PUNJAB DISTILLING INDUSTRIES LID. versus COMMISSIONER OF INCOME-TAX, PUNJAB

Citation: [1965] 3 S.C.R. 1 · Decided: 09-02-1965 · Supreme Court of India · Bench: K. SUBBA RAO

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Judgment (excerpt)

) 
B 
PUNJAB DISTILLING INDUSTRIES LID. 
v. 
COMMISSIONER OF INCOME-TAX, PUNJAB 
February 9, 1965 
[K. SUBBA RAO, F..AGHUBAR DAYAL, J. R. MUDHOLKAR, 
R. S. BACHAWAT AND V. RAMASWAMI, JJ.] 
India;, Income··t"x Act, 1022 (11 0£ 1922), s. 2(A) (d)--Distribut:on 
on reduction of company's cap'tal to the extent oJ accnmulated pro-
fits treated as 'dividend'-Si:cli dividend whether 'income' under 
C Entry 54, List I, Government of India Act, 1935-Section whether 
ultra vires. 
D 
F 
a 
R 
'Distribution'-Meaning of-Whether synonymous with 'paid' or 
'credited' in s. 16(2) Gf the Income-tax Act-Notional distribution 
whether takes place on issue of certificate under s. 61 ( 4) of the Indian 
Companies Act, 1913. 
' 
The appellant company reduced its capital and the reduction """ 
confirmed by the High Court. On November ~. 1954, i.e. during the 
course of the appellant's accounting year eneling November 30, 1954, 
the Registcar of Companies issued the requisite certificate under 
s. 61 ( 4) of the Indian Companies Act. The s~rplus share capital 
cansequent on reduction was, however, not refunded to the shatil-
holders during the said accounting year. It was refunded by actual 
payment or by credit entries in the next accounting year which 
ended on November 30, 1955. The Income-tax Officer held that the 
said distribution to the extent of accumulated profits was 'dividend' 
under s. 2(6A) (d) of the Indian Income-tax Act, 1922. He further held 
that the distribution took place in the accounting year ending 
Novemter 30, 1955, relevant for the assessment year 1956-57. On 
these findings he calculated the rebate on super-tax in the terms of 
cl. (i)(b) of the second proviso to paragraph D of Part II of the first 
schedule to the Finance Act, 1956. The findings of the Income-tax 
Officer were upheld by the Appellate Assistant Commissioner and the 
Appellate Tribunal, and also, in reference, by the High Court. The 
appellant came to the Suprernen Court by certificate. 
It was contended on l:ehalf of the appellant: (1) In defining 
'dividend' to include capital receipts resulting from distribution of 
capital on reduction, the legislature went beyond the ambit of entry 
54, List I, Seventh Schedule, Government of India Act, 1935, and 
s. 2(6A)(d) of the Indil!n Income-tax Act, 1922 v;'lls therefore, ultra 
vires. (2) The certificate of the Registrar under s. 61 ( 4) of the Indian 
Companies Act was issued on November 4, 1954 and therefore the 
'distribution' under s. 2(6A)(d) took place in the previous year rele-
vant to the assessment year 1955-56. 
HELD: The expression 'income' in entry 54 List I of the Seventh 
Schedule to the Government of India Act, 1935, and the correspond-
ing 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, [5H; 6A l 
s 
SUPREME 
COURT 
REPORTS 
[1965] 3 s.c.:a. 
United Provinces v. Atiqa Begum, P9401 F.C.R. 
110, Sardar 
Baldev Singk v. Commissioner ot Income-tax, Delhi and Aimer, 
[1961] 1 S. C.R. 482, Ba!aji v. Income-tax Officer Special Investigation 
Circle, [1962] 2 S.C.R. 983 and Navnitlal C. Javeri v. K. K.. Sen, 
Appellate Assistant Commissioner of Income-tax 'D' Ranae, Bombay, 
[196.5] 1 S.C.R. 909, referred to. 
A company may on the pretext of reducing its capital, utilise 
its accumulated profits to pay eack 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. If this were permitted 
there would be evasion of super-tax. Section 2(6A)(d) embodies a 
law to prevent such evasion and hence it ialls within the ken of 
entry 54 of List I of Schedule Seven to the Government ot India 
Act, 1935. r6H; 7A, Gl 
There is no inconsistency between a receipt being a capital one 
under the company law and by fiction 
being 
treated as taxable 
· under the Income-tax Act. r7F-Gl 
Per Subba Rao. Mudholkar and Ramaswami, JJ. The expression 
'distribution' connotes so1nething actual and 
not 
notional. 
Like 
'paid' or 'credited' in s. 16(2), distribution' signifies 'the discharge of 
the company's liability and making the divid~nd available to the 
members entitled thereto. raD, F, G] 
J. Dalmia v. Commissioner of I.T. Delhi, (1964) 53 I.TR 83 and 
Mrs. P. R. Saraiya v. Commissioner of Income-tax, Bombay City I, 
Bombay, [1965] 1 S.C.R. 307, relied on. 
Distribu

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