1962 (2) TMI 99 - HC - Income Tax

Summary

Issues Involved:
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 dividends deemed to have been 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.

Detailed Analysis:

1. Ultra Vires Argument:
The first issue addressed whether section 2(6A)(d) of the Indian Income-tax Act is ultra vires the Central Legislature. The assessee argued that taxing the return of capital on reduction is not income and thus falls outside the legislative competence under entry No. 54 of the Federal Legislative List I of the Seventh Schedule of the Government of India Act, 1935. The court referred to the Supreme Court decision in Navinchandra Mafatlal v. Commissioner of Income-tax, which held that "income" includes "capital gains" and that legislative entries should be given broad interpretations. The court held that section 2(6A)(d) was within the legislative competence of the Central Legislature, as it aimed to prevent the evasion of tax by distributing accumulated profits under the guise of capital reduction.

2. Accumulated Profits as Dividends:
The second issue was whether the accumulated profits of Rs. 4,69,244-13-0 could be deemed to have been distributed as dividends under section 2(6A)(d). The court noted that the Income-tax Officer had initially treated the entire sum of Rs. 8,42,337 as dividends but the Tribunal had reduced this to Rs. 4,69,244-13-0 after excluding exhausted profits and capital gains. The court upheld the Tribunal's decision, emphasizing that the distribution on the reduction of capital to the extent of accumulated profits is taxable as dividends, thus preventing evasion of tax by mislabeling profits as capital.

3. Security Deposit as Capital Gains:
The third issue was whether the amount of Rs. 11,687-3-0 received by the assessee as a security deposit for empty bottles could be considered as capital gains. The court referred to its earlier decision in Commissioner of Income-tax v. Punjab Distilling Industries Ltd., which held that such collections were assessable as income under section 10 of the Income-tax Act. Consequently, this issue was deemed res judicata, and no further analysis was required.

4. Timing of Dividend Distribution:
The fourth issue was whether the accumulated profits should be considered as dividends distributed in the assessment year 1955-56 or 1956-57. The court examined the sequence of events, noting that the resolution for capital reduction was passed on 16th December 1953, the High Court sanctioned it on 6th August 1954, and the Registrar issued a certificate on 4th November 1954. However, the actual distribution and debiting of refunds occurred in the accounting period relevant to the assessment year 1956-57. The court concluded that the distribution should be considered to have taken place in the assessment year 1956-57, as the actual payment and debiting were done during this period.

Conclusion:
The court upheld the validity of section 2(6A)(d) of the Indian Income-tax Act, confirmed that the accumulated profits could be deemed as dividends distributed on capital reduction, and decided that the security deposit was assessable as income. The court also ruled that the dividends were deemed to have been distributed in the assessment year 1956-57. The Commissioner of Income-tax was entitled to costs assessed at Rs. 250.