TaxTMI 
TaxTMI 
1962 (2) TMI 99
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....een 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 dividends 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 and the refunds were actually granted to the shareholders during the accounting period of the assessment year 1956-57?" 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, the Registrar of joint Stock Companies issued a certificate as required by section 61, sub-section (4), of the Indian Compa....
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....ich had to be excluded by virtue of the Explanation to section 2(6A)(d). The assessee also maintained that the accumulated profits, when the capital was reduced from Rs. 50 lakhs to Rs. 25 lakhs were not made available to the assessee and the amount could not be deemed to have been distributed as dividend. It was also stated that the balance, after reduction of the capital, did not relate to the assessment year 1956-57, which was under consideration, because the distribution had occurred before the commencement of the accounting period. These contentions of the assessee did not prevail with the Income-tax Officer who held that the entire sum of Rs. 8,42,337 was dividend and deemed to have been distributed in accordance with section 2(6A)(d). He, therefore, assessed tax at Rs. 9,48,587 as shown below: Rs. Dividends deemed to be distributed in accordance with the provisions of section 2(6A)(d) 8,42,337 Dividends distributed as per balance-sheet 1,06.250 Total 9,48,587 The assessee was unsuccessful in its appeal to the Appellate Assistant Commissioner. A further appeal was filed before the Income-tax Tribunal, Delhi Bench, which was disposed of on 21s....
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.... The questions of law under reference may now be considered ad seriatim. The first question is whether the provisions of section 2(6A)(d) of the Indian Income-tax Act are ultra vires the Central Legislature. The argument raised by Mr. S.M. Sikri, assessee's counsel, is that the assessee has been taxed on the return of capital on reduction, which is not the income which would bear the incidence of income-tax. He has drawn our attention to entry No. 54 in the Federal Legislative. List I of the Seventh Schedule of the Government of India Act, 1935, which refers to "taxes on income other than agricultural income". In the same List, there is also an entry No. 55 mentioning "taxes on the capital value of the assets exclusive of agricultural land, of individuals and companies, taxes on the capital of companies". Our attention has also been drawn to an omission in the above List of words which now appear against entry No. 97 in the Union List, Schedule VII, of the Constitution of India, which read as under: "97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists." No residuary power was specifically vested either ....
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....': (See Oxford Dictionary, Vol. V, page 162; Stroud, Vol. II pages 14-16). In the United States of America and in Australia both of which also are English speaking countries the word 'income' is understood in a wide sense so as to include a capital gain. Reference may be made to Eisner v. Macomber [1920] 252 U.S. 189; 64 L. Ed. 521, Merchants' Loan & Trust Co. v. Smietanka [1925] 255 U.S. 509; 65 L. Ed. 751 and United States v. Stewart [1940] 311 U.S 60; 85 L. Ed. 40 and Resch v. Federal Commissioner of Taxations [1942] 66 C.L.R. 198. In each of these cases very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observations of learned judges deciding those cases which have been quoted in the judgment of Tendolkar J. quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received." Mr. Sikri stresses on the last se....
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.... the significance of the next three words was either overlooked or misconceived,--' derived--from--capital',--'the--gain--derived--from--capital', etc. Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived', that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit, and disposal; that is income derived from property. Nothing else answers the description." Pitney J., also referred to a case decided by a Circuit Court of Appeals in Commissioner of Internal Revenue v. Mayer 139 Federal Reporter (2d series) 256, 258 for the following observations: "It is generally accepted that a return on capital or investment is not taxable under the Sixteenth Amendment." Reference was also made to Kansas City Southern Railway Co. v. Commissioner of Internal Revenue 52 Federal Reporter (2d series) 372, 378 for the general proposition that restorations of capital assets are not taxable income. The....
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.... but only by the plain words of a statute applicable to the facts and circumstances of his case." On the second question under reference Mr. Sikri merely said that in case the court answered the first question in the negative and held in favour of the validity of section 2(6A)(d) of the Act, then the provision should be interpreted as if the words "of other than capital" were inserted in section 2(6A)(d) after the words "any distribution". In other words, Mr. Sikri wants this court to find that a casus omissus has really occurred in the statute through the inadvertence of the legislature. I do not think that a casus omissus can be supplied by a court, for that would amount to making laws. It is not the function of the court to rewrite a section or to amend a statutory provision with a view to translate the supposedly real intention of the framers of the Act or on grounds of any inadvertence of the legislature. I do not think it is permissible to a court to insert by implication any matter thought to be erroneously left out by the legislature as that would not be construing an Act, but altering or amending it. It was observed by Lord Mersey in Thompson v. Goold [1910] A.C. 409, 4....
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...., and a Provincial Legislature has not, power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to this Act (hereinafter called the 'Federal Legislative List')." Thus, the legislative field is extensive and the items of legislation include not merely the main purposes but also all ancillary and subsidiary matters which can fairly and reasonably be said to fall within the scope of a particular entry. Reference may be made to United Provinces v. Mt. Atiqa Begum A.I.R. 1941 F.C. 16, 25. These entries are in the nature of legislative heads and are deemed to be of enabling character. The language of these entries is given wide scope for the main reason that they set up a machinery of Government and may cover the power not only of conferment but also of extinguishment, control or modification of the rights. The scope of ancillary or subsidiary matters is very extensive. Section 2(6A) of the Income-tax Act added an inclusive definition of "dividend" which was not exhaustive. The connotation of the word "dividend" has been extended. Speaking generally, "dividend" is a sum of money or portion of divisible thing to be distributed accor....
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....s being treated as dividend. The capital character of the distribution which is in excess of the accumulated profits is not being disturbed and to that extent that sum is not being treated as dividend under section 2(6A)(d). In the present case, the company, on the reduction of its capital from Rs. 25 lakhs to Rs. 15 lakhs, had to distribute a sum of Rs. 10 lakhs. Out of this sum of Rs. 10, lakhs, law treats the distribution of Rs. 4,69,244-13-0 as of accumulated profits and, therefore, as "dividend". The company cannot by styling the entire amount for distribution as capital evade its liability to be taxed on the sum of Rs. 4,69,244-13-0, which, being accumulated profits, now falls within the definition of "dividend". Mr. Sikri expressed an apprehension that, as in the balance-sheets for the subsequent years it was being shown that the company was still possessed of accumulated profits, the assessee company ran the risk of being taxed again, as that amount would not be treated as capital. This apprehension is more imaginary than real. The Tribunal has in this very case found that, at the time of the reduction of the capital from Rs. 50 lakhs to Rs. 25 lakhs in 1948, the assessee h....
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....ty deposit on account of empty bottles could be considered as capital gains, has been referred to this court at the instance of the Commissioner of Income-tax. In Commissioner of Income-tax v. Punjab Distilling Industries Ltd. [1962] 45 I.T.R. 548 relating to the accounting year ended 30th November, 1945, and also the accounting year ending 30th November, 1948, the question of law which was referred was: "Whether on the facts and circumstances of the case the collections by the assessee company described in its accounts as 'empty bottles return security deposits' were income assessable under section 10 of the Income-tax Act?" And it was answered by the Division Bench as under: "On the facts and circumstances of the case the collections by the assessee company described in its accounts as 'empty bottles return security deposits' were income assessable under section 10 of the Income-tax Act in so far as the collections have been made after 1st April, 1948, and to the extent allowable under rule 40, sub-rule (14), clause (f), of the Punjab Liquor Licence Rules as amended." This matter is now res judicata and Mr. D.N. Awasthy, learned counsel for....
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....4, the company notified to the shareholders that this court had sanctioned the reduction of the company's paid-up capital and, consequently, the shareholders would be entitled to a refund of Rs. 2 per share. It was also mentioned that the refund would be made on receiving confirmation of registration by the Registrar. The shareholders were requested to send their share certificates to the company for necessary endorsement and refund. They were also informed that the share transfer register of the company would remain closed from 16th November to 30th November, 1954 (inclusive); and that refund would be made to those shareholders whose names stood on the 15th November, 1954, in the books of the company. A reference may also be made to the balance-sheet for the year ending 30th November, 1954, in which the issued, subscribed and paid-up capital is shown as, Rs. 25 lakhs and not Rs. 15 lakhs as reduced. It is stated in the assessment order passed by the Income-tax Officer on 3rd February, 1957, that the share capital was distributed amongst the shareholders during the accounting period, 1st December, 1954, to 30th November, 1955, which was the period under consideration before him....
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....nd 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". This word "distributed" occurs in section 16(2), which provides: 16. (2) 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 or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company (without taking into account any rebate allowed or additional income-tax charged) for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend: Provided that when the sum out o....
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.... kept by the taxpayer on "accrual basis" the entries are made of credits and debits as liability arises and the tax is computed on that basis despite the fact that the time of receipts and disbursements may be different. Keeping accounts on the "accrual basis" as distinct from the "cash basis" imports that it is the right to receive and not the actual receipt that determines the inclusion of a particular amount in the taxpayer's gross income. The argument advanced on behalf of the assessee is that the method of accountancy adopted was the "mercantile system" under which the net profit or loss is calculated after taking into account all the income and all the expenditure during the accounting year regardless of the fact whether such income has been received or not or such expenditure has been actually paid or not. The argument based on the above distinction is that the sums should be treated as soon as the liability accrues, and as this liability arose on 4th November, 1954, when the Registrar, under section 61 of the Indian Companies Act, 1913, registered the order and the minute, the date of the distribution should be during the previous accounting period and not during the ac....
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....unts for that year. This case is no authority for interpretation of the meaning of the relevant expression in section 2(6A)(d). Moreover, in none of these cases the question of "distribution" under section 2(6A)(d) or under section 16(2) arose. A decision of the Bombay High Court in Purshotamdas Thakurdas v. Commissioner of Income-tax [1958] 34 I.T.R. 204 was cited by Mr. Sikri for the proposition that section 16(2) of the Income-tax Act is not controlled by section 13 and that the assessee's method of keeping accounts does not control the provisions of section 16(2) that the dividend income is to be included in a particular year. It was also held that declaration of dividend was not the test of taxability prescribed under section 16(2) of the Income-tax Act by the legislature. This decision, though not under section 2(6A)(d), is, by similarity of reasoning, more helpful. I may refer to the following observations of Chagla C.J.: "Mr. Joshi (for the Commissioner) says that if the legislature chose to make the declaration of a dividend the only test of taxability, then it is not for us to say that because of hardships or other difficulties of an assessee, some other t....