Punjab Distilling Industries Ltd. Vs.
Commissioner of Income-Tax, Punjab [1965] INSC 27 (9 February 1965)
09/02/1965 SUBBARAO, K.
SUBBARAO, K.
DAYAL, RAGHUBAR MUDHOLKAR, J.R.
BACHAWAT, R.S.
RAMASWAMI, V.
CITATION: 1965 AIR 1862 1965 SCR (3) 1
CITATOR INFO:
R 1984 SC 420 (45)
ACT:
Indian Income-tax Act, 1922 (11 of 1922,), s.
2(A) (d)--Distribution on reduction of company's capital to the extent of
accumulated profits treated as 'dividend'--Such dividend whether 'income' under
Entry 54, List I, Government of India Act, 1935--Section whether ultra vires.
Distribution'--Meaning of--Whether synonymous
with 'paid' of 'credited' in s. 16(2) of the Income-tax Act--Notional
distribution whether takes place on issue of certificate under s. 61(4) of the
Indian Companies Act, 1913.
HEADNOTE:
The appellant .company reduced its capital
and the reduction was confirmed by the High Court. On November 4-, 1954, i.e.
during the course of the appellant's accounting year ending November 30, 1954,
the Registrar of Companies issued the requisite certificate under s. 61(4) of
the Indian Companies Act. The surplus share capital consequent on reduction
was, however, not refunded to the shareholders during the said accounting year.
It was refunded by actual payment or by credit entries in the next accounting
year which ended on November 30, 1955. The Income-tax Officer held that the
said distribution to the extent of accumulated profits was 'dividend' under s.
2(6A)(d) of the Indian Income-tax Act, 1922. He further held that the
distribution took place in the accounting year ending November 30, 1955,
relevant for the assessment year 1956-57. On these findings he calculated the
rebate on super-tax in the terms of cl.
(i)(b) of the second proviso to paragraph D
of Part II of the first schedule to the Finance Act, 1956. The findings of the
Income-tax Officer were upheld by the Appellate Assistant Commissioner and the
Appellate Tribunal, and also, in reference, by the High Court. The appellant
came to the Supremen Court by certificate.
It was contended on behalf of the appellant:
(1) In defining 'dividend' to include capital receipts resulting from
distribution of capital on reduction, the legislature went beyond the ambit of
entry 54 List I, Seventh Schedule, Government of India Act, 1935, and s.
2(6A)(d) of the Indian Income-tax Act, 1922 was therefore, ultra vires.
(2) The certificate of the Registrar under s.
61(4) of the Indian Companies Act was issued on November 4, 1954 and therefore
the 'distribution' under s. 2(6A)(d) took place in the previous year relevant
to the assessment year 11955-56.
HELD': The expression 'income' in entry 54
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 must be widely and liberally construed so as to enable the Legislature to
provide by law for the prevention of evasion of Income-tax, [5H; 6A] 2 United
Provinces v. Atiqa Begum, [1940] F.C.R. 110, Sardar Baldev Singh v. Commissioner
of Income-tax, Delhi and Ajmer, [1961] 1 S.C.R. 482, Balaji v. Income-tax
Officer Special Investigation Circle, [1962] 2 S.C.R. 983 and Navnittal C.
Javeri v. K.K. Sen, Appellate Assistant Commissioner of Income-tax 'D' Range,
Bombay, [1965] 1 S.C.R. 909, referred to.
A company may on the pretext of reducing its
capital, utilise its accumulated profits to pay back to the shareholders the
whole or part of the paid up amounts on the shares. This is a division of
profits under the guise of division of capital. If this were permitted there
would be evasion of super-tax. Section 2(6A)(d) embodies a law to prevent such
evasion and hence it falls within the ken of entry 54 of List I of Schedule
Seven to the Government of India Act, 1935. [6H; 7A, G] There is no inconsistency
between a receipt being a capital one under the company law and by fiction
being treated as taxable under the Income-tax Act. [7F-G] Per Subba Rao.
Mudholkar and Ramaswami, JJ. The expression 'distribution' connotes something
actual and not notional. Like 'paid' or 'credited' in s. 16(2), distribution'
signifies 'the discharge of the company's liability and making the dividend
available to the members entitled thereto. [8D, F, G] J. Dalmia v. Commissioner
of I.T. Delhi, (1964) 53 I.T.R. 83 and Mrs. P.R. Saraiya v. Commissioner of
Income- tax, Bombay City 1, Bombay, [1965] 1 S.C.R. 307, relied on.
Distribution can ke physical, it can be
constructive.
One may distribute assets 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. [8D] Distribution in the above manner may take place partly in one year
and partly in another. But the amount of accumulated profits is fixed by the
resolution of the company reducing its capital, and the figure does not change
with the date of payment or credit. [9D, E] In the present case the payments
and credits were actually given during the accounting year ending November 30,
1955. The dividend under s. 2(6A)(d) must be deemed to have been distributed in
the said year. The relevant assessment year therefore was 1956-57.[10F] Per
Raghubar Dayal and Bachawat, JJ. The word distributed', in s. 2(6A)(d) does not
mean 'paid' or credited'. Cases under s. 16(2) are not relevant to the issue.
[14G-H] The 'distribution' contemplated by s. 2(6A)(d) is distribution at the
time of reduction of capital, that is to say, when the resolution of the
company reducing the capital takes effect. It means allotment or apportionment
of the surplus among 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. [12F-H] While the distribution as above takes place on
a single date i.e. the date of the reduction of capital, the payments to the
shareholders either actual or by credit entries in books of account may be made
subsequently and on different dates. The successive payments cannot be
'distribution' contemplated by s. 2(6A) (d). [13A-C] 3 In the instant case the
resolution for the reduction of the capital of the company and the
consequential refund of the surplus capital to the shareholder took effect on
November 4, 1954. Consequently the distribution of the 'dividend' as defined by
s. 2(6A)(d) took place on that date i.e. during the previous year corresponding
to the assessment year 1955-56. [15B]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 414 of 1965.
Appeal from the judgment and order dated
February 21, 1962, of the Punjab High Court in I.T. Reference No. 9 of 1959.
N.C. Chatterjee and R.V. Pillai, for the
appellant.
C.K. Daphtary, Attorney-General, R. Ganapathy
lyer, R.N. Sachthey for R.H. Dhebar, for the respondent.
The Judgment of SUBBA RAO, MUDHOLKAR and RAMASWAMI
JJ.
was .delivered by SUBBA RAO, J. The
dissenting Opinion of DAYAL and BACHAWAT JJ. was delivered by BACHAWAT J.
Subba Rao, J. This appeal by certificate
raises the main question whether s. 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 December 16, 1953, the High Court sanctioned a
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 s. 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 s. 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 el.
(i)(b) of the second proviso tO paragraph D
of Part I1 of the first schedule to the Finance Act, 1956. If the dividends
were distributed during the accounting year. i.e., December I, 1953, to
November 30, 1954, the appellant would be entitled to a higher rate of rebate
on super-tax under el. (ii) of the first proviso to paragraph D of Part II of
the first schedule to the Finance Act, 1956. The Income-tax Officer further
held that the 4 assessee's accumulated profits at the time of the reduction of
the Capital from Rs. 25 lakhs to Rs. 15 lakhs were Rs. 8,42,337. On appeal the
Appellate Assistant Commissioner accepted the said figure arrived at the
Income-tax Officer.
On further appeal, the Income-tax Appellate
Tribunal, for the reasons recorded by it in its order, reduced the figure under
the said head by a sum of Rs. 3.61,40.5.
It was contended on behalf of the assessee
that in as much as the certificate from the Registrar for the reduction of the
capital from Rs. 25 lakhs to Rs. 15 lakhs was obtained on November 4, 1954, the
distribution of the dividends should be deemed to have taken place during the
year 1953-54 and, therefore, the said dividends were not exigible to tax for
the assessment year. The Incometax Officer, the Appellate Assistant
Commissioner and the Tribunal concurrently rejected that plea and held that, as
the actual payment to the shareholders of the refund of the capital and the
debit in the accounts of the shareholders were effected in the accounting year,
the said dividends must be held to have been distributed in the accounting
year.
There is another sum of Rs. 11,687-3-0
received by the appellant as security deposit on account of empty 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 s. 2(6A)(d) of
the Indian Income-tax Act are ultra vires of the Central Legislature.
(2) Whether the accumulated profits amounting
to Rs. 4,69,244-13-0 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 indian Income-tax Act.
(3) Whether the amount of Rs. 11.687-3-0
received by the assessee us 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 of Companies under
Section 61(4) of the Indian Companies Act, 1913, or could be considered us
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.
5 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 s. 2(6A)(d) of
the Act is ultra vires the Central Legislature. Sub.section (6A) was inserted
in s. 2 of the Act by s. 2 of the Indian Income-tax (Amendment) Act,. 1939 (Act
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 company
possesses accumulated profits which arose after the end of the previous year
ending next before the 1st day of April, 1933, whether such accumulated profits
have been capitalised or not." The said Act VII of 1939 was passed by the
Central Legislature in exercise of its powers conferred under s. 100 of the Government
of India Act, 1935, read with entry 54 of List I of the. Seventh Schedule
thereof. Entry 54 reads:
"Tax on income other than agricultural
income." Mr. Chatterjee contends that while the said entry 54 enables the
appropriate Legislature to impose a tax on "income", the Legislature
by enlarging the definition of dividend so as to include the amount received by
a shareholder towards the share capital contributed by him, which cannot
possibly be income, seeks to tax a capital receipt, and, therefore, the said
clause is ultra vires the Central Legislature.
Mr. R. Ganapathy lyer, learned counsel for
the Revenue, contends that a legislative entry must receive the widest
connotation and should not be interpreted in any narrow or restricted sense,
and if so construed the said entry enables the Legislature to make a law to
prevent evasion of tax on income by devious methods and that the Legislature in
the instant case seeks to prevent the growing evil of tax evasion by companies
distributing profits under the guise of reduction of capital.
It is well settled 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 The United Provinces v. Atiqa Begum(1)
"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 (1) [1940] F.C.R. 110.
6 corresponding entry 82 of List 1 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 Income-tax, Delhi
and Ajmer (1) this Court maintained the constitutional validity of s. 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 shareholders of a
company in which the public were not substantially interested. In Balaji v.
Income-tax Officer, Special Investigation Circle (2) this Court ruled that s.
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
Income-tax, "D" Range, Bombay (3) sustained the validity of s.
2(6A)(e) of the Indian Income-tax Act, 1922, which included 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 private controlled
companies adopting the device of making advances or giving loans to their
shareholders with the object of evading payment of tax.
The question in the instant case, therefore,
is whether the constitutional validity of s. 2(6A)(d) of the Act can be
supported on the ground that it was enacted to prevent evasion of income-tax.
While an entry delineating a legislative field must be widely and liberally
construed, there must be a reasonable nexus between the item taxed and the
field so delineated. The said clause deals with the distribution by a company
on the reduction of its capital to the extent to which the company possesses
accumulated profits. Accumulated profits of a company may be utilised in the
following 3 ways: (1) for increasing the capital stocks; (2) for distributing
the same among the shareholders by way of dividends; and (3) for reducing the
capital.
Ordinarily a company reduces the capital when
there is loss or depreciation of assets; in that event there is no question of
distribution of profits to the shareholders but the shares are only devaluated.
But a company may, on the pretext of reducing its capital, utilise its
accumulated profits to pay back to the shareholders the whole or part of the
paid up amounts on the shares. A shareholder though in form gets back the whole
(1) [1961] 1 S.C.R. 482.
(2) [1962]2 S.C.R. 983. (3)[1965] 1 S.C.R.
909.
7 or a part of the capital contributed by
him, in effect he gets a share 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 lawful1y reduce the share capital
with the sanction of the Court, that there is no prohibition there under
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 ss. 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 s. 2(6A)(d) of the Act embodies
a law to prevent evasion of tax, it falls within the ken of entry 54 of List I
of Schedule Seven to Government of India Act, 1935.
The next question is whether the said
dividends were distributed in the year 1953-54, as the appellant contends, or
in the accounting year 1954-55, as the respondent argues.
The relevant sections of the Act in this
context are s.
2(6A)(c1) and s. 16(2). Section 2(6A)(d) has
been already extracted. The relevant part of l 6(2) reads:
"For the purposes of inclusion in the
total income of an assessee any dividend shall be deemed to be income of the
previous year in which it is paid, credited or di i b u t e d
..................................................
.
".
8 "Dividend", with which we are now
concerned, is not that which we ordinarily understand by that expression, but
dividend by definition. Under s. 2(6A)(d) of the Act it is one of the
ingredients of the definition that it shall have been distributed by a company
on reduction of the capital to the extent to which the company possesses
accumulated profits. Under s. 16(2) of the Act such a dividend shall be deemed
to be an income of the previous year in which it is paid, credited or
distributed. Unless such a distribution as is mentioned in cl. (d) of s. 2(6A)
of the Act had taken place, it would not be a dividend. If it was not so
distributed, s. 16(2) of the Act would not be attracted. To put it in other
words, if the accumulated profits were distributed, it would satisfy not only
the definition of "dividend" in cl. (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 s. 16(2) of the Act in J. Dalmia v. Commissioner
of I.T. Delhi(1). Shah, J., speaking for the Court observed:
"The expression "paid" in s.
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 reaffirmed the said principle in Mrs.
P.R. Saraiya v. Commissioner of Income-tax,
Bombay City 1, Bombay(2) 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 s. 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 s. 2(6A)(d) of the .Act becomes un workable in practice or at any rate
leads to unnecessary complications. We do not see any justification for this
comment.
9 Distribution is a culmination of a process.
Firstly, there will bea resolution by the General Body of a company for
reduction of capital by distribution of the accumulated profits amongst the
shareholders; secondly, the company will file an application in the Court for
an order confirming the reduction of capital; thirdly, after it is confirmed,
it will be registered by the Registrar of Joint Stock Companies; fourthly,
after the registration the company issues notices to the shareholders inviting
applications for refund of the share capital; and fifthly, on receiving the
applications the company will distribute the said profits either by crediting
the proportionate share capital to each of the shareholders in their
respective, accounts or by paying the said amounts in cash. Out of the said 5
steps, the first 4 are only necessary preliminary steps which entitle the
company to distribute the accumulated profits.
Credits or payments are related to the said
declaration;
that is to say, distribution is from and out
of the accumulated profits resolved to be distributed by the company. In this
view, the accumulated profits to be distributed are fixed by the resolution and
the figure does not change with the date of payment or credit. Indeed, a
similar process is to be followed in the case of declaration of ordinary
dividends; firstly, there will be a resolution by the General Body of the
company declaring the dividends;
secondly, thereafter 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 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 super-tax under
el. (ii) of the first proviso to paragraph D of Part II of the first schedule
to the Finance Act, 1956. 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, el. (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 cl. (ii)
of the first proviso by an amount computed at certain slab rates on the amount
of dividends distributed to the shareholders during the previous year. could
not be invoked. To put it in other words, the assessee claimed that as the dividends
were not distributed in the accounting year, there could not be any reduction
of the rebates under 10 cl. (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 computed 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. In this view, the claim of
reduction of rebate on super-tax provided by the first schedule to the Finance
Act, 1956, can be worked out without any confusion or complication. We,
therefore, hold that the dividends must be deemed to have been paid or
distributed in the year when it was actually, whether physically or
constructively, paid to the different shareholders, that is to say when the
amount was credited to the separate accounts of the shareholders or paid to
them.
What are the facts in the present case? The
High Court, on August 6, 1954, sanctioned the reduction of the capital from Rs.
25 lakhs to Rs. 15 lakhs. On November 4, 1954, the Registrar of Companies
issued the certificate under s. 61(4) of the Companies Act. On November 5,
1954, the Company issued notices to the shareholders inviting applications for
refunds. In the notice sent to the shareholders they were informed that the
share transfer register of the Company would remain dosed from November 16, to
November 30, 1954 (both days inclusive) and refund would be made to those
shareholders whose names stood on November 15, 1954, in the books of the
Company. After the applications were received, the amounts payable to the
shareholders were debited in the accounts and refunds were actually granted
during the accounting year, i.e., between December 1, 1954, and November 30,
1955. It is clear 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 s. 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 cl. (ii) of the first proviso
to paragraph D of part II of the first schedule to the Finance Act, 1956 and its
contention that the distribution of dividends on reduction of capital
contemplated by s. 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 cl. (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.
11 Now, el. (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 cl.
(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 el. (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 purpose
of paragraph D "the expression 'dividend' shall be deemed to include any
distribution included in the expression 'dividend' as defined in el. (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
distribution by a company on the reduction of its capital to the extent to
which the company possesses accumulated profits which arose after the end of
the previous year ending next before the lst day of April, 1933, whether such
accumulated profits have been capitalised or not." Obviously, s. 2(6A)(d)
contemplates a distribution on reduction of capital under s. 55(1)(c) of the
Indian Companies Act, 1913,under which subject to confirmation by the Court, a
limited company, if so authorised by its articles, may by special resolution
reduce the share capital in any way, and in particular may "either with or
without extinguishing or reducing liability on any of its shares, pay off any
paid-up capital which is in excess of the wants of the company", and may,
if and so far as is necessary, alter its memorandum by reducing the amount of
its share capital and of its shares accordingly. Section 56 of the Act enables
the company to apply to the Court for an order confirming the reduction, and
under s. 60 of the Act, the Court may make an order confirming the reduction on
such terms and conditions as it thinks fit.Upon compliance with certain
formalities, the Registrar of Joint Stock Companies is required under s. 61 of
the Act to register the order and a minute approved by the Court, and on such
registration, and not before, the resolution for reducing share capital as
confirmed by the order so registered shall take effect.
Under s. 62,the minute when registered shall
be deemed to be substituted for the corresponding part of the memorandum of the
company.
In the instant ease, the issued, subscribed
and paid-up capital 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 share-holders under s. 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 12 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 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 ending November 30, 1955.
The point in issue is when does the
distribution contemplated by s. 2(6A)(d) of the Income-tax Act. 1922 take
place? Section 2(6A)(d) speaks of dividend in the shape of any distribution by
a company amongst its shareholders on reduction on its capital to the extent of
accumulated profits possessed by it. We reject the contention that this
distribution takes place when the dividend is paid or credited to the
shareholders. The distribution contemplated s. 2(6A)(d) is a distribution by a
company "on the reduction of its capital". The word "on"
has no fixed meaning, but in the context of the sub-section, it must be given
the meaning "at the time of". as "on entering", "on
the 1st of the month". The distribution contemplated by the sub-section is
therefore, distribution at the time of the reduction of its capital, that is to
say, when the resolution for reduction of its capital under s. 55(1)(c) of the
Indian Companies Act, 1913 takes effect. As soon as the resolution for reduction
of capital and consequential refund of the surplus capital to the shareholders
takes effect, the capital stands reduced, the surplus ceases to be capital and
stands allotted to the shareholders, each shareholder obtains a vested right to
the refund of his share of the surplus, and a liability arises on the part of
the company to make the 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 s. 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.
13 A close scrutiny of s. 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 s. 2(6A)(d) are
forcibly brought out in the explanation to the corresponding s. 2(22) of the
Income-tax Act, 1961. We thus find firstly that the entire distribution of the
surplus amongst the shareholders takes place on a single date. Now if the
distribution is to have a certain 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 s. 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 s. 2(6A)(d)
must be fixed by reference to the accumulated profits on the date of the
reduction of capital and not by reference to the accumulated profits on the
successive dates of the payments. If the amount of the dividend were to be
fixed by reference to the accumulated profits on the several dates of the
payments, the result might well be that some payments would be dividends to
their full extent, some would be dividends to a limited extent and some would
not be dividends at all. Take a case where the accounting year of the company
ends on November 30, a resolution for the reduction of its capital to the
extent of Rs. 10 lakhs and for refund of Rs. 2 for each share of Rs. 5 takes
effect on June 30, 1954 and payments of rupees one, six and three lakhs are
made respectively on October 30, 1954, October 30, 1955 and October 30, 1956;
and assume that the extent of the accumulated profits is rupees ten lakhs on
June 30, 1954 and on October 30, 1954, rupees two Iakhs on October 30, 1955 and
rupees two lakhs on October 30, 1956. If the amount of the dividend were' to be
fixed by reference to the accumulated profits on the dates of the payments, the
result would be that the payment of rupees one lakh would be dividend to the
full extent, the payment of rupees six lakhs would be dividend to the extent of
one third and the payment of rupees three lakhs would not be dividend at all.
It is reasonable to think that the legislature did not contemplate such a
result. The character of the distribution is determined by the extent of the
accumulated profits on the date when the reduction /B(D)2SCI--3 14 of capital
becomes effective and is not altered by any subsequent increase or decrease of
the accumulated profits, and all subsequent payment of the capital so
distributed share alike the original character of the distribution.
It is argued that in the case of a normal
dividend, a comparable distribution 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 s. 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 s. 2(6A)(d)
in the shape of 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'
profits to the extent of which the distribution amounts to dividend does not
arise. This problem would have arisen, had s. 2(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 s. 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 s. 16(2) the
dividend was deemed to be the income of the shareholders when it was paid,
credited or distributed. An artificial dividend' under s. 2(6A)(d) is either
distributed or paid, whereas the normal dividend is either paid or credited,
and in the case of J. Dalmia v. Commissioner of Income-tax(1) and Padmavati R.
Suraiya v. Commissioner of Income-tax(2) it was held that the normal dividend
is neither paid nor credited by reason of the fact that the dividend is
declared. In this case, we are not concerned with the problem of construction
of s. 16(2) or the interpretation of the word "paid" or
"credited". The word "distributed" is not synonymous with
the word "paid" or "credited". The three words are used in
the Act in different senses. Moreover, the policy of the legislature on the
question of the taxability of the dividend in the hands of the shareholders has
varied from time to time.
Subsection (2) of s. 16 was repealed and in
its place, sub- s. (IA) of s. 12 was introduced by the Finance Act, 1959 with
effect from April 1, 1960, and the corresponding provision is to be found in s.
8 of the Income-tax Act, 1961. Under s. 12(IA) of the Income tax Act, 1922 and
s. 8 of the Income-tax Act the declaration of [1964] 53 I.T.R. 83, 90. (2)
[1965] 1 S.C.R.
307.
15 dividend is crucial even for purposes of
assessment of the shareholders. The legislature thus recognises now that the
distribution of the normal dividend takes place on the declaration of the
dividend.
In the instant case, the resolution for the
reduction of the capital of the company and the consequential refund of the
surplus capital to its shareholders took effect on November 4, 1954.
Consequently. the distribution of the dividend as defined by s. 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 n0
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 bookkeeping 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 an 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, Bombay(1).
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 profits 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 authorities rightly assumed that the distribution
and the ascertainment of the accumulated profits to the extent of which the
distribution is deemed to be dividend under s. 2(6A)(d) took place 16 during
the same accounting year, but they erred in holding that the accounting year
commencing on December 1, 1954 is the relevant year.
In our opinion, the High Court was in error
in holding that dividends under s. 2(6A)(d) were distributed during the
previous year corresponding to the assessment year, 1956-
57. We think that the dividends, if any,
under s. 2(6A)(d) were distributed in the previous year corresponding to the
assessment year 1955-56. and the fourth question should be answered
accordingly. The appeal is allowed in part to this extent. In view of the
divided success, we direct that the parties will pay and bear their own costs
in this Court and in the Court below.
ORDER BY COURT In accordance with the
majority Judgment, the appeal fails and is dismissed with costs.
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