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TMI Blog1965 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the applications, appropriate debit entries were made in the accounts of the shareholders and the amounts were actually paid to them during the previous year, i.e., December 1, 1954, to November 30, 1955. Under section 2(6A)(d) of the Act, "dividend" includes any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalised or not. In assessing the income of the appellant-company for the assessment year, 1956-57, the Income-tax Officer held that the said dividends were distributed during the accounting year and on that finding he calculated the rebate on super-tax in terms of clause (i)(b) of the second proviso to paragraph D of Part II of the First Schedule to the Finance Act, 1956. If the dividends were distributed during the accounting year, i.e., December 1, 1953, to November 30, 1954, the appellant would be entitled to a higher rate of rebate on super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 of Companies under section 61(4) of the Indian Companies Act, 1913, or could be considered as dividend deemed to have been distributed in the assessment year 1956-57 because the debits of refunds were actually made in the accounts of the shareholders during the accounting period of the assessment year 1956-57 ?" The High Court answered all the questions against the assessee. Hence the appeal. Mr. N. C. Chatterjee, learned counsel for the assessee, did not contest the correctness of the answer given by the High Court in regard to the third question and, therefore, nothing further need be said about it. The first question is whether section 2(6A)(d) of the Act is ultravires the Central Legislature. Sub-section (6A) was inserted in section 2 of the Act by section 2 of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939). Section 2(6A)(d) of the Act reads : " 'Dividend' includes any distribution by a company on the reduction of its capital to the extent to which the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shareholders of a company in which the public were not substantially interested. In Balaji v. Income-tax Officer, Special Investigation Circle, this court ruled that section 16(3)(a)(i) and (ii) of the Income-tax Act, which enabled the Income-tax Officer in computing the total income of a person to include the share of the income of his wife and minor sons therein, was constitutionally valid for the reason that it was intended to prevent evasion of tax by persons putting the properties in the names of their wives or minor children, as the case may be. This court again in Navnitlal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax, "D" Range, Bombay, sustained the validity of section 2(6A)(e) of the Indian Income-tax Act, 1922, which included in the definition of "dividend", inter alia, payment made by the company by way of advance or loan to a shareholder to the extent to which the company possessed accumulated profits on the ground that it was a measure to prevent pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act. This argument mixes up two aspects---the legal and fiscal. Under company law the question of reducing capital is a domestic one for the decision of the majority of shareholders. The court comes into the picture only to see that the reduction is fair and equitable and that the interests of the minority and the creditors do not suffer. It may not also be concerned with the motive of the general body in resolving to reduce the capital; but the income-tax law is concerned with tax evasion. Tax can be evaded by breaking the law, or avoided in terms of the law. When there is a factual avoidance of tax, in terms of law, the legislature steps in to amend the income-tax law so that it can catch such an income within the net of taxation. There is, therefore, no inconsistency between a receipt being a capital one under the company law, and by fiction being treated as taxable income under the Income-tax Act. Therefore, as section 2(6A)(d) of the Act embodies a law to prevent evasion of tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid 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 reaffirmed the said principle in Mrs. P. R. Saraiya v. Commissioner of Income-tax, and held that where dividend was not credited to any separate account of the assessee so that he could, if he wished, draw it, it was not "credited or paid" within the meaning of section 16(2) of the Act. The same meaning must be given to the word "distribution". The only difference between the expression "paid" and the expression "distribution" is that the latter necessarily involves the idea of division between several persons which is the same as payment to several persons. At this stage the anomaly that is alleged to flow from our view may conveniently be noticed. It is said that there will be different points of time for ascertaining the extent of the accumulated profits, with the result section 2(6A)(d) of the Act becomes unworkable in practice or at any rate leads to unnecessary complications. We do not see any justification for this comment. Distribution is a culmination of a process. Firstly, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 D of Part II of the First Schedule to the Finance Act, 1956, read with Explanation (ii) to paragraph D, which provides for reduction of rebate allowable under clause (ii) of the first proviso; by an amount computed at certain slab rates on the amount of dividends distributed to the shareholders during the e previous year, could not be invoked. To put it in other words, the assessee claimed that as the dividends were hot distributed in the accounting year, there could not be any reduction of the rebates under clause (i)(b) of the said proviso. If, as we have held, the distribution was made during the year ending November 30, 1955, i.e., the accounting year when the amounts were paid, the revenue would be entitled to reduce the rebate by the amount contoured at the prescribed rates on the amount of dividends. Some complication may arise only if we accept the argument that the date of payment fixes the date for ascertaining the quantum of accumulated profits. But we have rejected that contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 proviso to paragraph D of Part II of the First Schedule to the Finance Act, 1956, read with Explanation (ii) to paragraph D. Now, clause (i)(b) of the second proviso to paragraph D of Part II of the First Schedule to the Finance Act, 1956, provides for reduction of the rebate allowable under clause (ii) of the preceding proviso by an amount computed at certain slab rates on the amount of dividends "in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of 6 per cent. of its paid-up capital not being dividends payable at a fixed rate ", and the Explanation (ii) to paragraph D provides that for the purpose of paragraph D "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 Indian Income-tax Act ". Section 2(6A)(d) of the Indian Income-tax Act, 1922, provides that "dividend" includes "any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 registration and requesting the shareholders to send their share certificates to the company at an early date for necessary endorsement and refund of share capital and stating that the refund would be made to the shareholders, whose names stood on November 15, 1954, in the books of the company, the share transfer register would remain closed from November 16 to November 30, 1954, and the refunds would be made to the shareholders whose names stood on November 15, 1954, in the books of the company. The balance-sheet for the year ending November 30, 1954, did not show the reduction, and the capital of the company in this balance-sheet was shown to be Rs. 25 lakhs. The necessary book entries and the payments of dividends to the shareholders were not made during the year ending November 30, 1954. The book entries with regard to the reduction and refund were made, and the refunds were given to the shareholders during the year ending November 30, 1955, and the reduction was shown in the balance-sheet for the year en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The payments to the shareholders either actual or notional by credit entries in the books of account are made subsequently. The payments need not be made on one date; they may be and often are made on several dates. The successive payments cannot be the distribution contemplated by section 2(6A)(d). We find, secondly that the accumulated profits are to be ascertained on the date of the distribution. But we find independently, for reasons mentioned hereafter, that the accumulated profits must be ascertained on the date of the reduction of capital. Thus the two events, namely, the distribution and the reduction of capital must synchronise, and the accumulated profits must also be ascertained at the same point of time. The synchronisation is also obvious on a plain reading of the abridged text "any distribution on the reduction of capital to the extent of accumulated profits." The artificial dividend under section 2(6A)(d) must be fixed by reference to the accumulated profits on the date of the reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits to the extent of which the distribution amounts to dividend does not arise. This problem would have arisen, had section2(6A) defined normal dividend as " any distribution by a company on the declaration of dividend to the extent to which the company possesses accumulated profits ". On such a definition the only possible interpretation would have been that the accumulated profits are ascertained and the distribution takes place on the date of the declaration of the dividend. The argument based upon the decided cases under section 16(2) is misconceived. Section 16(2) dealt with the question when the dividend shall be deemed to be the income of the shareholders. By section 16(2) the dividend was deemed to be the income of the shareholders when it was paid, credited or distributed. An artificial dividend under section 2(6A)(d) is either distributed or paid, whereas the normal dividend is either paid or credited, and in the case of T. Dalmia v. Commissioner of Income-tax and Padmavati R. Saraiya v. Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. 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 accounting brings into debit as expenditure the amount for which a legal liability has been incurred before it is actually disbursed : see Keshav Mills Ltd. v. Commissioner of Income-tax. In conclusion, we must point out that the revenue authorities should have, but in fact have not fixed the amount of the dividend by reference to the accumulated profits on November 4, 1954, when the resolution for reduction of capital became effective, or by reference to the accumulated profits brought forward on December 1, 1953, at the commencement of the accounting year during which the reduction of capital took effect. Instead, the revenue authorities took into account the accumulated profits on December 1, 1954, that is to say, the date of the commencement of the subsequent accounting year, during which the dividends were paid. The amount of the accumulated profit as on December 1, 1954, was fixed by the Income-tax Officer at Rs. 8,42,337 and was subsequently reduced by the Tribunal to Rs. 4,69,244-13-0. The revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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