ivil Appeal No 414 of 1965
Appeal from the judgment and order dated February 21 1962 of the Punjab High Court in IT Reference No 9 of 1959
NC Chatterjee and RV Pillai for the appellant
CK Daphtary Attorney General R Ganapathy lyer RN Sachthey for RH 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 section 26Ad 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 section 614 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 ie December 1 1954 to November 30 1955
Under section 26Ad 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
ib 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
ie 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 842337
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 361405
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 11687 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 26Ad of the Indian Income tax Act are ultra vires of the Central Legislature
2 Whether the accumulated profits amounting to Rs 469244 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 26Ad of the indian Income tax Act
3 Whether the amount of Rs 11687 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 614 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 NC 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 26Ad 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 Act VII of 1939
Section 26Ad 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 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 CJ in The United Provinces vs Atiqa Begum1 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 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 vs Commissioner Income tax Delhi and Ajmer 1 this Court maintained the constitutional validity of section 23A1 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 vs Income tax Officer Special Investigation Circle 2 this Court ruled that section 163ai 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 vs
KK Sen Appellate Assistant Commissioner Income tax D Range Bombay 3 sustained the validity of section 26Ae 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 section 26Ad 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  2 19622 SCR 983
31965 1 SCR 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 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 the minority and the creditors do not suffer
It may not also be concerned with the motive of the general body in resolving to reduce the capital but the Income tax law is concerned with tax evasion
Tax can be evaded by breaking the law or avoided in terms of the law
When there is a factual avoidance of tax in terms of law the Legislature steps in to amend the Income tax law so that it can catch such an income within the net of taxation
There is therefore no inconsistency between a receipt being a capital one under the Company law and by fiction being treated as taxable income under the Income tax Act
Therefore as section 26Ad 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 section 26Ac1 and section 162
Section 26Ad has been already extracted
The relevant part of l 62 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 section 26Ad 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 162 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 section 26A of the Act had taken place it would not be a dividend
If it was not so distributed section 162 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 section 162 of the Act in J Dalmia vs Commissioner of IT Delhi1
Shah J speaking for the Court observed The expression paid in section 162 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 162 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 PR Saraiya vs Commissioner of Income tax Bombay City 1 Bombay2 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 162 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 bedifferent points of time for ascertaining the extent of the accumu lated profits
With the result section 26Ad 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
ib 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 dividents were not distributed in the accounting year there could not be any reduction of the rebates under 10 cl
ib of the said proviso
If as we have held the distribution was made during the year ending November 30 1955 ie 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 section 614 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 ie 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 ie 1954 55
In the result the appeal fails and is dismissed with costs
Bachawat J
For the reasons given by brother Subba Rao J we agree that section 26Ad 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 section 26Ad 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
ib 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
ib 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 26Ad 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 section 26Ad contemplates a distribution on reduction of capital under section 551c of the Indian Companies Act 1913under 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 section 60 of the Act the Court may make an order confirmingthe reduction on such terms and conditions as it thinks fit
Upon compliance with certain formalities the Registrar of Joint Stock Companies is required under section 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 section 62the 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 section 551c of the Indian Companies Act 1913On 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 1954the 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 section 26Ad of the Income tax Act
1922 take place Section 26Ad 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 section 26Ad 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 section 551c 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 section 26Ad 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 section 26Ad reveals that a the distribution takes place on a single date and b the expression accumulated profits means profits accumulated up to the date of the distribution
These two basic ideas which are implicit in section 26Ad are forcibly brought out in the explanation to the corresponding section 222 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 section 26Ad
We find secondly that the accumulated profits are to be ascertained on the date of the distribution
But we find independently for reasons mentioned hereafter
that the accumulated profits must be ascertained on the date of the reduction of capital
Thus the two events namely the distribution and the reduction of capital must synchronise and the accumulated profits must also be ascertained at the same point of time
The synchronisation is also obvious on a plain reading of the abridged text any distribution on the reduction of capital to the extent of accumulated profits
The artificial dividend under section 26Ad 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 BD2SCI 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 section 162 show that the distribution takes place on payment and not on the declaration of a dividend
We think this comparison of the normal dividend with the artificial dividend in section 26Ad 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 26Ad 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 section 26A defined normal dividend as any distribution by a company on the declaration of dividend to the extent to which the company possesses accumulated profits
On such a definition the only possible interpretation would have been that the accumulated profits are ascertained and the distribution takes place on the date of the declaration of the dividend
The argument based upon the decided cases under section 162 is misconceived
Section 162 dealt with the question when the dividend shall be deemed to be the income of the shareholders
By section 162 the dividend was deemed to be the income of the shareholders when it was paid credited or distributed
An artificial dividend  under section 26Ad is either distributed or paid whereas the normal dividend is either paid or credited and in the case of J Dalmia vs Commissioner of Income tax1 and Padmavati R Suraiya vs Commissioner of Income tax2 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 section 162 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 section 16 was repealed and in its place sub section IA of section 12 was introduced by the Finance Act 1959 with effect from April 1 1960 and the corresponding provision is to be found in section 8 of the Income tax Act 1961
Under section 12IA of the Incometax Act 1922 and section 8 of the Income tax Act the declaration of  90
2 1965 1 SCR 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 section 26Ad took place on November 4
1954 ie 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 vs Commissioner of Income tax Bombay1
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 842337 and was subsequently reduced by the Tribunal to Rs 469244 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 section 26Ad 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 section 26Ad were distributed during the previous year corresponding to the assessment year 1956 57
We think that the dividends if any under section 26Ad 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


Summary:
The appellant company reduced its capital and the reduction was confirmed by the High Court
On November 4  1954 ie during the course of the appellant s accounting year ending November 30 1954 the Registrar of Companies issued the requisite certificate under section 614 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 section 26Ad 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
ib 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 section 26Ad of the Indian Income tax Act 1922 was therefore ultra vires
2 The certificate of the Registrar under section 614 of the Indian Companies Act was issued on November 4 1954 and therefore the distribution  under section 26Ad 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 vs Atiqa Begum  Sardar Baldev Singh vs Commissioner of Income tax Delhi and Ajmer   Balaji vs Income tax Officer Special Investigation Circle  and Navnittal C Javeri vs KK Sen Appellate Assistant Commissioner of Income tax D  Range Bombay   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 26Ad 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 section 162 distribution  signifies the discharge of the company s liability and making the dividend available to the members entitled thereto
8D F G J Dalmia vs Commissioner of IT Delhi and Mrs PR Saraiya vs Commissioner of Income tax Bombay City 1 Bombay   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 section 26Ad must be deemed to have been distributed in the said year
The relevant assessment year therefore was 1956 5710F Per Raghubar Dayal and Bachawat JJ
The word distributed  in section 26Ad does not mean paid  or credited 
Cases under section 162 are not relevant to the issue
14G H The distribution  contemplated by section 26Ad 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 ie 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 section 26A 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 section 26Ad took place on that date ie during the previous year corresponding to the assessment year 1955 56