Judgment

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.

2. The assessee, a public limited company, was incorporated on May 23, 1945, under the Indian Companies Act, 1913, with a share capital of Rs. 50 lakhs. On December 15, 1947, at the instance of the appellant the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs. On December 16, 1953, the High Court sanctioned a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs. On November 4, 1954, the Registrar of Companies granted the requisite certificate under S. 61(4) of the Indian Companies Act. On November 5, 1964, the appellant issued notices to the shareholders inviting applications for the refund of share capital so reduced. On the receipt of the applications, appropriate debit entries were made in the accounts of the shareholders and the amounts were actually paid to them during the previous year, i.e., December 1, 1954 to November 30, 1955. Under S. 2(6A)(d) of the Act, "dividend" includes any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits whether such accumulated profits have been capitalised or not. In assessing the income of the appellant-company for the assessment year 1956-57, the Income-tax Officer held that the said dividends was distributed during the accounting year and on that finding he calculated the rebate on super-tax in terms of Cl. (i)(b) of the second proviso to paragraph D of Part II of the first schedule to the Finance Act, 1956. If the dividends were distributed during the accounting year, i.e., December 1, 1953 to November 30, 1954, the appellant would be entitled to a higher rate of rebate on super-tax under Cl. (ii) of the first proviso to paragraph D of Part II of the first schedule to the Finance Act, 1956. The Income-tax Officer further held that the 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 by the Income-tax Officer. On further appeal, the Income-tax Appellate Tribunal, for the reasons recorded by it in its order, reduced the figure under the said head by a sum of Rs. 3,61,405 / -.

3. It was contended on behalf of the assessee that inasmuch as the certificate from the Registrar for the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs was obtained on November 4, 1954, the distribution of the dividends should be deemed to have taken place during the year 1953-54 and, therefore, the said dividends were not exigible to tax for the assessment year. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal concurrently rejected that plea and held that, as the actual payment to the shareholders of the refund of the capital and the debit in the accounts of the shareholders were effected in the accounting year, the said dividends must be held to have been distributed in the accounting year.

4. 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.

5. 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(8A)(d) of the Indian Income-tax Act are ultra vires of the Central Legislature.

(2) Whether the accumulated profits amounting to Rs. 4,69,214-13-0 could be deemed to have been distrib