Dividend rebate reduction applies only to taxable profits, excluding Government guarantee payments from the super-tax base.

For rebate reduction in super-tax under the Finance Act, 1964, the phrase "the whole amount of the dividends" was construed to mean only dividends distributed out of profits chargeable to tax. The State Government's payment under the statutory guarantee was not income, profits or gains of the assessee under the State Financial Corporations Act, 1951, and therefore did not form part of total income for income-tax or super-tax purposes. Although the Companies Act, 1956 permits dividend payment from Government-provided moneys under a guarantee, that funding was excluded from the rebate-reduction base. The rebate reduction was confined to dividends attributable to taxable profits, and Government subvention was left out.

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Issues: Whether, for the purpose of reducing the rebate in super-tax under the Finance Act, 1964, the expression "the whole amount of the dividends" included the amount paid by the State Government under its guarantee, or only the dividends distributed out of the company's taxable profits.

Analysis: The reference turned on the construction of the rebate-reduction clause in Part II, Paragraph D of the First Schedule to the Finance Act, 1964, read with the charging provisions for income-tax and super-tax under the Income-tax Act, 1961. The sum paid by the State Government under the statutory guarantee was not income, profits or gains of the assessee under the State Financial Corporations Act, 1951, and therefore did not form part of the assessee's total income for income-tax or super-tax purposes. Although section 205 of the Companies Act, 1956 permits dividend to be paid out of moneys provided by Government under a guarantee, the rebate-reduction provision in the Finance Act was construed as referring only to dividends payable out of profits liable to tax, not to amounts funded by Government subvention. The expression "the whole amount of the dividends" was read in the context of the linked proviso dealing with dividends out of such profits.

Conclusion: The reduction in rebate in super-tax was confined to the dividend attributable to the assessee's taxable profits, and the Government subvention was excluded. The question was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: For rebate-reduction purposes under the relevant Finance Act provision, "dividends" means dividends distributed out of profits chargeable to tax, and not sums paid by Government under a guarantee that do not constitute the assessee's income.

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