SHASHIBALA NAVNITLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE short question that arises on this reference is whether a sum of Rs. 38,000 received the assessee in redemption of 380 redeemable preference shares held by her in a company called Sakarlal Ballabhai & Co. Ltd, ought to be included in the assessment made upon the assessee for the asst. year 1957 58, the accounting year being Samvat Year 2012. The determination of the question rests upon the proper construction of S. 2(6A)(a) of the IT Act, 1922, A highly ingenious argument has been advanced by Mr. Kaji on behalf of the assessee in an attempt to persuade us to answer the question in favour of the assessee and through the argument has been presented with skill and ability, we find there is no merit in it and it must be rejected.

(2.) THE material facts giving rise to the reference may be summarized as follows : Sakarlal Ballabhai & Co. (hereinafter referred to as the company), at all material times carried on business as managing agent of another limited company called Sarangpur Cotton Manufacturing Co. Ltd., which owned a cotton textile mill situate in the City of Ahmedabad. On or about 13th December, 1951, the company capitalised its accumulated profits to the extent of Rs. 3,84,000 and issued

(3.) NOW ordinarily when a company earns profits and distributes them amongst the shareholders, the amount received by the shareholders being dividend, would be taxable in their hands. But there may be diverse ways in which accumulated profits of a company may reach the hands of the shareholders without being dividend stricto sensu and in such a case they would escape taxation in the hands of the shareholders. The legislature, therefore, enacted S. 2(6A) extending the connotation of "dividend" so as to comprise items of distribution or payment by a company which may not normally be regarded as dividend. By the various clauses of S. 2(6A) the legislature sought to bring within the net of taxation cases of distribution or payment out of or to the extent of accumulated profits of the company, whether capitalised or not. There are five clauses of S. 2(6A) which deal with distribution or payment under different circumstances so as to make the ambit of taxation wide and extensive, but we are her concerned only with the first of those clauses, namely, cl. (a), which runs as follows :