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

2. The assessee, a public limited company, was incorporated on May 23, 1945, under the Indian Companies Act, 1913, with a share capital of Rs. 50 lakhs. On December 15, 1947, at the instance of the appellant the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs. On December 16, 1953, the High Court sanctioned a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs. On November 4, 1954, the Registrar of Companies granted the requisite certificate under S. 61(4) of the Indian Companies Act. On November 5, 1964, the appellant issued notices to the shareholders inviting applications for the refund of share capital so reduced. On the receipt of the applications, appropriate debit entries were made in the accounts of the shareholders and the amounts were actually paid to them during the previous year, i.e., December 1, 1954 to November 30, 1955. Under S. 2(6A)(d) of the Act, dividend includes any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits whether such accumulated profits have been capitalised or not. In assessing the income of the appellant-company for the assessment year 1956-57, the Income-tax Officer held that the said dividends was distributed during the accounting year and on that finding he calculated the rebate on super-tax in terms of Cl. (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 Cl. (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 assessees 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 / -3. 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 be held to have been distributed in the accounting year4. 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 assessee5. The assessee and the Commissioner of Income-tax filed two applications before the Tribunal for referring questions of law arising out of the Tribunals order to the High Court. The Tribunal referred the following questions of law to the High Court for its opinion(1) Whether the provisions of S. 2(8A)(d) of the Indian Income-tax Act are ultra vires of the Central Legislature(2) Whether the accumulated profits amounting to Rs. 4,69,214-13-0 could be deemed to have been distributed on the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs within the meaning of Section 2(6A)(d) of the Indian Income-tax Act(3) whether the amount of Rs. 11,687-3-0 received by the assessee 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 1956-576. The High Court answered all the questions against the assessee, Hence the appeal.

Reasoning:
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