COMMISSIONER OF INCOME TAX Vs. GEIGY INTERNATIONAL LIMITED

JUDGEMENT

(1.) THE question referred in this reference relates to the construction of rules in the Fifth Schedule to the IT Act, 1961, as they were in force and relevant for the assessment proceedings in the asst. yr. 1963 64. The assessee company purchased the shares of an Indian company, Suhrid Geigy Ltd., which was engaged in an industry for the manufacture and production of dye stuff. In assessment proceedings the assessee company claimed exemption from super tax in respect of dividends received from the said Suhrid Geigy Ltd. (hereinafter referred to as the "Indian company"). These shares were purchased by the assessee some time in April, 1962, when the Indian company raised fresh capital and issued fresh shares. The claim of the assessee for exemption under S. 99(1)(iv) of the IT Act, 1961, as it stood at the material time, was rejected by the ITO on the ground that the condition in r. 2 of the Fifth Schedule in respect of fresh capital by public subscription has not been satisfied by the Indian company from which the assessee got the dividends. He further held that the fresh capital of the Indian company did not come by public subscription and, therefore, the company was not entitled to any exemption in view of r. 2 of the Fifth Schedule. This view of the ITO having been confirmed by the AAC, the assessee company filed an appeal before the Tribunal. The Tribunal took the view that rr. 1 and 2 of the Fifth Schedule were independent of each other and while r. 1 took care of companies that were formed after 31st March, 1952, r. 2 took care of existing companies. The Tribunal further took the view that r. 2 could apply only to public companies as the necessary requisite was fresh issue of capital by public subscription. The Tribunal, therefore, took the view that r. 1 alone was applicable to the case of the assessee company and the assessee company was entitled to exemption in respect of the dividends received on fresh shares issued by the Indian company. Out of this order of the Tribunal, the question which has been referred at the instance of the Revenue is as follows :

(2.) MR . Joshi appearing on behalf of the Revenue tried to support the construction placed on the rules in the Fifth Schedule by the ITO and the AAC, but a bare reading of the two rules is sufficient, in our view, to indicate that the view of the ITO and the AAC was patently contrary to the requirements contemplated by the rules. Clause (iv) of S. 99(1) at the material time read as follows :

(3.) THE scheme of the Rules reproduced above is extremely simple. Rule 1 provides that super tax shall not be payable by a company in respect of dividend from a certain category of Indian companies which is assessable for the assessment year commencing on 1st day of April, 1962, and for the subsequent years. The Indian company whose dividend is contemplated by the rule is specified in cls. (a) and (b) of r. 1. The categorisation in cls. (a) and (b) is made on the basis of the articles manufactured by the Indian company, that is, whether it manufactures any articles specified in any of the items in Part A or Part B of the Fifth Schedule. Clause (a) deals with an Indian company formed or registered after 31st March, 1952, and before 1st day of April, 1967. Clause (b) deals with an Indian company formed and registered after 31st day of March, 1961, and before the 1st day of April, 1967. There are certain conditions which are required to be satisfied before exemption is claimed in respect of dividend declared by the Indian companies referred to in cls. (a) and (b) of r. 1. In respect of a company which is formed and registered after 31st day of March, 1952, and before 1st day of April, 1967, the Central Government has to be satisfied that the company is wholly or mainly engaged in an industry for the manufacture or production of any one or more of the articles specified in any of the items in Part A of the Schedule and the further condition is that the income of the Indian company would have been exempt under the provisions of S. 84 if the provisions of that section had been applicable thereto. Under cl. (b) also the satisfaction of the Central Government with regard to the fact that the company is wholly or mainly engaged in an industry for the manufacture or production of certain articles is necessary, but the articles for the purposes of cl. (b) are those specified in Part B of the Schedule. The condition with regard to the applicability of S. 84 is also to be satisfied. Rule 2 specifically refers to dividend payable, in respect of any fresh capital raised by an Indian company by public subscription. In respect of a company engaged in the manufacture or production of items specified in Part A of the Schedule, fresh capital should be raised after 28th February, 1953, and before 1st April, 1967, and in respect of a company engaged in the manufacture or production of articles specified in Part B of the Schedule, fresh capital must be raised after 31st March, 1961, and before 1st April, 1967. No doubt, rr. 1 and 2 both deal with exemption from super tax, but the companies, dividends from which are exempted, are of a different category. What is necessary under r. 2 is that the Indian company must have raised fresh capital by public subscription. Under S. 3 of the Companies Act, in the case of a private company, there is a positive prohibition against the private company issuing an invitation to the public to subscribe for any shares in, or debentures of, the said company. It is obvious, therefore, that so far as a private company is concerned, applicability of r. 2 will be completely out of question and, in such a case, r. 1 alone will apply. It is immaterial for the purposes of r. 1 as to whether the shares purchased by the assessee company were issued initially or they were for raising additional capital. It is difficult to comprehend how r. 2 can apply at all to a private company. In our view, there is hardly any scope for any argument that in the case of a private company, the proper provision to apply will be r. 1 and not r. 2. In our view, the Tribunal was, therefore, right when it took the view that, so far as the assessee was concerned, its claim for exemption would be governed by r. 1 and not by r. 2.