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Issues Involved:
1. Construction of section 2(6A)(c) of the Income-tax Act. 2. Whether the distribution of Rs. 1,570 per share out of "deemed profits" under section 10(2)(vii) is considered "dividend" under section 2(6A)(c). Issue-wise Detailed Analysis: 1. Construction of section 2(6A)(c) of the Income-tax Act: The primary issue in this case revolves around the interpretation of section 2(6A)(c) of the Income-tax Act. The court had to determine whether the distribution of Rs. 1,570 per share, categorized as "deemed profits" under the second proviso to section 10(2)(vii), could be considered as "accumulated profits" under section 2(6A)(c) and thus be liable to be regarded as "dividend." 2. Whether the distribution of Rs. 1,570 per share out of "deemed profits" under section 10(2)(vii) is considered "dividend" under section 2(6A)(c): The court examined the true nature of the receipt described as "deemed profit" under the second proviso to section 10(2)(vii). It was essential to determine whether the receipt was actual profit or fictionally regarded as profit. The court referred to the observations by Lord Radcliffe and Lord Simonds, emphasizing that the term "deemed" could impose an artificial construction or remove uncertainty but does not necessarily convert a non-profit receipt into profit. The court analyzed section 10, which deals with the computation of profits and gains from business, profession, or vocation. Specifically, section 10(2)(vii) allows for a deduction when the written down value of an asset exceeds the sale price. The second proviso to section 10(2)(vii) states that if the sale price exceeds the written down value, the excess is deemed as profits for the year of sale. The court highlighted that this deeming provision converts a capital return into profit for tax purposes. The Supreme Court's observation in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. supported this view, stating that the excess over the written down value, though fictionally regarded as profit, remains a capital return. The court rejected the revenue's argument that the legal fiction should extend beyond section 10 to section 2(6A)(c). It emphasized that legal fictions are created for specific purposes and should not be extended beyond their legitimate field. The fiction in section 10(2)(vii) is intended to tax the excess as profit for the computation of assessable income, not for defining "accumulated profits" under section 2(6A)(c). The court concluded that the distribution of Rs. 1,570 per share was not a distribution out of accumulated profits and thus could not be regarded as dividend under section 2(6A)(c). The court acknowledged that while this interpretation might result in the distribution escaping tax, it adhered to the principle that taxing statutes must be construed strictly based on their language. Conclusion: The court answered the question referred to it in the negative, concluding that the distribution of Rs. 1,570 per share was not a distribution out of accumulated profits of the company and therefore not liable to be regarded as dividend under section 2(6A)(c). The Commissioner was ordered to pay the costs of the reference to the assessee.
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