Ratio-based apportionment of dividends under composite business rules, with super-tax levied on the full undistributed balance.

For a composite business under section 23A of the Indian Income-tax Act, 1922, dividends and taxes had to be apportioned between industrial and non-industrial segments in the same ratio as their respective profits; the assessee could not adopt any different allocation. Explanation 2 was confined to determining the statutory percentage separately for each segment and did not permit an arbitrary division of declared dividends. Where the apportioned dividend was insufficient, additional super-tax was chargeable on the entire undistributed balance of distributable profits, not merely on the segment-wise shortfall.

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Issues: (i) Whether, for the purpose of section 23A of the Indian Income-tax Act, 1922, dividends declared by a company carrying on both industrial and non-industrial activities had to be apportioned between the two segments in the same ratio as their respective profits bore to the total profits, and whether the assessee could choose a different allocation. (ii) Whether, where the apportioned dividend fell short of the statutory percentage in one or both segments, additional super-tax under section 23A was leviable only on the segment-wise shortfall or on the entire undistributed balance of the company's distributable profits.

Issue (i): Whether, for the purpose of section 23A of the Indian Income-tax Act, 1922, dividends declared by a company carrying on both industrial and non-industrial activities had to be apportioned between the two segments in the same ratio as their respective profits bore to the total profits, and whether the assessee could choose a different allocation.

Analysis: Explanation 2 to section 23A required the statutory percentage to be applied separately to the profits attributable to the two parts of the business, and then provided that the dividends and taxes were also to be similarly apportioned. The expression "similarly apportioned" was construed to mean split up in the same ratio as the profits of the two segments bore to the total profits. The assessee could not make any convenient or arbitrary allocation of the declared dividends, because the statutory scheme itself fixed the method of apportionment by reference to the respective profits of the industrial and non-industrial activities.

Conclusion: The dividends had to be apportioned in the same ratio as the profits of the two segments, and the assessee had no choice to adopt a different basis.

Issue (ii): Whether, where the apportioned dividend fell short of the statutory percentage in one or both segments, additional super-tax under section 23A was leviable only on the segment-wise shortfall or on the entire undistributed balance of the company's distributable profits.

Analysis: Section 23A imposed a single levy on the undistributed balance of the total income of the previous year. Explanation 2 created a legal fiction only for the limited purpose of determining the statutory percentage separately for the two parts of a composite business. That fiction could not be extended beyond its express object so as to confine the tax only to the segment in which the shortfall occurred. The charge under section 23A remained on the whole undistributed balance of distributable profits once the statutory conditions were satisfied.

Conclusion: Additional super-tax was leviable on the entire undistributed balance of the company's distributable profits, not merely on the segment-wise shortfall.

Final Conclusion: The statutory scheme required mandatory ratio-based apportionment of dividends and taxes for a composite business, and once the company failed to distribute the requisite dividend, the entire undistributed balance attracted additional super-tax under section 23A.

Ratio Decidendi: Under section 23A and Explanation 2 of the Indian Income-tax Act, 1922, dividends and taxes in a composite business must be apportioned in the same ratio as the respective profits of the two segments, and the legal fiction created for computing the statutory percentage is confined to that limited purpose; the resulting additional super-tax is chargeable on the entire undistributed balance of total income.

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