Deeming dividend on capital reduction upheld, and actual distribution-not mere resolution-determined the year of taxability.

Section 2(6A)(d) of the Indian Income-tax Act was treated as a valid deeming provision because Entry 54 of List I was construed broadly to include ancillary measures preventing tax evasion; it did not tax capital as such, but brought within dividend treatment only the accumulated profits element on reduction of capital. The provision was therefore upheld. On timing, "distribution" was held to require actual disbursement or crediting in fact, not merely a resolution, registration, or book entry; accordingly, the accumulated profits were deemed distributed in assessment year 1956-57, not 1955-56, and the Revenue succeeded on both issues.

---

---

Issues: (i) Whether section 2(6A)(d) of the Indian Income-tax Act was ultra vires the Central Legislature and, if valid, whether distribution on reduction of capital to the extent of accumulated profits could be treated as dividend; (ii) whether accumulated profits were deemed to have been distributed in the assessment year 1955-56 or in the assessment year 1956-57 for tax purposes.

Issue (i): Whether section 2(6A)(d) of the Indian Income-tax Act was ultra vires the Central Legislature and, if valid, whether distribution on reduction of capital to the extent of accumulated profits could be treated as dividend.

Analysis: Entry 54 of List I in the Government of India Act, 1935, was construed broadly, and the power to tax income included the power to adopt ancillary measures to prevent evasion. The provision did not tax capital as such; it only treated distribution on reduction of capital as dividend to the extent of accumulated profits. The deeming fiction operated only on the profit element and left the capital element untouched. The provision was therefore within legislative competence and valid.

Conclusion: The challenge to the validity of section 2(6A)(d) failed and the provision was upheld in favour of the Revenue.

Issue (ii): Whether accumulated profits were deemed to have been distributed in the assessment year 1955-56 or in the assessment year 1956-57 for tax purposes.

Analysis: The expression "distribution" was held to mean actual dealing out or delivery, not a mere resolution, registration, or book entry. The reduction of capital and the consequent refund were not complete for tax purposes until the refunds were actually paid and debits were made in the shareholders' accounts during the relevant accounting period. The company's own accounts did not show an earlier actual distribution.

Conclusion: The accumulated profits were deemed to have been distributed in the assessment year 1956-57, not in the assessment year 1955-56, in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on the substantive issues decided, and the Revenue succeeded on the validity of the deeming provision and on the year of taxability.

Ratio Decidendi: A statutory deeming provision may validly treat accumulated profits distributed on reduction of capital as dividend to the extent of those profits, and "distribution" for that purpose requires actual disbursement or crediting in fact, not merely a corporate resolution or registration of the reduction.

---