Express charging provision required for dividend tax; gain on surrender of admitted capital asset is taxable as capital gains.

Dividend tax on a State Financial Corporation's distribution could not be sustained because no express charging provision authorised the levy; prescribing a tax rate did not create the tax liability, and the related rectification under section 154 fell with the invalid levy. By contrast, profit on surrender of loan bonds, accepted as capital assets, was taxable as capital gains because the assessee realised an excess on surrender of the capital asset. The reference was therefore answered partly for the assessee and partly against the assessee.

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Issues: (i) Whether dividend tax could be levied on dividend distributed by a State Financial Corporation in the absence of an express charging provision and whether the related rectification under section 154 was sustainable; (ii) Whether profit realised on surrender of loan bonds, admitted to be capital assets, was taxable as capital gains.

Issue (i): Whether dividend tax could be levied on dividend distributed by a State Financial Corporation in the absence of an express charging provision and whether the related rectification under section 154 was sustainable?

Analysis: The assessment and appellate records did not disclose any charging provision authorising levy of tax on the dividend distributed by the Corporation. The Court noted that prescribing a rate of tax is not the same as creating a liability to tax, and that the Corporation was to be treated as a company only for income-tax purposes under section 43 of the State Financial Corporations Act, 1951. In the absence of any provision showing that the dividend was chargeable to tax, the foundation for the levy failed. The question concerning subvention amounts did not survive once the levy itself was held unsustainable, and the rectification order stood on the same footing.

Conclusion: The dividend tax could not validly be levied on the dividend paid by the assessee, and the answer to this issue was in favour of the assessee.

Issue (ii): Whether profit realised on surrender of loan bonds, admitted to be capital assets, was taxable as capital gains?

Analysis: The assessee accepted that the bonds were capital assets. On maturity and surrender, the assessee realised an excess over the discounted purchase price. Once the asset was characterised as a capital asset, the gain arising on its surrender was liable to be brought to tax under the head of capital gains.

Conclusion: The profit of Rs. 9,000 was rightly taxed as capital gains, and this issue was decided against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly against the assessee, with the dividend-tax levy disallowed and the capital-gains treatment sustained.

Ratio Decidendi: A tax levy cannot be sustained unless supported by an express charging provision, whereas gain arising on the surrender of an admitted capital asset is taxable as capital gains.

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