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Petitioner: PUNJAB DISTILLING INDUSTRIES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, PUNJABHonorable Justice SUBBA RAON. C. Chatterjee,C. K. Daphtary
1965 P T D 793
1965 P T D 793
[Supreme Court India]
Present: K. Subba Rao, Raghubar Dayal, J. R. Mudholkar, R. S. Bachawat and V. Ramaswami, JJ
PUNJAB DISTILLING INDUSTRIES LTD.
Versus
COMMISSIONER OF INCOME-TAX, PUNJAB
Civil Appeal No. 414 of 1964, decided on 9th February 1965.
Dividend-Definition-Provision including any distribution on reduction of capital to the extent of accumulated profits-Validity- Super-tax-Rebate-Reduction on the basis of dividend distributed Resolution for reduction of capital in one year-Shareholders paid in subsequent year-Year in which dividend distributed-Meaning of "distribution" - Indian Income-tax Act, 1922, Ss. 2(6A)(d) & 16(2) - Government of India Act, 1935, S. 100, Sch. VII, List I, entry 54-Finance Act, 1956, Sch. 1, Part II, para. D, prov. 11, cl. (1)(b) - Constitution of India, Sch. VII, List I, entry 82-Indian Companies Act, 1913, Ss. 55(1)(c) & 61. (4).
Held, by the Full Court, (i) that section 2(6A)(d) of the Indian Income-tax Act, 1922, which provided that "dividend" included any distribution by a company on the reduction of its capital to the extent to which the company possessed accumulated profits, whether such accumulated profits had been capitalised or not, embodied a law to prevent evasion of tax and fell, within the ken of entry 54 of List I of Schedule VII to the Government of India Act, 1935: it was intra vires the Central Legislature. By enacting the provision the Legislature in reality taxed the profits in the hands of the shareholders received by them under the cloak of capital.
(ii) That the expression "income" in entry 54 of List I of Schedule VII to the Government of India Act, 1935, and the corresponding entry 82 of List I of Schedule VII to the Constitution of India had to be widely and liberally construed so as to enable the Legislature to provide by law for the prevention of evasion of income-tax. There had, however, to be a reasonable nexus between the item taxed and the legislative field delineated by the entry.
(iii) That there was 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.
(iv) That it was a well-settled rule of construction that entries in the legislative lists could not be read in a narrow or restricted sense: they should be construed most liberally and in their widest amplitude. 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.
United Provinces v. Atiqa Begum (1940) F C R 110 fol.
On December 16, 1953, the appellant-company passed a special resolution for the reduction of its share capital from Rs.25 lakhs to Rs. 15 lakhs, the High Court confirmed the resolution on August 6, 1954, and the Registrar of Companies issued the requisite certificate under section 61(4) of the Indian Companies Act, 1913, on. November 4, 1954. The company issued notices to its shareholders on November 5, 1954, inviting applications for the refund of the share capital so reduced. After receipt of the applications, appropriate debit entries were made in the accounts of the shareholders and the amounts were actually paid during the accounting year, December 1, 1954 to November 30, 1955, relevant to the assessment year 1956-57. In its assessment for that year, the Income-tax Officer held that dividend within the meaning of section 2(6A) (d) of the Income-tax Act, 1922, was distributed during the relevant accounting year, December 1, 1954 to November 30, 1955, and having ascertained the accumulated profits of the company, reduced 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. The company contended that the distribution should be deemed to have taken place during the earlier accounting year, December 1, 1953 to November 30, 1954.
Held, by Subba Rao, Mudholkar and Ramaswami, JJ. (Raghubar Dayal and Bachawat, JJ. dissenting), (i) that the expression "distribution" connoted something actual and not notional. It could be physical, it could also be constructive. One might 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. The expression "distribution" had to be given the same meaning which was given to the expression "credited or paid" in section 16 (2) of the Act. Dividend 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, i.e., when the amount was credited- to the separate accounts of the shareholders or paid to them. The distribution of the dividend within the meaning of section 2 (6A) (d) took place only during the accounting year, December 1, 1954 to November 30, 1955, relevant to the assessment year 1956-57.
J. Dalmia v. Commissioner of Income-tax (1964) 53 I T R 83 (S C) and Ramesh R. Saraiya v. Commissioner of Income-tax (1965) 55 I T R 699 (S C) applied.
(ii) That the date of the resolution for the reduction of capital, and not the several dates of payment to the shareholders, fixed the date for ascertaining the quantum of accumulated profits under section 2 (6A) (d).
Per Raghubar Dayal and Bachawat, JJ. (dissenting): (i) The distribution contemplated by section 2(6A)(d) of the Income-tax Act is distribution at the time of the reduction of the capital, viz., when the resolution for the reduction of the capital of the company under section 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 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.
(ii) The word "distribution" in the context of section 2(6A)(d) means allotment or apportionment of the surplus amongst the shareholders; the allotment take 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) distribution takes place on a single date and (b) the expression "accumulated profits" means profits accumulated up to the date of distribution. If the distribution is to have a single date, the date can only be the date when the reduction of capital becomes effective.
(iii) As the resolution in this case took effect on November 4, 1954, the distribution took place on that date, the assessee was bound to make entries in its books on that date, and, therefore, the distribution of dividends should be deemed to have taken place during the accounting year, December 1, 1953 to November 30, 1954.
Punjab Distilling Industries Ltd. v. Commissioner of Incometax (1963) 48 I T R 288 affirmed.
(Cases referred to.)
N. C. Chatterjee, Senior Advocate (R. V. Pillai with him) for Appellant.
C. K. Daphtary, Attorney-General for India (R. Ganapathy Iyer and R. N. Sachthey for R. H. Dhebar with him) for Respondent.
JUDGMENT
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 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 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-tax under clause (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 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 by 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. 3,61,405.
It was contended on behalf of the assessee that inasmuch 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 Income-tax 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 he 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 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. 4,69,244-13-0 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 Incometax 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 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 ultra vires the Central Legislature. Subsection (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 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 section 100 of the Government of India Act, 1935, read with entry 54 of List I of the Seventh Schedule thereof. Entry 54 read: "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 Iyer, 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 a 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 United Provinces v. Atiqa Begum ((1940) F C R 110), "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 ((1961) 1 S C R 482), this Court maintained the constitutional validity of section 23-A (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 percent. 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 ((1962) 2 S C R 983), 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 ((1965) 56 I T R 198 (S C)), sustained the validity of section 2 (6A) (e) of the 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 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 section 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 stock; (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 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 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 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 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, it falls within the ken of entry 54 of List I of Schedule VII to the 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 section 2 (6A) (d) and section 16 (2). Section 2 (6A) (d) has been already extracted. The relevant part of section 16 (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 distributed . . ."
"Dividend", with which we are now concerned, is not that which we ordinarily understand by that expression, but dividend by definition. Under section 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 section 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 clause (d) of section 2 (6A) of the Act had taken place, it would not be a dividend. If it was not so distributed, section 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 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 ((1964) 53 I T R 83, 90 (S C)). 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 reaffirmed the said principle in Mrs. P. R. Saraiya v. Commissioner of Income-tax ((1965) 55 I T R 699 (S C)) 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 will be a 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 bf capital; thirdly, after it is confirmed, it will be registered by the Registrar of Joint Stock Companies; fourthly, after the registration the company issue 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…
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