Commissioner of Income Tax vs Madras Motor and General Insurance Co. Ltd.

Ramaswami, J.—These two references relate to the same assessee but in respect of two different assessment years. The first reference

relates to the assessment year 1963-64, and the second relates to the assessment year 1964-65. The assessee is a public limited company carrying

on business in motor and general insurance. The previous years relevant to the assessment years in question are calendar years 1962 and 1963,

respectively. In respect of these assessment years the assessee filed the returns of income showing income from different sources separately. The

total of such income for the assessment year 1963-64 came to Rs. 22,15,583. This income included a sum of Rs. 4,85,802 being the income from

dividends from other companies. The assessee claimed that it is entitled to a rebate of Corporation tax at 45% on this dividend income as per the

Finance Act, 1963. The Income Tax Officer was of the view that, since in the case of an insurance company the entire income is assessed as from

business regardless of the separate sources from which such income were derived, the sum of Rs. 4,85,802 could not be regarded as dividend

income as such in the hands of the assessee. All the same the Income Tax Officer took into consideration the Board''s instructions contained in

Board''s Circular No. 15-D (XXXIII-10) of 1964 dated June 17, 1964, and considered the question of granting relief. It may be mentioned at this

stage that this Board''s circular interpreted the relevant provisions of the Finance Act, 1963, to the effect that companies like that of the assessee

would be entitled to the rebate of Corporation tax in respect of dividends received by them though the total income is considered under one single

head of business regardless of the separate sources from which they were received. But it contained also a direction that while giving such rebate

the proportionate management expenses incurred by the company should be reduced for the purpose of arriving at the 45% rebate. Purporting to

give effect to this Board''s circular the Income Tax Officer held that the assessee would be entitled to a rebate only on a sum of Rs. 4,34,941 and

accordingly granted the rebate of Rs. 1,95,723. The assessee appealed to the Appellate Assistant Commissioner contending that it was entitled

legally to a rebate of 45% on the entire dividend income and the Income Tax Officer was not right in reducing the proportionate expenses incurred

by the company relying on the Board''s instructions. The Appellate Assistant Commissioner took the view that the assessee was not entitled to any

rebate on the dividend income at all under the provisions of the Finance Act, but since the Income Tax Officer had given a rebate on the dividend

income as duly reduced by proportionate expenses incurred by the company he could not find any reason for enhancing the assessment and

accordingly confirmed the same.

On a further appeal the Tribunal, having regard to the language used in the Finance Act, came to the conclusion that the assessee was entitled to

a rebate of Corporation tax on the entire dividend income and that the provision did not warrant any deduction of management or other expenses.

In this view the Tribunal directed that the rebate should be granted on the gross dividends included in the total income without any reduction

towards the proportionate management expenses. At the instance of the revenue the following question has been referred :

Whether, on a construction of the provision of the Finance Act, 1963, Paragraph D, Part II, the rebate in respect of Corporation tax should be

restricted to the dividend received by the assessee less the proportionate management expenses or on the gross amount of dividend amounting to

Rs. 4,85,802.

In respect of the assessment year 1964-65, the assessee filed the return of income showing the total income at Rs. 26,28,344 which included a

dividend income of Rs. 4,91,470. In this case the assessee claimed that the entire dividend income should be exempted from levy of Corporation

tax by virtue of the provisions of Section 99(1)(iv) read with the Finance Act, 1964, Paragraph D, Part II. For the same reasons given for the

assessment year 1963-64, the Income Tax Officer held that even in respect of 1964-65, the assessee was not entitled to any rebate except as per

the instructions contained in the Board''s circular above referred to. Accordingly, after deducting the proportionate expenses from the dividend

income, the Income Tax Officer granted rebate of the entire Corporation tax at 55%. The assessee filed an appeal to the Appellate Assistant

Commissioner contending that it was entitled to a rebate of 55% on the entire dividend income received by it and not merely on the dividend

income as reduced by the proportionate expenses incurred by the company. The Appellate Assistant Commissioner did not agree with this

contention and took the view that in the case of the general insurance company the income is assessed under the head of business only and the

breaking up of such income into income from dividend or from other sources is not permissible under the statute, and that, therefore, the assessee

was not entitled to any rebate. But, on the ground that the Income Tax Officer had purported to give effect to the Board''s circular referred to

above, he considered that there was no case for enhancement and, in that view, dismissed the appeal. On a further appeal the Tribunal held that

the assessee was entitled to the rebate of Corporation tax under the Finance Act, 1964, on the dividend income, that there was nothing in the

Finance Act which permitted the deduction of management or other expenses and in that view granted a rebate on the gross dividend without any

reduction towards the proportionate management expenses. At the instance of the revenue, the following question has been referred:

Whether, on a construction of the provision of the Finance Act, 1964, Paragraph D, Part II, the rebate in respect of the Corporation tax should

be restricted to the dividend received by the assessee less the proportionate management expenses or on the gross amount of dividend amounting

to Rs. 4,91,470?

In respect of the assessment year 1964-65, the assessee also contended that, in view of the provisions in rule (1)(viii) of the First Schedule to

the Companies (Profits) Surtax Act, 1964, it was not liable to pay the surtax on the entire dividend received by it. Though the Tribunal gave relief

in respect of surtax as claimed by the assessee and agreed in its order dated 24th May, 1968, to refer the question of law to this court on the

application made by the department, no separate question has been referred to this court in respect of surtax. In the order of the Tribunal it is

stated that R. A. No. 1697 of 1967-68 which related to the question of surtax is only consequential to the reference made in respect of super-tax.

It also stated that the question of law that arises is the same as in the case of super-tax. Probably because of this view expressed by the Tribunal

no separate question has been referred. Though a separate question had not been referred, the learned counsel for the revenue as also the assessee

are agreed that it is not necessary for us at this stage to call for that question from the Tribunal and since the Tribunal had already expressed the

view that the same question which was referred in T. C. No. 120 of 1968 should also be referred in respect of the surtax we may consider that

question as comprehending within it the surtax, as well. We, therefore, proceed to consider the case on the basis that this reference in T. C. No.

120 of 1968 also includes the question in respect of surtax.

The answer to the reference made in respect of the assessment year 1963-64 depends on the construction of Paragraph D of Part II in the

Finance Act, 1963. The relevant portion reads as follows :

In the case of every company, other than the Life Insurance Corporation of India...

(ii) a rebate .... at the rate of 45 per cent, on so much of the total income as consists of dividends from any other Indian company ... shall be

allowed....

It was the contention of the learned counsel for the revenue that in the case of general insurance business in view of the special basis of

computation of profits of insurance business under the provisions of the Income Tax Act, 1961, no portion of the total income could be claimed as

dividend income from any other Indian company and the entire total income shall be deemed to be the income from business. It is not in dispute

that in both the assessment years the assessee in fact received dividend income from other companies and while submitting the returns of income

also showed the different sources separately.

We do not find anything in the language of the relevant provision in the Finance Act to warrant an interpretation that the said provision will apply

only to a company which is entitled to submit a return of its income and to be assessed in respect of such income under separate headings or

sources. If we have to accept the argument of the learned counsel for the revenue we would have to read the relevant provision as ""in the case of

every company other than the general insurance company and the Life Insurance Corporation of India"" which would be re-writing the section and

not giving effect to the same. Paragraph D of Part II to the Finance Act is intended to give relief by way of rebate in the super-tax for every

company other than the Life Insurance Corporation of India at the rates referred to in the proviso. General insurance companies like that of the

assessee are not specifically excluded by this provision. Nor do we find any particular reason as to why general insurance company should have

been excluded from the benefit of this provision. The provision refers to the factum of receipt of dividends from any other Indian company and not

its assessability under that heading. The reference to the dividend portion of the income in the provision was not, in our opinion, to the head of

income. We cannot import the idea of the special mode of computation of income of an insurance company under the First Schedule to the Income

Tax Act in the calculation of tax under the Finance Act. Each is independent of the other. Merely because the income of a general insurance

company was to be computed in a particular manner it could not be said that the total income did not include dividend from other Indian

companies when in fact the company had received such dividends. In our opinion, the provision in Paragraph D of Part II of the Finance Act refers

to the factual existence of income from dividend and not its assessability under any heads of income. We may also state that at the time when the

Finance Act was passed, the provisions relating to the assessment of general insurance companies as contained in the First Schedule to the Income

Tax Act were in existence. If really Parliament intended that the beneficial provision would not be applicable when the income of a company is to

be treated as one composite income from business, necessary language would have been employed to effectuate that intention. On the plain

language of the provision every company other than the Life Insurance Corporation of India would be entitled to the benefits provided they satisfy

the other conditions referred to therein. Any other interpretation would deprive all non-life insurance companies from the benefit of rebate provided

in the Finance Act. We are of the view that the words ""so much of the total income as consists of dividends"" refer to the factual existence of the

dividend income and not to any head of income, and, therefore, the assessee would be entitled to a rebate on the dividend income under the

provisions of the Finance Act.

In this connection we may also usefully quote the passage from Kanga and Palkhivala on The Law and Practice of Income Tax, VI edition,

volume I (page 1116) which reads as follows :

But computation of income, and determination of the rate and quantum of tax, are separate and independent concepts and processes. Section 44

which enjoins the computation of income of an insurance company without reference to the different heads of income, has obviously a direct

bearing on the process of computation of income ; but it has no bearing on the determination of the rate of tax which is prescribed by the relevant

Finance Act. Consequently, a non-life insurance company is entitled to the benefit of the lower tax rates contained in the various Finance Acts in

respect of dividends received from Indian companies. The dividend income does not cease to be dividend income because, for the purpose of

computation of income, it is treated as part of the profits of non-life insurance business under this rule.

We, therefore, agree with the view of the Tribunal that the assessee is entitled to claim rebate in respect of dividend received from other Indian

companies.

The next question that arises for consideration is whether the provisions of the Finance Act warrant any reduction of proportionate

management or other expenses from the dividend income for the purpose of ascertaining the rebate. The Finance Act only states that the rebate

has to be given at a particular rate on so much of the total income as consists of dividends from any other companies. It had not used any language

which would imply or warrant any deduction on account of expenditure. The only basis on which the Income Tax Officer reduced the expenses

was the Board''s circular above referred to. While interpreting the provisions of the Finance Act and holding that the higher rebate on super-tax will

be allowed on the dividend derived by general insurance companies, the Board also stated that such higher rebate should be allowed not on the

gross amount of the dividend but only on the net dividend income. That is the dividend portion allowable for such benefit should be taken as the

dividend income as reduced by proportionate share of the total expenses of the company. There is no warrant for such an interpretation. As

already stated, the Finance Act only refers to ""dividend"" and not ""net dividend"" or any other expression which will imply or justify a deduction of

proportionate expenditure. We, therefore, hold that the proportionate management expenses is not liable to be deducted and the rebate as per the

Finance Act, 1963, should be given on the gross amount of dividend amounting to Rs. 4,85,802. We accordingly answer the reference in T.C.

No. 119 of 1968 in the negative and against the revenue.

The provisions of law applicable to the assessment year 1964-65 are different but there is no material difference in its effect. Section 99(lXiv)

as it originally stood read as follows ;

Super-tax shall not be payable by the assessee in respect of the following amounts which are included in his total income......(iv) if the assessee is

a company, any dividend received by it from an Indian company subject to the provisions contained in the Fifth Schedule.

The Finance Act of 1964 amended this provision by substituting the following Clause (iv):

If the assessee is a company, any dividend received by it from an Indian company or a company which has made the prescribed arrangements for

the declaration and payment of dividends (including dividends on preference shares) within India.

It was the contention of the assessee before the Income Tax Officer that under this provision of the Finance Act the entire dividend income

should be exempted from the levy of super-tax. Though this interpretation was accepted by the Income Tax Officer, in calculating the rebate the

gross dividend income was not taken but the amount as reduced by proportionate expenses alone was taken for purposes of the rebate. This was

again on the basis of the interpretation placed by the Board in its circular above referred to. The learned counsel for the revenue attempted to

emphasise the words ""dividend received by it"" and in particular the words ""received by it"" in Clause (iv) of Section 99(1) as suggesting that the

rebate is only on the net dividend excluding the expenses incurred and not the gross dividend. Even this argument is not available to the learned

counsel now in view of the deletion of the words ""received by it"" by the Finance Act, 1968, with retrospective effect. While deleting the provisions

of Section 99, Finance Act, 1968, by Section 31(3) omitted the words ""received by it"" with effect from 1st April, 1962.

We, therefore, hold that the assessee is entitled to rebate u/s 99(1)(iv) as amended by the Finance Act, 1964, on the entire gross amount of

Rs. 4,91,470.

The assessee is also not liable for surtax on this dividend income under rule l(viii) of the First Schedule to the Companies (Profits) Surtax Act,

1964. This rule has employed a similar language as contained in Section 99(1)(iv) as amended by the Finance Act and for the reasons stated

above the dividend income is also exempt from surtax. Accordingly, in respect of the assessment year 1964-65, we answer both the questions

relating to super-tax and surtax in favour of the assessee.

The assessee will be entitled to its costs in both these tax cases. Counsel''s fee is Rs. 250 in each case.