TMI Blog1964 (10) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... g items - Rs. 1,000 being distribution of capital. 1,570 being distribution out of capital gains, and 930 being distribution out of accumulated profits. ------- 3,500 ------- 2. The dispute in the present reference is now confined only to the distribution of ₹ 1,570 per share and it is, therefore, not necessary to state the facts in regard to the distribution of the other two items. So far as the distribution of ₹ 1,570 per share is concerned, though the certificate issued by the liquidator described this distribution out of deemed profits arising to the company on the sale of its capital assets under the second proviso to section 10(2)(vii). The revenue sought to tax this distribution out of accumulated profits of the company. This claim was upheld by the Income-tax Officer but the Appellate Assistant Commissioner negatived it and on appeal being taken to the Tribunal on behalf of the revenue, the Tribunal also rejected it. The Tribunal took the view that deemed profits arising to a company under the second proviso to section 10(2)(vii) would certainly form part of the assessable income of the company and would have to be inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and what is, in the ordinary sense, impossible or to quote the words of Lord Simonds in Public Trustee v. Inland Revenue Commissioners, the word deemed is a word which, as my noble and learned friend Lord Radcliffe has said in another case, is apt to include the obvious, the uncertain and the impossible . It does not, therefore, follow merely because the word deemed is used that but for the deeming provision the receipt dealt with in the second proviso to section 10(2)(vii) would not be profit. We must examine the true nature of the receipt and determine whether it is profit apart from the deeming provision in the second proviso to section 10(2)(vii). If it is, then of course it would be covered by section 2(6A)(c) and there would be no difficulty in the way of the revenue in taxing it when distributed amongst the shareholders. But if it is not and it is the deeming provision which fictionally converts it into profit, then we will have to see how far the fiction goe: Does the fiction make it profit only for the purpose of computation of income of the company under section 10(1) or does the fiction make it profit for all purpose including the purpose of section 2(6A)(c ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of the total depreciation allowances granted in the past and it is to be deemed to be such profit in the year of account in which the capital asset is sold. It would be seen that a deeming provision is enacted in this proviso and the object clearly is to convert that which is not profit into profit. When a capital asset is sold what is received by the assessee is capital return and not profit. Of course, when we say this we are referring only to so much of the sale price as does not exceed the cost of the capital asset. The excess of the sale price over the cost would certainly be capital gain but the sale price to the extent to which it does not exceed the cost would be nothing but return of capital and no part of it even in excess of the written down value can be said to partake of the character of profit. The receipt of excess over written down value on sale of capital asset would, therefore, be in the nature of capital return and not profit. But the legal fiction in the second proviso to section 10(2)(vii) converts it into profit for the purpose of assessment of the taxable income of the assessee. The deeming provision in the second proviso to section 10(2)(vii) is thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation was debited to revenue, appreciation must likewise be debited to revenue for otherwise it would not reflect the correct state of affairs so far as the profit and loss position of the company was concerned. But whereas in the present case a capital asset is sold and on sale realises a price in excess of the written down value, the excess which is received is mere return of capital invested in the capital assets and that cannot be regarded as profit. Of course the very fact that excess is realised shows that depreciation charged to revenue in the earlier years was in fact over-charged and that the profits of the earlier years were in fact more than what appeared in the accounts but that would not mean that the excess is profit received by the assessee in the year in which the capital asset is sold. What we are concerned with in the present reference is only a limited question, namely, whether the receipt of excess over written down value constitute profit and that we think it does not. The decision cited by Mr. G. N. Joshi does not assist the argument urged on behalf of the revenue. Moreover, if the decision were construed as laying down the proposition that where excess over w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are limited to the purpose for which they are created and should not be extended beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion but that must be within the framework of the purpose for which it is created. When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion : vide State of Bombay v. Pandurang Vinayak Chaphalkar. The principle that a legal fiction must be limited to the purpose for which it is created was also applied by N. H. Bhagwati J. in Bengal Immunity Company Limited v. State of Bihar where the learned judge observe : A legal fiction presupposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. But due regard must be had in this behalf to the purpose for which the legal fiction has been created. If the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith computation of income of a business carried on by an assessee in the year of account and section 10(2) says what allowance shall be made in computing profits and gains of such business and in that connection the second proviso to section 10(2)(vii) provides that the excess over written down value received by the assessee on the sale of a capital asset shall be deemed to be the profit of the assessee in the previous year in which the sale took place so that such excess may be included in the computation of the profits and gains of the assessee and may be brought to tax in his hands. The reason for which this legal fiction is introduced is clear and may best be described in the words of the Supreme Court itself in Commissioner of Income-tax v. Bipinchandra Maganlal and Co : Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be profit by the legal fiction enacted in the second proviso to section 10(2)(vii). 16. It was contended on behalf of the revenue that if we take this view, an anomalous result would arise in that if the excess over written down value received by the company on the sale of its capital asset had been distributed among the shareholders while the company was going on, it would have been dividend but if it is distributed after the company has gone into liquidation it would not be liable to be regarded as dividend. Now it is undoubtedly true and that was not disputed by Mr. Palkhivala, learned advocate appearing on behalf of the assessee, that if this excess had been distributed amongst the shareholders while the company was functioning, it would have been dividend within the ordinary meaning of that word but it may be pointed out that it would have been dividend not because of the character of profit attaching to such excess in the hands of the company but because every distribution made by a company to its shareholders which is otherwise than by way of return of capital is dividend. Moreover it must be remembered that what we are concerned to inquire in this reference is not whet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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