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PUNJAB & HARYANA HIGH COURT
Tek Chand, S.B.Capoor and P.C.Pandit JJ.
Punjab Distilling Industries, Ltd.
Versus
Commissioner Of Income Tax, Simla
Income tax No. 9 of 1959,
Decided On : FEBRUARY 21, 1962
INCOME TAX - Whether the provisions of section 2(6A)(d) of the Indian Income-tax Act are ultra vires the Central Legislature? - 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? - 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? - 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 S. 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 share-holders and the refunds were actually granted to the share-holders during the accounting period of the assessment year 1956-57.
Fact of the Case:
The assessee is the Punjab Distilling Industries Limited, Khasa, and was incorporated on 23rd May, 1945, with a share capital of Rs. 50 lakhs. On 15th December, 1947, on a resolution having been passed, the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs and the capital was accordingly reduced. Again, on 16th December, 1953, a resolution was passed by the company for a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs and the necessary sanction was granted by the High Court on 6th August, 1954, and on 4th November, 1954 Registrar of Joint Stock Companies issued a certificate as required by section 61, sub-section (4), of the Indian Companies Act, 1913 . On 5th November, 1954, the company issued notice to the share-holders inviting applications for the refund of the share capital so reduced, and the necessary funds were distributed between 1st December, 1954 and 30th November, 1955. The assessment year in this case in 1956-57 and the accounting year ended on 30th November, 1955. All the shares of this company were fully paid.
Finding of the Court:
1. The provisions of section 2(6A)(d) of the Indian Income-tax Act are intra vires the Central Legislature. 2. 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. The amount of Rs. 11,687-3-0 received by the assessee as security deposit on account of empty bottles could not be considered as Capital Gains. 4. The accumulated profits 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 share-holders and the refunds were actually granted to the share-holders during the accounting period of the assessment year 1956-57.
Issues: 1. Whether the provisions of section 2(6A)(d) of the Indian Income-tax Act are ultra vires 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 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 S. 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 share-holders and the refunds were actually granted to the share-holders during the accounting period of the assessment year 1956-57.
Ratio Decidendi: 1. The impugned provision was within the legislative competence of the central Legislature and was within the ambit of entry No. 54 of List I of the 7th Schedule of the Government of India Act, 1935, not only in form but also in substance. 2. The word "distribution" occurring in Section 2(6A)(d) connotes to deal out or bestow in portions or shares among many; to allot or apportion as ones share. When something is delivered to several persons it is said to be distributed among them. Distribution is an act of dispensing portions between several. A "declaration" of a dividend is not the same thing as "distribution", as in the latter there are three stages, namely the declaration the dividend, (division?) and its distribution or disposal. "Distribution" is not merely an act of dividing or apportioning, but also dispensing or dealing out. To my mind, the act of "distribution" has to be actual and not notional; physical and not mental. A resolution or decision to distribute is not "distribution" as there is no giving out, dispensing, or disbursement involved. "Distribution" connotes two acts: a "division" and "delivery". 3. The company sent a circular notice (annexure H) on 5th November, 1954, to its share-holders requesting them to send their share-certificates to the company, at an early date for necessary endorsement and refund of share-capital. They were also informed that the Share Transfer Register of the company would remain closed from 16th of 30th November, 1954 (inclusive). It may be mentioned that no entry regarding distribution was made in the accounting year which, ended on 30th November, 1954.
Final Decision: 1. The provisions of section 2(6A)(d) of the Indian Income-tax Act are intra vires the Central Legislature. 2. 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. The amount of Rs. 11,687-3-0 received by the assessee as security deposit on account of empty bottles could not be considered as Capital Gains. 4. The accumulated profits 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 share-holders and the refunds were actually granted to the share-holders during the accounting period of the assessment year 1956-57.
Tek Chand, J.
1. The following four questions of law have been referred to the Full Bench.-
"(1) Whether the provisions of section 2(6A)(d) of the Indian Income-tax Act are ultra vires 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 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 S. 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 share-holders and the refunds were actually granted to the share-holders during the accounting period of the assessment year 1956-57."
2. The assessee is the Punjab Distilling Industries Limited, Khasa, and was incorporated on 23rd May, 1945, with a share capital of Rs. 50 lakhs. On 15th December, 1947, on a resolution having been passed, the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs and the capital was accordingly reduced. Again, on 16th December, 1953, a resolution was passed by the company for a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs and the necessary sanction was granted by the High Court on 6th August, 1954, and on 4th November, 1954 Registrar of Joint Stock Companies issued a certificate as required by section 61, sub-section (4), of the Indian Companies Act, 1913 . On 5th November, 1954, the company issued notice to the share-holders inviting applications for the refund of the share capital so reduced, and the necessary funds were distributed between 1st December, 1954 and 30th November, 1955. The assessment year in this case in 1956-57 and the accounting year ended on 30th November, 1955. All the shares of this company were fully paid.
3. According to the findings of Income-tax Officer, who made the assessment, the accumulated profits of the assessee-company at the time when the capital was reduced to Rs. 15 lakhs were Rs. 8,42,337/- the details of which were as under;
Special reserve. Rs. 17,620/-
General reserve. Rs. 7,44,708/-
Workmens compensation reserve. Rs. 22,950/-
Income-tax reserve. Rs. 57,059/-
Total. Rs. 8,42,337/-
The Income-tax Officer also held that the assessee-company had actually distributed dividends of Rs. 1,06,250/-. The Income-tax Officer required the assessee by a notice under section 23(3) of the Income-tax Act to explain why the distribution on the reduction of its share capital to the extent to which the company possessed accumulated profits be not treated as distribution on account of dividend in accordance with the provisions of section 2(6A)(d) of the Income-tax Act. The relevant provisions of section 2(6A)(d) are as under- "2. In this Act, unless there is anything repugnant in the subject or context- X X X X X X X X X X X X X X X X X X X X X X X X
(6A) dividend includes--- X X X X X X X X X X X X X X X X X X X X X X X X X X
(d) any distribution by a company on the reduction of its capital to the extent 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; X X X X X X X X X X X X X X X X X X X X X X X X
Explanation.--The expression accumulated profits, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April 1946, or after the 31st day of March, 1948, and before the 1st
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