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Petitioner: AHMEDABAD MANUFACTURING AND CALICO PRINTING CO. LTD. VS Respondent: S. G. MEHTA, INCOME-TAX OFFICERHonorable Justice S. K. DASR. J. Kolah, J. B. Dadachanji,Gopal Singh
1968 P T D 364
1968 P T D 364
[Supreme Court India]
Present: S. K. Das, J. L. Kapur, A. K. Sarkar, M. Hidayatullah and Raghubar Dayal, JJ
AHMEDABAD MANUFACTURING AND CALICO PRINTING CO. LTD.
Versus
S. G. MEHTA, INCOME‑TAX OFFICER AND ANOTHER
Civil Appeal No. 139 of 1962, decided on 14th November 1962.
Rectification of mistakes‑Rebate on undistributed profits-- Declaration of dividend out of such undistributed profits in later year‑Provision for recalling rebate by way of rectification Whether applies to distribution of dividend made before April 1, 1956‑-Interpretation of statutes‑Retrospective operation --Indian Income‑Tax Act, 1922, S. 35(10)‑Finance Act, 1952, Sch. I, Part I, para. B, first proviso‑Finance Act, 1956, Ss. 19 & 28.
For the assessment year 1952‑53 the assessee was allowed a rebate of income‑tax of one anna per rupee on its undistributed profits of Rs. 26,62,776, under the first proviso to Paragraph B of Part I of the First Schedule to the Finance Act, 1952. For the assessment year 1953‑54, the computation for the purpose of assess ment to income‑tax resulted in a loss but the assessee declared on April 20,1953, a dividend of Rs. 19,32,000 in relation to the calendar year 1952 which was the previous year. On March 27, 1958, the Income‑tax Officer passed an order under section 35 (10) of the Income‑tax Act, 1922, which came into force. on April 1, 1956, withdrawing the proportionate rebate on Rs. 19,32,000. The assessee objected to that order on the ground that section 35(10) did not apply because the dividend was declared before section 35(10) came into force:
Held, by Sarkar, Hidayatullah and Raghubar Dayal, JJ. (Das and Kapur, JJ. dissenting), (i) that section 35(10) applied even though the dividend was declared before April 1, 1956 ;
(ii) that the rule that an Act did not have retrospective operation on substantial rights which had become fixed before the date of the commencement of the Act was not unalterable. The legislature might affect substantial rights by enacting laws which were expressly retrospective or by using language which had that necessary result. And this language might give an enactment more retrospectivity than what the commencement clause gave to any of its provisions. When this happened the provisions thus made retrospective, expressly or by necessary intendment, would operate from a date earlier than the date of commencement and would affect rights which, but for such operation, would have continued undisturbed.
Per Das and Kapur, JJ. (dissenting) : There is nothing .in the language of section 35(10) which would justify the inference that the legislature intended to carry the legal fiction created by the subsection to a period earlier than the date on which it came into force. The language which creates the fiction is clearly prospective and shows that what was created at the time when the rebate was granted is rendered incorrect on the happening of the crucial event after the coming into force of the subsection. The statute does not necessarily become retrospective because part of the requisites for its action is drawn from a time antecedent to its passing. A statute which is not declaratory of a pre‑existing law nor a matter relating to procedure but affects vested rights cannot be given a greater retrospective effects than its language renders necessary, and even in construing a section which is to a certain extent retrospective, the line is reached at which the words of the section cease to be plain.
Decision of the Bombay High Court affirmed.
[Cases referred to]
R. J. Kolah, J. B. Dadachanji, O. C. Mathur and Ravinder Narain of J. B. Dadachanji & Co., for Appellant.
Gopal Singh and R. N. Sachthey, for Respondents.
JUDGMENT
S. K. DAS, J.--‑This appeal on a certificate of fitness granted by the High Court of Bombay raises a question of interpretation of subsection (10) of section 35 of the Indian Income‑tax Act, 1922. This subsection is one of a group of subsections substituted or inserted in the said. section by section 19 of the Finance Act, 1956 (18 of 1956). By section 28 of the said Finance Act, sub section (10) of section 35 of the Income‑tax Act, 1922, came into force on April 1, 1956. The short question before us is, whether on its true construction, subsection (10) of section 35 applies in a case where a company declares dividends by availing itself wholly or partly of the amount on which a rebate of income‑tax was earlier allowed to it under clause (i) of the proviso to Paragraph B of Part I of the relevant Schedules to the Finance Acts, when such dividends were declared prior to the coming into force of the subsection, that is, prior to April 1, 1956.
The facts which have given rise to the appeal are these. The Ahmedabad Manufacturing and Calico Printing Co. Ltd. is the appellant before us. The appellant company was incorporated under the Indian Companies Act, 1866, and has its office at Ahmedabad. It carries on the business of manufacturing and selling cotton piece‑goods and chemicals. For the assessment year 1952‑53, the corresponding account year being the calendar year 1951, the appellant was assessed to income‑tax and super‑tax on a total income of Rs. 1,02,79,808 and was allowed a rebate of one anna per rupee on the undistributed profits of Rs. 36,62,776 under the first proviso to Paragraph B of Part I of the First Schedule to the Finance Act, 1952. The amount of rebate allowed was Rs. 2,28,924. For the assessment year 1953‑54, the corresponding account year being the calendar year 1952, the appellant showed a book profit of Rs. 45,67,966, but was assessed to a loss of Rs. 5,98,353 on April 17, 1954: For the said calendar year 1952, the appellant declared a dividend of Rs. 19,32,000 on April 20, 1954. This dividend came out of the undistributed profits of the calendar year 1951 on which the appellant had been allowed a rebate.
On March 18, 1958, the Income‑tax Officer, Special Circle, Ahmedabad, respondent No. 1 before us, issued a notice to the appellant calling upon the latter to show cause why action under subsection (10) of section 35 should not be taken against the appellant by withdrawing the rebate allowed on the sum of Rs. 19,32,000. . The appellant raised some objections, one of which was that subsection (10) of section 35 did not apply to his case. The Income‑tax Officer, however, held that subsection (10) of section 35 applied and accordingly directed that the rebate allowed on the sum of Rs. 19,32,000 should be withdrawn, by recomputing the tax payable by the appellant. He, ordered the issue of a demand notice for a sum of Rs. 1,20,750 which was the rebate allowed on Rs. 19,32,000. The Income‑tax Officer passed this order on March 27, 1958.
Being aggrieved by that order, the appellant moved, the High Court of Bombay by a writ petition filed on June 26, 1958. The train ground taken by the appellant was that subsection (10) of section 35 did not apply to a case where dividend was declared, as in this case, before the coming into force of subsection (10) of section 35. The High Court rejected this contention and dismissed the writ petition. The appellant then obtained a certificate of fitness and has preferred the present appeal in pursuance of that certificate.
We may now read some of the provisions of section 35 in so far as they are relevant for our purpose:
"35. (1) The Commissioner or Appellate Assistant Commis sioner may, at any time within four years from the date of any order passed by him in appeal or, in the case of the Commissioner, in revision under section 33‑A and the Income‑tax Officer may, at any time within four years from the date of any assessment order or refund order passed by him on his own motion rectify any mistake apparent from the record of the appeal, revision, assessment or refund, as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee :
(5) Where in respect of any completed assessment of a partner in a firm it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm under section 31, section 33, section 33‑A, section 33‑B, section 66 or section 66‑A that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or, if included, is not correct, the inclusion of the share in the assessment or the correction thereof, as the case may be, shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section, and the provisions o f subsection (1) shall apply thereto accordingly, the period of four years referred to in that subsection being computed from the date of the final order passed in the case of the firm.
(6) Where the excess profits tax or the business profits tax payable by an assessee has been modified in appeal, revision or any other' proceeding, or where any excess profits tax or business profits tax has been assessed after the completion of the corresponding assessment for income‑tax (whether before or after the commencement of the Income‑tax (Amendment) Act, 1953), and in consequence thereof it is necessary to recompute the total income of the assessee chargeable to income‑tax, such recomputation shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section and the provisions of subsection (1) shall apply accordingly, the period of four years referred to in that subsection being computed from the date of the order making or modifying the assessment of such excess profits tax or business profits tax ......
(10) Where, in any of the assessments for the years beginning on the 1st day of April, of the years 1948 to 1955 inclusive, a rebate of income‑tax was allowed to a company on a part of its total income under clause (i) of the proviso to Paragraph B of Part I of the relevant Schedules to the Finance Acts specifying the rates of tax for the relevant year, and subsequently, the amount on which the rebate of income‑tax was allowed as aforesaid is availed of by the company, wholly or partly, for declaring dividends in any year, the amount or that part of the amount availed of as afore said, as the case may be, shall, by reason of the rebate of income tax allowed to the company and to the extent to which it has not actually been subjected to an additional income‑tax in accordance with the provisions of clause (ii) of the proviso to Paragraph B of Part I of the Schedules to the Finance Acts above referred to, be deemed to have been made the subject of incorrect relief under this Act, and the Income‑tax Officer shall recompute the tax payable by the company by reducing the rebate originally allowed, as if the recomputation is a rectification of a mistake apparent from the record within the meaning of this section and the provisions of sub section (1) shall apply accordingly, the period of four years specified therein being reckoned from the end of the financial year in which the amount on which the rebate of income‑tax was allowed as aforesaid was availed of by the company wholly or partly for declaring dividends."
Speaking generally, section 35 deals with rectification of mistakes in circumstances detailed in the various subsections there of and provides for orders consequent on such rectification. Subsection (1) empowers the Income‑tax authorities to rectify mistakes apparent from the record in respect of certain orders passed by them. It provides that the Income‑tax Officer concerned may at any time within four years from the date of any assessment order passed by him on his own motion rectify any mistake apparent from the record of the assessment. The power of rectification may be exercised subject to two conditions : and (1) that there is a mistake apparent from the record of the assessment, and (2) that the order of rectification is made within four years from the date of the assessment sought to be rectified. Subsection (5) deals with inclusion or correction of the income of a partner in a firm consequent upon assessment or reassessment of the firm of which he was a partner. Subsection (6) deals with recomputation of total income of an assessee in consequence of modifications made in the excess profits tax or the business profits tax payable by an assessee subsequent to an assessment made under the Income tax Act. These two subsections were considered by this court in two decisions to which we shall presently refer. They have been relied on by the appellant and have some bearing on the interpre tation of subsection (10). Subsections (2), (3), (4), (7), (8) and (9) are not relevant for our purpose and need not be referred to.
Now, we come to subsection (10). It deals with a case where a rebate was allowed to a company on a part of its income (viz., undistributed profits) by virtue of the concessions given by the Finance Acts of 1948 to 1955 : this is clear from the first part of the subsection. The second part states the condition in which, or rather the crucial event on the happening of which, the rebate granted to a company is deemed to have been given by a mistake apparent from the record this condition or crucial event is the declaration of dividends by the company out of the amount in whole or in part, on which rebate was earlier granted to it. The third and operative part states that on the happening of the crucial event, the amount on which rebate was granted and which has been subsequently utilised for declaring dividends shall be deemed to have been made the subject of incorrect relief under the Act and the Income‑tax Officer shall recompute the tax payable by the company by reducing the rebate originally allowed as if the recomputation is a rectification of a mistake apparent from the record within the 'meaning of the section. The fourth and last part introduces a period of limitation of four years, the four years being reckoned not from the date of the order passed as in subsection (1), but from the end of the financial year in which the amount on which rebate of income‑tax was allowed was availed of by the company wholly or partly for declaring dividends. This in brief, appears to be' the scheme of, subsection (10) of section 35.
Now, the argument on behalf of the appellant is this. Like subsection (5) of section 35, subsection (10) affects a vested right, namely, the right to a rebate of income‑tax on a part of the total income of the company under clause (i) of the proviso to Paragraph B of' Part I of the relevant Schedules to the Finance Acts of 1948 to 1955, and the further right to declare dividends out of the undistributed profits of the previous year. Under the well‑settled 'rules of statutory construction, no statute which impairs an existing right or obligation except as regards a matter of procedure, shall have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication. Put differently, a statute is not to be construed to have a greater retrospective operation than its language renders necessary ; and it is submitted that "the general rule is that all statutes other than those which are merely declaratory, or which relate only to matters of procedure or of evidence are prima facie prospective ; and retrospective effect is not to be given to them unless by express words or necessary implication, it appears that this was the intention of the Legislature" and "it is a corollary of this general presumption against retrospection that, even when a statute is intended to be to some extent retrospective, it is not to be construed as having a greater retrospective effect than its language renders necessary" (Halsbury's Laws of England, volume 36, third edition, page 423 and page 426). The argument on behalf of the appellant is that by section 28 of the Finance Act, 1956, subsection (10) has undoubtedly retrospective effect from April 1, 1956 ; but the language of the subsection does not expressly, nor by necessary implication, show that it has any greater retrospective effect. It is pointed out that, on the contrary, where the Legislature wanted a particular subsection to have greater retrospective effect, it had said so, e. g., in subsection (6). It is also pointed out that subsection (5) of section 35 was inserted by the Indian Income‑tax (Amendment) Act, 1953, and by section 1(2) of the said Act it came into force on April 1, 1952. Where the Legislature wanted to give greater retrospective effect to particular provisions, it said so in sections 3(2), 7(2) and 30(2) of the said 'Act. That being the position, the argument on behalf of the appellant is that we should not give any greater retrospective effect to subsection (10) of section 35 than what has been done by section 28 of the Finance Act, 1956. Learned counsel for the appellant has strongly relied on the decision of this court in Income‑tax Officer v. S. K. Habibullah ((1962) 44 I T R 809 (S C)) wherein with regard to subsection (5) of section 35 it was held that the subsection was not declaratory of the pre‑existing law nor a matter relating to procedure but affected vested rights and must be deemed to have come into force only from April 1, 1952 ; therefore the Income‑tax Officer had no jurisdiction under the said subsection to rectify the assessment of a partner consequent on the assessment of the firm in cases where the firm's assessment was completed before April 1, 1952. The argument of the learned counsel for the appellant is that the same principle must apply in the present case and subsection (10) of section 35 does not apply to a case where dividend was declared by the company before the date of the coming into force of the subsection, namely, April 1, 1956.
The second part of the argument of
the learned counsel for the appellant, is that there is no real difference in language between the two subsections, subsection (5) and subsection (10) of section 35. In both cases a rectification or correction is made by reason of a subsequent event ; in subsection (5) the subsequent event is the assessment of the firm which discloses the inaccuracy in the earlier "assessment of a partner ; in subsection (10) the subsequent event is the declaration of dividend out of the amount on which a rebate was earlier granted. It is pointed out that in their true scope and Effect, the two subsections stand on the same footing: Subsection (10) further makes it clear that by a legal fiction that which was correct at the time when it was made is rendered incorrect after the coming into force of the subsection. The subsection states clearly "...shall, by reason of the rebate of income‑tax allowed to the company be deemed to have been made the subject of incorrect relief under this Act, and the Income‑tax Officer shall recompute the tax payable by the company by reducing the' rebate originally allowed..." This language, it is argued, is clearly prospective and does not justify the carrying of the legal fiction to a period earlier than April 1, 1956.
As against these arguments, learned counsel for the respon dent has contended that the language of subsection (10) is different from that of subsection (5) and the principle laid down by this court in S. K. Habibullah's case, cannot be applied to the present case. Alternatively, he has argued that the decision is incorrect and should be reconsidered by us. The argument of learned counsel for the respondent is that subsection (10) by necessary implication has a greater retrospective effect than what is laid down by section 28 of the Finance Act, 1956. He points out that the first part of the subsection talks of the assessments made for any of the years beginning on April 1, 1948 to April 1, 1955 to when a rebate of income‑tax was allowed then the second part refers to the subsequent declaration of dividend by the company in any year. Learned counsel for the respondent has emphasised the expression "in any year" and has submitted that this shows that the intention was to take in a declaration of dividend made even earlier than April 1, 1956. According to him, the only effect of section 28 of the Finance Act, 1956, is that the Income tax officer can take action only after April 1, 1956, but the language of the subsection does not justify the conclusion that the legal fiction created by it must be restricted to the declaration of dividends on or after April 1, 1956.
We have carefully considered these arguments. The language of subsection (10) of section 35 is perhaps not as clear as one might wish it to lie. There is no doubt, however, that the subsection affects vested rights and should not be given a greater retrospective operation than its language renders necessary. Even though the subsection is to a certain extent retrospective, and section 28 of the Finance Act, 1956 in express terms makes it retrospective from April 1, 1956, it is clear to us that there is nothing in the language of the subsection which would justify the inference that the Legislature intended to carry the legal fiction created by the subsection to a period earlier than the date on which the subsection came into force. The maximum applicable in such cases is that even in construing a section which is to a certain extent retrospective, the line is reached at which the words of the section cease to be plain. We are further of the opinion that when the first part of the subsection refers to the assessments for the years 1948 to 1955, it merely refers to the period during which the rebate provisions were in force. It is not disputed before us that the rebate provisions came into force from the Finance Act of 1948 and ended with the Finance Act of 1955. The first part, therefore, is merely a reference to the period during which the rebate provisions were in force. It is indeed true that in the second part of the subsection the expression used is "declaring dividends in any year" and this has to be read in conjunction with the word "subsequently" which can only mean subsequent to the allowance of the rebate. But in the very same part, it is further stated that the declaration of dividend in any year shall, by reason of the rebate, be deemed to have made the amount on which the rebate was granted, the subject of incorrect relief etc. This language which creates the legal fiction is clearly prospective and shows that what was correct at the time when the rebate was granted is rendered incorrect on the happening of the crucial event after the coming into force of the subsection, and by the express terms of section 28 of the Finance Act, 1956, the subsection comes into force on April‑1, 1956. We are unable, therefore, to agree with the learned counsel for the respondent that the language of subsection (10) by necessary implication takes the legal fiction back to a period earlier than April 1, 1956. In coming to this conclusion, we have kept in mind the principle that a statute does not necessarily become retrospective because a part of the requisites for its action is drawn from a time antecedent to its passing.
Furthermore, we see no reason why the principle laid down in S. K. Habibullah's case will not apply in the present case nor are we satisfied that that decision with regard to subsection (5) of section 35 was incorrect. We may point out, however, that in Second Additional Income‑tax Officer v. Atmala Nagaraj ((1962) 46 I T R 609 (S C)) this court went a step further and held that subsection (5) of section 35 was not applicable to cases where the assessment of the partner was completed before April 1, 1952, even though the assessment of the firm was completed after April 1, 1952. Learned counsel for the appellant frankly conceded before us that he did' not wish to go as far as that and contend that even in a case where a declaration of dividend was made after April 1, 1956, subsection. (10) would not apply ; because that would .make subsection (10) unworkable. The decision in Second Additional Income‑tax Officer v. Atmala Nagaraj may perhaps require reconsideration as to which we need not express any final opinion now ; but so far as this case .is concerned we see no reason why the principle in S. K. Habibullah's case will not apply. The principle is simply this. A statute which is not declaratory of a pre‑existing law nor a matter relating to procedure but affects vested rights cannot be given a greater retrospective effect than its language renders necessary, and even in construing a section which is to a certain extent retrospective, the line is reached at which the words of the section cease to be plain. These are well‑settled principles, and there is no reason to doubt their accuracy.
For the reasons given above, we would allow the appeal, set aside the order and judgment of the High Court and quash the order of the Income‑tax Officer dated…
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