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PETITIONER: PUNJAB DISTILLING INDUSTRIES LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, PUNJAB

DATE OF JUDGMENT: 09/02/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. DAYAL, RAGHUBAR MUDHOLKAR, J.R. BACHAWAT, R.S. RAMASWAMI, V.

CITATION:  1965 AIR 1862            1965 SCR  (3)   1  CITATOR INFO :  R          1984 SC 420  (45)

ACT:     Indian  Income-tax  Act,  1922 (11 of  1922,),  s.  2(A) (d)--Distribution  on reduction of company’s capital to  the extent  of accumulated profits treated  as  ’dividend’--Such dividend whether ’income’ under Entry 54, List I, Government of India Act, 1935--Section whether ultra vires. Distribution’--Meaning of--Whether synonymous with ’paid’ of ’credited’  in  s. 16(2) of  the  Income-tax   Act--Notional distribution  whether  takes place on issue  of  certificate under s. 61(4) of the Indian Companies Act, 1913.

HEADNOTE:     The  appellant  .company  reduced its  capital  and  the reduction  was confirmed by the High Court. On November  4-, 1954,  i.e. during the course of the appellant’s  accounting year  ending November 30, 1954, the Registrar  of  Companies issued  the  requisite  certificate under s.  61(4)  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 s. 2(6A)(d)  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. (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 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

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went  beyond  the  ambit  of  entry    54  List  I,  Seventh Schedule, Government of India Act, 1935, and s. 2(6A)(d)  of the Indian Income-tax Act, 1922 was 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 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  v. Atiqa Begum, [1940]  F.C.R.   110, Sardar Baldev Singh v. Commissioner of Income-tax, Delhi and Ajmer,  [1961]  1 S.C.R. 482, Balaji v.  Income-tax  Officer Special  Investigation  Circle,  [1962]  2  S.C.R.  983  and Navnittal   C.   Javeri  v. K.K.  Sen,  Appellate  Assistant Commissioner  of  Income-tax  ’D’ Range,  Bombay,  [1965]  1 S.C.R. 909, 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 2(6A)(d) 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   s.   16(2), distribution’  signifies  ’the discharge  of  the  company’s liability  and making the dividend available to the  members entitled thereto. [8D, F, G]     J.  Dalmia  v.  Commissioner of I.T.  Delhi,  (1964)  53 I.T.R.  83 and Mrs. P.R. Saraiya v. Commissioner of  Income- tax,  Bombay City 1, Bombay, [1965] 1 S.C.R. 307, 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 s. 2(6A)(d) must be deemed  to have  been  distributed  in  the  said  year.  The  relevant assessment  year  therefore  was  1956-57.[10F]     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. [14G-H]     The  ’distribution’  contemplated  by  s.  2(6A)(d)   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

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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 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 subsequently and on  different dates.   The  successive payments cannot  be  ’distribution’ contemplated by s. 2(6A) (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 s. 2(6A)(d) took place on that date i.e.   during  the  previous  year  corresponding   to   the assessment year 1955-56. [15B]

JUDGMENT:     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.K.  Daphtary,  Attorney-General, R. Ganapathy  lyer,  R.N. Sachthey for R.H. 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 s. 2(6A)(d) 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  s. 61(4) 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, 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   were distributed during  the accounting year and on that  finding he  calculated  the  rebate  on super-tax in  terms  of  el. (i)(b)  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. i.e., December I, 1953, to November 30, 1954, the appellant  would

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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. 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. 3.61,40.5.     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. 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 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 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.  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 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 61(4) 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. 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

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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               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 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 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,  C.J., in The United Provinces v. Atiqa Begum(1) "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) [1940] F.C.R. 110. 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 v. Commissioner Income-tax, Delhi and Ajmer (1) 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 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    v.    Income-tax Officer,  Special Investigation Circle (2) this Court  ruled that s.  16(3)(a)(i) 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

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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  v.K.K.  Sen,   Appellate   Assistant Commissioner     Income-tax,   "D"  Range,  Bombay  (3)  sustained    the validity of s. 2(6A)(e) 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 s. 2(6A)(d) 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) [1961] 1 S.C.R. 482. (2) [1962]2 S.C.R. 983. (3)[1965] 1 S.C.R. 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 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

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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 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 accounting year 1954-55, as the respondent argues. The  relevant  sections of the Act in this  context  are  s. 2(6A)(c1)  and s.  16(2). Section 2(6A)(d) has been  already extracted. The relevant part of l 6(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 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 s. 2(6A)(d) 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 s. 16(2) 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 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 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 s. 16(2) of the Act in  J.  Dalmia  v. Commissioner  of I.T. Delhi(1).  Shah, J., speaking for  the

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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." This  Court  again reaffirmed  the said  principle  in  Mrs. P.R.  Saraiya v. Commissioner of Income-tax, Bombay City  1, Bombay(2)  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 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 s. 2(6A)(d) 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

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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.  (i)(b) 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.  (i)(b) of the said proviso.  If, 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 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  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 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,  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., 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 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

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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 s. 2(6A)(d) 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.  (i)(b) 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. (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 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 2(6A)(d) 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,  s.  2(6A)(d) contemplates a  distribution  on reduction  of  capital  under  s.  55(1)(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  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 s. 60 of the  Act, the Court may make an order confirming,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 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 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 s. 55(1)(c) of the Indian Companies Act, 1913.On 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, 1954,the order and the minute approved  by  the  Court  were  duly  registered  with   the

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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 s. 2(6A)(d) 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 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  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 s. 55(1)(c) 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 s. 2(6A)(d), 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 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

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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 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. 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 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  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 /B(D)2SCI--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 s. 16(2) 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  s.  2(6A)(d)  in  the  shape   of distribution  to the extent of the accumulated   profits  is misleading, and the assumptions on which this comparison  is

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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 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.     The argument based upon the decided cases under s. 16(2) is misconceived.  Section 16(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 J.  Dalmia  v. Commissioner  of Income-tax(1) and Padmavati R.  Suraiya  v. Commissioner  of Income-tax(2) 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. Subsection (2) of s. 16 was repealed and in its place,  sub- s.  (IA)  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(IA) of the Incometax Act, 1922 and s.  8 of the Income-tax Act the declaration of [1964]  53  I.T.R. 83, 90.             (2) [1965]  1  S.C.R. 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 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 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

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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. v. Commissioner of  Income- tax, Bombay(1).     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. 8,42,337, and was subsequently reduced by the Tribunal  to  Rs.  4,69,244-13-0.  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 s. 2(6A)(d) 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 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 BY COURT     In  accordance  with the majority Judgment,  the  appeal fails and is dismissed with costs. 17