9911796707
TMI Blog1969 (9) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... Sons Private Ltd., of 35, Cross Street, Calcutta, is a private limited company. The controversy relates to the assessment year 1957-58 for which the previous year was the calendar year 1956. The Income-tax Officer determined the total income of the company at Rs. 8,962. The share capital of the company, which stood at Rs. 3,84,000 at the beginning of the year, was reduced to Rs. 96,000 by the order of this court dated the 24th July, 1956. The reduction in capital thus amounted to Rs. 2,88,000. The company distributed amounts in cash to the shareholders in consequence of such reduction. It is recorded in paragraph 5 of the statement of the case that the assessee-company was formerly carrying on the business of generation and supply of electricity at Khandwa, Madhya Pradesh. Since the electricity supply was taken over by the State Government, the assessee had practically no business and the share capital was in excess of the requirements of the company. The High Court ordered the reduction of capital in the following terms: "The capital of Messrs. Jasrup Baijnath Bahety & Sons (Private) Ltd. henceforth is Rs. 96,000 divided into 3,840 shares of Rs. 25 each reduced from Rs. 4,34,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated June 12, 1963, in particular, notices two contentions. The first contention was with regard to the reduction of rebate of the super-tax on the declaration of excess dividend. He formulates the first contention to be that the definition in clause (d) of sub-section (6A) of section 2 of the Income-tax Act means a distribution out of the accumulated profits and not any distribution on the reduction of its capital. He dismisses it as a contention without merit. The relevant observations that he makes are as follows: "After all, the words used in the Act are 'any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose. . . . ' These words do not require that the distribution should be out of the accumulated profits. It is enough if the company has accumulated profits arid any distribution is made on the reduction of capital. The reduction of capital and the accumulated profits to the extent of Rs. 97,399 are not questions in the appeal. Therefore, this contention is rejected." The second contention that he notices is that the distribution in clause (c) of the second proviso to Paragraph D of the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot fulfil 'condition (b)' of clause (i). Condition (b) can apply only if the case of the company is one in which public are substantially interested with a further restriction that its total income falls below Rs. 25,000. If this interpretation is correct, clause (ii) would apply only to an Indian company (as referred to earlier) which is itself a company in which the public are substantially interested but with total income exceeding Rs. 25,000. Clause (iii) would apply to foreign companies (which have not provided for declaration of dividend in India) and to Indian companies in which public are not substantially interested. The second proviso providing for withdrawal of rebate applies only to companies entitled to rebate under clause (i) or clause (ii) of the first proviso, that is, to Indian companies in which public are substantially interested. This distinction is understandable because it is in the case of public limited companies that distribution of excessive dividends or issue of bonus shares are discouraged. In the present case, the assessee being a company in which public are not substantially interested the rebate admissible is 20% as mentioned in clause (iii) of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rebate under either of the preceding clauses. The main contention on behalf of the revenue is that the Tribunal was in error in applying clause (iii) of the first proviso of Paragraph D of Part II of the First Schedule of the Finance (No. 2) Act, 1957, and it should have applied clause (ii) of that proviso and condition (a) set out above. This is the crux of the contention on this statement of the case. It depends on a proper interpretation of these provisos and clauses. Looking at these three provisos, the first conclusion is that the rebates of 40%, 35%, 30% and 20%, as mentioned in these three provisos, are allocated and divided to go with the total income consisting of dividends under a subsidiary Indian company on the one hand and the balance of the total income on the other. The question naturally arises : where there is no question of any income from any dividend from any subsidiary Indian company, would these provisos have any application ? The point of significance is that there is no dividend from any subsidiary Indian company in the present case. Secondly, looking again at the provisos, there is no justification for coming to the conclusion, which the Tribunal did, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two parts of proviso (i)(a) are clearly separate, namely, the part that makes for "prescribed arrangements for the declaration and payment of dividends payable out of such profits" on the one hand and the part "for the deduction of super-tax on dividends in accordance with the provision of section 18(3D) of the Income-tax Act". The first part cannot include deemed or notional dividends at all. As the language clearly says, it means dividend which has been declared and paid by the prescribed arrangements. The second part under section 18(3D) of the Income-tax Act may include consideration of deemed dividend as the section itself provides. In order to succeed, therefore, the revenue has to establish in this case that the dividend taken to be dividend in this case was a dividend according to prescribed arrangements within the meaning of proviso (i)(a) of Paragraph D of the Finance Act quoted above. On the facts the revenue cannot do this in the present case. Therefore, the contention of the revenue to come within clause (a) of proviso (i) cannot succeed. Lastly, the overriding problem remains whether what has happened in this case can at all be called dividend within the meaning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that the expression "accumulated profits" does not in this context include capital gains before the 1st April, 1946, or after the 31st March, 1948, and before the 1st April, 1956. Section 2(6C) says that income includes, inter alia, dividend. Looking at the statutory description of what is dividend in section 2(6A) of the Income-tax Act, an inseparable adjunct appears as "accumulated profits". In other words, dividend in this respect cannot be conceived without some association or other with accumulated profits. The question immediately arises where there is a reduction of share capital because the Government has taken over the main item of business of manufacture and supply of electricity, then without anything more about accumulated profits being found as a fact, could this reduction of capital be dividend within the meaning of the Income-tax Act or the Finance Act. For instance, if a company is started by subscription to shares and immediately on allotment of shares it is found that a good part of the business of the company has become either unnecessary or impossible and the company, therefore, reduces the share capital and returns the money to the shareholders who had subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 5 of that report which is as follows : "2. Whether the accumulated profits amounting to Rs. 4,69,244-13-0 could be deemed to have been distributed on the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs within the meaning of section 2(6A)(d) of the Income-tax Act?" Here, there is no finding at all before us that there was any accumulation of profit as such and what was the extent of it. No doubt, the Income-tax Officer, as already set out elsewhere in this judgment, had tried to describe as accumulated profit a certain figure, manifestly under a misconception because he tried to include contingency reserve, accumulated balance under the profit and loss account and provision for income-tax which could by no means be considered as accumulated profits of the company. Even profits from the sale of machinery could not be said to be accumulated profits without something more and mere appreciation of the original value of the machinery will not it the expression "accumulated profits of the company". Accumulation of profits is a deliberate act and implies a conscious volition to accumulate the profits. Reduction of share capital is a well-known legal concept in company juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 23A which means that no part of section 23A of the Income-tax Act applies to a company in which public are substantially interested or to a subsidiary company of such company if the whole of the share capital of such subsidiary company is held by the parent company or by its nominees throughout the previous year. Explanation (ii) of Paragraph D of Part II of the Finance (No. 2) Act, 1957, expressly says that the expression "dividend" shall be deemed to include any distribution included in the expression "dividend" as defined in clause (6A) of section 2 of the Income-tax Act. The question then is : if section 2(6A) does not include the concept of deemed dividends, would that concept come in to be included for the purposes of allowing rebates for super-tax on a company? I shall now make a brief reference, dealing with the computation of the reduction of the amount of rebate under clause (i) or clause (ii). This will appear in the last proviso after clause (iii) and again proviso (i) with sub-clauses (a), (b) and (c). The opening words of this proviso are: "Provided further that the amount of the rebate under clause (i) or clause (ii) shall be reduced by the sum, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proviso (ii) applied, therefore, sub-clause (c) of the next proviso (i) applied in this case. Sub-clause (c) also on a reading shows that it relates to dividends and consequently also must include deemed dividends. This contention of the revenue does not and cannot any more arise having regard to the view we have taken of the first proviso (ii) of Paragraph D and havin regard to the fact that the revenue has not been also able to satisfy condition (a) of the first proviso (i). The legal position then is this. Section 2(6A) of the Income-tax Act describes what dividend includes and what it does not include. I have shown by my analysis that that description is inseparably associated with "accumulated profits". Section 2(6C) says that income includes dividend. As section 3 of the Income-tax Act charges the income or the total income to income-tax, it necessarily follows that the income-tax attaches to dividends as part of the income or a kind of income. Section 18(3D) of the Income-tax Act refers to the deduction of super-tax from dividends and provides for deduction of such tax at the source and which is expressly recognized in proviso (i)(a) of Paragraph D of the Finance (No. 2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1957. Normally, on this scheme of provisions, the rebate has to be claimed by the company and for the super-tax being imposed, it is the company-assessee which claims that it is entitled to rebate according to the provisos and their sub-clauses. But the primary fact must be first satisfied by the revenue that the case is one where the income of the company is liable to super-tax. The only point here is whether the reduction of share capital, in the facts and circumstances of this case, has produced an income which is liable to super-tax. The revenue contends that it has, on the ground, that it is an income by a kind of extended meaning of the word "dividend", a conclusion which we are unable to uphold. Here, on the facts and circumstances of the case, we are satisfied that the reduction of share capital has not produced or has not been shown to have produced on any evidence an income by way of "dividend", as contended by the revenue, according to the extended connotation of the word "dividend". We shall now proceed to answer the questions raised. Question No. 1 raises the issue whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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