1965 (2) TMI 6 - SC - Income Tax

Whether the constitutional validity of section 2(6A)(d) Indian Income-tax Act, 1922 can be supported on the ground that it was enacted to prevent evasion of income-tax? Whether the said dividends were distributed in the year 1953-54, as the appellant contends, or in the accounting year 1954-55, as the respondent argues? Held that - When there is a factual avoidance of tax, in terms of law, the legislature steps in to amend the income-tax law so that it can catch such an income within the net of taxation. There is, therefore, no inconsistency between a receipt being a capital one under the company law, and by fiction being treated as taxable income under the Income-tax Act.Therefore, as section 2(6A)(d) of the Act embodies a law to prevent evasion of tax, it falls within the ken of entry 54 of List I of Schedule VII to the Government of India Act, 1935. We agree with the High Court that the dividends were distributed to the shareholders during the accounting year, i. e., 1954-55. Appeal dismissed.

Issues Involved
1. Whether section 2(6A)(d) of the Indian Income-tax Act, 1922, is ultra vires the Central Legislature.
2. Whether the accumulated profits amounting to Rs. 4,60,244-13-0 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 a 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 section 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 shareholders during the accounting period of the assessment year 1956-57.

Detailed Analysis

1. Ultra Vires of Section 2(6A)(d) of the Indian Income-tax Act, 1922
The primary issue was whether section 2(6A)(d) of the Indian Income-tax Act, 1922, was ultra vires the Central Legislature. The court held that legislative entries must be construed liberally and in their widest amplitude. It was argued that the definition of "dividend" under section 2(6A)(d) was intended to prevent tax evasion by companies distributing profits under the guise of capital reduction. The court concluded that section 2(6A)(d) was enacted to prevent such evasion and thus fell within the ambit of entry 54 of List I of Schedule VII to the Government of India Act, 1935. Therefore, the section was not ultra vires the Central Legislature.

2. Accumulated Profits Deemed to Have Been Distributed
The court examined whether accumulated profits amounting to Rs. 4,60,244-13-0 could be deemed to have been distributed on the reduction of capital. The court held that the relevant sections, 2(6A)(d) and 16(2), indicated that "dividend" includes any distribution by a company on the reduction of its capital to the extent of accumulated profits. The distribution must be actual and can be either physical or constructive. The court concluded that the dividends were distributed during the accounting year when the amounts were credited to the shareholders' accounts or paid to them.

3. Security Deposit as Capital Gains
The third issue, whether the amount of Rs. 11,687-3-0 received as a security deposit on account of empty bottles could be considered as capital gains, was not contested by the assessee's counsel. Therefore, no further discussion was required on this issue.

4. Timing of Dividend Distribution
The fourth issue was whether the accumulated profits could be considered as dividends distributed in the assessment year 1955-56 or 1956-57. The majority judgment held that the dividends must be deemed to have been distributed in the year when they were actually paid or credited to the shareholders, i.e., the accounting year 1954-55. However, a separate judgment by Bachawat J. disagreed, stating that the distribution took place when the resolution for reduction of capital became effective, which was November 4, 1954. Therefore, the dividends should be considered distributed in the previous year corresponding to the assessment year 1955-56.

Conclusion
The appeal was dismissed based on the majority judgment, which held that the dividends were distributed during the accounting year 1954-55. The court upheld the constitutional validity of section 2(6A)(d) and confirmed that the dividends were distributed in the accounting year when they were actually paid or credited to the shareholders. The separate judgment by Bachawat J. partially allowed the appeal, stating that the distribution occurred when the resolution for capital reduction became effective.

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