P.N.BHAGWATI - (1.) BHAGWATI J.
(2.) AN interesting question of construction of sec. 2(6A)(c) of the Income-tax Act arises on this Reference. The Reference relates to the assessment of the assessee an individual for the assessment year 195657 the corresponding account year being Samvat Year 2011 (i. e. 27 October 1954 to 14th November 1955). The assessee at all material times held 18 shares in a limited Company called the Gujarat Spinning and Weaving Company Limited which we shall for the sake of convenience briefly refer as the Company. The Company went into liquidation on 23rd October 1954. On 20th November 1954 the Liquidator of the Company decided to make a distribution of Rs. 3 500 per share amongst the shareholders and pursuant to this decision the assessee received from the Liquidator on 25th November 1954 a sum of Rs. 63 0 as and by way of distribution in respect of her 18 shares. The sum of Rs. 3 500 per share distributed amongst the shareholders was composed of the following items:- Rs. 1000 being distribution of capital. Rs. 1570 being distribution out of capital gains, and Rs. 930 being distribution out of accumulated profits. Rs. 3 500/- The dispute in the present Reference is now confined only to the distribution of Rs. 1 570 per share and it is therefore not necessary to state the facts in regard to the distribution of the other two items. So far as the distribution of Rs. 1 570 per share is concerned though the certificate issued by the Liquidator described this distribution as one made out of capital gains it was in fact a distribution out of deemed profits arisen to the Company on sale of its capital assets under the second proviso to sec. 10(2)(vii). The Revenue sought to tax this distribution as dividend under sec. 2(6A)(c) on the basis that it represented distribution out of accumulated profits of the Company. This claim was upheld by the Income-tax Officer but the Appellate Assistant Commissioner negatived it and on appeal being taken to the Tribunal on behalf of the Revenue the Tribunal also rejected it. The Tribunal took the view that deemed profits arising to a Company under the second proviso to sec. 10(2)(vii) would certainly from part of the assessable income of the Company and would have to be included in computing the assessable income of the Company under sec. 10(1) but they are not covered by the expression accumulated profits in sec. 2(6A)(c) and the distribution of Rs. 1 570 per share can not therefore be said to be a distribution out of the accumulated profits so as to tall within the definition of dividend in sec. 2(6A)(c). The Revenue being dissatisfied with this view taken by the Tribunal applied for a Reference and on the application the Tribunal referred the following question for the opinion of this Court:- "Whether the sum of Rs. 1 570 being a payment out of deemed profits under sec. 10 included in the amount of Rs. 3 500 distributed by the liquidator of the Company and received by the assessee as a shareholder was dividend within the meaning of sec. 2(6A)(c) of the Indian Income-tax Act 1922?" It would be seen from the way in which the question is framed that the postulate of the question is that the distribution was out of deemed profits of the Company under the second proviso to sec. 10(2)(vii) and this was in fact common ground between the parties before the Tribunal as appears clearly from the order of the Tribunal. Being a distribution out of deemed profits of the Company under the second proviso to sec. 10(2)(vii) the question is :- can the distribution be said to be a distribution out of accumulated profits so as to be liable to be regarded as dividend under sec. 2 Or in other words can the deemed profits be treated as accumulated profits for the purpose of sec. 2(6A)(c)?
(3.) THE determination of this question depends on the true character of the receipt which we have conveniently described as deemed profit under the second proviso to sec. 10(2)(vii). Is the receipt real profit or is it fictionally regarded as profit though in fact it is not? This inquiry is necessary because as observed by Lord Radcliffe in St. Aubyn (L. M.) and others v. Attorney-General (1951) 2 All E. R. 473:- "THE word "deemed" is used a great deal in modern legislation Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious what is uncertain and what is in the ordinary sense impossible." or to quote the words of Lord Simonds in Public Trustee v. Inland Revenue Commissioners (1960) 1 All E. R. 1 at page 4 the word deemed is a word which as my noble and learned friend Lord Radcliffe has said in another case is apt to include the obvious the uncertain and the impossible. It does not therefore follow merely because the word deemed is used that but for the deeming provision the receipt dealt with in the second proviso to sec. 10(2)(vii) would not be profit. We must examine the true nature of the receipt and determine whether it is profit apart from the deeming provision in the second proviso to sec. 10 If it is then of course it would be covered by sec. 2(6A)(c) and there would be no difficulty in the way of the Revenue in taxing it when distributed amongst the shareholders. But if it is not and it is the deeming provision which fictionally converts it into profit then we will have to see how far the fiction goes:- Does the fiction make it profit only for the purpose of computation of income of the Company under sec. 10(1) or does the fiction make it profit for all purposes including the purpose of sec. 2(6A)(c) ? Now sec. 10 lays down the rules for computation of profits and gains of an assessee under the head Profits and gains of business profession or vocation. Sub-sec. (1) provides that tax shall be payable by an assessee under this head in respect of profits or gains of any business profession or vocation carried on by him in the year of account. Sub-sec. (2) says what allowances shall be taken into account in computing the profits and gains of such business profession or vocation and one of the allowances is that mentioned in Clause (vii) which is in the following terms:- "(vii) in respect of any such building machinery or plant which has been sold or discarded. demolished or destroyed the amount by which the written down value thereof exceeds the amount for which the building machinery or plant as the case may be is actually sold or its scrap value;" ;