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Petitioner: PUNJAB DISTILLING INDUSTRIES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, PUNJABHonorable Justice TEK CHAND
1968 P T D 885
1968 P T D 885
[Chandigarh (India)]
Before Tek Chand, S. B. Capoor and P. C. Pandit, JJ
PUNJAB DISTILLING INDUSTRIES LTD.
Versus
COMMISSIONER OF INCOME‑TAX, PUNJAB
Income‑tax Reference No: 9 of 1959, decided on 21st February 1962.
Income‑tax Act (XI of 1922)------S. 2(6‑A)(d)‑Definition of "dividend"‑Provision including distribution on reduction of capital to the extent of accumulated profits‑Whether ultra vires Meanings of "income" and "dividend" Proper year for assessment Year of confirmation of reduction of capital by Registrar of Com panies or year of actual distribution of assets‑Government of India Act, 1935, Sch. 7, List I, Entry 54‑Indian Companies Act, 1913, S. 61(2) and (4).
Section 2 (6‑A)(d) of the Income‑tax Act, 1922, included within the definition of "dividend" any distribution' by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, and thus made such distributions liable to income‑tax. It was contended that under Entry 54 of the Federal Legislative List of the Government of India Act, 1935, the Central Legislature had power to make laws as to taxes only in respect of "income" and, as section 2(6‑A)(d) purported to impose a tax on capital, even though only to the extent of accumulated profits possessed by the company, it was ultra vires the Central Legislature and therefore void:
Held, that the real object and effect of section 2(6‑A)(d) was only to levy a tax on the distribution of accumulated profits of the company, since capital distributed in excess of the accumulated profits was expressly excluded from the definition. The provision was only intended to prevent the avoidance of tax on accumulated profits by distribution of such profits. under the guise of "capital reduction" and it was, therefore, within the ambit of Entry 54 of List I not only in form but in substance; and was not ulira vires the Central Legislature.
(Meanings of "income" and "dividend" discussed).
Where in the case of such a distribution, the certificate of reduction of capital was granted by the Registrar of Companies under section 61(4) of the Indian Companies Act, 1913. in the year 1954‑55 but the debits of refund were actually ,made in the accounts of the shareholders and refunds were granted, in 1955‑56:
Held, that the dividend must be deemed. to hate been distribut ed only during the accounting year 1955‑56, and was not liable to be assessed in the assessment year 1955‑56, but only in the assessment year 1956‑57, even if the accounts of the company were maintained on the mercantile system.
It is a well‑settled principle that entries in Legislative Lists are given a broad and comprehensive interpretation, the cardinal rule of construction being, that words should be read in their natural and grammatical meaning subject to the rider that in construing the words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude.
[Case‑law referred].
STATEMENT OF CASE
These two reference applications are consolidated. Reference Application No. 250 of 1958‑59 has been filed by the Commissioner of Income‑tax, Simla, While Reference Application No. 193 of 1958‑59 has been filed by the assessee. By these applications the assessee and the Commissioner of Income‑tax require the Tribunal to refer to the High Court certain questions of law which are said to arise out of the Tribunal's order in I. T. A. No. 9431 of 1957‑58. As in our opinion, certain questions of law do arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of case and refer it to the High Court of Judicature at Chandigarh under section 66(1) of the Indian Income‑tax Act.
2. The statement of the case relates to the assessment year 1956‑57, the account year ending on November 30, 1955.
3. The assessee is a public limited company and was incorporated on the 23rd May 1945. Originally the capital of the assessee company was Rs. 50 lakhs. On the 15th of December 1947, the company obtained the sanction of the High Court to reduce its capital to Rs. 25 lakhs and the capital was accordingly reduced to Rs. 25 lakhs on January 11, 1948, after obtaining the requisite certificate of the Registrar of Companies under section 61(4) of the. Indian Companies Act, 1913. At the time of the reduction of the capital from Rs. 50 lakhs to Rs. 25 lakhs the assessee had accumulated profits to the tune of Rs. 3,61,405. On May 10, 1954, the assessee again applied to the High Court for permission to reduce the share capital from Rs. 25 lakhs to Rs. 15 lakhs. The High Court. granted the necessary sanction on August 6, 1954, and the necessary certificate from the Registrar of Companies under section 61(4) of the Indian Companies Act was obtained on November 4, 1954. Sub sequently, notices to the shareholders inviting for refund of the share capital were issued and the necessary refunds were granted during the previous year between the dates December 1, 1954, and November 30, 1955.
4. The Income‑tax Officer making the assessment on the assessee 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 as detailed below
Rs. Special reserve 17,620 General reserve 7,44,708 Workmen's compensation reserve 22,950 Income‑tax reserve 57,059
8,42,337
The Income‑tax Officer also found that the assessee had actually distributed dividends to the tune of Rs. 1,06,250. The assessee was required by notice under section 23(3) of the Indian Income‑tax Act to explain why the distribution by the assessee on the reduction of its share capital to the extent to which the company possessed accumulated profits be not treated as distribution on account of dividends in accordance with the provision of section 2(6‑A)(d) of the Indian Income‑tax Act. The assessee contended that the provisions of section 2(6‑A)(d) were ultra vires the Central Legislature. It was also stated that the provisions of the second proviso to, clause (d) to Part II of the First Schedule of the Finance Act of 1956 were not applicable to the assessee‑company. It was further added that the entire amount stated by the Income‑tax Officer in the notice was not accumulated profits which could be deemed to be dividends under section 2(6‑A)(d) inasmuch as the amount included a .sum of Rs. 1,69,268 on account of capital gains which had to be excluded by virtue of the explanation to section 2 (6‑A)(d). It was also stated that the accumulated profits at the time of reduction of the capital from Rs. 50 lakhs to Rs. 25 lakhs were not available to the assessee and could not be deemed to have been distributed as dividends. It was also averred that the balance after deduction of, the capital gains did not relate to the year under consideration, viz., the assessment year 1956‑57, inasmuch as the distribution had occurred before the commencement of the accounting period. The Income‑tax Officer rejected these contentions and held that the entire amount of Rs. 8,42,337 was dividends deemed to have been distributed in accordance with the provisions of section 2(6‑A)(d) of the Indian Income‑tax Act. He, accordingly, subjected to tax a sum of Rs. 9,48,587 on account of distribution of dividends as shown below:
Rs. Dividends deemed to be distributed in accordance with the provisions of section 2(6‑A)(d) 8,42,337 Dividends distributed as per balance sheet. 1,06,250
9,48,587
A copy of the order of the Income‑tax Officer is part of the case and is Annexure "A".
5. The assessee then took up an appeal before the Appellate Assistant Commissioner and raised the same contentions as we're raised before the Income‑tax Officer. The Appellate Assistant Commissioner repelled those contentions and confirmed the order passed by the Income‑tax Officer. A copy of the order passed by the Appellate Assistant Commissioner is part of the case and is Annexure "B".
6. The assessee then came in appeal before the Appellate Tribunal and again raised the same contentions as were raised before the income‑tax authorities.
7. The Tribunal for reasons recorded by it in its order dated March 21, 1958, as rectified on August 6, 1958, held that the provisions of section 2(6‑A)(d) were ultra vires the Central Legislature.
8. The Tribunal, however, found that at the time of the reduction of the capital from its. 50 lakhs to Rs. 25 lakhs in 1948, the assessee had accumulated profits of Rs. 3,61,405 and those profits had been exhausted long before the capital was reduced a second time from Rs. 25 lakhs to Rs. 15 lakhs in 1954. The Tribunal accordingly reduced the amount of ‑the accumulated profits of Rs. 8,42,337 by a sum of Rs. 3,61,405.
9. In regard to the assessee's contention about the capital gains which could not be treated as accumulated profits, it was pointed out by the assessee that the capital gains amounting to Rs. 1,15,303 which were receipts of the assessee on account of security money for return of empty bottles were of a capital nature and not revenue receipts. The departmental representative's contention was that the receipts of the assessee on account of security for return of empty bottles were of a revenue nature. The attention of the Tribunal was drawn to the orders passed by the Tribunal for the years 1946‑47 and 1949‑50 in which the Tribunal had held that these receipts were of capital nature, though in another order for the years 1947‑48 and 1948‑49 the Tri bunal had held that the receipts. were of a revenue nature. Copies of the orders passed by the Tribunal for the assessment years 1946‑47 and 1949‑50 and for the years 1947‑48 and 1948‑49 are part of the case and are Annexures "C" and "D" respectively. The Tribunal held that, out of the sum of Rs. 1,15,303, capital gains to the tune of Rs. 65,616 had already been included in the profits of Rs. 3,61,405 which, as stated above, had been exhausted before the capital was reduced from Rs. 25 lakhs to Rs. 15 lakhs and the unexpended capital gains were only Rs. 11,687‑3‑0. The Tribunal further held that according to the provisions of the Explanation to section 2(6‑A) capital gains accruing or arising to the assessee before the 1st day of April 1946, or after the 31st day of March 1948, and before the 1st day of April 1956, are to be excluded from the accumulated profits which were to be consider ed as deemed to have been distributed as dividends under that section and, therefore, the capital gains of Rs. 11,687‑3‑0 were liable to be deducted from the amount of accumulated profits which were computed by the Income‑tax Officer at Rs. 8,42,337. The Tribunal accordingly reduced the quantum of the accumulat ed profits from Rs. 8,42,337 to (Rs. 8,42,337 minus 3,61,405 minus 11,687‑8‑0) Rs. 4,69,244‑13‑0.
10. In regard to the contention of the assessee that inas much as the certificate from the Registrar for reduction of capital from Rs. 25 lakhs to Rs. 15 lakhs was obtained on November 4, 1954, the distribution of the dividend could be deemed to have taken place and occurred in the accounting period of the immediately preceding assessment year and not in the assessment year under consideration, the Tribunal held that inasmuch as the actual payment to the shareholders of the refund of the capital and the debits in the accounts of the shareholders actually took place in the accounting period of the assessment year, the contention was pointless and the dividend which could be deemed to have been distributed could be considered in the assessment year under consideration.
11. Copies of the orders of the Tribunal are parts of the case and are Annexures "E" and "E‑1".
12. Section 2(6‑A)(d) is in the following terms:
" `Dividend' includes‑ . . . .
(d) any distribution .by a company on the reduction of its capital to the extent to which the company possesses accumulat ed profits which arose after the end of the previous year ending next before the 1st day of April 1933, whether such accumulat ed profits have been capitalised or not."
The Explanation to section 2(6‑A) is in the following terms:
"Explanation.‑The expression `accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April 1946, or after the 31st day of March 1948, and before the 1st day of April 1956. "
13. On these facts, we refer the following questions of law for the opinion of their Lordships:
"(1) Whether the provisions of section 2(6‑A)(d) of the Indian Income‑tax Act are ultra vires 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(6‑A)(d) of the Indian Income -tax Act ?
(3) Whether the amount of Rs. 11,687‑3‑0 received by assessee as security deposit on account of empty bottles could be considered as capital gains ?
(4) Whether the accumulated profits could be considered as dividends 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 dividends 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 and the refunds were actually granted to the shareholders in this accounting period of the assessment year 1956‑57 ?"
14. The statement of the case was placed before the parties. The minor suggestions made by the assessee have been accepted. The suggestion of the assessee that the balance‑sheets of the company for the periods ended November 30, 1954, and November 30, 1955 be made part of the case is accepted and these balance‑sheets are made part of the case and are Annexures "F" and "G" The circular notice issued by the assessee‑com pany to its shareholders on the 5th of November 1954, is also part of the case and is Annexure "H". The Commissioner of Income‑tax has no suggestions to make. The statement is finalized.
[The case came on for hearing before Tek Chand and Gosain JJ., who made the following order of reference to a Full Bench on March 15, 1961.]
Order of Reference to Full Bench
(March 15, 1961)
TEK CHAND, J.‑The following four questions of law have been referred to this Court :
"(1) Whether the provisions of section 2(6‑A)(d) of the Indian Income‑tax Act are ultra vires 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(6‑A)(a) of the Indian Income tax Act?
(3) Whether the amount of R. 1‑1,687‑3‑0. 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 dividends 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 dividends 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 and the refunds were actually granted to the shareholders during the accounting period of the assessment year 1956‑57.
The first question raises a matter involving the vires of the Indian Income‑tax Act and the third question also raises an important issue. The matter seems to be res integra and after having heard brief arguments from the parties' counsel we are of the view that it will be desirable that the matter should be placed for decision before a larger Bench. Let the papers be placed before the Honourable the Chief Justice for constituting a Full Bench.
K. L. GOSAIN, J.‑I agree.
[The case was heard by a Full Bench composed of Tek Chand, S. B. Capoor and P. C. Pandit, JJ, and the following judgment was delivered on February 21, 1962 :]
S. M. Sikri A.‑G. and B. R. Kohli for the Assessee
D. N. Awasthy and H. R. Mahajan for the Commissioner.
JUDGMENT
TEK CHAND, J:‑The following four questions of law have been referred to the Full Bench:
"(1) Whether the provisions of section 2(6‑A)(d) of the Indian Income‑tax Act are ultra vires 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(6‑A)(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 dividends deemed to have been distributed in the assessment year 1955‑56 in view of the certificate granted by the Registrar of Com panies under section 61(4) of the Indian Companies Act, 1913, or could be considered as dividends 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 and the refunds were actually granted to the shareholders during the accounting period of the assessment year 1956‑57 ?"
The assessee is the Punjab Distilling Industries Limited, Khasa, and was incorporated on 23rd‑ May 1945, with a share capital of Rs. 50 lakhs. On 15th December 1947, on a resolu tion having been passed, the High Court sanctioned the seduction of the capital of the company from Rs. 501akhs to Rs. 2~ lakhs and the capital was accordingly reduced. Again, on 16th Decem ber 1953, a resolution was passed by the company for a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs and the necessary sanction Was granted by the High Court on 6th August 1954, and on 4th November 1954, the Registrar of Joint Stock Companies issued a certificate as required by sec tion 61, subsection (4), of the Indian Companies Act, 1913. On 5th November 1954, the company issued notice to the sharehol ders inviting applications for the refund of the share capital so reduced and the necessary
funds were distributed. between 1st December 1954, and 30th November 1955. The assessment year in this case is 1956‑57 and the accounting year ended on 30th November 1955. All the shares of this company were fully paid.
According to the findings of the Income‑tax Officer, who made the assessment, the accumulated profits of the assessee com pany at the time when the capital was reduced to Rs. 15 lakhs were Rs. 8,42,337 the details of which were as under
Rs: Special reserve 17,620 General reserve 7,44,708 Workmen's compensation reserve 22,950 Income‑tax reserve 57,059 Total 8,42,337
The Income‑tax Officer also held that the assessee‑company had actually distributed dividends of Rs. 1.06,250. The Income tax Officer required the assessee by a notice under section 23(3) of the Income‑tax Act to explain why the distribution on the reduction of its share capital to the extent to which the company possessed accumulated 'profits be not treated. as distribution on account of dividend in accordance with the provisions of sec tion 2(6‑A)(d) of the Income‑tax Act. The relevant provisions of section (6‑A)(d) are as under:
"2. In this Act, unless there is anything repugnant in the subject or context : ......
(6‑A) 'dividend' includes‑ ......
(d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulat ed profits which arose after the end of the previous .year ending next before the 1st day of April 1933, whether such accumulat ed profits have been capitalised or not ; ......
Explanation.‑The expression `accumulated profits' wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April 1946, or after the 31st day of March 1948, and before the 1st day of April 1956."
The assessee, inter alia, contended that the above provisions were ultra vires the Central Legislature and, further, the entire amount mentioned in the notice was not "accumulated profits" which could be deemed to be dividend under section 2(6‑A)(d) inasmuch as the amount included a sum of Rs. 1,69, 268 on account of capital gains which had to be excluded by virtue of the Explanation to section 2(6‑A)(d). The assessee also maintained that the accumulated profits, when the capital was reduced from Rs. '50 lakhs to Rs. 25 lakhs were not made available to the assessee and the amount could not be deemed to have been distributed as dividend. It was also stated that the balance. after reduction of the capital, did not relate to the assessment year 1956‑57, which was under consideration, because the distribution had occurred before the commencement of the accounting period. These contentions of the assessee did not prevail with the Income‑tax Officer who held that the entire sum of Rs. 8,42,337 was dividend and deemed to have been distributed in accordance with section 2(6‑A)(d). He, therefore, assessed tax at Rs. 9,48,587 as shown below:
Rs. Dividends deemed to be distributed in accord ance with the provisions of section 2(6‑A)(d) 8,42,337 Dividends distributed as per balance‑sheet 1,06,250
Total 9,48,587
The assessee was unsuccessful in its appeal to the Appellate Assistant Commissioner. A further appeal was filed before the Income‑tax Tribunal, Delhi Bench, which was disposed of on 21st March, 1958, holding that section 2(6‑A)(d) was intra vires the Central Legislature. The Tribunal however, held that at the time when the capital was reduced from R s. 50 lakhs to Rs. 25 lakhs in 1948 the assessee had accumulated, by way of profits a sum of Rs. 3,61,405 and those profits had been exhausted long before the capital was reduced for the second time in 1954, that is, from Rs. 25 lakhs to Rs. 15 lakhs. According to this finding, the Tribunal reduced the amount of the accumulated profits of Rs. 8,42,337 to Rs. 480,932.
The assessee also raised a contention that the capital gains amounting to Rs. 1,15,303, which represented the assessee's receipts on account of the security money for the return of empty bottles, were of a capital nature and not revenue receipts, and the Tribunal held that out of this amount capital against to the extent of Rs. 65,616 had already been included in the profits Rs. 3,61,405 which had already been exhausted before the reduction of. the capital from Rs. 25 lakhs to Rs. 15 lakhs and the unexpended capital gains were only Rs. 11,687‑3‑0. The Tribunal's view was that Rs. 11,687‑3‑0 were liable to be deducted from the amount of accumulated profits. The Tribunal, consequently, reduced the accumulated profits from Rs. 8.42,337 to ‑Rs. 4,69,244‑13‑0. This figure was arrived at by subtracting the two amounts of Rs. 3,61,405 and Rs. 11,687‑3‑0 from Rs. 8.42.337. Lastly, it‑ was also contended before the Tribunal by the assessee that as the certificate' from the Registrar for reduction of capital from Rs. 25 lakhs to Rs. 15 lakhs was obtained on 4th Novem ber 1954, the distribution of the dividend could be deemed to have taken place in the accounting year ending 30th November 1954, preceding the assessment year in question. 1956‑57. The Tribunal expressed the view that as the actual payment to the shareholders on the refund of the capital (reduced). and the debits in the accounts of the shareholders had been effected in the accounting period of the assessment year. the tax liability in question could be rightly considered to have arisen in the assessment year under consideration. Copies of the orders of the Tribunal, the Appellate Assistant Commissioner and the Income‑tax Officer have been placed on the record of this case as also, of the balance‑sheets and of the Tribunal's order for the previous assessment years.
The questions of law under reference may now be considered ad seriatim. The first question is whether the provisions of section 2(6‑A)(d) of the Indian Income‑tax Act are ultra vires the Central Legislature. The argument raised by Mr. S. M. Sikri, assessee's counsel, is that the assessee has been taxed on the return of capital on reduction, which is not the income which would bear the incidence of income‑tax. He has drawn our attention to entry No. 54 in the Federal Legislative List I of the Seventh Schedule of the Government of India Act, 1935. which refers to "taxes on income other than agricultural income". In the same List, there is also an entry No. 55 mentioning "taxes on the capital value of the assets exclusive of agricultural land, of individuals and companies, taxes on the capital of companies". Our attention has also been drawn to an omission in the above List of words which now…
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