Case: Punjab Distilling Industries Ltd Vs. Commissioner Of Income-Tax, Punjab

declaration of a normal dividend may be made out of accumulated profits, and need not necessarily be made out of the profits of any particular year. Section 2(6A)(d) does not contain any definition of a normal dividend. In the case of a normal dividend, the question of ascertaining the accumulated profits to the extent of which the distribution amounts to dividend does not arise. This problem would have arisen, had S. 2(6A) defined normal dividend as any distribution by a company on the declaration of dividend to the extent to which the company possesses accumulated profits. On such a definition, the only possible interpretation would have been that the accumulated profits are ascertained and the distribution takes place on the date of the declaration of the dividend. 29. The argument based upon the decided cases under S.16(2) is misconceived. Section l6(2) dealt with the question when the dividend shall be deemed to be the income of the shareholders. By S. 16(2) the dividend was deemed to be the income of the shareholders when it was paid, credited or distributed. An artificial dividend under S.2(6A)(d) is either distributed or paid, whereas the normal dividend is either paid or credited, and, in the case of 1964-53 ITR (SC) 83 at p. 90 : (AIR 1964 SC 1866 at pp.1869-70, and Civil Appeals Nos. 704- 715 of 1963 dated 22-9-1964 : (AIR 1965 SC 1263 ) it was held that the normal dividend is neither paid nor credited by reason of the fact that the dividend is declared. In this case, we are not concerned with the problem of construction of S.16(2) or the interpretation of the word paid or credited. The word distributed is not synonymous with the word paid or credited. The three words are used in the Act in different senses. Moreover, the policy of the legislature on the question of the taxability of the dividend in the hands of the shareholders has varied from time to time. Sub-section (2) of S.16 was repealed and in its place, sub-section (1A) of S. 12 was introduced by the Finance Act, 1959 with effect from April 1, 1960, and the corresponding provision is to be found in S. 8 of the Income-tax Act, 1961. Under S. 12(lA) of the Income-tax Act, 1922 and S. 8 of the Income-tax Act, 1961 the declaration of dividend is crucial even for the purpose 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. 30. In the instant case, the resolution for the reduction of the capital of the company and the consequential refund of the surplus capital to its shareholders took effect on November 4, 1954. Consequently, the distribution of the dividend as defined by S. 2(6A)(d) took place on November 4, 1954, i.e. during the previous year corresponding to the assessment year 1955-56. It is true that during the accounting year ending November 30, 1954, the company did not pay any dividends, nor make any book entries with regard to reduction of capital or with regard to refund or payment of surplus capital. But the company incurred on November 4, 1954 the legal liability to, make the refunds and the distribution must be deemed have taken place on November 4, 1954, though no 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 book-keeping is not relevant, but, were it so, it is pertinent to remember that the accounts of the company were kept on the mercantile basis. That system of accounting brings into debit as expenditure the amount for which a legal liability has been incurred before it is actually disbursed. See Keshao Mills Ltd. v. Commissioner of Income-tax, Bombay, 1953 SCR 950 at p. 958 : (AIR 1953 SC 187 at p. 190). 31. In conclusion, we must point out that the revenue authorities should have, but in fact have not fixed the amount of the dividend by reference to the accumulated profits on November 4, 1954, when the resolution for reduction of capital became effective, or by reference to the accumulated profits brought forward on December 1, 1953 at the commencement of the accounting year during which the reduction of capital took effect. Instead, the revenue authorities took into account the accumulated profits on December 1, 1954, that is to say, the date of the commencement of the subsequent accounting year during which the dividends were paid. The amount of the accumulated profit as on December l, 1954 was fixed by the Income-tax Officer at Rs. 8,42,337/-, and was subsequently reduced by the Tribunal to Rs. 1,69,244-13-0. The revenue authorities rightly assumed that the distribution and the ascertainment of the accumulated profit to the extent of which the distribution is deemed to be dividend under S. 2(6A)(d) took place during the same accounting year, but they erred in holding that the accounting year commencing on December 1, 1954 is the relevant year. 32. In our opinion, the High Court was in error in holding that dividends under S. 2(6A)(d) were distributed during the previous year corresponding to the assessment year, 1956-57. We think that the dividends, if any, under S. 2(6A)(d) were distributed in the previous year corresponding to the assessment year 1955-56, and the fourth question should be answered accordingly. The appeal is allowed in part to this extent. In view of the divided success, we direct that the parties will pay and bear their own costs in this court and in the Court below. ORDER 33.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 is 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 treted as taxable income under the Income-tax ActThe 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 personsDistribution 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 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 declarationIf as we have held, the distribution was made during the year ending November 30, 1955, i.e., the accounting year when the amounts were paid, the Revenue would be entitled to reduce the rebate by the amount computed at the prescribed rates on the amount of dividends. Some complication may arise only if we accept the argument that the date of payment fixes the date for ascertaining the quantum of accumulated profits. But we have rejected that contention. In this view, the claim of reduction of rebate on super-tax provided by the first schedule to the Finance Act, 1956, can be worked out without any confusion or complication. We, therefore, hold that the 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, that is to say when the amount was credited to the separate accounts of the shareholders or paid to themThe High Court, on August 6, 1954, sanctioned the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs. On November 4, 1954, the Registrar of Companies issued the certificate under S. 61(4) of the Companies Act. On November 5, 1954, the Company issued notices to the shareholders inviting applications for refunds. In the notice sent to the shareholders they were informed that the share transfer register of the Company would remain closed 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 actualy granted during the accounting year 1954 i.e., between December 1, 1954, and November 30, 1955. It is clear from the said facts, that the amounts were distributed only during the accounting year, when the amounts were both debited and paid. We, therefore, agree with the High Court that the dividends were distributed to the shareholders during the accounting year, i.e. 1951-55.7. 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.10. 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.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.This Court again reaffirmed the said principle in Mrs. P. R. Saraiya v. Commissioner of Income-tax, Bombay City, 1, Bombay, Civil Appeals Nos. 704-715 of 1963 dated 22-9-1964: (AIR 1965 SC 1263  ) and held that where dividend was not credited to any separate account of the assessee so that he could, if he wished, draw it, it was not credited or paid within the meaning of S, 16(2) of the Act. The same meaning must be given to the word distribution.The only difference between the expression paid and the expression distribution is that the latter necessarily involves the idea of division between several persons which is the same as payment to several15. At this stage the anomaly that is alleged to flow from our view may conveniently be noticed. It is said that there will be different points of time for ascertaining the extent of the accumulated profits, with the result S. 2(6A)(d) of the Act becomes 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 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 ofIf as we have held, the distribution was made during the year ending November 30, 1955, i.e., the accounting year when the amounts were paid, the Revenue would be entitled to reduce the rebate by the amount computed at the prescribed rates on the amount of dividends. Some complication may arise only if we accept the argument that the date of payment fixes the date for ascertaining the quantum of accumulated profits. But we have rejected that contention. In this view, the claim of reduction of rebate on super-tax provided by the first schedule to the Finance Act, 1956, can be worked out without any confusion or complication. We, therefore, hold that the 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, that is to say when the amount was credited to the separate accounts of the shareholders or paid to