Commissioner of Income Tax vs Trichy United Bank Ltd.

V. Balasubrahmanyan, J.—Before 1965, there were three banking companies in Tiruchirappalli. They were: the Woraiyur Commercial Bank

Ltd., the Palakkarai Bank Ltd., and the Tennur Bank Ltd. In 1965, the first two banks amalgamated with the third. The amalgamation involved the

transfer of all assets and liabilities of the first two banks to the third bank. With such transfer, the two transferor banks were wound up and

dissolved. The transferee bank continued its existence, with the transferred assets/liabilities along with its own, but it emerged under a new name,

the Trichy United Bank. The merger took place on 24-6-1965. The present reference is concerned with income tax assessments made on this

transferee bank subsequent to the merger. Prior to the amalgamation the three former banks were earning profits. But the profits were not

distributed as dividends then and there. They were carried to reserves by each of the banks. Each bank was an independent income tax assessee.

The profits earned by each, but credited to reserves was assessed to income tax. The profits so assessed included assessments before 1-4-1960,

that is to say, assessments up to the assessment year 1959-60. Long after the merger of the three banks, the Trichy United Bank distributed

dividends in the years 1968, 1969 and 1970. These dividends were distributed out of reserves. The bank claimed that in respect of these dividend

distributions it was entitled to relief u/s 236 of the income tax Act, 1961 (''the Act''). The claim was based on the footing that the dividends were

distributed out of reserves and those reserves represented taxed profits up to 31-3-1960.

The ITO, apparently, did not dispute the position that the profits of the three old banks were being subjected to income tax year after year and

their assessed profits included profits up to 31-3-1960. The officer also did not dispute that before the merger of the banks in 1965, those

assessed profits were not distributed as dividends by the respective banking companies. Apparently also, the officer did not dispute the facts that

when the Trichy United Bank actually effected the distribution of dividends during the years 1968, 1969 and 1970, those distributions came out of

the assessed profits of the three old banking companies. Nevertheless, the ITO held that relief could not be claimed in respect of the taxed profits

declared as dividends under the provisions of section 236, since, according to the ITO, the company which distributed the dividends was entirely a

new entity. He took the view that for relief u/s 236, the very company whose profits up to 31-3-1960, has been taxed must itself declare the

dividends out of such taxed profits. On appeal, however, the AAC took a different view, and allowed the claim for relief u/s 236 in its entirety. On

the department''s appeal against this order of the AAC the Tribunal''s decision was two fold. To the extent that the distribution could be attributed

to the taxed profits of the two transferor banks, the Woraiyur Commercial Bank the Palakkarai Bank, the Tribunal held that relief u/s 236 was not

available, since the dividend distribution was not effected by those banks, they having gone out of existence under the scheme of amalgamation

which took place long prior to the distribution of dividends in 1965. However, to the extent that the distribution of dividends could be attributed to

the taxed profits of Tennur Bank, the Tribunal held that the relief u/s 236 was available, since, according to the Tribunal, the distribution was

effected only by the Tennur Bank and, nonetheless so, for the fact that the Tennur Bank was re-christened as the Trichy United Bank. To Tribunal,

accordingly directed that relief u/s 236 will have to be worked out.

The income tax Department is aggrieved by this decision of the Tribunal. It has brought the present reference before this Court on the following

question of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the relief u/s

236 of the income tax Act, 1961, in respect of the dividends declared by it out of the alleged profits of the Tennur Bank Ltd. assessed prior to 1-

4-1960?

The question, as framed, carries an element of doubt as to the source of distribution of dividends. For this articulated uncertainty in the question

we do not find any basis in the findings of the Tribunal. According to the frame of the question of law, the dividends are said to have been declared

by Tennur Bank out of its ''alleged'' profits''. As we have earlier pointed out, neither in the order of the ITO nor in the subsequent appeal

proceedings, has there ever been a doubt cast about the fund from out of which the dividends had been declared by the Trichy United Bank in the

three years 1968, 1969 and 1970. On the contrary, there is an indication in the order of the AAC to the effect that the taxed profits of the three

banks, namely, Woraiyur Commercial Bank, Palakkarai Bank and Tennur Bank, up to 31-3-1960, were not distributed as dividends, but had

been carried to reserve. In the case of the two amalgamating banks, the amounts credited to reserve in this manner were transferred to, and got

merged with, the reserve of the Tennur Bank. These reserves were subsequently utilised by the Trichy United Bank to declare dividends. As

respects the taxed profits of the Tennur Bank up to 31-3-1960, it was not the department''s case, at any time during the earlier proceedings, that

those profits had been frittered away in some fashion and were not available for distribution during the years of 1968-69 and 1970. As in the case

of the other two banks, so too in the case of Tennur Bank, the taxed profits up to 31-3-1960 were not distributed as dividends, but were credited

to reserve, which reserve was carried year after year without being denuded in any fashion until the dividends were declared in 1968-69 and 1970.

This is the plank on which the whole discussion about the applicability of section 236 was held right through. We cannot, therefore, countenance

the element of doubt thrown into the frame of the question by the use of the expression, ''alleged profits of the Tennur Bank Ltd.'' while referring to

the fund out of which dividends had been declared and relief had been granted by the Tribunal, u/s 236.

The department''s contentions before us, as put forward by Mr. Jayaraman, their learned standing counsel, were two in number. In the first

place, he urged that the Tribunal was in error in proceeding as though the dividends were declared in 1968, 1969 and 1970 by the very same bank

which had earned those profits and that suffered tax thereon. The learned counsel submitted that with the merger of the three banks in the year

1965, the Tennur Bank also lost its identity.

This contention of the department, however, cannot be accepted. Under the scheme of amalgamation, the details of which are part of the

records in this case, only two banks went out of existence by liquidation, namely, Woraiyur Commercial Bank and Palakkarai Bank. Tennur Bank,

not only did not go into liquidation, but continued to flourish, albeit under a new name. It would be seen that the amalgamation in this case really

followed the terms of section 44A of the Banking Regulation Act, 1949, read with section 394 of the Companies Act, 1956. These provisions

ordinarily contemplate a scheme of amalgamation by means of a transfer of assets and liabilities from one existing company to another existing

company. It might be that company law does not frown against a scheme of amalgamation under which all existing companies which are proposed

to be merged may go out of existence, without exception, bringing into being an entirely new corporate unit to which the existing assets and

liabilities of all the liquidated companies get transferred. In this case, however, the scheme of amalgamation was by way of transfer of the

undertaking of two existing banking companies to another existing banking company. Woraiyur Commercial Bank and the Palakkarai Bank were

the transferor companies and the amalgamation was effected by transferring all their assets and liabilities to the Tennur Bank. Tennur Bank, which

was the transferee company, did not go out of existence. It remained the same, with its assets and liabilities considerably swelled by the

augmentation of assets and liabilities which stood transferred to it from the two transfer or banks. Excepting for a change in the name from Tennur

Bank to Trichy United Bank, which was also part of the terms of the merger, we cannot see any discontinuity, or change in identity, of the original

banking company which had earned the profits and had suffered income tax on those profits. It, therefore, follows that when those profits were

subsequently distributed as dividends, the requirements of section 236 were fulfilled.

The learned standing counsel submitted, as part of the same argument, that section 236 contemplates that the taxed profits up to 31-3-1960

must be the profits of the very company which subsequently distributes those profits as dividends. The learned counsel emphasised the expression,

pays any dividend wholly or partly out of its profits and gains actually charged income tax for any assessment year ending before the 1st April

1960"". The emphasis given by learned counsel to the expression, ''its profits'', however, really fits in with the facts of this case, because the profits

and gains of Tennur Bank, which had suffered tax prior to 1-4-1960, can be regarded as the profits of the same bank even after its change of

name into Trichy United Bank. What has undergone a change is only the name of the bank, and not the ownership of the profits or the identity of

the assessee which earned them. It must, therefore, be held that section 236 applied to this case to the very letter.

The learned standing counsel then urged, and this was his second major submission, that the Tribunal was not right in directing relief u/s 236 to

be worked out even on the footing that the distribution of dividends can by some process be related, or attributed, to the taxed profits or Tennur

Bank. The learned counsel submitted that on the Tribunal''s own finding in the course of their discussion of this question, it would be difficult, if not

impossible, to attribute any part of the dividend distribution to the taxed profits of Tennur Bank. The learned counsel particularly referred to the

following passage in the Tribunal''s order: ""It cannot be said that Trichy. United Bank had kept the profits of the banks in tact and separately and

the same had been distributed as dividends"".

This passage, in the Tribunal''s order, however, does not seem to us to run counter to their decision applying section 236 to the taxed profits of

Tennur Bank to the extent that dividends distributed in 1968, 1969 and 1970 are attributable to such profits. It may be that after the merger in

1965 there was only one bank with one set of assets of liabilities, including one reserve. Everything, after the merger, was an amalgam. The reserve

in particular was the amalgam of the reserves of Tennur Bank as well as the reserves of the two other banks. Nevertheless, when the reserves

came to be distributed, in the years 1968, 1969 and 1970, the inference must be that whatever taxed profits had gone into the amalgamated

reserves must have been distributed as dividends, in which even one has only to see what the quantum of taxed profits of Tennur Bank was for the

years up to 1-4-1960, so to forge the link between dividends distribution and taxed profits. The figures relating to Tennur Bank''s reserves and

taxed profits are both known quantities. Hence, the application of section 236 should present no problem, arithmetical or otherwise, for arriving at

the quantum of relief. The observation of the Tribunal that the Trichy United Bank did not keep the profits of the three old banks separate, is quite

in keeping with the scheme of amalgamation both in its letter and in its spirit. For no one would except the respective reserves of the three banks to

be kept distinct and separate even after the merger. This, however, does not mean that for the purposes of granting relief u/s 236, the taxed profits

of Tennur Bank could not be traced in the general amalgamated reserve, and the distribution of dividends could not be attributed to those profits.

The learned counsel submitted that in the absence of the taxed profits of Tennur Bank being held in tact and separately kept and directly

appropriated or utilised during the years 1968, 1969 and 1970 for distribution of dividends, it could not be said that the dividends ''had been

declared out of the profits and gains actually charged to income tax'' within the meaning of section 236, for any assessment year ending before 1-4-

1960. The point made out by the learned counsel was that when once the profits are carried to reserve, they lose their identity as profits and

although by a process of tracing dividends could be ''attributed'' to the profits of any given year which had gone into the reserve, it cannot be said,

in terms of the language of section 236, that the distribution is made out of the profits and gains ''actually charged'' to any year''s income tax.

There may be some point in this argument, if the section is sought to be construed and applied on its own words, literally without regard for

corporate principles and practices, which have gained acceptance in matters of appropriation of the annual profits and distribution of dividends of

companies. The profits of a company in a given year may, under the policy of appropriation, be resolved to be distributed straightaway as

dividends, without further ado. However, the modern practice is not to do so, but to credit the profits to reserve first, and then declare dividends

out of such reserves. In any event, where, with reference to any years profits, no decision is taken to declare dividends, then such profits will be

invariably carried to reserve. They will seldom be left high and dry in suspense, in a ''no man''s land'', as it were, on the liabilities side of the balance

sheet.

The Tribunal pointed out in its order, that the expression, ''actually'' occurring in section 236 should not be literally understood. Having regard

to the theory and practice of appropriation of corporate profits, this view of the Tribunal is quite correct. Section 236 grants relief on taxed profits

of a company subsequently distributed. The crux of the relief is the corporate act of dividend distribution. Hence, the provisions of the section

cannot be understood out of context, and out of keeping with corporate principles and practices. The only requirement of the section is that what

are distributed as dividends must be profits prior to 1-4-1960. The expression ''actually'' occurring in section 236 only rules out non-distribution of

taxed profits. It does not rule out the process of tracing, or of attribution of the profits (which subsequently get distributed as dividends) to the

accumulated reserve.

Having regard to the consideration which we have set out in the foregoing paragraphs, the question which we have set out earlier must be

answered in favour of the assessee and against the department. We answer that question accordingly, we uphold the decision of the Tribunal.

One other controversy which has been referred to us is whether an appeal lies from an order passed by the ITO u/s 236. Before the Tribunal

the department questioned the competence of the appeal filed by the assessee, that is, the Trichy United Bank, against the ITO''s order declining to

grant relief u/s 236. Reference was made to section 237 which is the provision relating to refunds generally. This section provides that where an

assessee satisfies the ITO that the tax paid by him for any assessment year exceeds the amount with which he is properly charge able under the

Act for that year, he shall be entitled to a refund of the excess. If the ITO does not grant the application of the assessee under this section or does

not grant the entire refund asked for by the assessee, the assessee has a remedy by way of appeal u/s 246(n) of the Act. That provision expressly

refers to an order u/s 237 as an appealable order. It was urged for the department that section 246 does not refer to an order u/s 236 as an

appealable order. According to the department''s way of thinking, a claim for relief which is refused in whole or in part u/s 236 cannot be brought

within the ambit of section 237.

It was urged before the Tribunal that section 236 is concerned with tax relief and not with refund of tax overpaid and hence, although section

236 speaks of a refund as a means of granting tax relief, that refund is only a refund in a manner of speaking and cannot be brought within the

generality of refunds governed by section 237. On the basis of this reasoning, it was urged, the right of appeal expressly provided for u/s 246(n)

against refused to grant, in whole or in part, a tax refund strictly so-called, cannot be extended to any adverse order u/s 236. It was urged that

section 236 was a complete code on the subject of relief in respect of dividend paid out of past taxed profits, and, in the absence of any special

provision for appealability against orders passed under that section, recourse cannot be had to the general provisions in section 237 read with

section 246(n).

The Tribunal rejected these contentions and held that an appeal lay from an order of the ITO denying either in whole or in part a claim for

refund u/s 236. Against this decision of the Tribunal, the following questions of law have been referred to us:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the appeal is maintainable in law in

the assessee''s case?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that section 237 is a general provision

which would also cover cases arising u/s 236 and, therefore, the appeal was competent?

Before us, the argument on behalf of the department of the subject of competence of the appeal was addressed on the same lines as had been

urged before the Tribunal. It was submitted that section 236 must be regarded as such a special provision that it was not susceptible to inclusion

within the ambit of the general provision contained in section 237. It was submitted that while section 237 related to refund in the sense of over

payment of tax, section 236 was in the nature of a tax relief which was granted to an assessee in the shape of a refund.

The department''s counsel said that in the very nature of things, the relief u/s 236 must, per force, take the form of a refund, considering that the

very rationale for relief is earlier payment of taxes on profits subsequently distributed as dividends.

We cannot discover any distinction with a difference, in substance, between a refund u/s 236 and refunds contemplated by section 237.

Section 237 speaks of an assessee being entitled to a refund where the tax paid by him exceeds the tax with which he is properly chargeable. An

assessee is entitled to refund u/s 236 only in this sense and in no other. Although the marginal note to section 236 gives the name ''relief'' to the

process of adjustment of a company''s liability, the text of the provision really does not differ, in any way, from any other refund under the Act. A

refund is essence, implies and postulates some amount of tax which has already been paid to the department which has got to be returned, either

under a further adjustment of tax liability by the assessing authority or on the basis of a subsequent proceeding by an appellate or other authority. It

is simply a repayment of amount overpaid under whatever mode or set of circumstances the over payment is recognised by the statute and

ascertained for purposes of repayment to the assessee. We are, therefore, of the view that notwithstanding the form of relief u/s 236, since it is

refund of tax already paid, subject to certain calculations, it must be brought within the general provisions of section 237. We further hold that once

it is shown that a refund u/s 236 does not differ in kind from any other refund which could be brought u/s 237, an order refusing refund or

withholding part of a refund must necessarily become appealable u/s 246(n).

This conclusion of ours may be supported by a reference to the legislative history of the provisions, as well. In the income tax Act, 1961, it so

happens that the relief to a company in respect of dividends paid out of its past taxed profits is confined to a separate chapter, namely Chapter

XVIII, while the comparable provisions in section 49BB of the Indian income tax Act, 1922 occurred in Chapter VII of that Act relating to

refunds generally. This legislative history shows that there is no reason why we should regard the relief u/s 236 as any the less a refund merely for

the reason that in the present Act it has been incorporated under a separate chapter-heading. Modern legislative enactments follow the fancy of

statutory draftsman in the matter of functional grouping of statutory provisions. A repealing and re-enacting statute, and even a consolidating the

amending act, never for the most part, only in regrouping preexisting provisions under different patterns (sic). This process of restructuring the

sections, however, cannot blind us to the real substance of the provisions, both before and after the recodification. We, therefore, hold that the

order u/s 236 to the extent that it goes against the assessee-company, is an appealable order.

The learned counsel for the department submitted that section 236 contemplated a self-acting procedure for granting refund and it did not

envisage that there must be an application by the assessee-company for the grant of a refund. This is quite true; there is no procedure for an

application for relief u/s 236. But we cannot see the point of the argument, based on this omission. For, even in the absence of an application the

ITO is bound to go into the question and grant the relief to which the assessee is entitled u/s 236. Because section 236 does not provide for a

refund application, does not mean that where one is filed it must be rejected as not maintainable. For what the ITO has power to grant suo moto

he ought to grant on the assessee''s application, even if the Act does not provide for such an application. The order passed by the ITO in this case

was in fact an order passed by way of disposal of an application by the assessee on 18-1-1974. Since the order refused the relief asked for, must,

in our judgment, be considered as one passed u/s 237 in which event, an appeal against the order is perfectly maintainable.

Of the two questions both of which raise the issue of maintainability; we think that the second question need not be gone into separately, since

it only raises a point of argument. For reasons which we have earlier set out, our answer to the pertinent question as to the competence of the

appeal is in favour of the assessee and against the department. In the result, our answer to all the three questions referred to us by the Tribunal is in

favour of the assessee. The department will pay the costs of the assessee. Counsel''s fee Rs. 500 one set.