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TMI Blog1962 (2) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 50 lakhs to ₹ 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 ₹ 25 lakhs to ₹ 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 Companies Act, 1913. On 5t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 2(6A)(d). The assessee also maintained that the accumulated profits, when the capital was reduced from ₹ 50 lakhs to ₹ 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 ₹ 8,42,337 was dividend and deemed to have been distributed in accordance with section 2(6A)(d). He, therefore, assessed tax at ₹ 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 21st March, 1958, holding that section 2(6A)(d) was intra vires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years. 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 residua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the dictionary it means 'a thing that comes in': (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 actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d chief emphasis upon the word 'gain', which was extended to include a variety of meanings; while 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "100. Subject matter of Federal and Provincial Laws.--(1) Notwithstanding anything in the two next succeeding sub-sections, the Federal Legislature has, 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 exh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is, ₹ 8,42,337 less ₹ 3,61,405 less ₹ 11,687-3-0. Now the effect of section 2(6A)(d) is that distribution by a company on the reduction of its capital to the extent of ₹ 4,69,244-13-0, the amount which the company possessed as accumulated profits is 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 ₹ 25 lakhs to ₹ 15 lakhs, had to distribute a sum of ₹ 10 lakhs. Out of this sum of ₹ 10, lakhs, law treats the distribution of ₹ 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 ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the face of an Act that it intends thereby to legislate in reference to a subject over which it has no jurisdiction, yet, if the enacting clauses of the Act bring the legislation within its powers, the Act cannot be considered ultra vires" (vide 1913 edition, page 75). Question No. 3, whether the amount of ₹ 11,687-3-0 received by the assessee as security 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 ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made to this court for sanction to reduce the capital and on 6th August, 1954, the sanction was granted. On 4th November, 1954, the notification was published regarding reduction of the capital as directed by the High Court and on the same date the Registrar, Joint Stock Companies, Jullundur, registered the order of the High Court referred to above. On 5th November, 1954, 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 ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word "distribution" connotes "to deal out or bestow in portions or shares among many; to allot or apportion as one's share". When something is delivered to several persons it is said to be distributed among them. Distribution is an act of dispensing portions between several. A "declaration" of a dividend is not the same thing as "distribution", as in the latter there are three stages, namely, the declaration, the dividend 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h different methods of accounting, the two main methods being the "cash system" and the "mercantile system". The other nomenclature employed as equivalent of mercantile basis is "accrual basis" and "double entry system". According to "cash basis" a record is kept of the actual receipts and actual payments and entries are made only when sums are actually received or disbursed. The tax is levied on the basis of the difference between the receipts and disbursements for the particular accounting period. The "double entry system" in book-keeping signifies two entries of the same transaction, one on the credit and the other on the debit side. When books are 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from the other authority relied upon by Mr. Sikri, Commissioner of Income-tax v. Nagri Mills Co. Ltd. [1958] 33 I.T.R. 681, which was a case for determining when bonus payable to the workers was deemed to have been paid by the company for purposes of claiming deduction. It was held in that case that, as under section 10(5) of the Income-tax Act, actual payment was not necessary for the purpose of deduction and it was sufficient if the liability to bonus was incurred according to the method of accounting, upon the basis of which the profits or gains were computed, the assessee company was entitled to the deduction under section 10, sub-section (2)(x), of the bonus paid from the profits of the earlier year even though the amount had not been entered in its accounts 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not paid in the year previous to the assessment year 1953-54." If, according to the reasoning in the above decision, section 16(2) of the Act is not controlled by section 13 and the assessee's method of keeping accounts does not control the provisions of section 16(2) as to the inclusion of an assessee's dividend income in a particular year, it is difficult to hold that, for purposes of construction of the word "distribution" occurring in section 2(6A)(d), the provisions of section 13 can be of any guide. The company sent a circular notice (annexure "H") on 5th November, 1954, to its shareholders requesting them to send their share certificates to the company at an early date for necessary endorsement and refund of share capital. They were also informed that the share transfer register of the company would remain closed from 16th to 30th November, 1954 (inclusive). It may be mentioned that no entry regarding distribution was made in the accounting year which ended on 30th November, 1954. In the balance-sheet (annexure "F") for the period which ended on 30th November, 1954, the directors, in their report to the shareholders, had made t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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