1. An interesting question of construction of section 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 1956-57, the corresponding accounting year being Samvat year 2011 (i.e., 27th 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. 63,000 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.1,000 being distribution of capital.1,570 being distribution out of capital gains, and930 being distribution out of accumulated profits.-------3,500-------
2. 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 out of 'deemed profits' arising to the company on the sale of its capital assets under the second proviso to section 10(2)(vii). The revenue sought to tax this 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 section 10(2)(vii) would certainly form part of the assessable income of the company and would have to be included in computing the assessable income of the company under section 10(1) but they are not covered by the expression 'accumulated profits' in section 2(6A)(c) and the distribution of Rs. 1,570 per share cannot, therefore, be said to be a distribution out of accumulated profits so as to fall within the definition of 'dividend' in section 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 cour :
'Whether the sum of Rs. 1,570 being a payment out of deemed profits under section 10(2)(vii) 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 section 2(6A)(c) of the Indian Income-tax Act, 192 ?'
3. 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 section 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 section 10(2)(vii), the question i : Can the distribution be said to be a distribution out of accumulated profits so as to be liable to be regarded as dividend under section 2(6A)(c Or, in other words, can the deemed profits be treated as accumulated profits for the purpose of section 2(6A)(c
4. 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 section 10(2)(vii). Is the receipt real profit or is it fictionally regarded as profit though in fact it is no This inquiry is necessary because as observed by Lord Radcliffe in St. Aubyn v. Attorney-Genera :
'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, 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 section 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 section 10(2)(vii). If it is, then of course it would be covered by section 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 goe : Does the fiction make it profit only for the purpose of computation of income of the company under section 10(1) or does the fiction make it profit for all purpose including the purpose of section 2(6A)(c
5. Now section 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-section (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-section (2) says that 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 term :
'(vii) in respect of any such building, machinery or plant which has been sold or discarded or 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.'
6. Under this clause in computing the profits, and gains of an assessee the amount by which the written down value of any building, machinery or plant which has been sold, discarded, demolished or destroyed exceeds the amount for which the building, machinery or plant is actually sold or its scrap value is to be allowed as a deduction. It is in the nature of what is called 'balancing charge' allowed in order to recoup the balance of the capital lost after deducting the depreciation allowance already charged to the profits of the earlier years, so as to reflect the true profit of the assessee which can only be arrived at after taking into account the loss in the value of the capital asset arising in the process of earning profit, that being the operating cost of the asset. But what is to happen if the amount for which the building, machinery or plant is sold exceeds the written down valu For that, provision is made in the second proviso to clause (vii) which reads as follow :
'Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'
7. The excess of the sale price over the written down value is to be deemed to be the profit of the assessee to the extent of the total depreciation allowances granted in the past and it is to be deemed to be such profit in the year of account in which the capital asset is sold. It would be seen that a deeming provision is enacted in this proviso and the object clearly is to convert that which is not profit into profit. When a capital asset is sold what is received by the assessee is capital return and not profit. Of course, when we say this we are referring only to so much of the sale price as does not exceed the cost of the capital asset. The excess of the sale price over the cost would certainly be capital gain but the sale price to the extent to which it does not exceed the cost would be nothing but return of capital and no part of it even in excess of the written down value can be said to partake of the character of profit. The receipt of excess over written down value on sale of capital asset would, therefore, be in the nature of capital return and not profit. But the legal fiction in the second proviso to section 10(2)(vii) converts it into profit for the purpose of assessment of the taxable income of the assessee. The deeming provision in the second proviso to section 10(2)(vii) is thus used to include the impossible, that is, that which is capital return and not profit in the category of profit. This view which we are inclined to take on principle is amply supported by the following observations of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co :
'What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realised and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profit : it reaches him as part of the capital invested by him, the fiction created by section 10(2)(vii), second proviso, notwithstanding.'
8. These observations preclude any further discussion of the question and in view of these observations the receipt of excess over written down value on sale of capital asset cannot be held to be profit independently and apart from the legal fiction enacted in the second proviso to section 10(2)(vii).
9. Mr. G. N. Joshi, learned advocate appearing on behalf of revenue, relied on a decision of the Court of Chancery in England in Bishop v. Smyrne and Cassaba Railway Company and urged that this decision supported his contention that the receipt of excess over written down value on sale of capital asset would be profit even according to the accepting connotation of that word, without invoking the aid of the legal fiction contained in the second proviso to section 10(2)(vii). In that case an investment made by a limited company on capital account having fallen in value, the amount of the company afterwards went into liquidation, the investment had risen in value and the liquidator in his accounts credited to revenue as 'appreciation' the amount which had previously been debited as depreciation. The amount of appreciation was rightly done. Kekewich J. held that the amount of appreciation was rightly credited by the liquidator to revenue and that it must be treated as income, and not as capital, since it was merely a restitution to profits of what has previously been taken from profits. This decision really deals with a case where a capital asset was revalued in the accounts having regard to the appreciation which had resulted in its value over a course of time. Now obviously if depreciation was debited to revenue, appreciation must likewise be debited to revenue for otherwise it would not reflect the correct state of affairs so far as the profit and loss position of the company was concerned. But whereas in the present case a capital asset is sold and on sale realises a price in excess of the written down value, the excess which is received is mere return of capital invested in the capital assets and that cannot be regarded as profit. Of course the very fact that excess is realised shows that depreciation charged to revenue in the earlier years was in fact over-charged and that the profits of the earlier years were in fact more than what appeared in the accounts but that would not mean that the excess is profit received by the assessee in the year in which the capital asset is sold. What we are concerned with in the present reference is only a limited question, namely, whether the receipt of excess over written down value constitute profit and that we think it does not. The decision cited by Mr. G. N. Joshi does not assist the argument urged on behalf of the revenue. Moreover, if the decision were construed as laying down the proposition that where excess over written down value is received by an assessee on sale of capital asset, it represents profit, notwithstanding that the price received by the assessee is less than the original cost of the capital asset, such proposition would be contrary to the observation of the Supreme Court to which we have just referred.
10. Mr. G. N. Joshi then argued that even if the view be taken that but for the fiction in the second proviso to section 10(2)(vii) the receipt of excess over written down value in case of sale of capital asset would not be profit, the fiction, in his submission, made all the difference and since the receipt was by fiction converted into profit, it was liable to be regarded as profit for all purposes. The character of profit attached to the receipt by reason of the fiction and the fiction was required to be taken to its logical conclusion which extended not only to the provisions of section 10(1) but also to the provisions of section 2(6A)(c). The argument of the revenue was that once the second proviso to section 10(2)(vii) required us to treat the receipt as profit, we must not allow our imagination to boggle when it comes to inevitable corollaries on that state of affairs and we must regard the receipt as profit for all purposes including the purpose of section 2(6A)(c). Now it is undoubtedly a well-settled principle that when a legal fiction is created, the legal fiction must be carried to its logical conclusion and full effect must be given to the legal fiction as if the putative state of affairs in fact existed. As observed by Lord Asquith of Bishopstone in East End Dwellings Co. Ltd. v. Finsbury Borough Counci :
'If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it come to the inevitable corollaries of that state of affairs.'
11. But it is equally well-settled and that is a principle which should not be lost sight of that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion but that must be within the framework of the purpose for which it is created. 'When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion : vide State of Bombay v. Pandurang Vinayak Chaphalkar. The principle that a legal fiction must be limited to the purpose for which it is created was also applied by N. H. Bhagwati J. in Bengal Immunity Company Limited v. State of Bihar where the learned judge observe :
'A legal fiction presupposes the correctness of the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. But due regard must be had in this behalf to the purpose for which the legal fiction has been created. If the purpose of this legal fiction contained in the Explanation to article 286(1)(a) is solely for the purpose of sub-clause (a) as expressly stated it would not be legitimate to travel beyond the scope of that purpose and read into the provision any other purpose howsoever attractive it may be. The legal fiction which was created here was only for the purpose of determining whether a particular sale was an outside sale or one which could be deemed to have taken place inside the State and that was the only scope of the provision. It would be an illegitimate extension of the purpose of the legal fiction to say that it was also created for the purpose of converting the inter-State character of the transaction into an intra-State one. This type of conversion could have been in the contemplation of the Constitution makers and is contrary to the express purpose for which the legal fiction was created as set out in the Explanation to article 286(1)(a).'
12. The Supreme Court applied the same principle also in the case of Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co., and this is what they said in regard to the fiction created by the proviso to paragraph B of Part I of the First Schedule to the Finance Act, 195 :
'All that the fiction does is to bring profits of back years into the immediately preceding previous years, so that the requirements of the income-tax law may be complied with. As we have already stated, this fiction cannot be carried further than what it is intended for; it cannot be used to make these profits take the place of total income, which did not exist in the previous year and to which the rate is to be applied under the terms of the proviso.'
13. It would, therefore, be seen that when the court is called upon to construe the effect of a legal fiction the court must first ascertain what is the purpose for which the legal fiction is enacted and then in the field of that purpose the court must give full effect to the legal fiction by carrying it to its logical conclusion.
14. Now in the present case what is the purpose of the legal fiction enacted in the second proviso to section 10(2)(vii As the context and the setting in which the proviso occurs show, the purpose of the fiction is to tax the assessee in respect of the excess over written down value realised by him on the sale of a capital asset. Section 10(1) deals with computation of income of a business carried on by an assessee in the year of account and section 10(2) says what allowance shall be made in computing profits and gains of such business and in that connection the second proviso to section 10(2)(vii) provides that the excess over written down value received by the assessee on the sale of a capital asset shall be deemed to be the profit of the assessee in the previous year in which the sale took place so that such excess may be included in the computation of the profits and gains of the assessee and may be brought to tax in his hands. The reason for which this legal fiction is introduced is clear and may best be described in the words of the Supreme Court itself in Commissioner of Income-tax v. Bipinchandra Maganlal and Co :
'Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt. Again, it is the accumulated depreciation over a number of years which is regarded as income of the year in which asset is sold. The difference between the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee is notionally regarded as profit in the year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years.'
15. The legal fiction in other words is created in order to enable to the revenue to take back what it had given by way of depreciation allowance in preceding years since what was given in preceding years was in excess of that which ought to have been given. Unless this were done, the result would be to recoup the assessee an amount in excess of the real operating cost of the capital asset and, therefore, in order to take back what had been wrongly allowed in the earlier years, the true character of the receipt is masked and by the legal fiction the receipt is treated as if it were profit for the purpose of computation of the assessable income of the assessee so that it would be brought to tax as such in the hands of the assessee. This being the purpose of the enactment of the legal fiction, the legal fiction must be limited to the field of that purpose; of course, within the framework of that purpose the legal fiction must be given full effect and must be carried to its logical consequence but it cannot be availed of for a different purpose. Having been enacted for the purpose of enabling the revenue to tax the fiction would be exhausted and would not operate in any other field unconnected or unrelated to the purpose for which the fiction is created. It is, therefore, clear that the fiction must be limited to the purpose of computation of the assessable income of the assessee under section 10 and it cannot be extended to other provisions such as section 2(6A)(c) which are unconnected with the assessment of the assessee and, therefore, unconnected with the purpose for which the fiction is created. We must accordingly reject the contention of the revenue that the words 'accumulated profits' in section 2(6A)(c) include receipt of excess over written down value on sale of capital assets which, though not profit in the accepted connotation of the word, is deemed to be profit by the legal fiction enacted in the second proviso to section 10(2)(vii).
16. It was contended on behalf of the revenue that if we take this view, an anomalous result would arise in that if the excess over written down value received by the company on the sale of its capital asset had been distributed among the shareholders while the company was going on, it would have been dividend but if it is distributed after the company has gone into liquidation it would not be liable to be regarded as dividend. Now it is undoubtedly true and that was not disputed by Mr. Palkhivala, learned advocate appearing on behalf of the assessee, that if this excess had been distributed amongst the shareholders while the company was functioning, it would have been dividend within the ordinary meaning of that word but it may be pointed out that it would have been dividend not because of the character of profit attaching to such excess in the hands of the company but because every distribution made by a company to its shareholders which is otherwise than by way of return of capital is dividend. Moreover it must be remembered that what we are concerned to inquire in this reference is not whether the distribution of this excess while the company was going on would have been dividend or not. The only question before us is whether the distribution of this excess falls fairly and squarely within the terms of section 2(6A)(c) and, for reasons which we have already given, we are of the view that it does not. It may be that the distribution of this excess would escape tax on the view we are taking but that is not a matter which should weigh with us in the construction of the language of the section. In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax, there is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only fairly look at the language used and if we do so, the conclusion to which we have arrived is the only conclusion which can be reached. We are, therefore, of the opinion that the distribution of Rs. 1,570 per share was not a distribution out of accumulated profits of the company so as to be liable to be regarded as dividend within the meaning of section 2(6A)(c).
17. In the result we answer the question referred to us in the negative. The Commissioner will pay the costs of the reference to the assessee.
18. Question answered in the negative.