# PUNJAB DISTILLING INDUSTRIES LID v. COMMISSIONER OF INCOME-TAX, PUNJAB

- **Citation:** [1965] 3 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1965-02-09
- **Case number:** Civil Appeal No. 414 of 1965
- **Bench:** K. Subba Rao, F..Aghubar Dayal, J. R. Mudholkar, R. S. Bachawat, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/punjab-distilling-industries-lid-v-commissioner-of-income-tax-punjab-3396
- **Pages:** 16

## Headnote

India;, Income··t"x Act, 1022 (11 0£ 1922), s. 2(A) (d)--Distribut:on
on reduction of company's cap'tal to the extent oJ accnmulated profits treated as 'dividend'-Si:cli dividend whether 'income' under
C Entry 54, List I, Government of India Act, 1935-Section whether
ultra vires.
D
F
a
R
'Distribution'-Meaning of-Whether synonymous with 'paid' or
'credited' in s. 16(2) Gf the Income-tax Act-Notional distribution
whether takes place on issue of certificate under s. 61 ( 4) of the Indian
Companies Act, 1913.
'
The appellant company reduced its capital and the reduction """
confirmed by the High Court. On November ~. 1954, i.e. during the
course of the appellant's accounting year eneling November 30, 1954,
the Registcar of Companies issued the requisite certificate under
s. 61 ( 4) of the Indian Companies Act. The s~rplus share capital
cansequent on reduction was, however, not refunded to the shatilholders 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 s. 2(6A) (d) of the Indian Income-tax Act, 1922. He further held
that the distribution took place in the accounting year ending
Novemter 30, 1955, relevant for the assessment year 1956-57. On
these findings he calculated the rebate on super-tax in the terms of
cl. (i)(b) 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 Suprernen Court by certificate.
It was contended on l:ehalf 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
s. 2(6A)(d) of the Indil!n Income-tax Act, 1922 v;'lls therefore, ultra
vires. (2) The certificate of the Registrar under s. 61 ( 4) of the Indian
Companies Act was issued on November 4, 1954 and therefore the
'distribution' under s. 2(6A)(d) took place in the previous year relevant to the assessment year 1955-56.
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 l
s
SUPREME
COURT
REPORTS
[1965] 3 s.c.:a.
United Provinces v. Atiqa Begum, P9401 F.C.R.
110, Sardar
Baldev Singk v. Commissioner ot Income-tax, Delhi and Aimer,
[1961] 1 S. C.R. 482, Ba!aji v. Income-tax Officer Special Investigation
Circle, [1962] 2 S.C.R. 983 and Navnitlal C. Javeri v. K. K.. Sen,
Appellate Assistant Commissioner of Income-tax 'D' Ranae, Bombay,
[196.5] 1 S.C.R. 909, referred to.
A company may on the pretext of reducing its capital, utilise
its accumulated profits to pay eack 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 2(6A)(d) embodies a
law to prevent such evasion and hence it ialls within the ken of
entry 54 of List I of Schedule Seven to the Government ot India
Act, 1935. r6H; 7A, Gl
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. r7F-Gl
Per Subba Rao. Mudholkar and Ramaswami, JJ. The expression
'distribution' connotes so1nething actual and
not
notional.
Like
'paid' or 'credited' in s. 16(2), distribution' signifies 'the discharge of
the company's liability and making the divid~nd availa

## Text

_Characters 0–39,961 of 46,778. This is a partial read: ask again with offset=39961 for what follows._

)
B
PUNJAB DISTILLING INDUSTRIES LID.
v.
COMMISSIONER OF INCOME-TAX, PUNJAB
February 9, 1965
[K. SUBBA RAO, F..AGHUBAR DAYAL, J. R. MUDHOLKAR,
R. S. BACHAWAT AND V. RAMASWAMI, JJ.]
India;, Income··t"x Act, 1022 (11 0£ 1922), s. 2(A) (d)--Distribut:on
on reduction of company's cap'tal to the extent oJ accnmulated profits treated as 'dividend'-Si:cli dividend whether 'income' under
C Entry 54, List I, Government of India Act, 1935-Section whether
ultra vires.
D
F
a
R
'Distribution'-Meaning of-Whether synonymous with 'paid' or
'credited' in s. 16(2) Gf the Income-tax Act-Notional distribution
whether takes place on issue of certificate under s. 61 ( 4) of the Indian
Companies Act, 1913.
'
The appellant company reduced its capital and the reduction """
confirmed by the High Court. On November ~. 1954, i.e. during the
course of the appellant's accounting year eneling November 30, 1954,
the Registcar of Companies issued the requisite certificate under
s. 61 ( 4) of the Indian Companies Act. The s~rplus share capital
cansequent on reduction was, however, not refunded to the shatilholders 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 s. 2(6A) (d) of the Indian Income-tax Act, 1922. He further held
that the distribution took place in the accounting year ending
Novemter 30, 1955, relevant for the assessment year 1956-57. On
these findings he calculated the rebate on super-tax in the terms of
cl. (i)(b) 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 Suprernen Court by certificate.
It was contended on l:ehalf 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
s. 2(6A)(d) of the Indil!n Income-tax Act, 1922 v;'lls therefore, ultra
vires. (2) The certificate of the Registrar under s. 61 ( 4) of the Indian
Companies Act was issued on November 4, 1954 and therefore the
'distribution' under s. 2(6A)(d) took place in the previous year relevant to the assessment year 1955-56.
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 l
s
SUPREME
COURT
REPORTS
[1965] 3 s.c.:a.
United Provinces v. Atiqa Begum, P9401 F.C.R.
110, Sardar
Baldev Singk v. Commissioner ot Income-tax, Delhi and Aimer,
[1961] 1 S. C.R. 482, Ba!aji v. Income-tax Officer Special Investigation
Circle, [1962] 2 S.C.R. 983 and Navnitlal C. Javeri v. K. K.. Sen,
Appellate Assistant Commissioner of Income-tax 'D' Ranae, Bombay,
[196.5] 1 S.C.R. 909, referred to.
A company may on the pretext of reducing its capital, utilise
its accumulated profits to pay eack 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 2(6A)(d) embodies a
law to prevent such evasion and hence it ialls within the ken of
entry 54 of List I of Schedule Seven to the Government ot India
Act, 1935. r6H; 7A, Gl
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. r7F-Gl
Per Subba Rao. Mudholkar and Ramaswami, JJ. The expression
'distribution' connotes so1nething actual and
not
notional.
Like
'paid' or 'credited' in s. 16(2), distribution' signifies 'the discharge of
the company's liability and making the divid~nd available to the
members entitled thereto. raD, F, G]
J. Dalmia v. Commissioner of I.T. Delhi, (1964) 53 I.TR 83 and
Mrs. P. R. Saraiya v. Commissioner of Income-tax, Bombay City I,
Bombay, [1965] 1 S.C.R. 307, relied on.
Distribution can 1:e physical, it can be constructive.
One may
distribute· assets between diffecent 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 omount due to him. raD]
Distribution in the above manner may take place partly in one
A
B
c
D
E
year and partly in another. But the amount of accumulated profits
'-"
is fixed by the resolution of the company reducing its capital, and
'l!
the figure does not change with the date of payment or credit. r9D,
El
In the pcesent case the payments and credits were actually given
during the accounting year ending November 30, 1955. The dividend
under s. 2(6A)(d) must be deemed to hav.e been distributed in the
said year. The relevant assessment year therefore was
1956-57.
[lOFl
Per Raghubar Dayal and Bachawat, JJ.
The word 'distributed',
in s. 2(6A)(d) does not mean 'paid' or 'credited'. Cases under s. 16(2)
are not relevant to the issue. r14G-H]
The 'distribution' contemplated by s. 2(6A)(d) is distribution at
the time of reduction of capital, that is to sav, when the resolution
of the company reducing the c'apital takes effect. It means allotment
or app01iionment of the surplus among the shareholders; this allotment takes place and each shareholder gets a vested right to hi•
port10n of the surplus as soon as the capital stands reduced. [12F-H]
While ·the distritution as above takes place on a single date i.e.
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 subsequer,itly. and on different dates. The successive payments cannot be 'd1stnbut10n' contemplated bys. 2(6A) (d). ri3A-Cl
G
B
A
B
Pl"NJAB DISTILLERIES v. c. I. T. (Subba Rao, J.)
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 s. 2(6A)(d) took place
on that date i.e. during the previous year corresponding to th•
assessment year 1955-56. [15Bl
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 414 of
1965.
Appeal from the judgment and order dated February 21, 1962,
of the Punjab High Court in I.T. Reference No. 9 of 1959.
N. C. Chatterjee and R. V. Pillai, for the appellant.
C
C. K. Daphtary, Attorney-General, R. Ganapathy Iyer, R. N.
Sachthcy for R. Ii. Dhebar, for the respondent.
D
E
F
The Judgment of SUBBA RAo, MUDHOLKAR and RM!ASWAMI
JJ. was delivered by SuBBA RAO, J. The dissenting Opinion of
DAYAL and BACHAWAT JJ. was delivered by BACIIA\VAT J.
Subba Rao, J.
This appeal by certificate rab~s the main
question whether s. 2(6A)(d) of the Indian Income-tax Acl, 1922,
hereinafter called the Act, is ultra vire! the Central Legislature.
The ass;;ssee, 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 o( the capital of the company from Rs. 50 lakhs !cJ Rs. 25
iakhs. On December 16, 1953, the High Court sanctioned a further reduction of the share capital from Rs. 25 lakhs to Rs. 15
Jakhs. 0;1 November 4, 1954, the Registrar of Companies granted
the requisite certificate under s. 61(4) of the Indian Companies Act.
On November ), 1954, the appellant issued notices to the shareholders inviting applications for the refund of share capital so
reduced.
On the receipt of the applications, appropriate debit
entries were made in the accounts of the shareholders and the
amounts were actually paid to' them during the previous year, i.e.,
December I, 1954, to November 30, 1955. Under s. 2(6A)(d) of
a 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
H 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. ff the
dividends were distributed during the accounting year. i.e.,
December !, 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 TI of the first schedule to the
Finance Act, 1956. The Income-tax Officer further helcl that the
·. ·!.
·SUPREME
COU,RT
REPORTS
[1965] 3 S.C.R,
assessee's accumulated profits at the time of the reduction of the
A.
capital from °]{s. 25 lakhs to Rs. 15 lakhs were Rs. 8,42,337. 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. 3.61,40S.
B
It was Contended on behalf of the assessee that in as much
as the certifieate from the Registrar for the reduction of the capital
from Rs. 25 !akhs to Rs. 15 lakhs was obtained on Novrmber 4.
1954, the distribution of the dividends should be deemed to have
taken place du~ing the year 1953-54 and, therefore, the said div1C
dends were notexigible to tax for the assessment year. The Incomctax Ofli~er. the Appellate Assistant Commissioner and the Tribunal concurrently rejecie::I that plea and held that, as the vctual
paymerrt to the shareholders of the refund of the capit1 l and th~
debit in 'ti1e accounts of the shareholders were effected in the
accounting year, the said dividends must be held to have been
D
distributed in the accounting year.
There is another sum of Rs. 11,687-3-0 received by the appellant as security deposit on account of empty bottles. A quesfr:n
was raised whether the said amount could be considered as capita!
gains and, therefore, should be excluded from the accumukted
proflts.
The Appellate Tribunal held in favour of the assessee
The assesse.; and the Commissioner of Income-tax filed two
applications before the Tribunal for, referring. ques'.ions of !aw
arising out ef the Tribunal's order to the High Court. The Tribunal
referred the fallowing questions of law to the High Court for its
opinion.
(!) Whether the provisions of s. 2(6A)(d) of the Indian
Income-tax Act are ultra vires of the Central Legislature:.
(2) Whether the accumulated profits amounting to
Rs. 4,69,244-13-0 could be deemed to have been distributed on the reduction of the capital from Rs. 25
lakhs to Rs. IS 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 1956-57.
E
B
'
'
A
B
c
D
PUNJAD DISTILLERIES v. o. I. T. (Subba Rao, J.)
I>
The High Court answered all the questions against the assessee. Hence the appeal.
Mr. N. C. Chatterjee, learned counsel for the assessee, did
not contest the correctness of the answer given by the High Court
in regard to the third question and, therefore, nothing further
need be said about it.
The first question is whether s. 2(6A)(d) of the Act is ultra
vires the Central Legislature.
Sub-section (6A) was inserted in s. 2
of the Act by s. 2 of the Indian Income-tax (Amendment) Act,
1939 (Act VII of 1939). Section 2(6A)(d) of the Act reads:
" 'Dividend' includes any distribution by a company on
the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the
end of the previous year ending next before the !st 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 s. 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
E the appropriate Legislature to impose a tax on "income'', the L:-
gislature by enlarging the definition of dividend so as to include the
amount received by a shareholder towards the share c~pital c8ntributed by him, which capnot possibly be income, seeks t:i tax a
capital receipt, and, therefore, the said clause is ultra
vires the
F Central Legislature.
Mr. R. Ganapathy Iyer, learned counsel for the Revenue,
contends that a legislative entry must receive the widest connotation and should not be interpreted in any narrow or restricted
sense, and if so construed the said entry enables the Lligislature
to make a law to prevent evasion of tax on income by devious
o 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.
R
In the words of Gwyer, C. J., in The· United Provinces v. Atiqa
Begum(') "each general word should be held to extend to all ancillary or subsidiary matters v:h!;h c:an fairly. and reasonably b.e
said to be comprehended by 1t. This Court m 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
(') [1940) F.C.R. l!C.
SUPREME
COURT
REPORTS
(1965) 3 S.C.R. •
corresponding entry 82 of List 1 of the Seventh Schedule to the A
Constitution o~ India, shall be widely and liberally construed so
as to cmible a Legislature to provide by law for the prevention
of evas10n of rncome-tax. In Sardar Baldev Singh v. Commissioner
of Income-tax, Delhi and Ajmer (') this Court maintained the constitutional validity of s. 23A(1) of the Income-tax Act, which empowered the Income-tax Officer to impose super-tax in a case B
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 sectic,m was to prevent avoidance of
super-tax by shareholders of a company in which the public were
not substantially interested. In Balaji v.
Income-tax Officer,
, ,
Special Investigation Circle (') this Co~rt ruled that s.
16(3)(a)(i) c
and (ii) of the Income-tax Act, which enabled the Income-tax
Officer in computing :he total income of a person to include the
share of the income cf his wife and minor sons therein, was constitutionally valid for the reason that it was intended to prevent eva5ion 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 D
Navnitial C. Javeri v. K. K. Sen, Appellate Assistant Commissioner
of Income-tax, "D" Range, Boinbay (") sustained the validity of
s. 2(6A)(e) of the Indian Income-tax Act, 1922, which included
in the definition of "dividend", inter alia, payment made by the
company by way of advance or loan to a shareholder to the extent
to which the company possessed accumulated profits on the E
groun:l 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 s. 2(6A)(d) of the Act can be supported F
on the ground that it was enacted to prevent evasion of income-tax.
While an entry delineating a legislative field must be wiqely 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.
G
Accumulated profits of a company may be utilised in the following 3 ways: (]) 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 H
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 for.m gets back the whole
(1) [1961] 1 R.C.Jl. 4S2.
('2} [I \JG2] 2 .S.C.R. 98'\.
e) fl tH~5] I S.C. R. PO fl.
Pl'KJAB DISTILLERIES v. c. r. T. (Subba RaJ, J.)
7
A 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
B 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
c
the cloak bf capital.
Learned counsel for the
appellant contends · that under
the Companies Act a company can
lawfull~ reduce the share
capital with the sanction of the Court, that there
is ."no
prohibition thereunder against such
a reduction being made
D 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 ss. 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
E
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 Jaw is concerned with tax evasion. Tax can be
evaded by breaking the Jaw, or avoided in terms of the law. When
F there is a factual avoidance bf ta)I: in tenns 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.
6
Therefore, as s. 2(6A)(d) of the Act embodies a law to prevent
evasion of tax, it falls within the ken of entry 54 of List I of
Schedule 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
1i accounting year 1954-55, as the respondent argues. The relevant
sections of the Act in this context are s. 2(6A)(d) and s.
16(2).
Section 2(6A)(d) has been already extracted. The relevant part of
s. 16(2) reads:
"For the purposes of inclusion in the total income of
an assessee any dividend shall be deemed to be income
of the previous year in which it is paid, credited or distributed ................................................... ".
8
SUPREME
COURT
REPORTS
(1965] 3 S.C.R.
"Dividend'', ~ith which we are now concerned, is not that which
A
we. ordinarily understand by that expression, but dividend by defimt10n. Under s. 2(6AJ(tl) of the Act it is one of the ingredients
of the de~nition that it .shall have been distributed by a company
on reduct10n of the capital to the extent to which the company
possesses accumulated profits. .Under s. 16(2) of the Act such a
dividend shall be deemed to be an income of the previous year in
B
which it is paid, credited or distributed. Unless such a distribution as is mentioned in cl. (d) of s. 2(6A) of the Act had taken
place, it would not be. a dividend. If it was not so distributed,
s. 16(2) of the Act wculd not be attracted. To put it in other
words, if the accunrnlsted profit1 were distributed, it would satisfy
not only the defir,ition of "dividend" in cl. (d) but also would
fix the yc1r in wh'ch it would be deeme.d to be income.
What
then is the rn~aning of the expression "d!stribut~on"? The_ dict;onary meaning o( the e:-:pressio:1 "distribution" is "to give each
a sbne, to give to several pers:ms". The expression "distribution"
connotes something actual and not notional. It can be physical;
c
it can also be constructive.
One may distribute amounts between
D
different shareholders either by crediting the amount due to each
one of them in their respective accounts or by actually paying to
e~ch 0ne of them the amount due to him.
This Court had to
ccnstrne the scope of the word "paid" in s. 16(2) of the Act in
J. Da!mia v. Commissioner of l.T., Delhi(').
Shah, J., speaking
for the Court observed:
"The expression "paid" in s. 16(2), it is true, does not
contemplate actual receipt of the dividend by the member.
In general, dividend may be said to be paid within the
meaning of section 16(2) when the company discharges its
liability and makes the amount of dividend unconditionally available to the member entitled thereto."
E
F
This Court again reaffirmed the said principle in Mrs. P. R.
Saraiya v. Commissioner of Incom·e-tax, Bombay City I, Bombay(')
and held that where dividend was not credited to any S(!parate
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".
G
The only differe:ice 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
B
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
~10t see any justificatiqn for this comment.
(') [19<14] 53 I.1'.R. 8'.l, 90.
(1) [1965] I S.C.R. ~07.
..
'
PUNJAB DISTILLERIES v. c. I. T. (Subba Rao, J.)
9
A
Distribut!on is a culmination of a process. Firstly, there will be
a resolut10n 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. f?r an order ~on~rming the reduction of capital; thirdly,
after 1t is confirmed, It will be registered by the Registrar of Joint
B
~tock Co~pames; fourthly, after the registration the company
issues no!ices 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
respect:ve accounts or by paying the said amounts in cash. Out of
0
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 distributea are fixed by the resolution and the figure
D
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
E
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
F
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
El
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 Company based its claim on the contention that ~he distribution. of
dividends on reductibn of capital took place durmg the year endmg
November 30, 1954, and not during the year ending November 30,
1955, and, therefore, cl. (i)(b) of the second proviso to paragraph
H
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 dividends were not distributed in the accounting year, there could not be any reduction of the rebates under
10
SUPRE~IE
COURT
HBPORTS
(1965) 3 8.C.R.
cl. (i)(b) of the said proviso.
If; as we have held, the distribution A
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 cf rebate on super-tax provided by the first schedule to
the Finance Act, 1956, can be worked out without any confusion
B
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 c
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 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,
D
to November 30, 1954 (both days inclusive) and refund would be
made to those shareholders whose names stood on November 15, E
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, 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
F
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., 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 s. 2(6A)(d) of the Indian Income-tax Act, 1922 is
not ultra vires the Central Legislature, but we are unable to agree
with bis 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
G
of super-tax under cl. (ii) of the first proviso to paragraph D of
part ll of"the first schedule to the Finance Act, 1956 and its conH
te!1tion that the distribution of dividends on reduction of capital
contemplated by s. 2(6A)(d) of the Indian Income-tax Act, 1922
took plncc 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. (i)(b)
of the second proviso to paragraph D of part II of the first schedule
to the Finance Act, 19,56 read with explanation (ii) to paragraph D.
;
•
A.
PUNJAll DISTILi.DRIES v. c. I. T. (Bachawil, J.)
J1
Now, cl. (i)(b) 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 cl. (ii) of the
preceding proviso which has distributed to its shareholders during
B
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 cl. (6A)
of section 2 of the Indian Income-tax Act". Section 2(6A)(d) of
C 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 !st day of April, 1933, whether such accumuiated profits have
D
E
been capitalised or not."
Obviously, s. 2(6A)(d) contemplates a distribution on reduction of capital under s" 55(l)(c) of the Indian Companies Act, 1913,
under which subject to confirmation by the Court, a limited company, if so authorised by its articles, may by special resoluh,n
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 s. 60 of the Act, the Court may make an order confirmin;!
F
the reduction on such terms and conditions as it thinks fit.
Upon compliance with certain formalities, the Registrar of Joint
Stock Companies is required under s. 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
G confirmed by the order so registered shall take effect. Under s. 62,
the minute when registered shall be deemed to be substituted for
the corresponding part of the memorandum of the company.
In the instant case, the issued, subscribed and paid-up capital
of the company was Rs. 25 lakhs, consisting of 5 lakhs shares of
Rs. 5 each. On December 16, 1953, the company passed a special
B
resolution for reducing its share capital Jrom Rs" 25 lakhs to
Rs. 15 lakhs and for payment of Rs. 2 per share to the existing
share"holders under s. 55(1)(c) of the Indian Companies Act, 1913"
On May I 0, 1954, the company applied to the Cour.t for an order
confirming the reduction.
On August 6, 1954, the High Court
made an order confirming the reduction. On November 4, 1954,
tre or'ler and the minute approved by the Court were duly registerd with the Registrar, and on the same date, the Registrar
12
SUPREME
COUR1'
REPORTS
[1965] 3 s.c.n.
issued a certificate of registration.
On November 5, 1954, the A
notice of registration was duly published. On the same day, the
company issued a circular notice to its sharehold.ers stating that
the refund of Rs. 2 per share will be made on receiving confirmation oi the registration and rnquesting 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
B
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
C
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 n
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 s. 2(6AHdi of the Income-tax Act, 1922 take place? Section
2(6A)(d) speaks of dividend in the shape of any distribution by a
company amongst its shareholders on reduction on its capital to
E
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 s. 2(6A)(d) 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 F
time of", as "on entering", "on the !st 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 s. 55(!)(c) of the Indian
Companies Act, 1913 takes effect. As soon as the resolution for
reduction of capital and consequential refund of the surplus capiG
ta! 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 K
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 s. 2(6A)(d), it means allotment or apportionment of the
suru\us 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.
PUNJAB DISTILLERIES v. c. I. T. (Bachawat, J.)
13
A
A close scrutiny of s. 2(6A)(d) 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 s. 2(6A)(d) are
forcibly brought out in the explanation to the corresponding s.
2(22) of the Income-tax Act, 1961. We thus find firstly that the
B 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
C date; they may be and often are made on several dates. The
successive payments cannot be the distribution contemplated by
s. 2(6A)(d). 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.
D 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 c<.pital to the extent of accumulated
profits".
E
The artificial dividend under s. 2(6A)(d) 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
F
payments would be dividends to their full extent, some
would be dividends to a limited extent and some would 1\0t
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.
JO lakhs and for
refund of Rs. 2 for each share of Rs. 5 takes effect on June 30,
G 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 Jakhs on October 30, 1955 and rupees two Jakhs OJI
October 30, 1956. If the amount of the dividend were.to be fixed
B
by reference to the accumulated profits on the dates of the -payments, the result would be that the payment of rupees one Jakh
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 Jakhs 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
L/B(D)2SCI-3
14
SUPREME COURT REPORTS
(1965] 3 S.C.R.
of capital becomes effective and is not altered.