the question of vires of the Finance Acts;
3. whether the particular provision under consideration is ultra vires.

Arguments of the Parties

Assessee's Arguments

The assessee submitted before the Tribunal that it was beyond the competence of the Finance Act to provide for levy of tax with reference to declaration of dividends or bonus shares in an earlier year.
The Tribunal, on the merits, accepted an argument that because the assessee had a loss for 1958-59 there was no actual reduction of super-tax or rebate in that year and therefore any unabsorbed reduction could not be said to remain to reduce the rebate in 1959-60.

Department's / Commissioner's Arguments

The department contended that the Tribunal was incompetent to deal with the question of vires of the Finance Acts.
Before the High Court, departmental counsel argued that the deduction envisaged by the second proviso is to be made irrespective of whether there was an actual deduction or unabsorbed deduction in the immediately preceding year; under the Finance Act, 1959 a fresh, notional calculation must be made to ascertain what has or has not been taken into account. Because the assessee suffered losses in the immediately preceding year, departmental counsel said the sum of Rs. 8,731.10 cannot be deemed to have been taken into account under the Finance Act of 1958 and therefore should be deductible from the rebate under the 1959 Act.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
K.S. Venkataraman and Co. (P.) Ltd. v. State of Madras (Supreme Court)	The Tribunal, as a creature of statute, can decide disputes only in terms of the Income-tax Act; questions of ultra vires are foreign to its jurisdiction. The High Court in a reference cannot decide ultra vires of a provision except to the limited extent of whether the Tribunal had jurisdiction to decide it; the Supreme Court can only do what the High Court can under the relevant statutory provisions.	Used to support the proposition that the Appellate Tribunal, High Court in a reference under the Income-tax Act, and the Supreme Court on appeal cannot entertain or decide questions as to the vires of provisions of the Income-tax Act or the annual Finance Acts.
Commissioner of Income-tax v. Straw Products Ltd.; Beharilal Shyamsunder v. Sales Tax Officer; C. T. Senthilnathan Chettiar v. State of Madras (Supreme Court decisions)	Reiteration of the principle that tribunals/High Courts cannot decide questions of vires in the statutory reference/appeal context described.	Referred to as further authority confirming the same jurisdictional limitation stated in K.S. Venkataraman.
Commissioner of Wealth-tax v. Jhagrakhand Collieries (Private) Ltd. (Calcutta High Court)	Adopts the view that the tribunal/High Court cannot go into questions of vires in the reference context (as stated by the Supreme Court authorities).	Cited as an example of a High Court adopting the same principle.
Maharajah of Pilhapuram v. Commissioner of Income-tax (Privy Council, [1945] 13 I.T.R. 221)	The Income-tax Act, 1922 as amended forms a code which has no operative effect except insofar as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act.	Used to show the close dependence of the Income-tax Act on the annual Finance Act and to support the conclusion that the Finance Act is integral to the operation of the Income-tax code.
Chatturam Horilram Ltd. v. Commissioner of Income-tax (Supreme Court)	Under the scheme of the Income-tax Act, an income attracts the quality of taxability by reference to the Act, but payability and quantification of tax depend on the annual Finance Act; income may be chargeable independent of the Finance Act but until the Finance Act is passed no tax can actually be levied.	Invoked to elaborate the proposition that the Finance Act is essential to the levy and quantification of tax and to show the close connection between the two statutes.
Papanasam Mills Co. (Private) Ltd. v. Commissioner of Income-tax (Madras High Court, [1961] 43 I.T.R. 53)	The second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1956 (reducing standard rebate in respect of excess dividends) was valid; there is no separate levy of super-tax on excess dividend — super-tax is levied on total income and legislature can prescribe limits for relief from that levy.	Referred to and followed: the Court in the opinion respectfully agreed with the Madras High Court's view that it is within legislative competence to correlate the rebate to dividends and to prescribe the basis on which rebate is granted or reduced.

Court's Reasoning and Analysis

The court began by identifying three main controversies: (a) whether Rs. 8,731.10 is deductible from the rebate under the specified sub-clause of the Finance Act, 1959; (b) whether the Tribunal or the courts in a reference can consider the vires of Finance Acts; and (c) whether the provision in question is ultra vires.

On the jurisdictional issue, the court relied on Supreme Court authorities (notably K.S. Venkataraman and subsequent cases) to conclude that the Appellate Tribunal, and consequently the High Court in a reference under Section 66 and the Supreme Court on appeal, cannot go into questions of vires of provisions of the Income-tax Act. The court explained that the Income-tax Act operates as a code whose operative effect for recovery of tax depends on the annual Finance Act (citing the Privy Council in Maharajah of Pilhapuram). The court also cited Chatturam Horilram Ltd. to explain that although income may be chargeable under the Income-tax Act, the payability and quantification of tax depend on the Finance Act; further statutory provisions (examples from the 1961 Act corresponding to earlier provisions) were used to illustrate the close integration between the two enactments.

From these authorities and statutory cross-references the court concluded that because the vires of the Income-tax Act itself cannot be inquired into by the Tribunal, High Court in a reference, or the Supreme Court in the appeal context, those authorities likewise have no jurisdiction to adjudicate the vires of annual Finance Acts. On that basis the court stated that it need not answer Question No. 1 of the reference (the validity of the specific sub-clause of the Finance Act, 1959).

Turning to the merits, the court considered the assessee's contention that the Finance Act lacked competence to provide for the tax consequences asserted. The court found that contention to be of "no substance" and referred approvingly to the Madras High Court's decision in Papanasam Mills which upheld the validity of provisions that reduce rebate in relation to excess dividends and explained that super-tax is levied on total income while the legislature may prescribe the basis for reliefs and rebates.

The court then addressed the departmental argument that the reduction envisaged by the second proviso must be calculated afresh under the Finance Act, 1959 irrespective of whether an unabsorbed deduction existed in the immediately preceding year. Departmental counsel maintained that a notional calculation under the 1959 Act leads to the conclusion that the Rs. 8,731.10 was not deemed to have been taken into account under the Finance Act, 1958 because of the assessee's losses. The court, as recorded in the opinion, expressly stated that it was unable to accept the departmental contentions. The opinion excerpt ends while the court is explaining the legal import of the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1959, with the sentence truncated: "In our view, the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1959, provides that the amount of rebate to-"

Because the provided text ends mid-sentence, the court's complete reasoning on the precise legal operation of the second proviso and any definitive conclusion on the deductible status of Rs. 8,731.10 is not contained in the excerpt.

Holding and Implications

Limited jurisdictional holding recorded in the excerpt: The court indicated that it did not need to answer Question No. 1 (i.e., the question on the validity of Sub-clause (a) of Clause (i) of the second proviso to Paragraph D of Part II of the Finance Act, 1959), because of the jurisdictional reasoning set out in the opinion (that the Tribunal and the courts in a reference context cannot decide vires questions of the Income-tax Act or the Finance Acts).

The excerpt also records that the court rejected the departmental contention (as to the mode of making a notional calculation under the Finance Act, 1959 and treating Rs. 8,731.10 as not taken into account under the 1958 Act). However, the opinion extract ends before a definitive disposal on whether the rebate in 1959-60 must be reduced by Rs. 8,731.10 was finally pronounced by the court.

Final ruling on the central monetary question and consequential implications:
This information was not available in the provided opinion.

Notes on implications that can be drawn strictly from the excerpt:

On jurisdiction: The court's analysis, as recorded, confirms and applies the line of authority that tribunals and courts in the Income-tax Act reference/appeal context cannot entertain challenges to the vires of the Income-tax Act or the annual Finance Acts.
On legislative competence: The court accepted the reasoning of the Madras High Court (Papanasam Mills) that it is within legislative competence to prescribe the basis on which rebates from a levy (super-tax) are granted or reduced, and that rebates may be correlated to dividends without constituting a separate levy on those dividends.
On the specific monetary adjustment at issue (Rs. 8,731.10): the court rejected the department's argument in principle as recorded in the excerpt, but the excerpt does not include the court's complete holding on whether the rebate was to be reduced by that sum in the 1959-60 assessment; therefore the direct legal consequence for the parties on that point is not ascertainable from the provided text.

Disclaimer: This summary is strictly limited to and derived from the text of the provided opinion excerpt. No information has been invented or inferred beyond what the excerpt explicitly states. Portions of the court's ultimate disposition and reasoning are not present in the provided excerpt and are therefore noted as unavailable above.

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Commissioner Of Income Tax v. Deoria Sugar Mills Ltd.

1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1959-60. The previous year ended on the 31st August, 1958. The Income-tax Officer, while making the assessment for the year 1956-57, found that the assessee had issued bonus shares to the extent of Rs. 3,58,800 and had also declared dividend to the extent of Rs. 44,944. He held that in terms of the Finance Act of 1956, the gross of corporation tax payable on the total income would be Rs. 43,460.25. He said that out of this sum a rebate @ 0-4-0 annas per rupee was allowable ; but this rebate had to be reduced in respect of the bonus shares issued @ 0-2-0 annas per rupee and also of the excess dividend over 6 per cent. @ 0-2-0 annas per rupee. In these premises, the Income-tax Officer computed the reduction in rebate at Rs. 45,973.62 and held that there was no unabsorbed reduction in rebate amounting to Rs. 20,219.37.

2. Again, while he was assessing the income for 1957-58, the Income-tax Officer worked out the rebate at Rs. 11,487.90 (@ 30%) under the Finance Act, 1957. He, thereupon, determined the unabsorbed reduction of rebate at Rs. 8,731.10 after taking into consideration the unabsorbed reduction of 1956-57.

3. In the assessment year 1958-59 the question of set-off of rebate did not arise as there was a net loss of Rs. 37,046.

4. For the year 1959-60 the Income-tax Officer worked out the corporation tax payable by the assessee as follows:

Rs.

Super-tax on Rs. 1,01,165 @ 50% 50,582.50 Less rebate @ 30% 30,349.50 Reduction inrebate as per sub-clause (a) of clause (i) of the second proviso to Paragraph D of Part II of the Schedule, the unabsorbed reduction in rebate 8,731.10 21,618.49 28,964.10 Less paid under section 18A 28,964.10 Super-tax payable Nil

5. The assessee objected to the reduction of rebate by the sum of Rs. 8,731.10. But the Appellate Assistant Commissioner decided against the assessee. Before the Tribunal the assessee submitted that it was beyond the competence of the Finance Act to provide for levy of tax with reference to declaration of dividend on bonus shares in an earlier year. The department contended that the Tribunal was incompetent to deal with the question of vires. The Tribunal did not accept the department's contention but did not choose to go into the question of vires. The Tribunal held that, on merits, the assessee was entitled to succeed. The Tribunal said that for the assessment year 1958-59, the assessee's total income resulted in a figure of loss, and there was no question of any reduction of corporation tax or reduction of rebate applicable to a company : and even assuming that the sum of Rs. 8,731.10 being unabsorbed reduction or rebate was to be considered in the assessment year 1958-59, there was no reduction of super-tax applicable to the company and, as such, the reduction in rebate would have exhausted itself. The Tribunal, accordingly, held that in the assessment year 1959-60 the rebate of super-tax @ 30% applicable to the assessee could not be cut down by Rs. 8,731.10.

6. The following questione have been referred to this court:

"(1) Whether, on the facts and in the circumstances of the case, Sub-clause (a) of Clause (i) of the second proviso to Paragraph D of Part II, of the Finance Act, 1959 has been validly enacted ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the rebate of super-tax in full under the provisions of the Finance Act, 1959, without reducing it by the sum of Rs. 8,731.10?"

7. It appears that three principal controversies have to be settled in this reference, viz., (1) whether the sum of 8,731.10 is deductible from the rebate under Sub-clause (a) of Clause (i) of the second proviso to Paragraph D of Part II of the Schedule to the Finance Act, 1929 ? (2) whether the Tribunal or the High Court or the Supreme Court in a reference under the Income-tax Act can go into the question of vires of the Finance Acts ; and (3) whether the particular provision under consideration is ultra vires ?

8. Let us first discuss the competence of an Appellate Tribunal under the Income-tax Act and consequently the High Court and the Supreme Court (hearing a reference under the said Act) to consider the question of vires of the Finance Acts.

9. The Supreme Court's observations in K.S. Venkataraman and Co. (P.) Ltd. v. State of Madras, . in this connection may in the first instance be referred to. At page 130 it is stated :

"As the Tribunal is a creature of the statute it can only decide the dispute between the assessee and the Commissioner in terms of the provisions of the Act (i.e., the Income-tax, Act). The question of ultra vires is foreign to the scope of its jurisdiction. If an assessee raises such a question, the Tribunal can only reject it on the ground that it has no jurisdiction to entertain the said objection or decide on it. As no such question can be raised or can arise on the Tribunal's order, the High Court cannot possibly give any decision on the question of the ultra vires of a provision. At the most the only question that it may be called upon to decide is whether the Tribunal has jurisdiction to decide the said question^ On the express provisions of the Act it can only hold that it has no such jurisdiction. The appeal under Section 66A(2) to the Supreme Court does not enlarge the scope of the said jurisdiction. This court can only do what the High Court can."

10. It is clear, therefore, that the question of vires of any of the provisions of the Income-tax Act cannot be gone into by the Appellate Tribunal constituted under the Act or in a reference to the High Court under Section 66 of the Act or in an appeal to the Supreme Court under Section 66A(2).

11. The Supreme Court has reiterated the same principles in Commissioner of Income-tax v. Straw Products Ltd., . Beharilal Shyamsunder v. Sales Tax Officer, . and in C. T. Senthilnathan Chettiar v. State of Madras, .. The Calcutta High Court has taken the same view in Commissioner of Wealth-tax v. Jhagrakhand Collieries (Private) Ltd., [1968] 67 I.T.R. 572 (Cal.)

12. We have now to discuss the Appellate Tribunal's powers to question the vires of the annual Finance Act. Dealing with the position of the Finance Acts in relation to the Income-tax Act, the Privy Council in Maharajah of Pilhapuram v. Commissioner of Income-tax, [1945] 13 I.T.R. 221, 223 (P.C.). said :

".... it should be remembered that the Indian Income-tax Act, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finace Act."

13. This shows that the Income-tax Act and the Finance Act are supplementary to each other and former has no operative effect without the aid of the annual Finance Act.

14. The Supreme Court has further elaborated this proposition in Chatturam Horilram Ltd. v. Commissioner of Income-tax, . in these words :

"Thus, under the scheme of the Income-tax Act, the income of an assessee attracts the quality of taxability with reference to the standing provisions of the Act but the payability and the quantification of the tax depend on the passing and the application of the annual Finance Act, Thus, income is chargeable to tax independent of the passing of the Finance Act but until the Finance Act is passed no tax can be actually levied."

15. The close connection between the Income-tax Act and Finance Act is further evident from the provisions of Section 294 of the Income-tax Act of 1961 corresponding to Section 67B of the Act of 1922. Section 294 runs thus :

"If on the 1st day of April in any assessment year provision has not yet been made by a Central Act for the charging of income-tax for that assessment year, this Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding assessment year or the provision proposed in the Bill then before Parliament, whichever is, more favourable to the assessee, were actually in force."

16. The charging Section, namely, Section 4 of the Act of 1961, corresponding to Section 3 of the 1922 also, inter alia, provides :

"Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person...."

17. All these prvoisions clearly indicate that the Income-tax Act has no operative force of its own and the Finance Act appears to be. an integral part of the Income-tax Act itself. Now, since the vires of the Income-tax Act cannot be enquired into either by the Appellate Tribunal or the High Court or the Supreme Court in terms of the aforesaid provisions, these authorities have no jurisdiction also to deal with the vires of the annual Finance Acts.

18. In these premises, we need not give any answer to question No. 1 in this reference but as the department's counsel has argued the point at length, we may broadly discuss the legal position.

19. It appears from paragraph 8 at page 2 of the statement of the case that the assessee submitted before the Tribunal that it was beyond the competence of the Finance Act to provide for levy of tax with reference to declaration of dividends or bonus shares in an earlier year.

20. The relevant provisions of paragraph D of Part II of the First Schedule to the Finance Act, 1959, is as follows :

"In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (XXXI of 1956),--

(i) a rebate at the rate of 40 per cent, on so much of the total income-as consists of dividends from a subsidiary Indian company and a rebate at the rate of 35 per cent. an the balance of the total income shall be allowed in the case of any company which--.....

(ii) a rebate at the rate of 40 per cent. on so much of the total income as consists of dividends from a subsidiary Indian company and a rebate at the rate of 30% on the balance of the total income shall be allowed in the case of and company which satisfies condition (a) but not condition (b) of the preceding clause;.....

Provided further that,--

(i)the amount of the rebate under Clause (i) or Clause (ii) 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 : --

(a) on that part of the aggregate of the sums arrived at in accordance with clause (i) of the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1958 (XI of1958), as has not been deemed to have been taken Into account, in accordance with clause (ii) of the said proviso, for the purpose of reducing the rebate mentioned in clause (i) of thesaid proviso to nil ;...........

The whole amount of such part. "

21. It seems that under these provisions super-tax is being levied on the whole of the total income of the assessee. But under the first proviso certain rebates have been provided for and in the second proviso there are provisions for reduction of rebates under specified circumstances. In other words, these provisions relating to rebate and reduction do not levy tax on any income. They take into consideration only rebates and reductions on the basis whereof the income chargeable to super-tax is to be ascertained.

22. In these premises, the assessee's submission to the Tribunal questioning the competence of the Finance Act appears to be of no substance. We may, in this connection, refer to a decision of the Madras High Court in Papanasam Mills Co. (Private) Ltd., v. Commissioner of Income-tax, [1961] 43 I.T.R. 53 (Mad.). The Madras High Court has said the provisions, of the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1956, which provide that the standard rebate in super-tax permissibe to a company under the first proviso to that Paragraph shall be reduced if the dividends declared by the company are in excess of the minima specified therein, are valid. There is no levy, as such, according to the Madras High Court, of any super-tax on the excess dividend : super-tax is levied only on the total income of the previous year; that levy is authorised by Section 55 of the Income-tax Act : and the rate is authorised by Part II-D of the First Schedule to the Finance Act of 1956. The Madras High Court is of the view that it is within the competence of the legislature to prescribe the limits within which relief from that levy could be given. In other words, it is open to the legislature to prescribe the basis for the grant of the rebate, and co-relale the rebate to excess dividends, whether paid out of the total income of the previous year or from any other source. And whether or not the excess dividends came out of the total income of the previous year, the quantum of the dividends regulate the rebate and not the super-tax itself, either the charge or the rate. We respectfully agree with these views of the Madras High Court.

23. Let us now go into the merits of this case which bring us to the consideration of the issue whether the sum of Rs. 8,731.10 would be deductible from the rebate in terms of the aforesaid provisions.

24. Learned counsel for the department has argued before us that the deduction envisaged by the second proviso aforesaid is irrespective of whether or not there was deduction or unabsorbed deduction in the immediately preceeding year. He says that under the Act of 1959 a fresh calculation would have to be made and notionally it has to be ascertained what has or has not been taken into account. Admittedly, in this case, owing to the losses which the assessee had suffered in the immediately preceding year the obvious conclusion is that this sum of Rs. 8,731-10 cannot be deemed to have been taken into account under the Finance Act of 1958. Accordingly, says counsel for the Commissioner, the Tribunal was not correct in allowing the rebate of super-tax in full in the instant reference.

25. We are unable to accept these contentions on behalf of the department. In our view, the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1959, provides that the amount of rebate to-

Commissioner Of Income Tax v. Deoria Sugar Mills Ltd.

Structured Summary of the Provided Legal Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Department's / Commissioner's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income Tax v. Deoria Sugar Mills Ltd.

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