Statutory fiction for excess dividend tax fails where no prior undistributed profits existed and the distributed amounts were untaxed.

Additional income-tax on excess dividend under clause (ii) of the proviso to paragraph B of the First Schedule to the Finance Act, 1951 applies only where the statutory fiction treats the dividend as coming out of undistributed profits of earlier years that had borne income-tax. Where no such undistributed profits existed and the distributed amounts had not previously suffered tax because they were allowed as depreciation deductions, the deeming provision cannot operate and the prescribed computation method for additional tax fails. In those circumstances, additional income-tax is not leviable.

---

---

Issues: Whether additional income-tax was payable on excess dividend where the company had no undistributed profits in the preceding years and the dividend was declared out of amounts which had not suffered tax because they were allowed as depreciation deductions.

Analysis: The charging provision for additional income-tax under clause (ii) of the proviso to paragraph B of the First Schedule to the Finance Act, 1951 proceeds on the basis that the excess dividend is to be treated as having come out of undistributed profits of one or more preceding years and that such profits had borne some income-tax, the shortfall being recoverable as additional tax. That mechanism depends on the statutory fiction for deeming the source of the excess dividend. On the facts, there were no undistributed profits of earlier years available to attract the fiction, and the amounts distributed had not borne tax in the first place. The fiction therefore had no application, and the method prescribed by the Act for computing the additional tax could not be invoked.

Conclusion: Additional income-tax was not leviable on the assessee in the circumstances.

---