1978 (6) TMI 4 - HC - Income Tax

High Court limits relief under Section 49BB to Rs. 706, deems dividend paid from previous year's income.

The High Court held that the assessee was entitled to relief under Section 49BB only to the extent of Rs. 706, as the remaining dividend amount was deemed ... Relief under section 49BB - legal fiction by Explanation I to section 49BB - computation of 'distributable income' under Explanation II to section 49BB - deeming provision as to source of dividendsRelief under section 49BB - legal fiction by Explanation I to section 49BB - deeming provision as to source of dividends - Whether the assessee was entitled to relief under section 49BB and whether the Explanations to section 49BB limit or circumscribe that relief. - HELD THAT: - Section 49BB(1) and (2) together with Explanation I and Explanation II form an integrated statutory code for granting and calculating the limited relief. Explanation I is a deeming provision which must be applied to all claims under section 49BB and can operate to deprive an assessee of part or all of the relief otherwise appearing to be available under subsections (1) and (2). The Explanations are not mere optional clarifications; they introduce an artificial or notional construct (a distributable income for the previous year) which may differ from the factual position. The court rejected the submission that the Explanations apply only where the position is unclear or only in partial cases: Explanation I applies generally to all claims under section 49BB. The Court also rejected the contention that the Explanations are inapplicable because the assessee had no actual distributable income in the relevant year; a legal fiction may create a notional distributable income and that fiction must be applied if the statutory language demands it.Explanation I and II are integral to section 49BB, must be applied where relief is claimed, and may limit the relief by deeming part of the dividend to have been paid out of a notional distributable income of the previous year.Computation of 'distributable income' under Explanation II to section 49BB - Whether the increases and reductions in Explanation II are to be computed with reference only to the previous year or with reference to all years from the company's inception. - HELD THAT: - Explanation II defines 'distributable income' of any previous year by reference to the total income assessed for that year, with specified reductions and specified increases. The opening words of Explanation II, and the statutory context confining the deeming to the 'previous year', show that both the reductions and the increases in Explanation II relate to that single previous year. The Tribunal's interpretation extending the operation of the increases (for allowances not taken into account in profit and loss account) to all years from inception would defeat the statutory scheme and make the computation unworkable; therefore that wider construction is not permissible. On the facts, applying Explanation II to the previous year produced a notional distributable income of Rs. 1,81,644, which under Explanation I would be treated as the source of part of the declared dividend, leaving only a small balance eligible for relief under section 49BB(2).Explanation II applies to the previous year alone; its adjustments are to be made with reference to that year and not to all years from the company's inception.Verification of figures for application of Explanation II - Whether the exact extent of relief should be determined on verification of the figures of allowances and provisions. - HELD THAT: - Although the legal principles for applying Explanation I and II are settled, the factual computation required verification. The Tribunal directed the ITO to check the assessee's figures concerning allowances and provisions to ascertain whether the amounts submitted were correct; if correct, relief should be given accordingly but only after applying the deeming and computation rules of the Explanations. This entails a factual and ministerial exercise by the assessing authority to determine the final quantification of distributable income and thereby the precise amount of relief.The matter of ascertaining the correct figures for allowances and provisions was remitted for verification by the ITO, who is to grant relief if the assessee's figures are found correct; accordingly the exact extent of relief is remanded for calculation.Final Conclusion: The Explanations to section 49BB form an integral part of the relief scheme, Explanation I creates a deeming fiction and Explanation II prescribes a distributable income computed with reference to the previous year alone; on the facts a notional distributable income of Rs. 1,81,644 arises under Explanation II so that only a small balance of the declared dividend (Rs. 706) qualified for relief under section 49BB(2), and the ITO is directed to verify the assessee's figures and give relief only to the extent found correct. Parties to bear their own costs. Issues Involved:1. Entitlement to relief under Section 49BB of the Indian Income-tax Act, 1922.2. Interpretation and application of Explanations I and II to Section 49BB.3. Calculation of distributable income for the purpose of relief under Section 49BB.Detailed Analysis:1. Entitlement to Relief under Section 49BB:The primary issue was whether the assessee was entitled to relief under Section 49BB of the Indian Income-tax Act, 1922, for the dividend declared in the financial year ending March 31, 1960. The assessee claimed relief on the basis that the dividend of Rs. 1,82,250 was declared out of profits already charged to income-tax before April 1, 1960.The Tribunal initially accepted the assessee's contention that the dividend was paid from the reserve fund accumulated from prior years' profits. However, the Commissioner challenged this, arguing that the relief under Section 49BB was not applicable due to the deeming provisions in Explanations I and II.2. Interpretation and Application of Explanations I and II to Section 49BB:Explanation I introduces a legal fiction, deeming that dividends are first paid out of the distributable income of the previous year, and only the balance, if any, from earlier years' undistributed income. Explanation II defines 'distributable income' and includes adjustments for income-tax, super-tax, other taxes, charitable contributions, and allowances not accounted for in the profit and loss account.The Tribunal held that the reference to the profit and loss account should include all years from the company's inception, not just the previous year. This interpretation was challenged by the Commissioner, who argued that only the previous year's accounts should be considered.The High Court disagreed with the Tribunal, stating that the statutory scheme under Section 49BB, including Explanations I and II, must be read as an integrated provision. The Court held that the reductions and increases specified in Explanation II pertain only to the previous year, not to all years since the company's inception.3. Calculation of Distributable Income:The Income Tax Officer (ITO) initially calculated the distributable income for the assessment year 1960-61 as Rs. 13,58,908, ignoring the provision of Rs. 11,77,364 for machinery and building replacement. The Appellate Assistant Commissioner (AAC) revised this to Rs. 1,81,644, considering the provision.The Tribunal directed the ITO to verify the assessee's figures and provide relief if correct. However, the High Court clarified that the calculation of distributable income should consider only the previous year's accounts, as per Explanation II.The High Court concluded that the dividend declared and paid out of the previous year's fictional distributable income (Rs. 1,81,644) would not qualify for relief under Section 49BB. Only the balance amount of Rs. 706, deemed paid out of earlier taxed profits, would qualify for relief.Conclusion:The High Court held that the assessee was entitled to relief under Section 49BB only to the extent of Rs. 706, as the remaining dividend amount was deemed paid out of the previous year's fictional distributable income. The integrated statutory scheme of Section 49BB and its Explanations must be applied, considering only the previous year's accounts for calculating distributable income. The parties were directed to bear their own costs.