Supreme Court Upholds Assessee in War Profits Tax Dispute Due to Retrospective Application of Dividend Exemption. Dividend Income from Company Already Subject to War Profits Tax Excluded Under Explanation to Rule 3 of Gwalior War Profits Tax Ordinance, Samvat 2001.

Civil appeal by special leave against a High Court judgment in a tax reference under Section 46 of the Gwalior War Profits Tax Ordinance, Samvat 2001, concerning the chargeability of dividend income to war profits tax.

The appellant War Profits Tax Commissioner sought to set aside the High Court's decision and have the dividend income included as taxable; the respondent assessee sought exemption of the dividend income.

Dispute arose because the War Profits Tax Officer included Rs. 11,09,332 received as dividend from Binod Mills in the assessee's taxable income for the chargeable accounting period July 1, 1944 to October 16, 1944.

The War Profits Tax Officer, by order dated July 9, 1951, included the dividend amount in taxable income; the Appellate Assistant Commissioner and Commissioner upheld this. On reference, the High Court first accepted the assessee's contention that the shareholding was not connected with business and answered in its favor on April 19, 1957. The Supreme Court, on December 20, 1961, set aside that judgment and remanded for consideration of other contentions. On remand, the High Court accepted the contention that the Explanation exempted the dividends and answered in favor of the assessee on September 6, 1962, leading to the present appeal.

Whether dividend income of Rs. 11,09,332 received from Binod Mills was chargeable under the War Profits Tax. Whether the Explanation inserted by the 1946 Amendment Ordinance applied retrospectively to the chargeable accounting period July 1, 1944 to October 16, 1944. Whether the Explanation applied to Rule 3(1) as well as Rule 3(2) of the First Schedule to the Ordinance.

Appellant contended that the Explanation was not in existence at the relevant time and could not be taken into consideration; it was prospective only. Appellant further contended that the Explanation was an Explanation to Rule 3(2) only and could not be used to explain Rule 3(1). Respondent submitted that the Explanation exempted dividends from a company carrying on a business to the whole of which War Profits Tax applied, and that the dividend income was not liable to be included.

The Explanation to Rule 3 of the First Schedule to the Gwalior War Profits Tax Ordinance, as inserted by the 1946 Amendment and clarified by the 1947 Amendment, is retrospective from July 1, 1944, because the 1947 Amendment deemed the comma in the Explanation to be present from that date, indicating the Explanation itself was in force. The Explanation applies to both Rule 3(1) and Rule 3(2) because the phrase 'income from investments to be included in the profits of the business under the provisions of this rule' covers both sub-rules. Dividends received from a company whose business is wholly subject to War Profits Tax are excluded from the assessee's taxable profits to avoid double taxation.

The language of the explanation is very plain, and it means that if income is received by way of dividends or profits from a company carrying on a business, to the whole of which the section of the Ordinance imposing the War Profits Tax applies, then the income has to be excluded in the assessment to War Profits Tax of the assessee receiving that income. Ordinance 2004 expressly assumes that the explanation was in existence from the date when the Ordinance came into force and no other meaning can be given to s. 2 of Ordinance 2004 because by deeming that the comma shall be deemed to be there from the date from which the Ordinance came into force it expressly assumes that the explanation was also in force from that date. if we look at the language of the explanation it was meant to be an explanation not only to r. 3(2) but to r. 3(1) also.

The War Profits Tax Officer included the dividend income in the assessee's taxable income by order dated July 9, 1951. The Appellate Assistant Commissioner and Commissioner upheld the inclusion. At the assessee's instance, the Commissioner referred three questions to the High Court. The High Court, by judgment dated April 19, 1957, accepted the assessee's first contention and answered the question in its favor. The Commissioner appealed to the Supreme Court, which by judgment dated December 20, 1961 set aside the High Court judgment and remanded for consideration of the other contentions. On remand, the High Court accepted the second contention based on the Explanation and answered in the assessee's favor by judgment dated September 6, 1962. The Commissioner obtained special leave to appeal, resulting in the present judgment dated April 20, 1966.

• Gwalior War Profits Tax Ordinance, Samvat 2001: Section 2(5), Section 46, First Schedule, Rule 1, Rule 3(1), Rule 3(2), Explanation to Rule 3
• Gwalior War Profits Tax (Amendment) Ordinance, Samvat 2002: Section 2
• Gwalior War Profits Tax (Amendment) Ordinance, Samvat 2004: Section 2