Nalini Behari Singha, Ukhara vs Commissioner of Income Tax, West Bangal, Calcutta

G.K. Mitter, J.—The question referred to this Court u/s 66(1) of the Indian income tax Act in this case is:

Whether on the facts and in the circumstances of the case the amount of Rs. 28,125 was rightly included as dividend in the total income of the Assessee for the assessment year 1949-50?

The facts are shortly as follows: The Assessee was a member of the Ukhara Estate Zamindaries Ltd. and in the previous year relevant to the assessment year 1949-50 he had received among other sums dividend amounting to Rs. 37,528 from this company. In his return of income he claimed that this sum was not taxable because it came out of the funds of the company which were not in any sense taxable profits. His main contention was that the dividend had been declared and distributed by the company out of capital gains which arose after March 31, 1948 and as such did not fall within the definition of the word ''dividend'' in Section 2(6A) of the income tax Act as it stood at that time. The Appellate Assistant Commissioner took the view that out of the total dividends of Rs. 2,04,000 declared by the company, about Rs. 54,000 came from profits which had been charged to income tax and that Rs. 38,000 came from capital gains arising between April 1, 1946 and March 31, 1948, liable to capital gains tax. In the result, he held that a sum of Rs. 1,12,500 had come from capital gains arising after April 1, 1948 and was not liable either to capital gains tax or income tax. The Assessee''s share of this amount was Rs. 28,125. Accordingly, he excluded this sum from the dividends liable to tax in the hands of the Assessee. The Tribunal took the view that Section 2(6A) did not give any exhaustive definition of dividend but only an inclusive one. The exclusion of certain gains from accumulated profits for the issue in dispute. According to the Tribunal,

In the ultimate analysis the question is not whether the amounts received can be described as dividends but whether the amounts are in the nature of income. From whatever source the company might have paid them, by whatever name the paying company may have called them, the central fact remains that the payments are in the nature of a return to the shareholders on their outlay on the shares and they have been paid periodically and regularly by reference to the holding of shares. They bear all the attributes of income and must be taxed as such.

Section 2(6A) was introduced in the Act by the Indian income tax Amendment Act (VII of 1939) providing as follows:

''dividend'' includes:

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;

(b) any distribution by a company of debentures or debenture-stock, to the extent to which the company possesses accumulated profits, whether capitalised or not;

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company:

Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included; and

(d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not:

Provided that ''dividend'' does not include a distribution in respect of any share issued for full cash consideration which is not entitled in the event of liquidation to participate in the surplus assets, when such distribution is made in accordance with Sub-clause (c) or (d).

Explanation: The words ''accumulated profits'', wherever they occur in this clause, shall not include ''capital profits''.

The explanation was replaced by a proviso by Act 45 of 1947 reading:

Provided further that the expression ''accumulated profits'' wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after 31st day of March, 1948.

The contention of the revenue before the Tribunal, in substance, amounted to ignoring the proviso and proceeding on the ordinary meaning of the word ''dividend'' as something which the company distributes to the shareholders. No doubt, the definition of dividend is not an exhaustive one; but, in order to find out what are the returns it includes, one must consider the section as a whole. u/s 2(6A)(a) dividend includes any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. If the proviso which replaced the explanation was never included in the section the case of the Revenue Authorities would be unanswerable, but whatever be the reason the legislature in its wisdom thought that the distribution of accumulated profits which amounted to capital gains accruing to the company either before the 1st day of April 1946 or after 31st day of March 1948, were to be excluded. If capital gains accruing before April 1, 1946 or after March 31, 1948, were to be included within the meaning of dividend for the purpose of the Act, the proviso would be meaningless and wholly unnecessary. The function

of an excepting or qualifying proviso is to except out of the preceding portion of the enactment, or to qualify something enacted therein which but for the proviso would be within it: Craies on Statute Law, 5th ed., p. 201.

If ''dividends'' in Section 2(6A)(a) were to include accumulated profits in the nature of capital gains accruing before April 1, 1946 or after March 31, 1948, the legislature would be taking away with one hand what it gave by the other. I am not suggesting that such an anachronism may not occur in a statute, but if possible such a construction ought to be avoided and it seems to me plain that capital gains accruing before April 1, 1946 or after March 31, 1948, were not intended to be taxed in the hands of the shareholders as dividend.

Mr. Pal arguing on behalf of the revenue contended that in order to find out whether a sum was taxable as dividend or not all we had to see was whether it fell within the various meanings ascribed to it in Section 2(6A). According to him, if there was a distribution by a company of accumulated profits which entailed release by the company to its shareholders of any part of the assets of the company, there was a distribution of dividend. He referred us to the case of Pool v. The Guardian Investment Trust Co. Ltd. (1922) 1 K.B. D. 347 and certain observations of Sankey, J. in that case. There the Respondent company owned shares in Union Pacific Rail-Road Co., an American company which declared an extra dividend upon its common capital stock in the year 1914 out of its accumulated profits which consisted partly of cash and partly of shares of the Baltimore and Ohio Rail Road Co. in which a part of the reserve of the company had been invested. The Respondents duly received a proportion of this dividend in cash and shares and sold the shares for �1086-19-6 d. in July 1915 the amount being credited in their books to capital account. They were assessed to income tax in respect of the amount realised by the shares and on appeal the General Commissioners discharged the assessment holding that the distribution of the assets in question was a distribution by the Union Pacific Company of capital and not income. It was held by Sankey, J. that the distribution was not of capital but of profits or gains and consequently the sum in question was liable to income tax. Mr. Pal referred us in particular to a passage at p. 357 of the judgment where his Lordship said that

in my view, the true test as to whether a distribution of shares falls to be taxed depends upon two questions: (1) whether there has been a release of assets, (2) if so, whether the assets released were capital or income.

His Lordship took the view that the assets distributed were not capital assets but were profits or gains and as such were taxable under the income tax Act. Mr. Pal argued that the capital of the company in this case was left undisturbed even after the distribution of the dividend and therefore the distribution would only be profits or gains amounting to release of assets of the company taxable in the hands of the shareholders. But this argument misses the fundamental reasoning that what the shareholders received in this case was certainly accumulated profits in the shape of capital gains and would be taxable but for the proviso. I do not think it necessary to discuss in detail the other cases cited by Mr. Pal. In Inland Revenue Commissioners v. Reid''s Trustees 1949 A.C. 361, a South African company declared a dividend of 20 per cent payable from capital profits realised on the sale of properties in addition to a dividend payable from the trading profits. The shareholders of the company received in the United Kingdom various sums remitted to them in respect of these dividends the remittance being received without deduction of income tax. It was held by the House of Lords that the sums so received fell within the charging rule of Schedule D of the income tax Act of 1918. On the same line was the case of A. Veerappan and Others Vs. Commissioner of Income Tax, Madras, . The Assessee in this case was a shareholder in a company which had its registered office in Colombo owning various properties in Ceylon. The Assessee received a sum of Rs. 21,250 as dividend on 2125 shares held by him in the company. This was remitted to India. In the course of the assessment proceedings the Assessee contended that this sum was exempt from tax on the ground that it was paid out of the capital profits of the company. No evidence was however produced to substantiate this. Before the Tribunal it was also contended on his behalf that the Ceylon company was not a company within the meaning of the Indian income tax Act and therefore, the income tax Officer could not go by the definition of dividend in Section 2(6A)(a). Before the High Court reference was made to the explanation of Section 2(6A) which read:

the expression ''accumulated profits'' wherever it occurs in this clause shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948 and before-the 1st day of April, 1950,

and it was contended that the capital gains except those occurring within a certain period were to be excluded in considering whether it amounted to a dividend assessable to tax. The Court observed that

the records did not disclose nor had the Assessee been able to state the nature of the business of the company. For all that we know, these properties might have formed the trading assets of the company, a disposal of which would not yield capital profits but only income of a revenue nature.

This was sufficient to dispose of the case but earlier their Lordships had also observed that

the fact that the company received any capital profits is immaterial in so far as any distribution by way of dividend by that company to the shareholders is concerned.

Strong reliance was placed by counsel for the revenue on the above sentence and it was contended that what we have got to consider is the nature of the receipt by the Assessee; if it is income in his hands then it does not matter that it came as a result of distribution of capital profits by the company. Undoubtedly distribution of accumulated gains made by a company as accumulated profits would be covered by the definition of dividend in Section 2(6A) and as I have already said but for the proviso dividends of this nature received before and after specified dates would also be taxable in the hands of the shareholders.

Lastly, it was argued that the definition of dividend in Section 2(6A)(a) is only applicable when the distribution is not of cash but of assets of the company apart from cash. Reference was made in this connection to the decision of the Supreme Court in Kantilal Manilal and Others Vs. The Commissioner of Income Tax, Bombay, , where it was observed:

dividend need not be distributed in money; it may be distributed by delivery of property or right having monetary value.

It was said that distribution of dividend by delivery of property was all that was included within Section 2(6A)(a). I see no warrant for such a proposition. It is up to the company to make the distribution either in case or in shares or whatever other assets it may have. If it represented any part of the assets of the company a distribution thereof would amount to a distribution of dividend. The Supreme Court merely pointed out that the distribution need not necessarily be in cash.

For the reasons indicated the question must be answered in the negative and in favour of the Assessee who will have the costs of this Reference.

Masud, J.

I agree: