Supreme Court Upholds Constitutionality of Dividend Definition Under Income-tax Act in Capital Reduction Case. Majority Holds Distribution of Accumulated Profits on Reduction of Capital Occurred When Payments/Credits Made to Shareholders in Accounting Year Ending 1955, Attracting Assessment Year 1956-57 Under Section 2(6A)(d) of Indian Income-tax Act, 1922.

Tax reference arising from assessment of a public limited company under Indian Income-tax Act, 1922, involving deemed dividend on reduction of share capital and rebate on super-tax.

The assessee company sought a declaration that section 2(6A)(d) was ultra vires and that the dividend should be deemed distributed in the previous year relevant to assessment year 1955-56, entitling it to higher rebate.

The Income-tax Officer assessed the company for assessment year 1956-57, treating the distribution of accumulated profits on reduction of capital as dividend in the accounting year ending 30-11-1955, and applying lower rebate; the company appealed against this assessment.

The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal concurrently held that the distribution occurred in the accounting year ending 30-11-1955, making assessment year 1956-57 applicable. The Punjab High Court in I.T. Reference No.9 of 1959 answered all questions against the assessee, upholding constitutionality and the later assessment year.

Whether section 2(6A)(d) of Indian Income-tax Act, 1922 is ultra vires the Central Legislature under Entry 54 List I Government of India Act, 1935. Whether the accumulated profits amounting to Rs. 4,69,244-13-0 could be deemed distributed on reduction of capital within meaning of section 2(6A)(d). Whether the amount of Rs. 11,687-3-0 received as security deposit on empty bottles was capital gains (not contested in Supreme Court). Whether dividend deemed distributed in assessment year 1955-56 based on Registrar's certificate dated 4-11-1954, or in assessment year 1956-57 based on actual debits/payments during accounting year.

For appellant: Section 2(6A)(d) ultra vires because it taxes capital receipts, not income; entry 54 only permits tax on income. Distribution took place when Registrar issued certificate under s.61(4) on 4-11-1954, so relevant assessment year 1955-56, not 1956-57. For respondent: Entry 54 must be widely construed to prevent income-tax evasion; section embodies law to prevent distribution of accumulated profits under guise of capital reduction, hence intra vires. Distribution requires actual payment or credit to shareholders, which occurred in accounting year ending 30-11-1955, so assessment year 1956-57.

The expression 'income' in Entry 54 List I of Government of India Act, 1935 (and Entry 82 of Constitution) must be widely construed to enable legislature to prevent evasion of income-tax; a law treating distribution of accumulated profits on reduction of capital as dividend is a valid anti-evasion measure under the taxing entry. 'Distribution' under section 2(6A)(d) (majority view) connotes actual or constructive making available of dividend to shareholders, whether by payment or credit, and not merely the reduction/certificate date; thus the year of actual payment/credit determines the relevant assessment year. The minority view held distribution occurs on the date of reduction itself, giving shareholders vested rights, irrespective of later payments.

The expression 'income' in entry 54 List I of the Seventh Schedule to the Government of India Act, 1935, and the corresponding entry 82 of List I of the Seventh Schedule to the Constitution of India must be widely and liberally construed so as to enable the Legislature to provide by law for the prevention of evasion of Income-tax. Distribution can be physical, it can be constructive. One may distribute assets between different shareholders either by crediting the amount due to each one of them in their respective accounts, or by actually paying to each one of them the amount due to him. The word 'distributed', in s. 2(6A)(d) does not mean 'paid' or credited'. Cases under s. 16(2) are not relevant to the issue. A company may on the pretext of reducing its capital, utilise its accumulated profits to pay back to the shareholders the whole or part of the paid up amounts on the shares. This is a division of profits under the guise of division of capital.

The appellant company was incorporated on 23-5-1945 under Indian Companies Act, 1913 with share capital Rs. 50 lakhs. On 15-12-1947, High Court sanctioned reduction to Rs. 25 lakhs. On 16-12-1953, further reduction to Rs. 15 lakhs sanctioned. On 4-11-1954, Registrar issued certificate under s.61(4). On 5-11-1954, appellant issued notices to shareholders for refund. Payments/debits made during accounting year 1-12-1954 to 30-11-1955. Income-tax Officer for assessment year 1956-57 treated distribution as dividend and computed rebate; appeals to AAC and Tribunal confirmed; Tribunal referred questions to High Court; High Court answered against assessee on 21-2-1962; assessee appealed to Supreme Court by certificate.

• Indian Income-tax Act, 1922: Section 2(6A)(d), Section 16(2)
• Government of India Act, 1935: Entry 54, List I, Seventh Schedule
• Indian Companies Act, 1913: Section 61(4)
• Finance Act, 1956: First Schedule, Part II, Paragraph D, Second Proviso Clause (i)(b), First Proviso Clause (ii)
• Constitution of India: Entry 82, List I, Seventh Schedule