Income-tax charge on excess dividends failed because deemed earlier profits were not included in the year's total income.

Income-tax under the statutory scheme is levied only on the total income of the previous year, while the annual Finance Act fixes the rate within that framework. The impugned proviso deemed excess dividends to arise out of undistributed profits of earlier years, but it did not also bring those profits into the total income of the relevant year. As a result, the charge operated outside the statutory basis for income-tax, because the amount taxed was not part of the assessed year's total income. The additional income-tax on excess dividends was therefore not validly charged, and the referred question was answered in the negative.

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Issues: Whether the additional income-tax on excess dividends was validly charged under the Finance Act read with the Indian Income-tax Act, and whether the charging provision could operate outside the scope of the tax on the total income of the previous year.

Analysis: The statutory scheme of the Income-tax Act fastens tax on the total income of the previous year, while the annual Finance Act fixes the rate and operates within that framework. The impugned proviso created a fiction that excess dividends were deemed to come out of undistributed profits of earlier years, but it did not further enact that those profits became part of the total income of the relevant previous year. The charge therefore remained detached from the statutory basis on which income-tax is levied, because the amount subjected to tax was not made part of the total income of the year under assessment.

Conclusion: The additional income-tax was not validly charged, and the answer to the referred question was correctly given in the negative.

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