Holding

The deduction under Section 80M must be computed with reference to dividend income as computed under the Act, and Section 80AA is merely declaratory and not constitutionally infirm.

Summary

Distributors (Baroda) Ltd., an investment company, claimed a deduction under Section 80M of the Income Tax Act for inter‑corporate dividends based on the full amount of dividends received, contrary to the Revenue’s view that the deduction should be calculated on dividend income as computed under the Act. The Supreme Court examined the language of Section 80M, the legislative history, and the object of the provision, concluding that the deduction must be based on the dividend income computed in accordance with the Act, not the gross amount received. The Court also considered the constitutional challenge to Section 80AA, which retrospectively clarified the same interpretation, and held that the amendment was merely declaratory of the law as it always stood and therefore not invalid. Consequently, the writ petition was dismissed.

Issues considered

The proper construction of Section 80M: whether the deduction is to be calculated on the full amount of dividend received or on dividend income computed under the Income Tax Act.
Whether Section 80AA, introduced retrospectively, is constitutionally valid or amounts to an impermissible retrospective tax increase.
The applicability of the doctrine of stare decisis in overruling the earlier Cloth Traders decision.

Legislation cited

Constitution of Indias. Article 141, s. Article 19(1)(g)
Income Tax Act, 1961s. 280D, s. 80A, s. 80AA, s. 80B, s. 80C, s. 80D, s. 80E, s. 80M, s. 80VV, s. 85A, s. 99

Subjects

inter‑corporate dividenddeductionIncome Tax Actretrospective legislationconstitutional challengeSection 80MSection 80AAdouble taxationstatutory interpretationstare decisis

Judgment

778

A DISTRIBUTORS (BARODA) PVT. LTD.

v.

UNION OF INDIA AND TWO ORS.

B July 1, 1985

[Y.V. CHANDRACHUD, C.J., BHAGWATI, AllAR8NDRA NATH
SEN, D.P. MADON AND M.P. THAKKAR, JJ]

Income Tax Act 1961 Sections 80M(J) and 80A.,4 :
c
income by way of inturcorporate dividends-Deduction-Whether to be
1nade with reference to full an1ounl of dividend received or dividend computed i11
accordance with the prvvisions of the Act -Section SOAA- ~Vhether retrospect iv~
in operation.

D Constitution of India 1950, Artice 141:

Supreme Court-Declaration of/aw-To be certain, definite and correct-
Jndicial decisions-Continuity anJ consistency-Essentiality-Pointed out-Earlier
ruling of Co,,,rt-Manifest!y wrong, proreeds upon mistaken assumption with
regard to exi3tence or continuance of statutory provision, contrary to another
E decision of Court-Doctrine of stare decisis-No bar to over~ruling such
decision-Decision of Court in fiscal n1atters-Jnterference in exceptionaf cases-
Necessity of.

Interpretation of Statutes :

F Statutory prol'ision-Meaning of-Interpretation on earlier statutory
provision In different language arid structurally different-Reference lo and reliance
on-Whether permissible.

Words and Phrases-Meaning of:

G 'Such income by way of di'lidendJ'-Meaning of-Section SOM lnroff1e Tax
Act 1961.

The earliest provision granting exemption from super tax in respect of
inter-corporate dividend was made as far back as 9th December, 1933 in a
Notification issued by the Governor General in Council and it provided as
H follows:-

''The Governor General in Council is pleased to exempt from super
tax:
DJStRIBUTORS (BARODA) LTD. V. UNION 779
(i) So much of the income of any investment trust company as is
derived from dividends paid by any other company which has paid or will A
pay super-tax in respect of the profits out of which such dividends are paid".

This provision came up for consideration before a Division Bench of
the High Court of Bombay in CITv. Industrial, investment Trust Co. Ltd.
(1968) 671.T.R. 437. The High Court guided by a decision of this Court in
CITv. South India Bank (1966) 59 !TR 763 held that the "dividend income B
which was exempted under the notification would be the dividend income
received by the assessee and not the said income less any further amounts"
because the notification must be regarded a self-contained one and not
controlled by any other provisions of the Act and there was no warrant to
construe the word 'income' in the notification as total income nor to qualify
the dividend computed under Section 12 of the Act.
c
A provision of a similar kind granting exemption from super tax in
respect of certuin specified categories of inter-corporate dividend was intro-
duced as Section 56A of the Income Tax Act 1922 by the Finance Act,
1953.

When the Indian Income Tax Act. 1922 was 1epealed and the Income D
Tax Act, 1961 was enacted with effect from 1st April, 1902, Section 99, sub-
section (i) was introduced in the new Act exempting certain categories of
income from super tax and one such category was that set out in clause (iv) of
Section 99 sub-section (1) which read as follows :

'·99. (I) Super-tax shall not be payable by an assessee in respect E
of the following amounts which are included in his total income-
(iv) if the assessee is a company, any dividend received by it from
an Indian company, subject to the provisions contained in the
fifth Schedule."

This provision continued in force upto Ist March, 1965 subject to a F
minor inconsequential amendment made by the Finance Act, .1964.

This provision did not come up for interpretation before this Court only
in Cloth Traders Case, but it came to be considered by some of the High
Courts.
G
The three High Courts of Bombay, Calcutta and Madras C./.Tv. New
Great Insurance Company Ltd. (1963) 90 !TR 348, C.l.T. v. Darbhangha Market-
ing Company Ltd. 1971 80 !TR 72 and Madras Auto Service v. I.T.0. (1975)
101 I. T.R.. 589] on a const~uct1on of clause (1v) of sub~section (I) of section 99,
took th~ view that the entJCe amount of dividend received by the assessee from R
~n .1ndd1and~?dmpda~y was exempt from super tax and the exemption was not
l
1m1te to 1v1 en income computed in accordance wi'th the p · ·
.
f h
rov1s1ons o t e
Act and formmg part of the total income.
780 SUI'REME COURT REPoRTS [ J98S) SUPPL. S.C.8..

Section 99 sub-section (i) remained in force only upto the close of the
A assessment year 1964-65 and by an amendment made by the Finance Act,
1965, Section 99 sub-section (1 \was omitted and chapter IVA and se<..tion 85A
were introduced in the present Act with effect from Ist April, 1965. Chapter
IV A comprised section 80A to 80D providing for certain specified deductions
to be made in computing total income, while Section 85A provided for
deduction of tax on incorporate dividends.
B
This Section was also considered by the Bombay High Court in New
Great Insurance Company's Ca1e. The High Court observed that except for
some minor verbal changes, section SSA was almost in the same terms as
section 99 sub:section (1) clause (iv), the only real difference being that the
exemption granted under section 99 sub-section (i) clause (iv) was in regard to
super-tax, while lhe deduction allowed under section 85A WJS in regard to
c income tax, and held that under section 85A also, the deduction admissible
was in respect of the entire dividend received by the assessee from an Indian
Company and not in respect of dividend income minus deductions allowable
under the provisions of the Act in computing 'total income'

The spate of legislative changes did not come to an end with the enact-
D ment of section gsA. The Original Chapter VIA and certain other sections
including section 85A were deleted from the present Act by Finance (No 2)
Act, 1967 with effect from Ist April, 1968 and replaced by the new Chapter
VIA which contains a fasciculus of sections from s. 80A to s. 80VV. Section
SOA sub-section (1) provides that in computing the total income of an
assessee there shall be allowed from his gross total income, in accordance
with and subject to the provisions of Chapter VIA the deduction specified in
E Section SOC to Section 80VV and sub-section (2) of that Section
imposed t? ceiling on such deductions by enacting that the aggregate amount
of such deduction shall not in any case, exceed the gross total income of the
assessee. The expression "gross total income" is defined in clause (V) of
Section SOB to mean the total income computed in accordance with the pro-
visions of the Act before n1aking any deduction under Chapter VIA or under
F Section 2SOD. : ection SOM is the new section which corresponds to the
repealed Section 85A ~nd it provides for deduction in respect of certain
categories of inter-corporate dividends, Several amendments were made sub-
sequently in this section but they relate primarily to the percentage of the
income to be allowed as a deduction.

One amendment that was made by the Finance Act, 1968 was that the
G words "received by it" occurring in sub-section (1) of Section SOM were
omitttd with effect from Ist April, 1968, so that right from the date of its
enactment, section SOM sub-section (1) was to be read as if the words "receivt"d
by it" were not in the opening part of that provision.

Petitioner No. 1 was incorporated as a Limited Company and Petitioner
H No. 2 a Director and shareholder therein. Petitioner No 1 received dividends
on shares held by it in different domestic companies and paid interest
on monies borrowed for the purpose of investment in such shares. In
the course of its assessment for the assesment years 1970-71 up to 1980~81,
DISTRIBUTORS (BARODA) LTD. v, UNION 781

Petitioner No.1 claimed that the deduction permissible under Section SOM
must be calculated with reference to the full amount of dividends received by A
Petitioner No. l from the domestic companies and not with reference to the
dividends as computed in accordance with the provisions of the Income Tax
Act, 1961. The assessments of Petitioner No. 1 were actually completed on
the basis of his claim and the view taken by this Court in Cloth Traders Case
in regard to the construction of Section SOM. The Revenue preferred appeals
against such assessments and these appeals were pending at different stages at
the time of filing the Writ Petition.
B

The Petitioner No. l was entitled to succeed in the appeals as well as in
the original assessments which were pending before the different authorities, so
long as the decision in Cloth Traders Case stood unaflected by any constitu·
tionally valid legislative amendment.
c
However, with a view to overriding the decision in the Cloth Traders
case with retrospective effect, Parliament enacted Section 80AA and since this
section was deemed to have been introduced in the Income Tax Act, 1961 with
effect from Tst April, 1968, and it provided that the deduction required to be
allowed under Section SOM shall be computed not with reference to the gross
amount of dividend received by the assessee from a domestic company D
but with reference to the dividend income as computed in accordance with the
provisions of the Act, the claim of petitioner No. 1 for deduction on the basis
of the full amount of dividend received by it from domestic companies was
liable to be rejected and deduction could be allowed to Petitioner ~No. 1 only
with reference to the dividend income computed in accordance with the
provision of the A ct.
E
The introduction of Section 80AA thus had the effect of enhancing the
tax liability of Petitioner No. l and the petitioners filed a Writ Petition
challenging the Constitutional validity of Section 80AA on the ground that
it enhanced the tax burden with retrospective effect going back for a period of
almost 12 years and consequently imposed an unreasonable restriction on the
right of petitioner No. 1 to carry on its business in breach of Article 19 (J) (g)
of the Constitution.
F

Dismissing the writ petition,

HELD-(By the Court)
G
I. The deduction envisaged by sub-section (I) of Section 80M is
required to be made with reference to the income by way of dividends
computed in accordance with the provisions of the Income Tax Act and not
with reference to the full amount of dividend received by the assessee.
[802F, 809A]
H
2. Section 80AA in its retro~pective operation is merely declaratory of
the law as it always was since !st April, 1968 and no complaint can validly b~
!Dade against it. (807E, 809D]
782 SUPREME COURT REPORTS (1985] SUPPL. S,C.R.

Cloth Traders Ltd. v. Additional Commissioner of Income Tax, 118 ITR
A 243, over-ruled and Can1bey Electrical Supply Industrial Co. Ltd. v. Commissioner
of Income-Tax, (1970) 113 84, approved.

(Per Chandrachud C.J., P.N. Bhagwati, D.P. Madon and M.P.
Thakkar, JJ).

The Inquiry is not whether the view taken by the Bombay High Court
8 in New Great Insurance Company's case is correct. Jt must be conceeded that
it has been held to be correct in the decision in Cloth Traders Case However
another view in regard to the interpretation of Section 85A is possible. It is
not at all unreasonable to construe the words "income so included .. as
meaning the quantum of income by way of dividends included in the total
income of the assessee. These words in the context in which they occur have
c obviously reference to quantum of the income by way of dividends to which
the average rate of income tax is to be applied That quantum is defined by
these words and in order to determine it, the question is what is the income by
way of dividends included in the total income and the answer can only be that
is income computed in accordance with the provisions of the Act. It is not
necessary to consider whether the construction placed on Section 85A by the
Bombay High Court in New Great Insurance Company Case is correct or not,
D because interpretation of Section SSA is not concerned. It is section SOM
which has to be construed and this section, is materially different from Section
85A. Section SOM cannot be construed in the light of the interpretation placed
on its predecessor section by the Bombay High Court particularily when
Section SOM is admittedly worded differently from its predecessor section.
Section SOM must be construed on its own language and its true interpretation
arrived at according to the plain natural meaning of the words used by the
E Legislature. [795 D -HJ

2. Section SOM is the new Section which corresponds to the repealed
Section 85A and it provides for deduction in respect of certain categories of
intercorporate dividends. It is the interpretation of this section which consti·
tutes the subject-matter of controversy between the parties. [796 DJ
}<'
3. What is the object behind grant of relief under Section SOM. The
main object of the relief under Section SOM is to avoid taxation once again in
the hands of the receiving con1pany of the amount which has already borne full
tax in the hands of the paying company. Now when an an1ount by way of
dividend is received by the assessee from the paying company the full amount
G of such dividend would have suffered tax, in the assessment of the paying
company in order to encourage inter-company investinents. Ia order to
encourage investments the Legislature intended that this amount should not
bear tax once again in the hands of the assessee either its entirety or to a
specified extent. But the amount by way of dividend which would otherwise
suffer tax in the hands of the assessee, would be the amount computed in
accordance with the provisions of the Act and not the full amount re:eived
H from the paying company. Therefore, it is reasonable to assume that in
enacting Section 80~1 the Legislature intended to grant relief with reference to
the amount of dividend computed in accordance with the provisions of the Act
and not with reference to the full amount of dividend received from the paying
DISTRIBUTORS (BARODA) LTD. v. UNION 783

company. The Legislature could certainly be attributed the intention to
prevent double taxation but not to provide an additional benefit which would A
go beyond what is required for saving the amount of dividend from taxation
once again the hands of the assessee. (799 A-BJ

4. Section SOM sub~section (l) opens with the words "where the gross
total income of an assessee ............ includes any income by way of dividends
from a domestic company" and proceeds to say that in such a case, there shall 8
be allowed in computing the total income of the assessee, a deduction ''from
such income by way of dividends" of an amount equal to the whole of such
income or 60% of such income as the case may be, depending on the nature
of the domestic company from which the income by way of dividends is
received. The opening words describe the condition which must be fulfilled in
order to attract the applicability of the provision contained in sub-section (1)
of Section SOM. The condition is that the gross totol income of the assessee c
must include income by way of dividends from a domrstic company "Gross
total incon1e" is defined in Section SOB clause (VJ to mean "total income
computed in accordance with the provisions of the Act before making any
deduction under Chapter VIA or under Section 280D". Income by way of
dividends from a domestic company included in the gross total income would
therefore obviously be income computed in accordance with tht: provisions of
the Act, that is after deducting interest on monies borrowed for earning such D
income. If income by way of dividends from a domestic company computed
in accordance with the provisions of the Act is included in the gross total
income, or in other words, forn1 part of the gross total income,the conditions
specified in the opening part of sub-section (1) of Section SOM would be
full:fllled and the provision enacted in that sub-section would be attracted.
[7990-SOOCj E
5. The words ''such income by way of dividends" must have reference
to the income by way of dividends mentioned earlier and that would be income
by way of dividends from a domestic company which is included in the gross
total income. Consequently, in order to determine what is "such income by
way of dividends", the question to be asked is what is the income by way of
dividends from a domestic company included in the grocis totol income and F
that would obviously be the income by way of dividends computed in accord-
ance with the provisions of the Act. It is difficult to apprecia1e how, when
interpreting the words "such income by way of dividends" a dichotomy can be
made between the category of income and the quantum of the income by way
of dividends so included. [800H-80IC]

6. There is also another strong indication in the language of sub-section G
(I) of Section SOM which clearly compels taking the view that the deduction
envisaged by that provision is required to be made with reference to the in-
come by way of dividends computed in accordance with the prO\'isions of the
Act and not with referrence to the full amount of dividend re :eived by the
1

assessee. The indication was also unfortunately lost sight of by the Court in
Cloth T1aders case presumably because it was not brought to the attention of H
the Court. The Court observed in Cloth Traders case that the whole of the
income by way of dividends fro1n a domestic company or 60% of such income
ps tho same may be, would l>e deductible from the gross total income for
784 SUPREME COURT REPORTS [1985) SUPPL. s.c.R.

striving at the total income of the assessee. This observation appears to have
A been made under some misapprehension, because what sub-section (1) of
Section 80M required is that the deduction of the whole or a specified percen-
tage must be made from "such income by way of dividends" and not from the
gross total income. Now when in computing the total income of the assessee.
a deduction has to be made from ''such income by way of dividends" it is
elementary that ''such income by way of dividends" from which deduction has
to be made must be part of gross total income. It is difficult to see how the
B language of this part of sub-section (1) of Section SOM can possibly fit in it if
).

"such income by way of dividends" were interpreted to mean that full amount
of dividend received by the assessee. The full amount -. of dividend received by
the assessee would not be included in the gross total income what would be
included would only be the amount of dividend as comput~d in accordance
with the provisions of the Act. If that be so it is difficult to appreciate how for
c the purpose of con1puting the total income from the gross total income any
deduction should be required to be made from the full amount of the dividend.
The deduction required to be made for computing the total io<:ome from the
gross total income can only be from the amount of dividend computed in
accordance with the provisions of the Act which would be forming part of the
gross total income. Whatever might have been the interpretation placed on
clause (iv) of sub-section (1) of Section 99 and Section 85A the correctness of
D which is not in issue, so far as sub-section ( ) of Section F0!\-1: is concerned, the
deduction required to be allowed under that provision is liable to be calculated
with reference to the amount of dividend computed in accordance with the
provisions of the Act and forming part of the gross total income and not with
reference to the full amount of dividend received by the assessee. (801G-802FJ

E 7. Structurally there is hardly any difference between Section SOE sub-
section (I) and Section SOM sub·section (I) and the reasoning which appealed
to the Court in the interpretation of sub-section (I) of Section SOE in Cambay
Electric Supply Industrial Company Ltd. v. C.1.T. must apply equally in the
interpretation of sub-section (1) of Section SOM. (803 B]

8. Ordinarily this Court would be reluctant to overturn a decision
F given by a Bench of this Court, Cecause it is essential that there should be
continuity and consistency in judicial decisions, and Jaw should be certain and
definite. It is almost as important that the law should be settled correctly.
But there may be circumstances where public interest demands that th~
previous decision be reviewed and reconsidered. The doctrine of stare decisis
should not deter the Court from overruling an earlier decision, if it is satisfied
G that such decision is manifestly wrong or proceeds upon a mistaken assump-
tion in regard to the existence or continuance of a statutory provision or is
contrary to another decision of theC ourt. [805G-806A]

9. There are over-riding considerations which compel reconsideration
and review of the decision in Cloth Traders Case. In the first place, the decision
H in Cloth Traders case was rendered by this Court on 4th May, 1979 and im-
mediately thereafter, with in afew months, Parliament introduced Section
SOAA with retrospective effect from Ist Apnl, 1968 with a view to over-riding
lhe interpretation placed on Section SOM in Cloth Traders case. fhe decision
DISTRIBUTORS (BARODA) LTD. v. UNION 785

in Cloth Traders case did not therefore hold the field for a period of more than a
few months and it could not be said that any assessee was misled into acting A
to its detriment on the basis of that decision. There was no decision of this
Court in regard to the interpretation of sub-section (1) of Section SOM prior
to the decision in Cloth Traders case and there was therefore no authoritative
pronouncement of this Court on this question of interpretation on which an
assessee could claim to rely for making its fiscal arrangements. Another
circun1stance which makes is necessary to reconsider and review the decision in B
Cloth Trcders Case. is the decision in Comboy Electric Supply Company case.
The decision in Cloth Traders case is inconsislent with that in Cambay Electric
Supply Company's case Both cannot siand together. If one is correct, the
other n1ust logically be wrong and vice-versa. It is therefore necessary to
resolve the conflict between these two decisions and harmonise the law and
that necessiatates an inquiry into the correctness of the decision in Cloth
Traders Case, and having considered and reviewed the decision in Cloth Traders C
case come to the conclusion that the decision in Cloth Traders Case is erroneous
and must be over turned. [806C-807D]

(Per A.N. Sen, J. concurring)

The authority and jurisdiction of a larger Bench of this Court to over· D
ride and over-rule any decision of a smaller Bench cannot be questioned.
IIowever, a decision of this Court on any fiscal legislation involving the
question of financial benefit and liability should not normally be interfered
with and should be interfered with only in very rare cases. On the basis of
the decision of this Court on any fiscal legislation and any matter involving
financial arrangements and adjustments, parties are entitled to arrange their
:financial affairs and in fact they so arrange and adjust the financial affairs on E
the basis of the law laid down by this Court. Unsettling a position settled by
the decision of this Court may lead to the confusion and re-suit in financial
instability, causing serious prejudice not only to the parties concerned but
also to the economic growth of the country as a whole. {808 C·E]

2. If on interpretation of any provision of any fiscal legislation two
views may be reasonably possible, a larger Bench of this Court may not
interfere with a view taken by a smaller Bench by this Court mainly on the
ground that the other view appears to the larger Bench to be the better view
and may commend itself to the larger Bench. If, howeuer, a decision of the
smallar Bench has necessarily to interfere with the decision, as this Court will
not permit a wrong decision to operate as good law of the land. {808 FJ
G
ORIGINAL JURBDICT!ON: Writ Petition No. 2043 of 1981.

Under Article 32 of the Constitution of India

K.H. Kaji and M.N. Shroff for the Petitioners. H
K. Parasaran, Attorney Gener~! and J(.S. Gwumoorthy for the
~espondents,
7S6 SUPREME COURT REPORTS [19S5] SUPPL. s.c.R.

The following Judgments were delivered
A
BHAGWATI, J. This writ petition raises an interesting question
of construction of Section SOM of the Income Tax Act, 1961. Thls
question would appear to be concluded in favour of the assessee by
the decision of this Court in Cloth Traders Limited v. Additional
B Commissioner of Income Tax, l lS ITR 243, but the correctness of
the view taken in that case has been challenged in the present writ
petition. Since the decision in Cloth Traders Case (supra) was given
by a Bench of three Judges, it is obvious that its validity can be
canvassed before this Bench which consists of five Judges. If thls
Bench too takes the same view in regard of the construction of
c Section SOM as that taken in C/ath Traders case (supra), it would
become necessary to consider the question of constitutional validity
of Section SOAA which was introduced in the Income Tax Act, 1961
by Section 12 of the Finance (No. 2) Act 19SO with a view to over-
riding with retrospective effect the comtruction placed on Section
D SOM by this in Clath Traders case (supra). If on the other hand, this
Bench disagrees with the view taken in Cloth Traders case (supra)
and hold that even before the introduction of Section SOAA, Section
SOM, on a true interpretation of its language, meant exactly what
Section 80AA now retrospectively declares it to mean, no question of
constitutional validity of Section 80AA would arise since Section
E 80AA would then be merely declaratory of the law as it always was
and would not be imposing any new tax burden with retrospective
effect. The first question that we must therefore consider is as to what
is the true construction of Section 80M unaided by the subsequent
legislative interpretation imposed upon it by the enactment of Section
F 80AA : do we affirm the view taken in Cloth Traders case (supra)
or do we dissent from it.

We have given our most anxious consideration to this question,
particularly since one of us, namely, P.N. Bhagwati, J. was a party
to the decision in Cloth Traders case (supra). But having regard to
G
various considerations to which we shall advert indetail when we
examine the arguments advanced on behalf of the parties, we are
compelled to reach the conclusion that Cloth Traders case must be
regarded as wrongly decided. The view taken in that case in regard
to the construction of Section SOM must be held to be erroneous
H
and it must be corrected. To perpetuate an error is no heroism.
To rectify it is the compulsion of judicial conscience. In this we
derive comfort and stren~th frail\ the wise (Ind inspirin~ words of
DISTRIBUTORS (BARODA) LTD. v. UNION (Bhagwatt, J.) 787

Justice Bronson in Pierce v. De/ameter A.M.Y. at page lS: "a Judge
ought to be wise enough to know that he is fallible therefore ever· A
ready to learn: great and honest enough to discard all mere pride of
opinion and follow truth wherever it may lead : and courageous
enough to acknowledge his errors".

We may begin our discussion by referring to the legislative B
history of the provision enacted in Section SOM but before we do so,
a brief statement of facts may help to provide the back-drop against
which the question of construction of Section SOM arises for conside·
ration. Petitioner No. 1 was incorporated as a limited company on
10th November 1941 under the Baroda Companies Act, 1918 and at
all materiol times it carried on business of an investment company.
c
Petitioner No. 2 is a Director and shareholder of Petitioner No. I.
Throughout the material period with which we are concerned in this
writ petition, Petitioner No. 1 received dividends on shares held by it
in different domestic companies and paid interest on monies borro·
wed for the purpose of investment in such shares. In the course of D
its assessments for the assessment years 1970-71 upto 1980-81,
Petitioner No. 1 claimed that the deduction permissible under Section
SOM must be calculated with reference to the full amount of divid-
ends received by Petitioner No. 1 from domestic companies and not
with reference to the dividend income as computed in accordance
with the provisions of the Income Tax Act, 1961. This claim was E
liable to succeed if the view taken in Cloth Traders case (supra) in
regard to the con >!ruction of Section SOM was correct and some of
the assessments of Petitioner No. l were actually completed on the
basis that this claim was justified. The Revenue preferred appeals
against such assessments and these appeals were pending at different F
stages at the time of filing of the present writ petition. The assess-
ments for some of the assessment years were also pending before the
Income tax Officer. So long as the decision in Cloth 1ruders case
(supra) stood unaffected by any Constitutionally valid legislative
amendment, Petitioner No. 1 was entitled to succeed in the appeals
as well as in the original assessments which were pending conside· G
ration before different authorities. But with a view to overrinding
the decision in Cloth Traders case (supra) with retrospective effect,
Parliament enacted Section SOAA and since this section was deemed
to have been introduced in tho Income Tax Act, 1961 with effect
from 1st April, 1968 and it provided that the deduction require!i to
H
be allowed under Section SOM shall be computed not with reference
to the gross amou11t of dividend received by the assessee from a
788 SUPREME COURT REPORTS (1985] SUPPL. s.c.a.

domestic Company but with reference to the dividend income as
A computed in accordance with the provisions of the Act, the claim of
petitioner No. I for deduction on the basis of the full amount of
dividend received by it from domestic companies was liable to be
rejected and deduction could be allowed to petitioner no. 1 only with
reference to the dividend income computed in accordance with the
B provision of the Act. The introduction of Section SOAA thus had
the effect of enhancing the tax liability of petitioner No. 1 and the
petitioners accordingly filed the present writ petition challenging the
constitutional validity of Section 80AA on the ground that it enhan-
ced the tax burden of petition No. I with retrospective effect going
b.ack for a period of almost 12 years and thus imposed unreasonable
c restriction on the right of petitioner No. l to carry on its business in
breach of Article 19(l)(g) of the Constitution.

We may first set out the history of the legislation preceding
the enactment of Section SOM, since considerable reliance was placed
D on this history both in the decision in Cloth Traders case (supra) as
also in the course of the arguments in the present writ petition. The
earliest provision granting exemption from super tax in respect of
inter-corporate dividends was made as far back as 9th December
1933 in a notification issued by the Governor General in Council and
it provided as follows :
E
"The Governor General in Council is pleased to
exempt from super tax- (i) so much of the income of any
investment trust company as is derived from dividmds
., paid by any other company which has paid or will pay
super-tax in respect of the profits out of which such
dividends are paid."

This provision came up for consideration before a Division Bench of
the High Court of Bombay in C.J. r. v. Industrial Investment Trust
Co. Ltd. (1968) 67 I.T.R. 437 and the question was whether the
G
dividend income exempted from super tax the entire income by way
of dividend received by an investment trust company or the dividend
income as computed in accordance with the provisions of the Act,
i.e. after deducting the expenses incurred in earning it. The High
H Court of Bombay held that the ''dividend income which was exempted
under the notification would be the dividend income received by
the assessee and not the said income less any further amounts"
1>eca11se
-
"the
. . notification
.
mus( be regarded
- as a self-contained WI~
b1STRIBUTORS (BARODA) LTD. v. UNION (Bhagwati, J.) 7s9
and not controlled by any other provisions of the Act" and there was
"no warrant to construe the word 'income' in the notification as total A
income nor to qualify the dividend income specified in the said
notification as the dividend income computed under Section 12 of
the Act." It was thus held that the entire amount of dividend
received by an investment trust company would be exempt from super
tax and not the amount of dividend minus the expenses incurred in B
earning it. It may be noticed, and this aspect was emphasised by
the Bombay High Court, that what was exempted from super tax
under the notification was "so much of the income of any investment
trust company as is derived from dividends paid by any other
company" and there was no reference to 'total income' in the noti-
fication nor was any indication given in the notification that the
c
income derived from dividends which was sought to be exempted
from super tax was dividend income forming part of 'total income'
and that is why the Bombay High Court came to the conclusion that
the dividend income exempted under the notification was the entire
income by way of dividend received by the assessee and not the D
dividend income as computed in accordance with the provisions of
the Act.

The High Court of Bombay in taking this view in Industrial
Investment Trust Company's case was guided by the decision of this
Court in C.I.T. v. South Indian Bank (1966) 59 l.T.R. 763. Since E
the decision in South Indian Bank case (supra) is the only decision
of this Court respecting an allied provision prior to the decision in
Cloth Traders case (supra), it is necessary to refer to it in some
detail in order to see whether it really supports the conclusion reached
in Cloth Traders case (supra). The question which arose in South F
Indian Bank case (supra) was in regard to the true interpretation of
a notification issued by the Central Government under Section 60A
of the Indian Income Tax Act, 1922. This notification was subse-
quent in point of time to the notification which came to be
considered by the High Court of Bombay in the Industrial Investment
Trust Company's case, hut it came up for construction before this
G
court earlier in South Indian Bank case (supra). This notification was
in the following terms :

"No income-tax shall be payable by ao assessee on H
the interest received on the following income-tax free
loans issued by the former Government of Tranvancore or
by the former Government of Cochin, provided that such
'790 SUPREME COURT REPORTS [1985) SUPPL. S.C.R.

interest is received within the territories of the State of
A Travancore Cochin and is not brought into any other part
of the taxable territories to which the said Act applies.
Such interest shall, however, be included in the total
income of the assessee for the purpose of section 16 of
the Indian Income-tax Act, 1922 ......... "
B
The argument of the Revenue was that the exemption from income
tax granted under this notification was in respect of interest receiv·
able on securities minus the expenses incurred in earning it and not
in respect of the entire amount of interest because it was only that
C amount of interest arrived at after computation in accordance with
Section 8 of the old Act which was includible in the total income and
liable to bear tax and the exemption from the tax could, therefore
only be in respect of such amount. This argument was negatived by
the court and it was pointed out by Subba Rao, J. that (p. 766) :

D " ..... this notification does not refer to the provision
of section 8 of the Income-tax Act at all. It gives a total
exemption from income-tax to an assessee in respect of
the interest receivable on income-tax free loans mentioned
therein. It gives that exemption subject two conditions,
E namely, (i) that the interest is received within the terri-
tories of the State of Travancore-Cochin, and (ii) that it is
not brought to any other part of the taxable territories.
Jt includes the said exempted interest in the total income
of the assessee for the purpose of section 16 of the
Income·tax Act. Shortly stated, the notification is a self·
F contained one; it provides an exemtion from income-tax
payable by an assessee on a particular class of income
subject to specified conditions. Therefore, there is no
scope for controlling the provisions of the notification
with reference to section 8 of the Income tax Act. The
expression 'interest receivable on income-tax free loans' is
G clear and unambigous. Though the point of time from
which the exempiion works is when it is received within
the territories of the State of Travancore-Cochin, what is
exempted is the interest reeeivable. 'Interest receivable'
can only mean the amount of interest calculated as per
the terms of the securities. It cannot obviously mean
interest receivable minus the amount spent in receiving the
same."
nisTRIBUTORS (BARODA) LTD. v. UNION (Bhagwati j,) 791

It will be noticed that the entire basis of the judgment of the Court
was that the notification was a self-contained one and it gave A
exemption from income tax in respect of interest receivable on certain
categories of income tax free loans, without any reference to 'total
income, or to "the provisions of section 8 of the Income tax Act at
all." That is why the judgment pointed out that there was no scope
for controlling the provisions of the notification with reference to
B
section 8 of the Income Tax Act and proceeded to hold that what
was exempted from income tax under the notification was "interest
receivable" that is, "the amount of interest calculated as per the
terms of the securities" without deduction of the "amount spent in
receiving the same". There was nothing in the notification to indicate
that what was sought to be exempted was the amount of interest c
included in the ·total income'.

Thereafter a provision of a similar kind granting exemption
from super tax in respect of certain specified categories of inter·
corporate dividends was introduced as Section 56 in the Indian D
Income Tax 1922 by the Finance Act, 1953. It is however not
necesslfY to make any detailed reference to this provision since there
is no decided case which has considered thi.s provision or expressed
any opinion upon it.

When the Indian Income Tax Act 1922 was repealed and the E
Income Tax Act 1961 was enacted with effect from !st April, 1962,
section 99 sub-section (i) was introduced in the new Act exempting
certain categories of income from super tax and one such category
was that set out in clause (iv). Section 99 sub-section (I) clause (iv)
read as follows : F

"99. (I) Super-tax shall not be payable by an
assessee in respect of the following amounts which are
included in his total income ..... (iv) if the assessee is a
company, any dividend received by it from an Indian G
company, subject to the provisions contained in the

l Fifth Schedule."

This provision continued in force upto !st March, 1965 subject to a H
minor inconsequential amendment made by the Finance Act 1964.
Now this provision did not at any time come up for interpretation
before this Court prior to the decision in Cloth Traders case but it
792 SUPREME COURT REPORTS iI98SjsuPi>L. s.c.f!..

did came to be considered by some of the High Courts. The question
A in regard to the interpretation of this provision which arose before
the High Court of Bombay in C.l.T. v. New Great Insurance
Company Ltd. (1963) 90 l.T.R. 348 was whether the exemption
granted under this provision was in regard to the entire amount of
dividend received by the assessee from an Indian Company or it was
B limited to the dividend income computed in accordance with the
provisions of the Act and forming part of 'total income'. The High
Court of Bombay accepting the contention of the assessee held that
on a plain reading of clause (iv) snb·section (I) of Section 99, it was
clear that the exemption from super tax was granted in respect of
"any dividend received by it from an Indian Company" and these
c last words, according to their plain grammatical construction, could
mean only one thing, namely, the entire amount of dividend received
by the assessee from an Indian Company and nothing less. The
Bombay High Court emphasised the word 'received' following
immediately upon the word 'dividend' and observed that the use of
this word also showed that the exemption was in regard to the
D dividend received and not in regard to the dividend received minus
the expenses. The High Court of Bombay pointed out that the
words "amounts which are included in his total income" in the
opening part of section 99 sub-section (I) did not have any
!imitative effect but they were used merely as a convenient mode of
E describing the different items of income set out in clauses (i) to (v) of
that sub-section. Clauses (i) to (v) referred to different items of
income which were sought to be exempted from super tax under sub-
section (!) of Section 99 and it was only if these items of income
were included in the total income of the assessee that the question of
exemption from super-tax would arise and hence the legislature used
F the general words "amounts which are included in his total income"
in the opening part of sub-section (I) of section 99 as an omnibus
formula to cover these different items. These words, according to
the Bombay High Court, were descriptive of the items of income a
included in the computation of the total income and were not indica-
G tive of the quantum of the amounts of the different items included in
such computation and they did not, therefore, have the effect of
cutting down the plain natural meaing of the words "any dividend
received by it from an Indian company" which represented the quan-
tum of income in respect of which exemption from super-tax was
J
B granted under the section. It may be pointed out that the same view
in regard to the construction of clause (iv) of sub-section (I) of
Section 99 was taken by the Calcutta High Court in C.I.T. v.
OISTRIBtiTORS (BARODA) LTD. i>. UNION (Bhagwati, J.) '793

Darbhanga Marketing Campany Limited.(') and this decision of the
Calcutta High Court was noted with approval by the High Court of A
Bombay in New Great Insurance Company's case (supra). The same
view was also taken by the Madras High Court in C.I.T. v. Madras
Motor and General Insurance Campany(') and it was approved in a
later decision of the same High Court in Madras Auto Service v.
I.T.0.( 3 ) It would thus be seen that, on a construction of clause (iv) B
of sub-section (I) of Section 99, three High Courts, namely, Bombay,
Calcutta and Madras took the view that the entire amount of divi-
dend received by the assessee from an Indian company was exempt
from super tax and the exemption was not limited to dividend income
computed in accordance with the provisions of the Act and forming
part of the 'total income'. c
This view taken by the three High Courts was strongly relied
upon by the petitioners in support of the construction of Section
80M canvassed on their behalf and in fact the decision in Cloth
Traders case (supra) sought to derive some strength from this view. D
But on further reflection we do not see how this view taken by the
three High Courts in regard to the construction of clause (iv) of
sub-section (I) of Section 99 can assist in the interpretation of an
entirely new section, namely, Section 80M which, as we shall
presently point out, is different in its structure, language and content
from clause (iv) sub-section (I) of Section 99. We may point out E
that some doubt was raised on behalf of the Revenue in regard to
the correctness of th is view taken by the three High Courts but we
do not think it necessary to consider whether this doubt is well
founded or not because we are of the view that even if the construc·
tion placed on clause (iv) of sub-section (1) of Section 99 by the three
High Courts were correct, it cannot necessarily lead to the conclusion
that a similar construction must also be placed on Section SOM
which is different in material respects from clause (iv) of sub-section
(I) of Section 99. It is most unsafe to try to arrive at the true mean·
ing of a statutory provision by reference to an interpretation which .•
might have been placed on an earlier statutory provision which is not G
only couched in different language but is also structurally different
We must therefore construe the language of Section SOM on its own
terms uninhibited by any interpretation which may have been placed
on clause (iv) of sub-section (I) of Section 99 by any High Court.
H
(I) [1971) 80 I.T.R. 72.
(2) [1975] 99 1.T.R. 243.
(3) [1975] IOI J.T.R. 589.

•
794 SUPREME COURT REPORTS {1985) SUPPL. s.c.R.

We may, proceeding further with the narration of the history
A of the legislation, point out that Section 99 sub-section (!) remained
in force only upto the close of the assessment year J964·65 and by
an amendment made by the Finance Act No. JO of 1965 Section 99
sub-section (I) was omitted and Chapter VI A and Section 85A
were introduced in the present Act with effect from Jst April, 1965,
B Chapter VI A comprised Section SOA to 800 providing for certain
specified deductions to be made in computing total income, while
Section 85 A in so far as material provided as follows :

"85A. Deduction of tax on intercorporate dividends
c where the total income of an assessee being a com-
pany includes any income by way of dividends received .·
by it from an Indian company or a cl)mpany which has
made the prescribed arrangements for the declaration and
payment of dividends (including dividends on preference
shares ) within India, the assessee shall bo entitled to a
D deduction frcm the income tax with which it is chargeable
on its total income for any assessment year of so much
of the amount of income tax calculated at the average
rate of income-tax on the income so included (other than
any such income on which no income-tax is payable
under the provisions of this Act ) as exceeds an amount
E of twenty five per cent thereof... . ..... "

This section too came to be considered by the Bombay High Court
in New Great Insurance Company's case (supra ) because two of
the assessment years with which the Bombay High Court was
F concerned in that case were assessment years 196S·66 and 1966·67
when Section SSA was in force. The Bombay High Court pointed
out that except for some minor verbal changes, Section 8SA was
almost in the same terms as Section 99 sub-section (I) clause (iv),
the only real difference being that the exemption granted under
G Section 99 sub-section (I) clause I iv) was in regard to super-tax,
while the deduction allowed under Section 8SA was in regard to
income-tax. The same interpretation was, therefore, placed on
Section 85A as in the case of Section 99 sub-section (!)clause (iv)
and it was held that under Section SSA the assessee wuld be entitled
H to deduction of income-tax in respect of the whole of the dividend
received from an Indian company. The expression "where the total
income...... includes any income by way of dividends" in the
opening part of Section SSA was construed as referring to the

•
DISTRIBUTORS (BARODA) LTD. V. UNION (.Bhagwati, J.) 195

category of income by way of dividends received from an Indian
compay. so that if this particular category of income is included in A
the computation of total income, the assessee would be entitled to a
deduction of so much of the amount of income-tax calculated at
the average rate of income-tax on the "income so included" as
exceeds an amount of twenty-five per cent of such income. The
words "income so included" were read to mean not the quantum of
the "income by way of dividends" included in the total income but
the income falling within the category of "income by way of
dividends from an Indian company" included in the total income.
Thus, the view taken by the Bombay High Court was that under
Section SSA also, the deduction admissible was in respect of the
entire dividend 'received by the assessee from ~n Indian company c
' and not in recpect of dividend income minus deductions allowable
under the provisions of the Act in computing 'total income'.

But here again we are not concerned to inquire whether the
view taken by the Bombay High Court in New Great Insurance
CompJny's case (Supra) is correct, though it must be conceded that D
it has been held to be correct in the decision in Cloth Traders Case
(Supra ). We do feel, however, that another view in regard to the
interpretation of Section SSA is possible. It is not at all unreasonable
to construe the words "income so included" as meaning the quantum
of income by way of dividends included in the total income of the
assessee. These words in the context in which they occur have
E
obviously reference to quantum of the income by way of dividends
to which the average rate of income tax is to be applied. That
quantum is defined by these words and in order to determine it, we
have to ask the question : what is the income by way of dividends
included in the total income and the answer can only be that it is F
income computed in accordance with the provisions of the Act. But,
as we have pointed out above, it is not necessary to consider whether
the construction placed on Section SSA by the Bombay High Court
in New Great Insurance Company's case (supra) is correct or not,
because we are not concerned here with the interpretation of Section
SSA. It is Section SOM which has to be construed and this Section G
as we shall presently show, is materially different from Section 85A.
We cannot construe Section SOM in the light of the interpretation
placed on its predecessor section by the Bombay High Court
~articularly when s_ection SOM is admittedly worded differently from
its predecessor section. We must construe Section SOM on its own H
and arrive at its true interpretation according to the plain natural
language meaning of the words used by the legislature.
SUPREME COURT REPORTS [1985) SUPPL. s.c.a.

It seems that the spate of changes in this legislative provision
A did not come to an end with the enactment of Section 85A. The
original Chapter VI A and certain other section including Section 85
A were deleted from the present Act by the Finance (No. 2) Act,
1967, w!th effect from 1st April 1968, and replaced by a new Chapter
VI A which contains a fasciculus of sections from Section 80A to
80VV. Section 80A, sub-section (I) provides that in computing the
B total income of an assessee there shall be allowed from his gross
total income, in accordance with and subject to the provisions of
Chapter VI A, the deductions specified in Section 80C to Section
80VV and sub-section (2) of that Section imposes a ceiling on such
deductions by enacting that the aggregate amount of such deductions
c shall not, in any case, exceed the gross total income of the assessee. ,
The expression "gross total income" is defined in clause (v) of Section
80B to mean the total income computed in accrdance with the
provisions of the Act before making any deductions under Chapter
vr A or under Section 280 D. Section 80M is the new Section which
corresponds to the repealed Section 85A and it provides for
D deduction in respect of certain categories of inter-corporate dividends.
It is the interpretation of this section which constitutes the subject-
matter of controversy between the parties and hence it would be
desirable to set it out in extenso. This Section has under-gone changes
from time to time since the date of its enactment and we will
E therefore reproduce it in the form in which it stood when originally
enacted :

"80M. Deduction in r~spect of certain inter-
corporate dividends- (I) Where the gross total income of
an assessee being a company includes any income by way
F of dividends received by it from a domestic company,
there shall in accordance with and subject to the provi-
sions of this section, be allowed, in computing the total
income of the assessee, a deduction from such income by
way of dividends of an amount equal to-

G (a) Where the assessee is a foreign company-

(i) in respeet of such income by was of dividends
received by it from an Indian company which
is not such a company as is referred to in
H Section 108 and which is mainly engaged in a
priority industry
80%of such
income;
DISTRIBUTORS (BARODA) LTD. v. UNION (Bhagwati, J.) 797

(ii) in respect of such income by way of dividends
other than the dividends referred to in sub· A
clause (i)
65% of such
income;

(b) where the assessee is a domestic company-
B
in respect of any such income by way of
dividends
60% of such
income"

There were several amendments made subsequently in this Section c
but they relate primarily to the percentage of the income to be
allowed as a deduction and do not have any bearing on the question
of interpretation posed before us. One amendment is however
material and that was made by the Finance Act 1968 by which the
words "received by it" occurring in sub-section (!) of Section SOM
were omitted with effect from 1st April 1968 so that right from the D
date of its enactment, Section SOM sub-section (I J was to be read as
if the words "received by it" were not in the opening part of that
provision.
Soon after the enactment of Section SOM a question arose
before the Gujarat High Court in Addi. C. 1. T. v. Cloth Traders E
Private Limited(!) whether on a true construction of that Section,
the permissible deduction is to be calculated with reference to the
full amount of dividends received by the assessee from a domestic
company or with reference to the dividend income computed in
accordance with the provisions of the Act, that is, after deducting the F
interest paid on monies borrowed for earning such income. The
Gujarat High Court in a Judgment delivered on 28th November 1973,
held that the deduction permissible under Section 80M is liable to he
calculated with reference to the dividend income computed in
accordance with the provisions of the Act and not with reference to
the full amount of dividends received by the assessee. The assessee
G
being aggrieved by this judgment preferred an appeal to this Court
and this appeal was allowed by the judgment delivered in Cloth
Traders Case (supra ). This Court over-ruled the view taken by the
Gujarat High Court and held that the deduction required to be
allowed under Section SOM must be calculated "wilh reference to
H
the full amount of dividends received from a domestic comany and
(I) J1974) 97 l.T.R. 140.
798 SUPREME COURT REPORTS (1985) SUPPL. S.C.R.

not with reference to the dividend income as computed in
A accordance with the provisions of the Act, that is, after making
deductions provided under the Act." This decision was given by the
Court on 4th May 1979.

Now, according to Parliament, this interpretation placed on
Section SOM by the summit court was not in conformity with the
B legislative intent and it resulted in considerable unjustified loss of
revenue. Parliament therefore immediately proceeded to set right
what, according to it was an interpretation contrary to the legislative
intent and with a view to setting at naught such interpretation.
Parliament, by Section 12 of Finance (No. 2) Act 19SO, introduced
in the Income Tax Act, 1961, Sect;on SOAA with retrospective
c effect from !st April I 96S, that is the date when Section SOM was
originally enacted, providing that the deduction required to be
allowed under Section SOM ht respect of intercorporate dividends
"shall be computed with reference to the income by way of such
dividends as computed in accordance with the provisions of this Act
D (before making any deduction under this Chapter ) and not with
reference to the gross amount of such dividends ". It is the validity
of this new Section SOAA which is challenged in the present writ
petition. But we may make it clear that "hat is challenged is not
the prospective operation of Section SOAA. That would clearly be
unexceptionable because the Legislature can always impose a new tax
E burden or enhance an existing tax liability with prospective effect.
But the complaint of the assessee was against retrospective effect
being given to Section SOAA, because that would have the effect of
enhancing the tax burden on the assessee by setting at naught the
interpretation placed on Section SOM by the decision in Cloth
Traders case and reducing the amount of deduction required to be
F
allowed under Section SOM. However. as pointed out at the
commencement of this judgment, it would become necessary to
examine this compaint against the constitutional validity of
retrospective operation of Section SOAA only if we art'irm the
interpretation placed on Section SOM by the decision of this Court
G in Clath Traders case. If we do not agree with the decision of this
Court in Cloth Traders case (supra) and take the view that the
Gujarat High Court was right in the interpretation placed by it on
Section SOM in Addi. C. I. T. v. Cloth Traders Private Limited no
question of constitutional validity of the retrospective operation of
Section 80AA would remain to be considered, because in that event
H
Section SOAA in its retrospective operation would he merely
clarificatory in nature and would not involve imposition of any new
tall burden.
DISTRIBUTORS (BARODA) LTD. v. UNION (Bhagwati, J.) 799

We may therefore first examine the language of Section SOM
for arriving at its true interpretation. But before we do so, let us A
consider what is the object behind grant of relief under Section SOM.
It was common ground between the parties that the main object of
the relief under Section SOM is to avoid taxation once again in the
hands of the receiving company of the amount which has already
borne full tax in the hands of the paying company. Vide the written B
submission under the heading ''Object of relief on intercorporate
dividends" filed by the learned counsel on behalf of the assessee in
the course of the arguments. Now when an amount by way of
dividend is received by the assessee from the paying company, the
full amount of such dividend would have suffered tax in the assess-
ment of the paying company and it is obvious, that, in order to c
encourage inter-company investments, the Legislature intended that
this amount should not bear tax once again in the hands of the
assessee either its entirety or to a specified extent. But the amount
by way of dividend which would other-wise suffer tax in the hands
of the asseesee, would be the amount computed in accordance with
D
the provisions of the Act and not the full amount received from the
paying company. Therefore it is reasonable to assume that in
enacting Section SOM the Legislature intended to grant relief with
reference to the amount of dividend computed in accordance with
the provisions of the Act and not with reference to the full amount
of dividend received from the paying company. It is difficult to E
imagine any reason why the Legislature should have intended to give
relief with reference to the full amount of dividend received from
the paying company when that is not the amount with is liable to
snffer tax once again in the hands of the assessee. The Legislature
could certainly be attributed the intention to prevent double taxation
but not to provide an additional benefit which would go beyond F
what is required for saving the amount of dividend from taxation
once again in the hands of the assessee. Bearing in mind these
prefatory observations in regard to the legislative object, we may now
proceed to construe the language of Section SOM.
G
Section SOM sub-section (I) opens with the words "where the
gross total income of an assessee ......... .includes any income by
way of dividends from a domestic company" and proceeds to say
that in such a case, there shall be allowed in computing the total
income of the assessee, a deduction "from such income by way of H
dividends" of an amount equal to the whole of such income or 60%
of such income, as the case may be, depending on the nature of the
l)omestic company from which the income by way of dividends is
800 SUPREME COURT REPORTS (1985] SUPPL. s.c.R.

received. The opening words describe the condition which must be
A fulfilled in order to attract the applicability of the provision
contained in sub-section (I) of Seetion 80M. The condition is that
the gross total income of the assessee must include income by way
of dividends from a domestic company. "Gross total income" is
defined in Section SOB clause (v) to mean "total income computed
in accordance with the provisions of the Act before making any
B
deduction under Chapter VIA· or under Section 280D." Income
by way of dividends from a domestic company included in the gross
total income would therefore obviously be income computed in
accordance with the provisions of the Act, that is, after deducting
interest on monies borowed for earning such income. If income by
c way of dividends from a domestic company computed in accordance
with the provisions of the Act in included in the gross total income,
or in other words, forms part of the gross total income, the condition
specified in the opening part of sub-section(!) of section 80M would
be fulfilled and the provision enacted in that sub-section would be
attracted.
D
Now it was urged on behalf of the assessee that the words
"Where the gross total income of an assessee ......... includes any
income by way of dividends from a domestic company" in the open-
ing part of sub-section (l) of Section 80M refer only to the inclusion
of the category of income and not to the quantum of such income
E and therefore the words "such income by way of dividends" follow-
ing upon the specification of this condition, cannot have reference to
the quantum of the income included but must be held referable only
to category of the income included, that is, income by way of divi·
dends from a domestic company. This was the same argument which
F found favour with the Court in Cloth Traders case (supra), but on
fuller consideration, we do not think it is well founded. We may
assume with the Court in Cloth Traders case that the words "where
the gross total income of an assessee includes any income
by way of dividends from a domestic company" are intended only
to provide that a particular category of income, namely, income by
G way of dividends from a domestic company should form a
component part of gross, total income, irrespective of what is the
of quantum income so included but it is difficult to see how the factor
of quantum can altogether be excluded when we talk of any category
of income included in the gross total income. What is included in the
H gross total income in such a case is a particular quantum of income
belonging to the specified category. Therefore the words "such
income by way of dividends" must be r~feral;>le not only to \h~ ~ate·
DISTRIBUTORS (BARODA) LTD. v. UNION (Bhagwati J.) 801

gory of income included in the gross total income but also to the
quantum of the income so included. It is obvious, as a matter of plain A
grammer. that the words "such income by way of dividends" must
have reference to the income by v ay of dividends mentioned ·
earlier and that would be income by way of dividends from a
domestic company which is included in the gross total income.
Consequently, in order to determine what is "such income by
B
way of dividends", we have to ask the question : what is
the income by way of dividends from a domestic company
included in the gross total income and that would obviously
be the income by way of aividends computed in accordance with
the provisions of the Act. It is difficult to appreciate how, when
we are interpreting the words "such income by way of dividends", c
we can make a dichotomy between the category of income by way of
dividends included in the gross total income and the quantum of the
income by way of dividends so included. This Court observed in
Cloth Traders case that the words "such income by way of
dividends" as a matter of plain grammer must be substituted by the
words "income by way of dividends from a domestic company" in D
order to arrive at a proper construction of the section, but there is a
clear fallacy in this observation, because in making the substitution it
stop short with the words "income by way of dividends from a
domestic company" and does not go the full length to which plain
grammer must dictate us to go, namely, "income be way of divi· E
dends from a domestic company included in the gross total incom•"
(emphasis supplied). Otherwise we would not be giving to the word
'such' its full meaning and effect. The word 'such' in the context in
which it occurs can only mean that income by way of dividends from
a domestic company which is included in the gross total income and
that must necessarily be income by way of dividends computed in F
accordance with the provisions of the Act.

There is also one other strong indication in the language of
sub-section (I) of Section SOM which clearly compels us to take the
view that the deduction envisaged by that provision is required to be
made with reference to the income by way of dividends computed in
G
accordance with the provisions of the Act and not with reference to
the fuU amount of dividend received by the assessee. This indication
was also unfortunately lost sight of by the Court in Cloth Traders
case presumably because it was not brought to the attention of the
H
Court. The Court observed in Cloth Traderl case that the whole of
the in.come by way of dividends from a domestic company or 60% of
such mcome as the ca5e may be, would be dedu.;tible from the gross
802 SUPREME COURT REPORTS (19S5( SUPPL. S.C.ll.

total income for arriving at the total income of the assessee. We are
A afraid this observation appears to have been made under some mis-
apprehension, because what sub-section (I) of Section SOM requires
is that the deduction of the whole or a specified percentage must be
made from "such income by way of dividends" and not from the
gross total income. Sub-section (1) of Section SOM provides that in
B computing the total income of the assessee there shall be allowed a
deduction from "such income by way of dividends" of an amount
equal to the whole or a specified percentage of such income. Now
when in computing the total income of the assessee, a deduction bas
to be made from "such income by way of dividends'', it is elementary
that "such income by way of dividends" from which deduction bas
c to be made must be part of gross total income. It is difficult to see
how the language of this part of sub-section (1) of Section SOM can
possibly fit in if "such income by way of dividends" were interpreted
to mean the full amount of dividend received by the assessee. The
full amount of dividend received by the assessee would not be
included in the gross total income : what would be included would
D
only be the amount of dividend as computed in accordance with the
provisions of the Act. If that be so it is difficult to appreciate how
for the purpose of computing the the total income from the gross
total income any deduction should be required to be made from the
full amount of the dividend. The deduction required to be made
E for computing the total income from the gross total income can only
be from the amount of dividend computed in accordance with the
provisions of the Act which would be forming part of the gross total
income. It is therefore clear that whatever might have been the
interpretation placed on clause (iv) of sub-section (I) of Section 99
and Section SSA, the correctness of which is not in issue before us,
F so far as sub-section (1) of Section SOM is concerned, the deduction
required to be allowed under that provision is liable to be calculated
with reference to the amonnt of dividend computed in accordance
with the provisions of the Act and forming part of the gross total
income and not with reference to the full amount of dividend
G received by the assessee.

This view which we are taking in regard to the construction of
sub-section (I) of Section SOM is also supported by the decision of
a Bench of this Court consisting of one of us, Chandrachud, C.J. and
H Tulzapurkar, J. in Cambay Electric Supply Industrial Company
Limitedv. C.l.T.(1 ) This decisi0u was reudered by the Court on

(I) !1978] 113 l.T.R. 8~
DISTRIBU roRs (BARODA) LTD. v. UNION (Bhagwati, J.) S03

11th April J97S at least a year before the decision in Cloth Traders
• case, but, unfortunately, it appears, it was net brought to the atten- A
tion of the Court when the Cloth Traders case was argued, because
we have no doubt that if it had been cited, the Court would have
certainly made a reference to it in the judgment in Cloth Traders
case. The Section which came up for consideration before the
Court in Cambay Electric Supply Company's case was undoubtedly B
a different oue, namely, Section SOE, but the reasoning which
prevailed with the Court in placing a particular interpretation on
sub-section (I) of Section SOE would equally to applicable in the
interpretation of sub·seCtion (!) of Section SOM. Section SOE as it
stood at the material time provided inter a/ia as follows in sub-
section (I) : c
"SOE(!). Deduction in respect of profits and gains
from specified industries in the case of certain companies.
-(!) In the case of a company to which this section
applies, where the total income {as computed in accor- D
dance with the other provisions of this Act) includes any
profits and gains attributable to the business of generation
or distribution of electricity or any other form of power
or of construction, manufacture or production of any one
or more of the articles or things specified in the list in the
Fifth Schedule, there shall be allowed a deduction from E
such profits and gains of an amount equal to eight per
cent thereof, in computing the total income of the
company."

The question which arose in Cambay Electric Supply Company's case F
was whether unabsorbed depreciation and unabsorbed development
rebate were liable to be deducted in arriving at the figure of profits
and gains exigible to deduction of S per cent contemplated in sub-
section (I) of Section SOE. The argument of the assessee was precisely
the same as the one advanced in the present case, namely, that the
words "such profits and gains" in the later part of sub-section(!) of
G
Section SOE were intended to refer only to the category of profits
and gains referred to in the earlier part of that provision, namely,
"profits and gains attributable to the business of generation or
distribution of electricity or any other form of power or of construc- H
tion, manufacture or production of any one or more of the articles
or things specified in the list in the Fifth Schedule" and not to the
quantum of the profits and gains included in the total income, so
804 SUPRBMB COURT RBPORTS (1985} SUl'PL. s.c.a.

that the profits and gains exigible to the deduction of 8 per cent
A were the profits and gains attributable to the specified business in •
their entirety and not the profits and gains as computed in accor•
dance with the provisions of the Act. The assessee contended that,
in the circumstances, unabsorbed depreciation and unabsorbed
development rebate were not liable to be deducted from the profits
and gains attributable to the specified business for arriving at the
B
figure exigible to the deduction of 8%. This argument of the
assessee was rejected by the Court and the Court held that the profits
and gains exigible to the deduction of 8 per cent were profits and
gains computed in accordance with the provisions of the Act and
forming part of the total income and hence unabsorbed depreciation
c and unabsorbad development rebate were liable to be excluded from
the profits and gains attributable to the specified business in arriving
at the figure exigible to 8 per cent deduction. Tulzapurkar, J.
speaking on behalf of the Court analysed the provisions of sub-
section (I) of Section 80E in tb.e following words :
D "On reading sub-section (!) it will become clear that
three important steps are required to be taken before the
special deduction permissible thereunder is allowed and
the net total income exigible to tax is determined. First,
compute the total income of the concerned assessse in
E accordance with the other provisions of the Act, i e., in
accordance with all the provisions except section SOE;
secondly, ascerta what part of the total income so com-
puted represess the profits and gains attributable to the
business of the specified industry (here generation and
distribution of electricity); and, thirdly, if there be profits
F and gains so attributable, deduct 8 per cent thereof from
such profits and gains and then arrive at the net total
income exigible to tax."

The learned Judge then proceeded to apply this interpretation of
sub-section (I) of Section SOE to the facts of the case before him and
G
observed:

"As indicated earlier, sub-section (I) contemplates
three steps being taken for computing the special deduc-
tion permissible thereunder and arriving at the net income
H
exigilbe to tax find the first two steps read together
contain the legislative mandate as to how the total income
-of which the profits and ~ai.n~ a\trjbu\abl~ to the busi-
t>ISTRJBUTORS (BARODA) LTD. v. UNION (.8hagwall, J.) sos
ness of the specified industry forms a part-of the concer·
ned assessee is to be computed and according to the A
parenthetical clause, which contains the key words, the
same is to be computed in accordance with the provisions
of the Act except section 80E and since in this case it is
income from business the same will have to be computed
in accordance with sections 30 to 43A which would in·
B
elude section 32(2) (which provides for carry forward of
depreciation) and section 33(2) (which provides for carry
forward of development rebate for eight years). In other
words, in computing the total income of the concerned
assessee, items of unabsorbed depreciation and unabsorb·
ed development rebate will have to be deducted before c
arriving at the figure that will become exigible to the
dednction of 8 per cent contemplated by Section SOE
(!)."

It will thns be seen that according to this decision, the words "such
profits and gains" in the later part of sub-section( I J of Section SOE D
were referable to the quantum of the profits and gains attributable
to the specified business included in the total income as referred to
in the earlier part of the provision. If this decision lays down the
correct interpretation of sub-section (1) of Section SvE the same
interpretation must also govern the language of sub-section (I) of E
Section SOM. Structurally there is hardly any difference between
Section SOE sub-section (I) and Section SOM sub-section (I) and the
reasoning which appealed to the Court in the interpretation of sub·
section (!) of Section SOE must apply equally in the interpretation
of sub-section (I) of Section SOM. We find ourselves wholly in
agreement with the view taken by the Court in Cambay E/eetric F
Supply Company's case and we must therefore dissent from the
interpretation placed on sub-section (!) of Section SOM by the
decision in Cloth Traders case (supra).

But, even if in our view the decision in Cloth Traders case is
G
erroneous, the question still remains whether we should over-turn it.
Ordinarily we would be reluctant to over-turn a decision given by a
Bench of this Court, because it is essential that there should be
continuity and consistency in judicial decisions and law should be
certain and definite. It is almost as in.portant that the law should be H
settled permanently as that it should be settled correctly. But there
may be circumstances where public interest demands that the previous
decision be reviewed and reconsidered. The doctrine of stare
806 SUPREME COURT REPORTS [198S) SUPPL. s.c.R.

decisis should not deter the Court from over-ruling an earlier deci-
A sion, if it is satisfied that such decision is manifestly wrong or
proceeds upon a mistaken assumption in regard to the existence or
continuance of a statutory provision or is contrary to another deci·
sion of the Court. It was Jackson, J. who said in his dissenting
opinion in Massachusetts v. United States(') : "I see no reason
why I should be consciously wrong today because I was un·
8 consciously wrong yesterday". Lord Denning also said to the same
effect when he observed in Ostime v. Australian Mutual Provident
Society(') : "The doctrine of precedent does not compel Your Lord-
ships to follow the wrong path until you fall over the edge of the
cliff". Here we find that there are over-riding considerations which
c compel us to reconsider and review the decision in Cloth Traders
case. In the first place, the decision in Cloth Traders ca'e was
rendered by this Court on 4th May 1979 and immediately thereafter,
within a few months, Parliament introduced Section SOAA with
retrospective effect from !st April l 9GS with a view to over-riding
the interprepretation placed on Section 80M in Cloth Traders case.
D The decision in Cloth Traders case did not therefore hold the field
for a period of more than a few months and it could not be said that
any assessee was misled into acting to its detriment on the basis of
that decision. There was no decision in regard to the interpretation
of sub-section ( 1) of Section SOM given by any High. Court prior to
E the decision in Cloth Traders case and there was therefore no
authoritative pronouncement of this Court on this question of inter-
pretation on which an assessee could claim to rely for making its

-
fiscal arrangements. The only decision in regard to the interpreta-
tion of sub-section ( 1) of Section 80M given by any High Court
prior to the decision in Cloth Traders case, was that of the Gujarat
F High Court in Addi. C.I.T. v. Cloth Traders Private Limited and that
decision took precisely the same view which we are inclined to
accept in the present case. It is therefore difficult to see how
any assessee can legitimately complain that any hardship
or inconvenience would be caused to it if the decision in Cloth
Traders case was over-turned by us. If despite the decision of the
G
Gujarat High Court in Addi. C.T.T. v. Cloth Traders Prfrate Limited
(supra) the assessee proceeded on the assumption, now found to be
erroneous, that the Gujarat High Court decision was wrong and the
deduction permissible under sub-section (I) of Section SOM was
H liable to be calculated with reference to the full amount of dividend

(I) 333 U.S. 611
(2) [1963] A.C. 459
DISTRIBUTORS (BARODA) LTD. v. UNION (A.N. Sen, J.) S07

received by the assessee, the assessee can have only itself to blame.
Knowing fully well that the Gujarat High Court had decided the A
question of interpretation of sub·section (I) of Section SOM in favonr
of the Revenue and there was no decision of this Court taking a
different view, no prudent assessee could have proceeded to make its
financial arrangements on the basis that the decision of the Gujarat
High Court was erroneous. Moreover, we find, for reason we have B
already discussed that the decision in Cloth Traders case is manifestly
wrong because it has failed to take into account a very vital factor,
namely, that the deduction required to be made under sub· section (l)
of Section SOM is not from the gross total income but from "such
income by way of dividends". There is also another circumstance
which makes it necessary for us to reconsider and review the decision c
in Cloth Traders case and that is the decision in Cambay Electric
Supply Company's case. The decision in C/ath Traders case is
incoasistent with that in Cambay Electric Supply Company's case.
Both cannot stand together. If one is correct, the other must
logically be wrong and vice 1•ersa. It is therefore necessary to resolve D
the conflict between these two decisions and harmonise the law and
that necessasitates an inquiry into the correctness of the decision in
Cloth Traders case. It is for this reason that we have reconsidered
and reviewed the decision inC/oth Traders case and on such reconsi-
deration and review, we have come to the conclusion that the decision
in Cloth Traders case in erroneous and must be over-turned. E

It is obvious that, on this view, it becomes unnecessary to
consider the question of constitutional validity of the retrospective
operation of Section SOAA. Section SOAA in its retrospactive
operation is merely deolaratory of the law as it always was since F
!st April 196S and no complaint can validly be made against it.

We accordingly dismiss the writ petition but, in the pecnliar
circumstances of the case, we direct that each party shall bear and
pay its own costs. G

AM~RENDRA NATH SEN, J. I have had the benefit of reading
the judgment of my learned brother Bhagwati, J. My learne<l brother
in his judgment has set out all the material facts and circumstances
of the case. He has referred to the relevant statutory provisions and H
to the legislative history of Section SOM of the Income·Tax Act. He
has also considered the earlier decisions of various Courts including
SiJPRBllil! COURT RBPORTs (l98S) SUPPL. S.C,R,

the decisions of this Court in Cloth Traders Ltd. v. Additional
A Commissioner of Income Tax(') and in Cambay Electrical Supply
Indu.strial Co. Ltd v. Commissioner of Income· Tax.(') He has analy·
aed the provisions of Section SOM and has proceeded to interpret the
same. As I am in broad agreement with what have been stated by
my learned brother, I do not propose to reproduce the same.
B I, however, wish to make some observations of my own.

The authority and jurisdiction of a larger Bench of this Court
to over-ride and over-rule any decision of a smaller Bench cannot be
questioned. I am, however, of the opinion that the decision of this
Court on any fiscal legislation involving the question of financial
c benefit and liability should not normally be interfered with and
should be interfered with only in very rare cases. On the basis of
the decision of this Court on any fiscal legislation and any matter
involving financial arrangements and adjustments, parties are entitled
to arrange their financial affairs and in fact they so arrange and
D adjust their financial affai1s on the basis of the law laid down by this
Court. Unsettling a position settled by the decision of this Court
may lead to confusion and result in financial instability, causing
serious prejudice not only to the parties concerned but also to the
economic growth of the country as a whole. If on interpretation of
any provision in any fiscal legislation two views may be reasonably
E possible, a larger Bench of this Court may not interfere with the view
taken by a smaller Bench of this Court merely on the ground that the
other view appears to the larger Bench to be the better view and may
commend itself to the larger Bench. If, however, the decision of the
smaller Bench is erroneous, the larger Bench has necessarily to
F interfere with the decision, as this Court will not permit a wrong
decision to operate as good law of the land.

On a careful consideration of all the relevant facts and
circumstances of this case and the earlier decisions which have
all been noted in the judgment of my learned brother,
G
I have no hesitation in coming to the conclusion that the decision
arrived at by my learned brother for the reasons stated by him in
his judgment is sound and correct. My learned brother has properly
analysed the provisions of Section SOM and has correctly construed
H the same, applying the well settled principles of construction. I agree

(I) 118 J.T.R. 243.
(2) [19701113 J.T.R. 84.
bisnieuroRs {BARODA) LTD. v. UNION (A.N. Sen, J.) 809

with my learned brother and the reasons given by him for coming to
the conclusion that the decision of this Court Cloth Traders Ltd. v. A
Additional Commissioner of Income Tax is erroneous. In my opinion,
it cannot be said that in deciding the case of Cloth Traders Ltd. this
Court had taken one of two reasonably possible views. As my
learned brother in his judgrr.ent has aptly pointed out on a proper
interpretation of Section SOM that the view taken by this Court in B
Cloth Traders case is fallacious and wrong. I am in entire agreement
with the interpretation of Section SOM made by my learned brother
for reasons >lated in his judgment.

It may be noted that as soon as the decision of this Court in
Cloth Traders case was given, the Parliament to clearly manifest the c
legislative intent and to indicate that the decision did not reflect the
true intention of the Legislature introduced by amendment Section
SOAA with retrospective effect. In view of the proper interpretation
of Section SOM in the judgment of my learned brother with which I
agree, it cannot be said that Section SOAA has the effect of imposing D
any fresh tax with retrospective effect. Section SOAA is clearly
declaratory in nature and merely declares what the correct position
has always been. No question of imposition of any fresh tax with
retrospective effect falls for consideration in this case. It may also
be pointed out that the decision in Cloth Traders case cannot be said
to have held the field for any lenght of time to cause any serious E
prejudice to an assessee. The decision of the Gujarat High Court in
Cloth Traders case which was upset by this Court was against the
assessee and the Parliament had intervened as soon as this Court
,. reversed the decision of the Gujarat High Court in Cloth Traders
case. This aspect has also been fully dealt with in the judgment of F
my learned brother.

With these observations I am in entire agreement with the
judgment of my learned brother and I agree with the order proposed
by him.
G
N.V.K. Petition dismissed.