COMMISSIONER OF INCOME TAX, MADRAS versus M/S. P. S. S. INVESTMENTS (P) LTD.

Citation: [1977] 2 S.C.R. 78 · Decided: 09-11-1976 · Supreme Court of India · Bench: HANS RAJ KHANNA · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
c 
D 
E 
F 
G 
7 ii 
COMMISSIONER OF INCOME TAX, MADRAS 
v. 
M/S. P. S. S. INVESTMENTS (P) LTD. 
November 9, 1976 
[H. R. KHANNA AND V. R. KRISHNA IYER, JJ.] 
Finance Act, 
1958, 
First Schedule Part IT, 
Explanation (iii) to par11-
graph D-Calculation of rebate in computation of Super-tax, whether profits 
earned during previous year to be taken into account. 
The Income-tax officer took into account the respondent's entire dividend 
income of the year ending December 30, 1957, while calculating the super-tax 
payable by it for the assessment year 1958-59. 
Jn appeal against the computa-
tion the respondent contended before the Appellate Assistant Commissioner that 
the dividend-income included profits earned during the previous years, and that 
rebate should be reduced only with reference to the propartionate part of the 
dividend declared during 1957 which had come out of the other income assessed 
to income-tax. and super-tax in the assessment year 1957-58. 
The respondent's 
contention was accepted in pninciple. 
The Department's appeal was dismis.e<i 
by the Appellate Tribunal. 
The matter was then referred to the High Court 
under section 66 ( 1) of the Indian Income Tax Act, 1922, and decided in favour 
of the assessee. 
Allowing the appeals the Court, 
HELD : For computing the reduction in rebate under paragraph D of Part H 
of the First Schedule to the Finance Act, 1958, the position of profits and gains 
as it existed in the previous year should be taken into account and not in the 
years prior to that Clause (iii) introduces a fiction with regard to the amount 
of dividends which shall be deemed to have been distributed. The taxing autho-
rities have to take into account the company's total income and the profits and 
gains other than capital recJ'ipts reduced by certain allowances only in the pre-
vious year, i.e., the year in which the dividend was distributed. 
The fact that 
those profits and gains accrued in ye·ars prior to the previous year and included· 
portions which were exempt from tax under the provisions of the Income-tax 
Act would not be of much relevance. 
[85 A-DJ 
CIVIL APPELLATE JURISDICTION : Civil .Appeal Nos. 1853 (A) 
and 1854 of 1971. 
Appeal from the Judgment and Order dated the 18th April, 1969 
of the Madras High Court Madras in Tax Cases Nos. 18 and 19 of 
1966. 
V. S. Desai, J. Ramamurthi and M. N. Shroff, for the Appellant. 
T. A. Ramaclwndran, for Respondent. 
The Judgment of the Court was delivered by 
KHANNA, J. This judgment would dispose of two civil appeals 
H 
Nos. 1853(A) and 1854 of 1971 which have been filed on certificate 
by the Commissioner of Income-tax against the judgment of Madras 
High Court (reported in 79 ITR 456) answering the following two 
questions referred to it in two references under section 66(1) of 
f 
1 
( 
c. I. T. MADUS v. P. s. s. INVESTMENTS (Khanna J.) 
79 
the Indian Income-tax Act, 1922 in the affirmative in favour of the 
assessee and against the revenue : 
"1. Whether on the facts and in the circumstances of 
the case, the Appellate Tribunal was right in holding that 
for computing the reduction in rebate under Para D of Part 
II to the First schedule to the Finance Act, 1959 (in R. 
A. No. 169 of 1965-66) 
and of Finance 
Act, 1958,(in· 
R. A. No. 168 of 1965-66) in the composition of profits 
of the year from which the dividend had been 
declared 
should be looked ·into, and 
2. Whether the Appellate Tribunal was right in law in 
holding that the paid up capital of the assessee company 
should be proportionately reduced for 
the 
purpose 
of 
reducing the rebate in Corporation Tax in the manner direc-
ted." 
The matter relates to the assessment of the respondent company 
for the assessment years 1958-59 and 1959-60. 
For sake of con-
venience we may set out the facts relating to the assessment year 
1958-59. It is the common case of the parties that the decision 
about that year would also govern the point of controversy relating 
to the other year. 
The assessee is a private limited company. In 
the previous year ending on December 31, 1957 relevant for 
the 
assessment year 1958-59, it declared a dividend of Rs. 99.000. 
Its 
paid up capital was Rs. 1,65,000. 
The total income of the assessee 
company V.'a.'i determined at Rs. 73,255 made up as under : 
Rs. 
Business 
Nil 
Other source; 
26,554 
Capital gains 
46,701 
Total income 
73,255 
A 
B 
c 
D 
E 
As the dividend of Rs. 99,000 declared by the assessee company 
was in exc

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