Retrospective tax provisions and vested rights: rebate withdrawal could not extend to dividends declared before commencement.

Section 35(10) of the Indian Income-tax Act, 1922 created a deeming fiction allowing rebate withdrawal where profits on which rebate had been allowed were later used to declare dividends. The majority held that, although the Finance Act, 1956 gave the provision express retrospective effect to a limited extent, it could not be stretched to cover dividend declarations made before 1 April 1956 because the language did not clearly require application to completed transactions and the provision affected vested rights. On that view, rebate could not be withdrawn for pre-commencement dividends. The dissent read the words "subsequently" and "in any year" as sufficient to cover such dividends.

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Issues: Whether section 35(10) of the Indian Income-tax Act, 1922 applied to withdraw rebate where the company had declared dividends out of the relevant profits before 1 April 1956, the date on which the provision came into force.

Analysis: The provision created a deeming fiction enabling recomputation of tax where, after rebate had been allowed on undistributed profits for the assessment years 1948 to 1955, those profits were later used for declaring dividends. The majority held that although the provision was retrospective to the extent expressly provided by section 28 of the Finance Act, 1956, it could not be given a further retrospective reach so as to apply to dividend declarations made before the commencement date. The language did not clearly require the legal fiction to operate on events completed before 1 April 1956, and a provision affecting vested rights could not be construed to have greater retrospectivity than its terms necessarily implied.

Conclusion: Section 35(10) did not apply to dividends declared before 1 April 1956, and the rebate could not be withdrawn on that basis.

Dissenting Opinion: Sarkar, J. and Hidayatullah, J. held that the words "subsequently" and "in any year" showed a clear legislative intention to cover dividend declarations made before the commencement of section 35(10), and that the provision validly authorised withdrawal of the rebate in the present case.

Ratio Decidendi: A fiscal provision that is not merely procedural and that affects vested rights cannot be applied to completed transactions before its commencement unless its language clearly and unambiguously requires such greater retrospectivity.

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