TMI Blog1965 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... 65 - Judge(s) : V. RAMASWAMY., K. SUBBA RAO., RAGHUBAR DAYAL., J. R. MUDHOLKAR., R. S. BACHAWAT JUDGMENT [The judgment of Subba Rao, Mudholkar and Ramaswami JJ. was delivered by Subba Rao J. The judgment of Raghubar Dayal and Bachawat JJ. was delivered by Bachawat J.]. SUBBA RAO J.---This appeal by certificate raises the main question whether section 2(6A)(d) of the Indian Income-tax Act, 1922, hereinafter called the Act, is ultra vires the Central Legislature. The assessee, a public limited company, was incorporated on May 23, 1945, under the Indian Companies Act, 1913, with a share capital of Rs. 50 lakhs. On December 15, 1947, at the instance of the appellant the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs. On August 6, 1954, the High Court sanctioned further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs. On November 4, 1954, the Registrar of Companies granted the requisite certificate under section 61(4) of the Indian Companies Act. On November 5, 1954, the appellant issued notices to the shareholders inviting applications for the refund of share capital so reduced. On the receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpty bottles. A question was raised whether the said amount could be considered as capital gains and, therefore, should be excluded from the accumulated profits. The Appellate Tribunal held in favour of the assessee. The assessee and the Commissioner of Income-tax filed two applications before the Tribunal for referring questions of law arising out of the Tribunal's order to the High Court. The Tribunal referred the following questions of law to the High Court for its opinion : " (1) Whether the provisions of section 2(6A)(d) of the Indian Income-tax Act are ultra vires of the Central Legislature ? (2) Whether the accumulated profits amounting to Rs. 4,60,244-I3-0 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 Indian Income-tax Act ? (3) Whether the amount of Rs. 11,687-3-0 received by the assessee as security deposit on account of empty bottles could be considered as capital gains ? (4) Whether the accumulated profits could be considered as dividend deemed to have been distributed in the assessment year 1955-56 in view of the certificate granted by the Registrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed rule of construction that entries in the legislative lists cannot be read in a narrow or restricted sense : they should be construed most liberally and in their widest amplitude. In the words of Gwyer C.J. in United Provinces v. Atiqa Begum, "each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it." This court in a number of decisions held that the expression "income" in entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935, and the corresponding entry 82 of List I of the Seventh Schedule to the Constitution of India, shall be widely and liberally construed so as to enable a legislature to provide by law for the prevention of evasion of income-tax. In Sardar Baldev Singh v. Commissioner of Income-tax, this court maintained the constitutional validity of section 23A(1) of the Income-tax Act, which empowered the Income-tax Officer to impose super-tax in a case where a private limited company distributed less than sixty per cent. of the total income of the company as dividends on the ground that the object of the section was to prevent avoidance of super-tax by share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the accumulated profits which, if a straightforward course was followed, he should have received as dividend. This is a division of profits under the guise of division of capital; a distribution of profits under the colour of reduction of capital. If this was permitted, there would be evasion of super-tax, the extent of the evasion depending upon the prevalence of the evil. The legislature, presumably in the interest of the exchequer, enlarged the definition of "dividend" to catch the said payments within the net of taxation. By doing so, it is really taxing the profits in the hands of the shareholders, though they are receiving the said profits under the cloak of capital. Learned counsel for the appellant contends that under the Companies Act a company can lawfully reduce the share capital with the sanction of the court, that there is no prohibition thereunder against such a reduction being made by way of distribution of accumulated profits to the shareholders, that the amounts so paid to them would be in law capital receipts and that, therefore, there could not be in law or in fact any evasion of tax on income. Reliance is placed upon sections 100 to 103 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated profits were distributed, it would satisfy not only the definition of "dividend" in clause (d) but also would fix the year in which it would be deemed to be income. What then is the meaning of the expression "distribution"? The dictionary meaning of the expression "distribution" is "to give each a share, to give to several persons". The expression "distribution" connotes something actual and not notional. It can be physical; it can, also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him. This court had to construe the scope of the word "paid" in section 16(2) of the Act in J. Dalmia v. Commissioner of Income-tax. Shah J. speaking for the court, observed : " The expression 'paid' in section 16(2), it is true, does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto." This court again r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter the amounts payable to each of the shareholders are distributed by appropriate credits or payments. Dividends may be paid or credited to different shareholders during different accounting years; and the shareholders may be assessed in respect of the said payments in different years. Even so, the payments are referable only to the declaration of the dividends out of the profits of a particular year. This court, as we have noticed earlier, in the decisions cited supra held that the year of credit or payment to a shareholder was crucial for the purpose of assessment and not the date of the declaration. Let us see whether this view introduces any complication in the matter of reduction of rebate on super-tax payable by the company. The appellant-company set up a claim for a rebate on the super-tax under clause (ii) of the first proviso to paragraph D of Part II of the first Schedule to the Finance Act, I956. The company based its claim on the contention that the distribution of dividends on reduction of capital took place during the year ending November 30, 1954, and not during the year ending November 30, 1955, and, therefore, clause (i)(b) of the second proviso to paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the said facts that the amounts were distributed only during the accounting year, when the amounts were both debited and paid. We, therefore, agree with the High Court that the dividends were distributed to the shareholders during the accounting year, i. e., 1954-55. In the result, the appeal fails and is dismissed with costs. BACHAWAT J.---For the reasons given by brother Subba Rao J., we agree that section 2(6A)(d) of the Indian Income-tax Act, 1922, is not ultra vires the Central Legislature, but we are unable to agree with his conclusion With regard to the fourth question of law referred for the opinion of the High Court. The fourth question arose because of the claim of the appellant-company to a rebate of super-tax under clause (ii) of the first proviso to paragraph D of Part II of the First Schedule to the Finance Act, I956, and its contention that the distribution of dividends on reduction of capital contemplated by section 2(6A)(d) of the Indian Income-tax Act, 1922, took place during the year ending November 30, 1954, and not during the year ending November 30, 1955, and consequently there could be no reduction of the rebate under clause (i)(b) of the second p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducing share capital as confirmed by the order so registered shall take effect. Under section 62, the minute when registered shall be deemed to be substituted for the corresponding part of the memorandum of the company. In the instant case, the issued, subscribed and paid-up capital of the company was Rs. 25 lakhs, consisting of 5 lakhs shares of Rs. 5 each. On December 16, 1953, the company passed a special resolution for reducing its share capital from Rs. 25 lakhs to Rs. 15 lakhs and for payment of Rs. 2 per share to the existing shareholders under section 55(1) (c) of the Indian Companies Act, 1913. On May 10, 1954, the company applied to the court for an order confirming the reduction. On August 6, 1954, the High Court made an order confirming the reduction. On November 4, 1954, the order and the minute approved by the court were duly registered with the Registrar, and on the same date, the Registrar issued a certificate of registration. On November 5, 1954, the notice of registration was duly published. On the same day, the company issued a circular notice to its shareholders stating that the refund of Rs. 2 per share will be made on receiving confirmation of the registrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refund. This liability arises as soon as the reduction of capital takes effect, and it matters not that the company has not made the necessary book entries showing the reduction of capital and the transfer of the surplus to the account of the shareholders. The word "distribution has several dictionary meanings. In the context of section 2(6A)(d), it means allotment or apportionment of the surplus amongst the shareholders; this allotment takes place and each shareholder gets a vested right to his portion of the surplus as soon as the capital stands reduced. A close scrutiny of section 2(6A)(d) reveals that (a) the distribution takes place on a single date and (b) the expression "accumulated profits" means profits accumulated up to the date of the distribution. These two basic ideas which are implicit in section 2(6A)(d) are forcibly brought out, in the Explanation to the corresponding section 2(22) of the Income-tax Act 1961. We thus find firstly that the entire distribution of the surplus amongst the share-holders takes place on a single date. Now if the distribution is to have certain single date, that date can only be the date when the reduction of capital becomes effective. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a result. The character of the distribution is determined by the extent of the accumulated profits on the date when the reduction of capital becomes effective and is not altered by any subsequent increase of capital so distributed share alike the original character of the distribution. It is argued that in the case of a normal dividend, a comparable distri bution takes place, a declaration of dividend out of the profits of a particular year is made, and is followed by payment of the dividend, and decided cases under section 16(2) show that the distribution takes place on payment and not on the declaration of a dividend. We think this comparison of the normal dividend with the artificial dividend in section 2(6A)(d) in the shape of the distribution to the extent of the accumulated profits is misleading, and the assumptions on which this comparison is made are not correct. The declaration of a normal dividend may be made out of accumulated profits, and need not necessarily be made out of the profits of any particular year. Section 2(6A)(d) does not contain any definition of a normal dividend. In the case of a normal dividend, the question of ascertaining the accumulated profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as defined by section 2(6A)(d) took place on November 4, 1954, i.e., during the previous year corresponding to the assessment year 1955-56. It is true that during the accounting year ending November 30, 1954, the company did not pay any dividends, nor make any book entries with regard to reduction of capital or with regard to refund or payment of surplus capital. But the company incurred on November 4, 1954, the legal liability to make the refunds and the distribution must be deemed to have taken place on November 4, 1954, though no book entries were made and no payments were made on that date. In view of the fact that the distribution took effect on November 4, 1954, the company was bound to make necessary entries in their books on November 4, 1954, showing the reduction of capital, and was also bound to show the reduction in its balance-sheet for the year ending November 30, 1954. Irrespective of its method of book-keeping, the company incurred on November 4, 1954, the legal liability to make the refunds. The method of book-keeping is not relevant, but, were it so, it is pertinent to remember that the accounts of the company were kept on the mercantile basis. That system of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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