judgement:
APPEAL No. 560 or 1964.
Appeal from the judgment and order dated August 11, 1961 of the Madras High Court in Writ Petition No. 295, of 1958.
A.V. Viswanatha Sastri.
R. Thiagarajan for R. Ganapathy lyer, for the petitioner.
A. Ranganadham Chetty and A.V. Rangam, for the respon dents.
The Judgment of the Court was delivered by Gajendragadkar,C.J.
On August 4, 1956, the Governor of Madras issued a notification in exercise of the powers conferred on him by sub section (4) of section 64 of the Madras Hindu Religious and Charitable Endowments Act.
1951 (Madras Act XIX of 1951) directing that notification No. 638, dated the 25th May, 1937.
relating to Sri Thiyagarajaswami Temple, Tiruvarur, Nagapattanam Taluk, Tanjor District, be continued for a period of five years from September 30, 1956.
The earlier notification which was thus continued had itself been issued by the respondent State of Madras in exercise of the powers conferred on it by clause (b) of sub section (5) of s.65A of the Hindu Religious Endowments Act, 1926 (Madras Act 1I of 1927).
declaring that the temple in question and the specific endowments attached thereto shall be subject to the provisions of Chapter VI A of the said Act.
In other words, the earlier notification which brought the temple of Sri Thiyagarajaswami at Tiruvarur under the purview of the earlier Madras Act has been extended by the notification issued on 4th August, 1956.
for a further period ' of five years.
By a writ petition filed by the appellant, Sri la Sri Subramania Desika Gnana Sambanda Pandarasannadhi, Hereditary Trustee of the Rajan Kattalai of the temple in question, in the High Court of Madras the validity of this latter notification was challenged.
The High Court has rejected the pleas raised by the appellant in support of his case that the impugned notification is invalid, and has dismissed the writ petition filed by him.
It is against this order that the appellant has come to this Court with a certificate granted by the High Court.
The controversy between the parties as it has been presented before us in appeal.
really lies within a very narrow compass.
but in order to appreciate the points raised for our decision, it is necessary to set out very briefly the background of the present litigation.
19 In the town of Tiruvarur in Thanjavur Dist.
there is an ancient temple.
The Presiding Deity is Sri Thyagarajaswami.
A distinguishing feature of this temple is that apart from an allowance called the Mohini allowance ', there is no other property which can be treated as devoted for its general maintenance.
A large number of specific endowments called 'Kattalais ' with specific reference to special services in the temple, its festivities and several charities in glorification of the principal deity, have however been made in respect of this temple.
It is said ' that there are 13 such Kattalais, the important amongst them being Rajan Kattalai, Ulthurai Kattalai, Abisheka Kattalai and Annadanam Kattalai.
In respect of these Kattalais, large endowments have been made.
According to the appellant, these endowments were made by the Indian Rulers who ruled Thanjavur before the establishment of the British Rule.
It appears that the management of each one of these Kattalais is vested in a certain Trustee or Trustees hereditarily.
The trusteeship of Rajan Kattalai vests in the head of the Dharmapuram mutt in the Thanjavur district.
The Dharmapuram mutt itself has large endowments of lands in Thanjavur and Tirunelveli districts.
The head of this mutt is known as Pandarasannadhi and under his management there are about 27 temples.
Having regard to the nature of the duties of the head of a mutt of this importance and magnitude, it is not possible for the Pandarasannadhi to supervise all the temples personally, and so, Deputies are appointed on his behalf to supervise and look after the management of the various institutions.
With regard to the services connected with the Rajan Kattalai in Sri Thyagarajaswami temple at Thiruvarur, the head of Dharmapuram mutt generally functions through a deputy known as Kattalai Thambiran.
Ordinarily, a Kattalai is a specific endowment in respect of which it would be competent for the founder to prescribe the line of trustees for its management, and so, the property endowed for the performance of the Kattalai in question cannot be held to be transferred in trust to the trustee vesting the legal estate therein in him; such legal estate would vest in the deity itself.
Thus, the position of the Kattalai trustee would normally be no more than that of a manager of a Hindu Religious Endowment.
It, however, appears that Kattalais which are attached to Sri Thyagarajaswami temple at Thiruvarur have been treated as constituting a slightly different category by the Madras High Court in Vythilinga Pandara Sannadhi vs Somasundara Mudaliar(1) but with that aspect of the matter, we are not concerned in the present appeal.
In practice, a scheme appears to have been evolved that in .regard to the various services in the temple in respect of which Kattalais had been endowed, the management of the allotted properties vested in separate trustees and in that sense, all the trustees administering separate Kattalais could be said to constitute a kind of corporation in which (1)[1894] I.L.R. 20 the management of the temple properties vested.
each one of its members being in charge of particular items of properties the proceeds of which would be utilised for the performance of a specific Kattalai.
In course, of time, however, this practice did not work harmoniously and coordination between the duties of the various trustees worked unsatisfactorily, because more emphasis came to be placed on the individuality of the Kattalais and that led to anomalies in the actual administration of the said Kattalais.
As a result.
in 1910, a suit was flied under s.92 of the Code of Civil Procedure for the settlement of a scheme to manage the affairs of the temple in the Sub Court at Thanjavur.
A scheme was accordingly settled.
and when the matter was taken in appeal, the High Court substantially confirmed the said scheme (vide Gnana Sambanda vs Vaithilinga Mudaliar).
(1) The scheme thus framed governed the management of the temple thereafter.
It appears that the affairs of the said temple again came up for consideration before the Madras High Court in Ramanathan Chettiar vs Balayee Ammal(2).
In that case, the High Court rejected the contention of one of the Kattalai trustees that subject to the performance of services, the endowments in question had to be treated as his .property; the view taken by the High Court on this occasion was that all the Kattalais were appendages of the temple; though each Kattalaidar was a separate trustee, there was no question of private ownership.
In the year 1931, there was another suit under s.92 of the Code on the file of the District Court, East Thanjavur for the modification of the scheme already framed.
It was urged that certain defects in the scheme had been noticed in the actual working, and so, it was necessary to make some modifications.
Accordingly, some modifications were made.
Meanwhile, the Madras Legislature passed the Madras Hindu Religious Endowments Act, 1927.
The object of this Act was to provide for the proper administration and governance of certain Hindu Religious Endowments.
The Act contemplated the supervision of these endowments through a statutory body called the Madras Hindu Religious Endowments Board.
It divided the temples into "excepted and non excepted temples".
It also provided for the framing of a scheme for the management of the temples.
This Act was amended by Madras Act IX of 1937.
The result of the amendment was that Chapter VI A was added to the Act of 1927.
The provisions .of this chapter laid down that notwithstanding that a temple, or specific endowment attached to a temple was governed by a scheme previously framed by the Board or settled by a Court, the Board if it were satisfied that the temple or endowment was being mismanaged and that in the interests of the administration of the temple or endowment it was necessary to take (1) [1928] 18 L.W. 247.
(2) [1923] 27 L.W. 33.
21 proceedings under the said Chapter, might "notify" the temple or endowment.
and on the publication of such notification, the administration of the temple or endowment would go under the control of the Board notwithstanding the scheme which might have been framed already.
On taking management of a notified temple or endowment, the Board was authorised to appoint an Executive Officer and define his duties.
In consequence, such Executive Officer would virtually displace the trustee and would function under the control of the Endowment Board.
The result of the notification in substance would.
be that the previously existing scheme would be suspended, and the management would vest in the Board.
Soon after this Act was passed, proceedings were commenced by the Board for the purpose of notifying the temple with which we are concerned in the present appeal, and the Kattalais attached thereto.
The Trustees of the various Kattalais naturally opposed this step, but their objections were over ruled, and on May 25, 1937, a notification was issued.
To this notification we have already referred.
In pursuance of this notification, an Executive Officer was appointed by the Board on July 12, 1937.
On July 30, 1937, the Board defined the powers of the Executive Officer and directed him to take charge and be in possession of the temple and the various Kattalais attached thereto.
As a result of this order, the Executive Officer began to exercise all the Dowers and discharge all the functions of a trustee of a non excepted temple, and that left very little powers in the hands of the trustees of the several Kattalais.
The Pandarasannadhi of the Dharmapuram Mutt who was then the hereditary Trustee of the Rajan Kattalai instituted C.S. No. 20 of 1938 in the Madras High Court for a declaration that the said notification was illegal and for setting aside the orders issued by the Board in pursuance of the said notification.
It appears that the suit did not proceed to a trial, because the parties entered into a compromise.
In substance, as a result of the compromise, the notification was maintained, but the possession of the Kattalai properties was restored to the Trustee who was to manage the same by a staff under his control.
and had to keep accounts.
Certain other provisions were made to safeguard the efficient management of the said trust, and the overall control and supervision of the Executive Officer was maintained.
One of the clauses of the compromise, clause (k) expressly reserved to the Board liberty to re define the powers and duties as specified above in case the trustee commits any wilful breach of the above terms and conditions or is guilty of wilful neglect of the duties specified above, provided that the Board shall not do so except on notice to the trustee and after giving reasonable opportunity to him to be heard in his defence.
This compromise decree was passed on August 1, 1940, and since then, the administration of the Kattalai in question has been conducted jn accordance with the terms of this decree.
22 After the Constitution came into force on January 26, 1950,the Hindu Religious Endowments Act of 1927 was repealed and in its place Act XIX of 1951 was substituted.
This latter Act came into force on September 30. 1951.
Section 5 of this Act repealed the earlier Act of 1927.
The Chapter relating to notification of temples and endowments was numbered as Chapter VI in the new Act.
Section 64 of this new Act provided for the notification of a temple or a religious institution, and sub s.(4) laid down that every notification published under this section shall remain in force for a period of five years from the date of its publication; but the Government may at any time on an application made to them cancel the notification.
This section had made provision for the notification of religious institutions after this new Act came into force.
Section 103(c) dealt with cases where notifications had been made trader the previous enactment.
That section provided that the notification published under s.65A. sub s.(3) or sub s.(5) of the said Act and in force immediately before the commencement of the new Act would be deemed to be a notification published under s.64 and would be in force for five years from the date of the commencement of the new Act (No. XIX of 1951).
In 1956, another Amending Act (No. IX of 1956) was passed.
Section 2 of this Amending Act substituted a new sub section in the place of s.64(4).
Under that provision, every notification published or deemed to be published under that section shall remain in force for a period of five years.
but it may by notification be cancelled at any time or continued from time to time for a further period or periods not exceeding five years at a time as the Government may by notification in each case think fit to direct.
As a consequence, s.103(c) was also amended, and the words "and shall be in force for five years from the date of the commencement of this Act" were omitted.
The result of this amendment was that the notification issued or deemed to be issued under the relevant provisions of the new Act would remain in force for a period of five years; it can be cancelled even before the said period expired, or it can be continued after the expiry of the said period from time to time for such further period or periods as the Government may deem fit.
We have already seen that the impugned notification has been issued under s.64(4) of Act XIX of 1951.
That, broadly stated, is the background of the present dispute between the appellant and the respondent State of Madras.
Two principal contentions were urged before the High Court by the, appellant in support of his plea that the impugned notification is invalid.
It was argued that the trusteeship of the Rajan Kattalai being hereditary in the head of the Dharmapuram Mutt.
is a right of property under article 19(i)(f) of the Constitution, and since s.64 of the Act empowers the respondent State to take away that right of property in an arbitrary and capricious manner.
that provision is Constitutionally invalid.
The second ground which was urged by the appellant was that the notification was issued without 23 giving an opportunity to the appellant to show cause why the earlier notification should not be extended.
and that made the notification invalid.
The High Court has rejected the first contention,and we are really not called upon to consider that finding of the High Court in the present appeal, because the arguments urged before us covered a much narrower ground.
In regard to the second contention raised by the appellant.
the High Court has found in favour of the appellant that the proceedings authorised to be taken under s.64(4) are in the nature of quasi judicial proceedings.
and the order which can be passed under the said provision is a quasijudicial order; and so, the High Court conceded that before making such an order, it was necessary that the appellant should have been given an opportunity to be heard, for that is the requirement of natural justice; but the High Court thought that this specific point had not been taken by the appellant in his writ petition; that is why it was not inclined to allow it.
The High Court refused to uphold the said point for the other reason that the impugned notification would soon expire on September 30, 1961 and the Government would then have to consider whether it should be renewed or not.
and the High Court thought that on that occasion, the Government would certainly hear the appellant before making up its mind on that issue.
The judgment of the High Court was delivered on August 11. 1961, and since the High Court thought that the impugned order can last only for a short period thereafter, it would serve no purpose to issue a writ quashing the said order on the ground that the principles of natural justice had not been complied with before passing it.
Mr. Viswanatha Sastri for the appellant contends that both the grounds given by the High Court in support of its refusal to issue a writ are plainly erroneous, and were satisfied that Mr. Sastri is right.
Before dealing with these grounds, however, it is necessary to consider the argument urged by Mr. Raganathan Chetty on behalf of the respondent State that the High Court was in error in holding that the Order which has been passed under s.64(4) is a quasi judicial order and can be legitimately passed only after complying with the principles of natural justice.
He argues that though the proceedings contemplated by s.63 and s.64(1), (2) and (3) are quasi judicial proceedings.
the position in regard to the Order which can be passed under s.64(4) is entirely different.
He concedes that in making the first order notifying an institution under s.64(3).
principles of natural justice have to be complied with: in fact.
express provisions have been made in that behalf, but he argues that the said principles do not apply where a notification validly issued under s.64(3) has merely to be cancelled or extended under 64(4).
Chapter VI of Act XIX of 1951 which consists of sections 53 to 69, deals with the notification of religious institutions.
Secion 63(1) in terms requires the issue of notice to show cause why a specific institution should not be notified.
Sub section (2) requires 24 that the said notice shell state the reasons for the action proposed, and specify a reasonable time, not being less than one month from the date of the issue of the notice, for showing such cause.
Subsection (3) allows objections to be filed by the trustee; and sub s.(4) requires that such objections shall be in writing and shall reach the Commissioner before the period specified.
Having provided for the issue of a notice and for objections to be filed by the trustee, s.64 deals with the consideration of the objections, if any, and notification of institution.
S.64(2) requires an enquiry to be held by the Commissioner at which the validity of the objections would have t9 be examined.
Section 64(3) authorises the Commissioner to make, a report to the Government that in his opinion, the institution should be notified.
Thereupon, the Government can issue the notification in question.
Thus, it is plain that the issue of a notification has to be preceded by an enquiry and the trustee in question is entitled to urge his objections against issue of such a notification; and so, there can be no doubt that these proceedings are quasi judicial, and if a notification is issued under s.64(3) without complying with the requirements of the provisions of s.63 and s.64(1) and (2), it would be invalid.
Mr. Cherry.
however, contends that the position under s.64(4) is entirely different.
We have already quoted this provision.
According to Mr. Cherry, the decision as to whether a notification should be cancelled before the period of five years is over, or continued from time to time, is a purely administrative decision.
The Government is already in possession of the material relevant for the purpose of deciding the question.
This material has been placed before the Government at time of the enquiry which is held by the Commissioner under s.64(2) before the initial notification is issued, and all that the Government has to do on subsequent occasions is to consider whether the said notification should be cancelled or continued.
Such a decision needs no further enquiry and cannot be characterised as quasi judicial.
That is how Mr. Cherry supports the validity of the impugned notification, though it has been issued without giving notice to the appellant.
In support of this contention, he has relied upon the decision of this Court in Shri Radeshyam Khare & Anr.
vs The State of Madhya Pradesh and Others.
(1) In that case, it was held that sections 53A and 57 of the C.P. and Berar Municipalities Act, 1922, differed materially in their scope and effect, and that the nature of the orders which can be passed under the two respective sections was not the same.
That is why this Court found that whereas in taking action under s.53A the State Government was required to act judicially, the same could not be said to be true about s.57.
We ' do not see how this decision can afford any assistance to Mr. Chetty in support of his argument that s.64(4) is entirely different (1)[1959] S.C.R. 1440.
25 in character from s.64(3).
It is plain that just as while acting under s.64(3) the Government has ultimately to consider whether a case has been made out for the issue of a notification, so while acting under s.64(4), Government has to consider whether a case has been made out for cancelling the notification or for extending it.
and on each occasion, where a decision has to be taken under s.64(4), the process of reaching the decision is exactly similar to the process in reaching a decision under s.64(3).
All relevant facts in regard to the management of the endowment must be taken into account, and the question to be considered on each occasion would be whether or not supervision by the Executive Officer under the notification is required in the interests of public good.
It is difficult to see how the Government can legitimately and satisfactorily consider the question as to whether the notification should be cancelled, unless it hears the party asking for such cancellation.
Similarly, it is difficult to understand how Government can legitimately and reasonably decide to extend the notification, unless it gives an opportunity to the Trustee to show cause why it should not be continued.
One can imagine several circumstances which may arise after the issue of the first notification and which would help the Trustee to claim that the notification should either be cancelled or should not be extended.
The nature of the order which can be passed under s.64(4) and its effect on the rights of the trustee are exactly similar to the order which can be passed under s.64(3).
We are.
therefore, satisfied that the High Court was right in holding that it was obligatory on the respondent State as a matter of natural justice to give notire to the appellant before the impugned notification was passed by it.
That takes us to the consideration of the question as to whether the two reasons given by the High Court in support of this decision are valid.
The first reason, as we have already indicated, is that the High Court thought that the plea in question had not been raised by the appellant in his writ petition.
This reason is no doubt, technically right in the sense that this plea was not mentioned in the first affidavit filed by the appellant in support of his petition; but in the affidavit in rejoinder filed by the appellant this plea has been expressly taken.
This is not disputed by Mr. Chetty, and so, when the matter was argued before the High Court, the respondents had full notice of the fact that one of the grounds on which the appellant challenged the validity of the impugned Order was that he had not been given a chance to show cause why the said notification should not be issued.
We are, therefore, satisfied that the High Court was in error in assuming that the ground in question had not been taken at any stage by the appellant before the matter was argued before the High Court.
The second reason given by the High Court appears to be plainly erroneous.
In assuming that the impugned Order would come to an end on September 30, 1961, the High Court appears to have ignored the fact that before it delivered its judgment, a 26 new Act had come into force (Madras Act XXII of 1959).
This Act came into operation on January I, 1960.
Section 72(7) of this Act provides that any notification published under sub s.(1) or sub s.(3) of section 64 of Act XIX of 1951 before the commencement this Act shall be as valid as if such notification had been published under this Act.
This provision has again been subsequentlyamended by Act XL of 1961, and the amended provision is retrospectively brought into operation from January 1. 1960.
We do not propose to consider in this appeal the effect of these amendments, because it is enough for our purpose to state that as a result of the subsequent Act which had already come into force on the date when the High Court delivered its judgment, it is obvious that the impugned notification would not automatically come to an end on September 30, 1961.
This position is not disputed by Mr. Chetty and appears to be plain; so that the main reason which weighed with the High Court in not issuing a writ in favour of the appellant that the impugned notification would remain in operation for a very short period after it delivered its judgment, is found to be erroneous; and the impugned notification would continue in operation without the appellant getting an opportunity to show cause why it should not continue to be in operation.
We are, therefore, satisfied that the High Court should have granted the prayer made by the appellant for the issue of an appropriate writ cancelling the impugned notification.
Though the impugned notification has been issued in 1956 for five years, its life gets statutorily extended, and the only way in which the appellant. 'would be able to show cause why the said notification should not be extended .in respect of his Kattalai is to quash the said notification.
In the result, we allow the appeal, set aside the order passed by the High Court, and direct that an appropriate writ or order be issued quashing the notification issued by the respondent State on August 4, 1956.
The appellant would be entitled to his costs throughout.
Appeal allowed.

summary/full:
By a notification issued in 1937 the respondent State of Madras had made Ch.
VI A of the Hindu Religious Endowments Act, 1926, applicable to the Thiyagarajaswami temple at Tiruvarur.
In 1956 the aforesaid notification was extended for a period of five years beginning on September 30, 1956.
This was done in exercise of powers under section 64(4) of the Madras Hindu Religious and Charitable Endowments Act, 1951.
The appellant challenged the issue of the notification under section 64(4) in a writ petition before the High Court.
At the hearing it was urged that the impugned notification was invalid as it had been passed without giving a reasonable opportunity to the appellant to show cause against it.
The High Court while accepting this contention, nevertheless refused to issue.
the writ prayed for because: (1) the said plea had not been taken in the writ petition and (2) the period for which the notification had been extended was shortly due to expire.
The appellant came to the Supreme Court with certificate of fitness.
It was contended on behalf of the appellant that the two reasons given by the High Court for not issuing a writ were wrong.
The respondent State on the other hand contended that no quasi judicial enquiry was necessary for extending an existing notification under section 64(4) although such an enquiry was necessary before issuing a notification for the first time under section 64(3).
HELD: (i) ' Whether f,or issuing a notification under 64(3) or for extending an existing notification under section 64(4) the process of dec.ision is the same.
In either case the Government had to satisfy itself whether supervision by the Executive Officer under the notification is required for public good.
The Government cannot legitimately and satisfactorily consider the question as to whether the notification should be cancelled without hearing the party asking for cancellation; nor can it legitimately and reasonably decide to extend the notification without hearing the trustee.
Circumstances could arise after the issue of the first notification which would help the Trustee to claim that the notification should either be cancelled or should not be extended.
The nature of the order which can be passed under section 64(4) and its effect on the rights of the Trustee are exactly similar to the order which can be passed under section 64(3).
[25 A E] The High Court was therefore right in holding that it was obligatory on the respondent State as a matter of natural justice to give, notice to the appellant before the impugned notication was passed by it.
[25E] Shri Radeshyam Khare & Ant.
vs State of Madhya Pradesh and Ors.
, distinguished.
18 (ii) Although the plea of denial of natural justice had not been taken by the appellant in his writ petition, it had been taken in the rejoinder, and the respondent thereafter had full notice of the said plea.
Therefore the first reason given by the High Court for refusing the writ was wrong.
[25G H] (ii) The High Court ignored the fact that before it delivered its judgment a new Act had come into force, namely, Madras Act XXII of 1959, whereby the life of the impugned notification had been extended.
Therefore the second reason which weighed with the High Court in not issuing a writ in favour of the appellant, that the impugned notification would remain in operation for a very short period after it delivered its judgment, was also wrong.
[26C E]


judgement:
ivil Appeal No. 414 of 1965.
Appeal from the judgment and order dated February 21, 1962, of the Punjab High Court in I.T. Reference No. 9 of 1959.
N.C. Chatterjee and R.V. Pillai, for the appellant.
C.K. Daphtary, Attorney General, R. Ganapathy lyer, R.N. Sachthey for R.H. Dhebar, for the respondent.
The Judgment of SUBBA RAO, MUDHOLKAR and RAMASWAMI JJ.
was .delivered by SUBBA RAO, J.
The dissenting Opinion of DAYAL and BACHAWAT JJ.
was delivered by BACHAWAT J. Subba Rao, J.
This appeal by certificate raises the main question whether section 2(6A)(d) of the Indian Income tax Act, 1922, hereinafter called the Act, is ultra vires the Central Legislature.
The assessee, a public limited company, was incorporated on May 23, 1945, under the Indian Companies Act, 1913, with a share capital of Rs. 50 lakhs.
On December 15, 1947, at the instance of the appellant the High Court sanctioned the reduction of the capital of the company from Rs. 50 lakhs to Rs. 25 lakhs.
On December 16, 1953, the High Court sanctioned a further reduction of the share capital from Rs. 25 lakhs to Rs. 15 lakhs.
On November 4, 1954, the Registrar of Companies granted the requisite certificate under section 61(4) of the Indian Companies Act.
On November 5, 1954, the appellant issued notices to the shareholders inviting applications for the refund of share capital so reduced.
On the receipt of the applications, appropriate debit entries were made in the accounts of the shareholders and the amounts were actually paid to them during the previous year, i.e., December 1, 1954, to November 30, 1955.
Under section 2(6A)(d) of the Act, "dividend" includes any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalised or not.
In assessing the income of the appellant company for the assessment year 1956 57, the Income tax Officer held that the said dividends were distributed during the accounting year and on that finding he calculated the rebate on super tax in terms of el.
(i)(b) of the second proviso tO paragraph D of Part I1 of the first schedule to the Finance Act, 1956.
If the dividends were distributed during the accounting year.
i.e., December I, 1953, to November 30, 1954, the appellant would be entitled to a higher rate of rebate on super tax under el.
(ii) of the first proviso to paragraph D of Part II of the first schedule to the Finance Act, 1956.
The Income tax Officer further held that the 4 assessee 's accumulated profits at the time of the reduction of the Capital from Rs. 25 lakhs to Rs. 15 lakhs were Rs. 8,42,337.
On appeal the Appellate Assistant Commissioner accepted the said figure arrived at the Income tax Officer.
On further appeal, the Income tax Appellate Tribunal, for the reasons recorded by it in its order, reduced the figure under the said head by a sum of Rs. 3.61,40.5.
It was contended on behalf of the assessee that in as much as the certificate from the Registrar for the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs was obtained on November 4, 1954, the distribution of the dividends should be deemed to have taken place during the year 1953 54 and, therefore, the said dividends were not exigible to tax for the assessment year.
The Incometax Officer, the Appellate Assistant Commissioner and the Tribunal concurrently rejected that plea and held that, as the actual payment to the shareholders of the refund of the capital and the debit in the accounts of the shareholders were effected in the accounting year, the said dividends must be held to have been distributed in the accounting year.
There is another sum of Rs. 11,687 3 0 received by the appellant as security deposit on account of empty bottles.
A question was raised whether the said amount could be considered as capital gains and, therefore, should be excluded from the accumulated profits.
The Appellate Tribunal held in favour of the assessee.
The assessee and the Commissioner of Income tax filed two applications before the Tribunal for referring questions of law arising out of the Tribunal 's order to the High Court.
The Tribunal referred the following questions of law to the High Court for its opinion.
(1) Whether the provisions of section 2(6A)(d) of the Indian Income tax Act are ultra vires of the Central Legislature.
(2) Whether the accumulated profits amounting to Rs. 4,69,244 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 us 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 us 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.
5 The High Court answered all the questions against the assessee.
Hence the appeal.
Mr. N.C. Chatterjee, learned ,counsel for the assessee, did not contest the correctness of the answer given by the High Court in 'regard to the third question and, therefore, nothing further ' need be said about it.
The first question is whether section 2(6A)(d) of the Act is ultra vires the Central Legislature.
Sub.section (6A) was inserted in section 2 of the Act by section 2 of the Indian Income tax (Amendment) Act,.
1939 (Act VII of 1939).
Section 2(6A)(d) of the Act reads: " 'Dividend ' includes 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." The said Act VII of 1939 was passed by the Central Legislature in exercise of its powers conferred under section 100 of the Government of India Act, 1935, read with entry 54 of List I of the.
Seventh Schedule thereof.
Entry 54 reads: "Tax on income other than agricultural income." Mr. Chatterjee contends that while the said entry 54 enables the appropriate Legislature to impose a tax on "income", the Legislature by enlarging the definition of dividend so as to include the amount received by a shareholder towards the share capital contributed by him, which cannot possibly be income, seeks to tax a capital receipt, and, therefore, the said clause is ultra vires the Central Legislature.
Mr. R. Ganapathy lyer, learned counsel for the Revenue, contends that a legislative entry must receive the widest connotation and should not be interpreted in any narrow or restricted sense, and if so construed the said entry enables the Legislature to make a law to prevent evasion of tax on income by devious methods and that the Legislature in the instant case seeks to prevent the growing evil of tax evasion by companies distributing profits under the guise of reduction of capital.
It is well settled rule of construction that entries in the legislative lists cannot be read in a narrow or restricted sense: they should be construed most liberally and in their widest amplitude.
In the words of Gwyer, C.J., in The United Provinces vs Atiqa Begum(1) "each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it.
" This Court in a number of decisions held that the expression "income" in entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935, and the (1) 6 corresponding entry 82 of List 1 of the Seventh Schedule to the Constitution of India, shall be widely and liberally construed so as to enable a Legislature to provide by law for the prevention of evasion of income tax.
In Sardar Baldev Singh vs Commissioner Income tax, Delhi and Ajmer (1) this Court maintained the constitutional validity of section 23A(1) of the Income tax Act, which empowered the Income tax Officer to impose super tax in a case where a private limited company distributed less than sixty per cent.
of the total income of the company as dividends on the ground that the object of the section was to prevent avoidance of super tax by shareholders of a company in which the public were not substantially interested.
In Balaji vs Income tax Officer, Special Investigation Circle (2) this Court ruled that section 16(3)(a)(i) and (ii) of the Income tax Act, which enabled the Income tax Officer in computing the total income of a person to include the share of the income of his wife and minor sons therein, was constitutionally valid for the reason that it was intended to prevent evasion of tax by persons putting the properties in the names of their wives or minor children, as the case may be.
This Court again in Navnitlal C. Javeri vs
K.K. Sen, Appellate Assistant Commissioner Income tax, "D" Range, Bombay (3) sustained the validity of section 2(6A)(e) of the Indian Income tax Act, 1922, which included the definition of "dividend", inter alia, payment made by the company by way of advance or loan to a shareholder to the extent to which the company possessed accumulated profits on the ground that it was a measure to prevent private controlled companies adopting the device of making advances or giving loans to their shareholders with the object of evading payment of tax.
The question in the instant case, therefore, is whether the constitutional validity of section 2(6A)(d) of the Act can be supported on the ground that it was enacted to prevent evasion of income tax.
While an entry delineating a legislative field must be widely and liberally construed, there must be a reasonable nexus between the item taxed and the field so delineated.
The said clause deals with the distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits.
Accumulated profits of a company may be utilised in the following 3 ways: (1) for increasing the capital stocks; (2) for distributing the same among the shareholders by way of dividends; and (3) for reducing the capital.
Ordinarily a company reduces the capital when there is loss or depreciation of assets; in that event there is no question of distribution of profits to the shareholders but the shares are only devaluated.
But 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.
A shareholder though in form gets back the whole (1) ; (2) [1962]2 S.C.R. 983.
(3)[1965] 1 S.C.R. 909.
7 or a part of the capital contributed by him, in effect he gets a share of the accumulated profits, which, if a straightforward course was followed, he should have received as dividend.
This is a division of profits under the guise of division of capital; a distribution of profits under the colour of reduction of capital.
If this was permitted, there would be evasion of super tax, the extent of the evasion depending upon the prevalence of the evil.
The Legislature, presumably in the interest of the exchequer, enlarged the definition of "dividend" to catch the said payments within the net of taxation.
By doing so, it is really taxing the profits in the hands of the shareholders, though they are receiving the said profits under the cloak of capital.
Learned counsel for the appellant contends that under the Companies Act a company can lawful1y reduce the share capital with the sanction of the Court, that there is no prohibition thereunder against such a reduction being made by way of distribution of accumulated profits to the shareholders, that the amounts so paid to them would be in law capital receipts and that, therefore, there could not be in law or in fact any evasion of tax on income.
Reliance is placed upon sections 100 to 103 of the Companies Act.
This argument mixes up two aspects the legal and fiscal.
Under Company Law the question of reducing capital is a domestic one for the decision of the majority of shareholders.
The Court comes into the picture only to see that the reduction is fair and equitable and that the interests of the minority and the creditors do not suffer.
It may not also be concerned with the motive of the general body in resolving to reduce the capital; but the Income tax law is concerned with tax evasion.
Tax can be evaded by breaking the law, or avoided in terms of the law.
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 Seven to Government of India Act, 1935.
The next question is 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.
The relevant sections of the Act in this context are section 2(6A)(c1) and section 16(2).
Section 2(6A)(d) has been already extracted.
The relevant part of l 6(2) reads: "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 di i b u t e d . . . . . . . . .
8 "Dividend", with which we are now concerned, is not that which we ordinarily understand by that expression, but dividend by definition.
Under section 2(6A)(d) of the Act it is one of the ingredients of the definition that it shall have been distributed by a company on reduction of the capital to the extent to which the company possesses accumulated profits.
Under section 16(2) of the Act such a dividend shall be deemed to be an income of the previous year in which it is paid, credited or distributed.
Unless such a distribution as is mentioned in cl.
(d) of section 2(6A) of the Act had taken place, it would not be a dividend.
If it was not so distributed, section 16(2) of the Act would not be attracted.
To put it in other words, if the accumulated profits were distributed, it would satisfy not only the definition of "dividend" in cl.
(d) but also would fix the year in which it would be deemed to be income.
What then is the meaning of the expression "distribution"? The dictionary meaning of the expression "distribution" is "to give each a share, to give to several persons".
The expression "distribution" connotes something actual and not notional.
It can be physical; it can also be constructive.
One may distribute amounts 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.
This Court had to construe the scope of the word "paid" in section 16(2) of the Act in J. Dalmia vs Commissioner of I.T. Delhi(1).
Shah, J., speaking for the Court observed: "The expression "paid" in section 16(2), it is true, does not contemplate actual receipt of the dividend by the member.
In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto." This Court again reaffirmed the said principle in Mrs. P.R. Saraiya vs Commissioner of Income tax, Bombay City 1, Bombay(2) and held that where dividend was not credited to any separate account of the assessee so that he could, if he wished, draw it, it was not "credited or paid" within the meaning of section 16(2) of the Act.
The same meaning must be given to the word "distribution".
The only difference between the expression "paid" and the expression "distribution" is that the latter necessarily involves the idea of division between several persons which is the same as payment to several persons.
At this stage the anomaly that is alleged to flow from our view may conveniently be noticed.
It is said that there will bedifferent points of time for ascertaining the extent of the accumu lated profits.
With the result section 2(6A)(d) of the .Act becomes un workable in practice or at any rate leads to unnecessary complications.
We do not see any justification for this comment.
9 Distribution is a culmination of a process.
Firstly, there will bea resolution by the General Body of a company for reduction of capital by distribution of the accumulated profits amongst the shareholders; secondly, the company will file an application in the Court for an order confirming the reduction of capital; thirdly, after it is confirmed, it will be registered by the Registrar of Joint Stock Companies; fourthly, after the registration the company issues notices to the shareholders inviting applications for refund of the share capital; and fifthly, on receiving the applications the company will distribute the said profits either by crediting the proportionate share capital to each of the shareholders in their respective, accounts or by paying the said amounts in cash.
Out of the said 5 steps, the first 4 are only necessary preliminary steps which entitle the company to distribute the accumulated profits.
Credits or payments are related to the said declaration; that is to say, distribution is from and out of the accumulated profits resolved to be distributed by the company.
In this view, the accumulated profits to be distributed are fixed by the resolution and the figure does not change with the date of payment or credit.
Indeed, a similar process is to be followed in the case of declaration of ordinary dividends; firstly, there will be a resolution by the General Body of the company declaring the dividends; secondly, thereafter the amounts payable to each of the shareholders are distributed by appropriate credits or payments.
Dividends may be paid or credited to different shareholders during.
different accounting years; and the shareholders may be assessed in respect of the said payments in different years.
Even so, the payments are referable only to the declaration of the dividends out of the profits of a particular year.
This Court, as we have noticed earlier, in the decisions cited supra held that the year of credit or payment to a shareholder was crucial for the purpose of assessment and not the date of declaration.
Let us see whether this view introduces any complication in the matter of reduction of rebate on super tax payable by the company.
The appellant Company set up a claim for a rebate on super tax under el.
(ii) of the first proviso to paragraph D of Part II of the first schedule to the Finance Act, 1956.
The Company based its claim on the contention that the distribution of dividends on reduction of capital took place during the year ending November 30, 1954, and not during the year ending November 30, 1955, and, therefore, el.
(i)(b) of the second proviso to paragraph D of Part II of the first schedule to the Finance Act, 1956, read with Explanation (ii) to paragraph D, which provides for reduction of rebate allowable under cl.
(ii) of the first proviso by an amount computed at certain slab rates on the amount of dividends distributed to the shareholders during the previous year.
could not be invoked.
To put it in other words, the assessee claimed that as the dividents were not distributed in the accounting year, there could not be any reduction of the rebates under 10 cl.
(i)(b) of the said proviso.
If, as we have held, the distribution was made during the year ending November 30, 1955, i.e., the accounting year when the amounts were paid, the Revenue would be entitled to reduce the rebate by the amount computed at the prescribed rates on the amount of dividends.
Some complication may arise only 'if we accept the argument that the date of payment fixes the date for ascertaining the quantum of accumulated profits.
But we have rejected that contention.
In this view, the claim of reduction of rebate on super tax provided by the first schedule to the Finance Act, 1956, can be worked out without any confusion or complication.
We, therefore, hold that the dividends must be deemed to have been paid or distributed in the year when it was actually, whether physically or constructively, paid to the different shareholders, that is to say when the amount was credited to the separate accounts of the shareholders or paid to them.
What are the facts in the present case? The High Court, on August 6, 1954, sanctioned the reduction of the capital from Rs. 25 lakhs to Rs. 15 lakhs.
On November 4, 1954, the Registrar of Companies issued the certificate under section 61(4) of the Companies Act.
On November 5, 1954, the Company issued notices to the shareholders inviting applications for refunds.
In the notice sent to the shareholders they were informed that the share transfer register of the Company would remain dosed from November 16, to November 30, 1954 (both days inclusive) and refund would be made to those shareholders whose names stood on November 15, 1954, in the books of the Company.
After the applications were received, the amounts payable to the shareholders were debited in the accounts and refunds were actually granted during the accounting year, i.e., between December 1, 1954, and November 30, 1955.
It is clear from the said facts that the amounts were distributed only during the accounting year, when the amounts were both debited and paid.
We, therefore, agree with the High Court that the dividends were distributed to the shareholders during the accounting year, i.e., 1954 55.
In the result, the appeal fails and is dismissed with costs.
Bachawat J;.
For the reasons given by brother Subba Rao J, we agree that section 2(6A)(d) of the Indian Income tax Act, 1922 is not ultra vires the Central Legislature, but we are unable to agree with his conclusion with regard to the fourth question of law referred for the opinion of the High Court.
The fourth question arose because of the claim of the appellant company to a rebate of super tax under cl.
(ii) of the first proviso to paragraph D of part II of the first schedule to the Finance Act, 1956 and its contention that the distribution of dividends on reduction of capital contemplated by section 2(6A)(d) of the Indian Income tax Act, 1922 took place during the year ending November 30, 1954, and not during the year ending November 30, 1955, and consequently there could be no reduction of the rebate under cl.
(i)(b) of the second proviso to paragraph D of part II of the first schedule to the Finance Act, 1956 read with explanation (ii) to paragraph D. 11 Now, el.
(i)(b) of the second proviso to paragraph D of part II of the first schedule to the Finance Act, 1956 provides for reduction of the rebate allowable under cl.
(ii) of the preceding proviso by an amount computed at certain slab rates on the amount of dividends "in the case of a company referred to in el.
(ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of 6 per cent of its paid up capital not being dividends payable at a fixed rate", and the explanation (ii) to paragraph D provides that for purpose of paragraph D "the expression 'dividend ' shall be deemed to include any distribution included in the expression 'dividend ' as defined in el.
(6A) of section 2 of the Indian Income tax Act".
Section 2(6A)(d) of the Indian Income tax Act, 1922 provides that "dividend" includes "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 lst day of April, 1933, whether such accumulated profits have been capitalised or not.
" Obviously, section 2(6A)(d) contemplates a distribution on reduction of capital under section 55(1)(c) of the Indian Companies Act, 1913,under which subject to confirmation by the Court, a limited company, if so authorised by its articles, may by special resolution reduce the share capital in any way, and in particular may "either with or without extinguishing or reducing liability on any of its shares, pay off any paid up capital which is in excess of the wants of the company", and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
Section 56 of the Act enables the company to apply to the Court for an order confirming the reduction, and under section 60 of the Act, the Court may make an order confirming,the reduction on such terms and conditions as it thinks fit.
Upon compliance with certain formalities, the Registrar of Joint Stock Companies is required under section 61 of the Act to register the order and a minute approved by the Court, and on such registration, and not before, the resolution for reducing share capital as confirmed by the order so registered shall take effect.
Under section 62,the minute when registered shall be deemed to be substituted for the corresponding part of the memorandum of the company.
In the instant ease, the issued, subscribed and paid up capital the company was Rs. 25 lakhs, consisting of 5 lakhs shares of Rs. 5 each.
On December 16, 1953, the company passed a special resolution for reducing its share capital from Rs. 25 lakhs to Rs. 15 lakhs and for payment of Rs. 2 per share to the existing share holders under section 55(1)(c) of the Indian Companies Act, 1913.On May 10.
1954, the company applied to the Court for an order confirming the reduction.
On August 6, 1954, the High Court made an order confirming the reduction.
On November 4, 1954,the order and the minute approved by the Court were duly registered with the Registrar, and on the same date, the Registrar 12 issued a certificate of registration.
On November 5, 1954, the notice of registration was duly published.
On the same day, the company issued a circular notice to its shareholders stating that the refund of Rs. 2 per share will be made on receiving confirmation of the registration and requesting the shareholders to send their share certificates to the company at an early date for necessary endorsement and refund of share capital and stating that the refund would be made to the shareholders, whose names stood on November 15, 1954 in the books of the company, the share transfer register would remain closed from November 16 to November 30, 1954, and the refunds would be made to the shareholders whose names stood on November 15, 1954 in the books of the company.
The balance ,sheet for the year ending November 30, 1954 did not show the reduction, and the capital of the company in this balance sheet was shown to be Rs. 25 lakhs.
The necessary book entries and the payments of dividends to the shareholders were not made during the year ending November 30, 1954.
The book entries with regard to the reduction and refund were made, and the refunds were given to the shareholders during the year ending November 30.
1955 and the reduction was shown in the balance sheet for the year ending November 30, 1955.
The point in issue is when does the distribution contemplated by section 2(6A)(d) of the Income tax Act.
1922 take place? Section 2(6A)(d) speaks of dividend in the shape of any distribution by a company amongst its shareholders on reduction on its capital to the extent of accumulated profits possessed by it.
We reject the contention that this distribution takes place when the dividend is paid or credited to the shareholders.
The distribution contemplated section 2(6A)(d) is a distribution by a company "on the reduction of its capital".
The word "on" has no fixed meaning, but in the context of the sub section, it must be given the meaning "at the time of".
as "on entering", "on the 1st of the month".
The distribution contemplated by the sub section is therefore, distribution at the time of the reduction of its capital, that is to say, when the resolution for reduction of its capital under section 55(1)(c) of the Indian Companies Act, 1913 takes effect.
As soon as the resolution for reduction of capital and consequential refund of the surplus capital to the shareholders takes effect, the capital stands reduced, the surplus ceases to be capital and stands allotted to the shareholders, each shareholder obtains a vested right to the refund of his share of the surplus, and a liability arises on the part of the company to make the refund.
This liability arises as soon as the reduction of capital takes effect, and it matters not that the company has not made the necessary book entries showing the reduction of capital and the transfer of the surplus to the account of the shareholders.
The word "distribution" has several dictionary meanings.
In the context of section 2(6A)(d), it means allotment or apportionment of the surplus amongst the shareholders; this allotment takes place and each shareholder gets a vested right to his portion of the surplus as soon as the capital stands reduced.
13 A close scrutiny of section 2(6A)(d) reveals that (a) the distribution takes place on a single date and (b) the expression "accumulated profits" means profits accumulated up to the date of the distribution.
These two basic ideas which are implicit in section 2(6A)(d) are forcibly brought out in the explanation to the corresponding section 2(22) of the Income tax Act, 1961.
We thus find firstly that the entire distribution of the surplus amongst the shareholders takes place on a single date.
Now if the distribution is to have a certain date, that date can only be the date when the reduction of capital becomes effective.
The payments to the shareholders either actual or notional by credit entries in the books of account are made subsequently.
The payments need not be made on one date; they may be and often are made on several dates.
The successive payments cannot be the distribution contemplated by section 2(6A)(d).
We find secondly that the accumulated profits are to be ascertained on the date of the distribution.
But we find independently for reasons mentioned hereafter.
that the accumulated profits must be ascertained on the date of the reduction of capital.
Thus the two events, namely, the distribution and the reduction of capital must synchronise, and the accumulated profits must also be ascertained at the same point of time.
The synchronisation is also obvious on a plain reading of the abridged text "any distribution on the reduction of capital to the extent of accumulated profits".
The artificial dividend under section 2(6A)(d) must be fixed by reference to the accumulated profits on the date of the reduction of capital and not by reference to the accumulated profits on the successive dates of the payments.
If the amount of the dividend were to be fixed by reference to the accumulated profits on the several dates of the payments, the result might well be that some payments would be dividends to their full extent, some would be dividends to a limited extent and some would not be dividends at all.
Take a case where the accounting year of the company ends on November 30, a resolution for the reduction of its capital to the extent of Rs. 10 lakhs and for refund of Rs. 2 for each share of Rs. 5 takes effect on June 30, 1954 and payments of rupees one, six and three lakhs are made respectively on October 30, 1954, October 30, 1955 and October 30, 1956; and assume that the extent of the accumulated profits is rupees ten lakhs on June 30, 1954 and on October 30, 1954, rupees two Iakhs on October 30, 1955 and rupees two lakhs on October 30, 1956.
If the amount of the dividend were ' to be fixed by reference to the accumulated profits on the dates of the payments, the result would be that the payment of rupees one lakh would be dividend to the full extent, the payment of rupees six lakhs would be dividend to the extent of one third and the payment of rupees three lakhs would not be dividend at all.
It is reasonable to think that the legislature did not contemplate such a result.
The character of the distribution is determined by the extent of the accumulated profits on the date when the reduction /B(D)2SCI 3 14 of capital becomes effective and is not altered by any subsequent increase or decrease of the accumulated profits, and all subsequent payment of the capital so distributed share alike the original character of the distribution.
It is argued that in the case of a normal dividend, a comparable distribution takes place, a declaration of dividend out of the profits of a particular year is made, and is followed by payment of the dividend, and decided cases under section 16(2) show that the distribution takes place on payment and not on the declaration of a dividend.
We think this comparison of the normal dividend with the artificial dividend in section 2(6A)(d) in the shape of distribution to the extent of the accumulated profits is misleading, and the assumptions on which this comparison is made are not correct.
The declaration of a normal dividend may be made out of accumulated profits, and need not necessarily be made out of the profits of any particular year.
Section 2(6A)(d) does not contain any definition of a normal dividend.
In the case of a normal dividend, the question of ascertaining the accumulated ' profits to the extent of which the distribution amounts to dividend does not arise.
This problem would have arisen, had section 2(6A) defined normal dividend as "any distribution by a company on the declaration of dividend to the extent to which the company possesses accumulated profits".
On such a definition, the only possible interpretation would have been that the accumulated profits are ascertained and the distribution takes place on the date of the declaration of the dividend.
The argument based upon the decided cases under section 16(2) is misconceived.
Section 16(2) dealt with the question when the dividend shall be deemed to be the income of the shareholders.
By section 16(2) the dividend was deemed to be the income of the shareholders when it was paid, credited or distributed.
An artificial dividend ' under section 2(6A)(d) is either distributed or paid, whereas the normal dividend is either paid or credited, and in the case of J. Dalmia vs Commissioner of Income tax(1) and Padmavati R. Suraiya vs Commissioner of Income tax(2) it was held that the normal dividend is neither paid nor credited by reason of the fact that the dividend is declared.
In this case, we are not concerned with the problem of construction of section 16(2) or the interpretation of the word "paid" or "credited".
The word "distributed" is not synonymous with the word "paid" or "credited".
The three words are used in the Act in different senses.
Moreover, the policy of the legislature on the question of the taxability of the dividend in the hands of the shareholders has varied from time to time.
Subsection (2) of section 16 was repealed and in its place, sub section (IA) of section 12 was introduced by the Finance Act, 1959 with effect from April 1, 1960, and the corresponding provision is to be found in section 8 of the Income tax Act, 1961.
Under section 12(IA) of the Incometax Act, 1922 and section 8 of the Income tax Act the declaration of , 90.
(2) [1965] 1 S.C.R. 307.
15 dividend is crucial even for purposes of assessment of the shareholders.
The legislature thus recognises now that the distribution of the normal dividend takes place on the declaration of the dividend.
In the instant case, the resolution for the reduction of the capital of the company and the consequential refund of the surplus capital to its shareholders took effect on November 4, 1954.
Consequently.
the distribution of the dividend as defined by section 2(6A)(d) took place on November 4.
1954, i.e. during the previous year corresponding to the assessment year 1955 56.
It is true that during the accounting year ending November 30, 1954.
the company did not pay any dividends, nor make any book entries with regard to reduction of capital or with regard to refund or payment of surplus capital.
But the company incurred on November 4, 1954 the legal liability to make the refunds and the distribution must be deemed to have taken place on November 4, 1954, though n0 book entries were made and no payments were made on that date.
In view of the fact that the distribution took effect on November 4, 1954, the company was bound to make necessary entries in their books on November 4, 1954 showing the reduction of capital, and was also bound to show the reduction in its balance sheet for the year ending November 30, 1954.
Irrespective of its method of book keeping, the company incurred on November 4, 1954, the legal liability to make the refunds.
The method of bookkeeping is not relevant, but, were it so, it is pertinent to remember that the accounts of the company were kept on the mercantile basis.
That system of accounting brings into debit an expenditure the amount for which a legal liability has been incurred before it is actually disbursed.
See Keshav Mills Ltd. vs Commissioner of Income tax, Bombay(1).
In conclusion, we must point out that the revenue authorities should have, but in fact have not fixed the amount of the dividend by reference to the accumulated profits on November 4, 1954.
when the resolution for reduction of capital became effective, or by reference to the accumulated profits brought forward on December 1, 1953 at the commencement of the accounting year during which the reduction of capital took effect.
Instead, the revenue authorities took into account the accumulated profits on December 1, 1954, that is to say, the date of the commencement of the subsequent accounting year during which the dividends were paid.
The amount of the accumulated profits as on December 1, 1954 was fixed by the Income tax Officer at Rs. 8,42,337, and was subsequently reduced by the Tribunal to Rs. 4,69,244 13 0.
The revenue authorities rightly assumed that the distribution and the ascertainment of the accumulated profits to the extent of which the distribution is deemed to be dividend under section 2(6A)(d) took place 16 during the same accounting year, but they erred in holding that the accounting year commencing on December 1, 1954 is the relevant year.
In our opinion, the High Court was in error in holding that dividends under section 2(6A)(d) were distributed during the previous year corresponding to the assessment year, 1956 57.
We think that the dividends, if any, under section 2(6A)(d) were distributed in the previous year corresponding to the assessment year 1955 56.
and the fourth question should be answered accordingly.
The appeal is allowed in part to this extent.
In view of the divided success, we direct that the parties will pay and bear their own costs in this Court and in the Court below.
ORDER BY COURT In accordance with the majority Judgment, the appeal fails and is dismissed with costs.

dataset_name: IN-Abs

summary/full:
The appellant .company reduced its capital and the reduction was confirmed by the High Court.
On November 4 , 1954, i.e. during the course of the appellant 's accounting year ending November 30, 1954, the Registrar of Companies issued the requisite certificate under section 61(4) of the Indian Companies Act.
The surplus share capital consequent on reduction was, however, not refunded to the shareholders 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 section 2(6A)(d) of the Indian Income tax Act, 1922.
He further held that the distribution took place in the accounting year ending November 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 Supremen Court by certificate.
It was contended on behalf 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 section 2(6A)(d) of the Indian Income tax Act, 1922 was therefore, ultra vires.
(2) The certificate of the Registrar under section 61(4) of the Indian Companies Act was issued on November 4, 1954 and therefore the 'distribution ' under section 2(6A)(d) took place in the previous year relevant to the assessment year 11955 56.
HELD ': 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, [5H; 6A] 2 United Provinces vs Atiqa Begum, , Sardar Baldev Singh vs Commissioner of Income tax, Delhi and Ajmer, ; , Balaji vs Income tax Officer Special Investigation Circle, ; and Navnittal C. Javeri vs K.K. Sen, Appellate Assistant Commissioner of Income tax 'D ' Range, Bombay; , , referred to.
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.
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 falls within the ken of entry 54 of List I of Schedule Seven to the Government of India Act, 1935.
[6H; 7A, G] 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.
[7F G] Per Subba Rao.
Mudholkar and Ramaswami, JJ.
The expression 'distribution ' connotes something actual and not notional.
Like 'paid ' or 'credited ' in section 16(2), distribution ' signifies 'the discharge of the company 's liability and making the dividend available to the members entitled thereto.
[8D, F, G] J. Dalmia vs Commissioner of I.T. Delhi, and Mrs. P.R. Saraiya vs Commissioner of Income tax, Bombay City 1, Bombay; , , relied on.
Distribution can ke 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.
[8D] Distribution in the above manner may take place partly in one year and partly in another.
But the amount of accumulated profits is fixed by the resolution of the company reducing its capital, and the figure does not change with the date of payment or credit.
[9D, E] In the present case the payments and credits were actually given during the accounting year ending November 30, 1955.
The dividend under section 2(6A)(d) must be deemed to have been distributed in the said year.
The relevant assessment year therefore was 1956 57.[10F] Per Raghubar Dayal and Bachawat, JJ.
The word distributed ', in section 2(6A)(d) does not mean 'paid ' or credited '.
Cases under section 16(2) are not relevant to the issue.
[14G H] The 'distribution ' contemplated by section 2(6A)(d) is distribution at the time of reduction of capital, that is to say, when the resolution of the company reducing the capital takes effect.
It means allotment or apportionment of the surplus among the shareholders; this allotment takes place and each shareholder gets a vested right to his portion of the surplus as soon as the capital stands reduced.
[12F H] While the distribution as above takes place on a single date i.e. the date of the reduction of capital, the payments to the shareholders either actual or by credit entries in books of account may be made subsequently and on different dates.
The successive payments cannot be 'distribution ' contemplated by section 2(6A) (d).
[13A C] 3 In the instant case the resolution for the reduction of the capital of the company and the consequential refund of the surplus capital to the shareholder took effect on November 4, 1954.
Consequently the distribution of the 'dividend ' as defined by section 2(6A)(d) took place on that date i.e. during the previous year corresponding to the assessment year 1955 56.


judgement:
ivil Appeal No. 195 of 1963.
Appeal from the judgment and decree dated March 24, 1959 the Allahabad High Court in First Appeal No. 76/47.
C.B. Agarwala and J.P. Goyal, for the.
appellant.
S.T. Desai, M.V. Goswami and B.C. Misra, for the respondent No. 1.
M.V. Goswami and B.C. Misra, for respondents Nos. 2, 7.
and 8.
R.S. Gupta, S.S. Khanduja and Ganpat Rai, for respondent No. 9.
The Judgment of the Court was delivered by Hidayatullah, J.
This appeal arises from a suit filed by respondents 1 and 2 for declaration of their rights to the Phulpur Estate, for possession of properties belonging to the Estate and for mesne profits.
The Phulpur Estate is situated in Allahabad District.
One Rai Bahadur Rai Pratap Chand who died on January 23, 1901, was the Zamindar of this Estate.
After his death, his widow Rani Gomti Bibi succeeded to the Estate.
Rani Gomti Bibi was considerably influenced by her brother Gaya Prasad and priests belonging to some temples.
In the years following the death of her husband, Rani Gomti Bibi made many endowments involving vast properties and in July 1920, the Court of Wards assumed charge of the Estate which the Rani was mismanaging.
On February 21, 1923, the Rani adopted one Bindeshwari Prasad and then applied to the Court of Wards under section 37 of the U.P. Court of Wards Act for permission to make the adoption.
The Collector (Mr. Knox) made an enquiry and on April 3, 1923.
made a report exhibit 79 stating that the evidence tendered before him was so conflicting and unreliable that he had come to the conclusion that the authority of Rai Pratap Chand to adoption by his widow was not proved.
He, therefore, recommended that Rani Gomti Bibi be declined permission to make the adoption and the Board of Revenue accordingly refused permission.
Rani Gomti Bibi, however, executed a deed of adoption on November 6, 1924 in favour of Bindeshwari Prasad.
A suit was filed by Parmeshwar Dayal (who was the first plaintiff in the persent suit) in 1925 against Rani Gomti Bibi, Bindeshwari Prasad and the Court of Wards challenging the adoption made by the Rani.
On August 21, .1926, the suit was decreed, and it was held that the adoption was contrary to section 37 of the U.P. Court of Wards Act, 1912 and was thus 29 invalid inasmuch as permission to take the adoption was not obtained from the Court of Wards.
Rani Gomti Bibi then applied to the Court of Wards for permission to adopt Bindeshwari Prasad 's brother 's son Dwarka Nath who is the present appellant.
Fresh enquiries about the authority of the husband were made by the then Collector Mr. Thompson.
He examined witnesses from a list filed by Gaya Prasad in the earlier suit of 1925.
After considering the evidence, the Collector recommended grant of permission under section 37 of the U.P. Court of Wards Act and permission was accordingly granted by the Board of Revenue.
On November 28, i929, the Rani adopted Dwarka Nath at Phulpur.
Immediately after this adoption the Court of Wards released the Estate and assumed charge of it again on behalf of Dwarka Nath who was a minor.
On january 5, 1943, Rani Gomti Bibi died and the present suit was filed by Parmeshwar Dayal and one Amarnath Agarwal to whom Parmeshwar Dayal had assigned 6/16th share in the Estate.
This suit was decreed by the Civil Judge of Allahabad who held inter alia that Parmeshwar Dayal was the nearest reversioner of Rai Partap Chand and was entitled to succeed him, and further that the adoption was invalid as there was no proof of authority given by Rai Pratap Chand to Rani Gomti Bibi to make the adoption.
The suit for declaration and possession was decreed with mesne profits amounting to Rs. 88,000 against Dwarka Nath and the Collector and the Court of Wards who was also made a party to the suit.
Three appeals were filed against the judgment and by a common judgment dated March 24, 1959, the High Court affirmed the decree except in respect of mesne profits.
The High Court certified the case as fit for appeal to his Court and the present appeal results.
At the hearing, Mr. C.B. Agarwala stated on behalf of the appellant that he did not challenge that Parmeshwar Dayal was the nearest reversioner of Rai Pratap Chand.
We are also not now concerned with the endowments.
Mr. Agarwala contended that the findings about authority by Rai Pratap Chand to the adoption were erroneous an required to be reconsidered.
In seeking reconsideration of this finding.
Mr. Agarwala relied both on facts and law.
In so far as his claim is to have the evidence reconsidered, it may be stated at once that it is not the practice of this Court to examine the evidence at large specially when the High Court and the Court below have drawn identical conclusion from it.
In this case, the evidence about the authority, such as it was, was considered both by the Trial Judge and the High Court and they could not persuade themselves to accept it.
Following the settled practice of this Court we declined to look into the evidence for the third time, but we permitted Mr. Agarwala to raise arguments of law and we shall deal with those arguments now.
30 Mr. Agarwala relies upon ss 37 and 53 of the U.P. Court of Wards Act, 1912 and contends that inasmuch as the Court of Wards made an enquiry into the truth of the allegations that Rai Pratap Chand had given express authority to Rani Gomti Bibi to make an adoption after his death and found in favour of authority, the conclusion of the Court of Wards to grant permission and the reasons for the decision cannot be questioned by a civil suit.
This argument, in our judgment, cannot be accepted.
Section 37, of the U.P. Court of Wards Act, in so far as it is material.
reads as follows: "37.
Disabilities of wards A ward shall not be competent (a). . . . . (b) to adopt without the consent in writing of the Court of Wards; (c) . . . .
Provided, first, that the Court of Wards shall not withhold its consent under clause (b) . . if the adoption . . . is not contrary to the personal or special law applicable to the ward . . . ". lm0 The section obviously places a hurdle in the way of adoptions by the wards which must be removed before the adoption can be valid.
The section affects the competence of the Wards to make the adoption and as the consent is a pre requisite, any adoption made without such consent must be ineffective.
The section, however, does not make the sanction of the Court of Wards to cure illegalities or breaches of the personal law.
Nor does the sanction make up for incompetence arising under the personal law.
It is obvious that if the adoption is void by reason of the personal law of the person adopting, the consent of the Court of Wards cannot cure it.
Nor would ' the consent take the place of the essential ceremonies or the religious observances where necessary.
Those matters would have to be determined according to the personal law in civil court of competent jurisdiction.
Mr. Agarwala argues that section 53 is a bar to any suit questioning the adoption made after the consent of the Court of Wards to the adoption has been given.
That section cannot be used in this manner.
It reads: "53.
(i) The exercise of any discretion conferred on the State Government or the Court of Wards bythis Act shall not be questioned in any Civil Court.
(2) . . . .
The section merely puts the exercise of discretion by officers acting under the Court of Wards Act beyond question.
Thus if the Court of Wards gave or refused its consent to a proposed adoption a suit would not He either to cancel the consent or to compel it.
This section, however, does not go to the length that after the consent of the Court of Wards the adoption itself cannot be question 31 ed at all.
There are no words in the section to this effect nor can such a result be implied.
If the Court of Wards gave its concurrence to a proposed adoption, the bar created by section 37 of the Act would be removed.
but it would not make the adoption immune from attacks in a Civil Court on any ground on which adoptions are usually questioned there.
Mr. Agarwala claims that the reasons for the consent of the Court of Wards are a part of the consent and are within section 53(1).
This cannot be accepted.
No doubt, the Court of Wards reached its own conclusion for purpose of section 37 that Raj Pratap Chand had accorded authority to Rani Gomti Bibi to adopt a son.
but if the adoption was questioned in a civil court.
the civil court would not be ousted of its jurisdiction to decide the question.
All that the civil court would be compelled hold would be that the requirements of the Court of Wards Act ds to the consent of the Court of Wards were fulfilled.
In our judgment, the legal argument that after the consent of the Court of Wards the Civil Court was incompetent to reconsider the question of the authority given by the husband cannot be accepted.
In deciding the question of authority, the High Court rejected the oral evidence led before it and affirmed the conclusions of the trial Judge.
The High Court considered this evidence both intrinsically and in the light of the attending circumstances and found it unacceptable.
The trial Judge pointed out that as lawyers were present when Rai Pratap Chand 'is alleged to have given authority to his widow and as it was also suggested that that fact should be recorded, it was unbelievable, if the statements were true, that written authority would not have been prepared then and there.
The High Court did not content itself with accepting the opinion of the trial Judge but discussed the evidence de novo and rejected it.
The High Court pointed out that Rai Pratap Chand was only 30 years old at the time of his death and his wife was 25 years old and he could not have abandoned the hope of having an issue.
Evidence shows that the writing was put off because it was not thought that Rai Pratap Chand was dying.
The High Court also pointed out that Rani Gomti Bibi executed between November 24, 1901 and August 19, 1904 4 documents making different endowments.
In none of these documents, she mentioned that she had been asked by her husband to make them.
The High Court pertinently pointed out that the oral evidence showed that the declaration of the authority to his wife and the oral will to make the endowments, were made by Rai Pratap Chand at the same time and these facts would have figured as the reason for the endowments in these documents.
Mr. Agarwala contends that even if the reasons for the endowments might be expected to be expressed.
it is not logical to say that the deeds should have recited the irrelevant fact that authority was given to Rani Gomti Bibi to make the adoption.
This is perhaps right, but the fact remains that the two directions of Rai Pratap Chand went hand in hand; and even if the fact of authority was not 32 recited in the documents, one would expect at least the oral will to make the endowments to be mentioned.
This shows that the whole story about oral directions to Rani Gomti Bibi was untrue.
Mr. Agarwala then seeks to use the statements made by Gaya Prasad and the witnesses before Mr. Thompson.
In the High Court this claim was based upon sections 11, 32 and 157 of the Indian Evidence Act.
The High Court rejected these statements and declined to attach any value to them.
Section 11 was not relied upon before us; but the other two sections were referred to in an effort to have that evidence read.
Section 157 of the Indian Evidence Act lays down: "157.
Former statements of witness may be proved to corroborate later testimony as to same fact: In order to corroborate the testimony of a w:mess, any former statement made by such witness relating to the same fact at or about the time when the fact took place, or before any authority legally competent to investigate the fact, may be proved.
" Two circumstances, which are alternative, are conditions precedent to the proof of earlier statements trader this section.
The first is that the statements must have been made at or about the time when a fact took place.
The fact here is the authority said to have been given by the husband in 1901.
The statements were made on December 18, 1928, 27 years after the event.
They cannot be said to have been made "at or about the time when the fact took place".
Further, as rightly pointed 'out by i;he High Court, the Court of Wards was making an enquiry for the purpose of according its consent.
It was not enquiring into the fact of the giving of authority as an 'authority legally competent '.
That authority, as we have pointed out already, is the civil court for the civil court alone can finally decide such a question.
It can do so even after the Court of Wards had reached a conclusion, and contrary to that conclusion.
Section 157 therefore cannot make the statements provable.
Mr. Agarwala next relies on section 32(7) of the Indian Evidence Act to introduce the earlier statements.
That sub section reads: "32.
Statements.
written or verbal, of relevant facts made by a person who is dead, or who cannot be found, or who has become incapable of giving evidence, or whose attendance cannot be procured without an amount of delay or expense which under the circumstances of the case appears to the Court unreasonable, are them selves relevant facts in the following cases: * * * * (7) When the statement is contained in any deed, will or other document which relates to any such transaction as is mentioned in section 13, clause (a).
* * * * 33 Clause (7) makes relevant statements made in deeds, wills and such other documents which relate to transactions by which a right or custom in question "was created, claimed, modified, recognised, asserted or denied" (to add the words of cl.
(a)of section 13).
The clause does not allow introduction of parole evidence, see Field on the Law of Evidence 8th Edn.
p. 202.
Such parole evidence may be relevant under cl.
(5) of section 32, but that is not relied upon.
We questioned Mr. Agarwala whether he wished to rely upon clause (5), but he did not wish to put his case under that clause and we need not therefore consider the application of that clause.
We think Mr. Agarwala is right in taking this course, be cause cl.
(5) requires that such a statement should have been made before the quest, ion in dispute was raised.
The statements in question were definitely made after the question in dispute in the suit had already arisen, because one enquiry had already been made by Mi '.
Knox and the statements now relied upon were made in the second enquiry before Mr. Thompson.
Mr. Agarwala next wishes to use the statements made by Gaya Prasad on March 14, 1926 "exhibit 72"; but that clearly is not admissible, because when it was made in the suit, Gaya Prasad was being examined as a party before issues were framed.
In fairness to Mr. Agarwala it may be mentioned that he did not press the point after noticing the above fact.
Mr. Agarwala` contends lastly that as Dwarka Nath was adopted on November, 28, 1929 and the present suit was filed on May 21, 1945, after more than 15 years, and as during this time.
Dwarka Nath had been considered by everyone to be legally and validly adopted the suit ought to have been dismissed.
It may be pointed out that Parmeshwar Dayal never accepted the adoption of Dwarka Nath.
He had filed an earlier suit and questioned the competence of Rani Gomti Bibi to make the adoption of Bindeshwari Prasad.
In that suit he had denied that Rai Pratap Chand had given authority to his wife to make the adoption of a son after his death.
He consistently denied the validity of the second adoption and in these circumstances, it cannot be said that he was concluded by any rule of law from questioning the adoption of Dwarka Nath after Rani Gomti Bibi 's death.
On an examination of all the legal pleas against the judgment of the High Court we are satisfied that none of them avails the appellant.
In so far as the question of fact are concerned, we have already stated that we do not propose to go into them as it did, not appear to us that there was any legal reason for reaching a different conclusion.
We accordingly dismiss the appeal but order that the parties shall bear their own costs throughout.
Appeal dismissed.

summary/full:
A widow whose estate was under the charge of the Court of Wards.
made an adoption and applied under section 37 of the U.P. Court of Wards Act, 1912, for permission to make the adoption.
The Collector refused the permission as the grant of authority to adopt, by the husband who died in 1901, was not proved.
The 1st respondent 's father, the nearest reversioner, filed a suit challenging the adoption as contrary to section 37 of the Act and the suit was decreed.
The widow.
there.after, applied to the Court of Wards for permission to adopt the appellant.
Fresh enquiries about grant of authority by the husband to adopt, were made, and permission was granted and the appellant was adopted in 1929.
Immediately after the adoption of the appellant the Court of Wards, released the estate and assumed charge of it again on behalf of the appellant who was a minor.
On the death of the widow in 1943, the 1st respondent 's father filed a suit, challenging the validity of the appellant 's adoption on the ground that the widow had no authority from her husband to adopt.
The Trial Court decreed the suit and the High Court, on appeal.
affirmed the decree.
In appeal to this Court it was contended that the conclusion of the Court of Wards to grant permission and the reasons for the decision could not be questioned in a civil suit.
HELD: The Civil Court was competent to reconsider the question, of the authority given by the husband, even after the consent of the Court of Wards.
Section 37 of the U.P. Court of Wards Act affects the competence of the wards to make an adoption, and as the consent of the Court of Wards is a pre requisite, any adoption made without such consent must be ineffective.
The section, however, does not make the sanction of the Court of Wards cure illegalities or breaches of personal law.
Nor does the sanction make up for incompetence arising under the personal law.
Those matters would have to be determ/ned according to the personal law in a Civil Court of competent jurisdiction.
[30E G] Section 53 also is not a bar to such a suit.
The section only provides that if the Court of Wards gave or refused its consent to a proposed adoption a suit would not lie to cancel the consent or to compel it.
It does not go to the length of saying that after the consent of the Court of Wards, the adoption itself cannot be questioned at all.
[30H] In deciding the question of authority, the statements made by witnesses at the second enquiry by the Court of Wards for giving its consent to adopt, could not be considered by the Civil Court they were not relevant or admissible either under section 32(7) or section ,of the Indian Evidence Act.
[32 D F; 33 A C] 28 As the 1st respondent 's father never accepted the appellant 's adoption it could not be said that the suit, filed more than 15 years after the adoption during which time the appellant had been considered by everyone to be legally and validly adopted, ought to be dismissed.
[33E G]