SHAH, - (1.) THE following Judgment of the court was delivered by :
(2.) BY a resolution dated 23/08/1952, it was resolved to wind up the respondent company and to appoint a liquidator for that purpose. The paid-up capital of the assesses was Rs. 25 lakhs, and on the date of commencement of winding up it had an accumulated profit of Rs. 5,34,041.00. From time to time the liquidator ,distributed the assets in his hands among the shareholders. The following table sets out the distributions made by the liquidator: JUDGEMENT_795_AIR(SC)_1967Html1.htm Out of the distribution made on 9/09/1952, the Income-tax Officer brought, in the assessment year 1953-54, to tax Rs. 52,400.00 as `dividend` within the meaning of s. 2(6A)(c) of the Income-tax Act, 1922, as it then stood. On 24/07/1957, the liquidator distributed Rs. 3,000.00 per share among the shareholders. The Income-tax Officer in the course of assessment for the year 1958-59 sought to bring the entire amount of Rs. 75,000.00 distributed to tax as `dividend` within the meaning of s.2(6A)(c) of the Income-tax Act as amended by the Finance Act, 1956. The objections raised by the liquidator were rejected and the amount was brought to tax. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In appeal to the tribunal on behalf of the assessee, it was urged that the entire accumulated profitwas exhausted when Rs. 17,25,000.00 were distributed in the year 1952 and thereafter there were no accumulated profits in the hands of the liquidator which could be distributed and that in any event whenever distribution is made of the assets in the hands of the liquidator, accumulated profits and the capital same proportion in which the accumulated profits and the capital stood at the date of liquidation. The Tribunal rejected the first contention and did not consider the second. The Tribunal referred the following question to the High Court of Judicature at Bombay under S.66(1) of the Income tax Act, 1922: "Whether on the facts and in the circumstances of the case the sum of Rupees 75,000 or any part thereof could be treated as dividend under S.2(6A)(c) of the Indian Income-tax Act, 1922?" The reference was transferred after reorganisation of the State under the Bombay State Reorganisation Act, 1960, to the High court of Gujarat for hearing and disposal. The reference was heard before a bench consisting of Shelat, C. J. and Bhagwati J., The two learned Judges differed, and the case was referred to Bakshi, J. Bakshi, J., agreed with Bhagwati, J., and answered the question referred to in the negative. To appreciate the arguments advanced at the Bar, it is necessary to notice the changes which were made from time to time in s. 2(6A)(c) of the Indian Income-tax Act, 1922, and the reasons for enacting and amending that clause. Clause (6A) which defines 'dividend' was inserted In the Indian Income-tax Act by Act 7 of 1939. As originally enacted, it provided insofar as it is material for the purpose of this appeal:' `'dividend' includes:- (a) (b) (c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company: `Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included;` By S. 3 of the Finance Act, 1955, the proviso to cl. (c) was deleted and by s. 3 of the Finance Act, 1956, with effect from 1/04/1956, the following clause (c) was substituted: `(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution, is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;`
(3.) BY s. 17(2) of the Indian Companies Act, 1913, Reg. 97 of Table A was one of the obligatory regulations which had to be adopted in terms identical with or to the same effect in the Articles of Association of every Company. Regulation 97 provided that `No dividend shall be paid, otherwise than out of profits of the year or any other undistributed profits.` Distribution of the profits of the year or of accumulated profits was therefore `dividend` within' the meaning of the Companies Act, 1913, and also of the Income-tax Act,1922. BY Act 7 of 1939 an inclusive definition of 'dividend' was devised, so as to include therein heads of distribution by a Company which may not normally be regarded as dividend: and one such head was in cl. (c). The reason for insertion of the clause was that on winding up of a company the distinction between the assets and undistributed profits disappears. It is well settled that a Company as a going concern distributing profits of the year or accumulated profits is regarded as distributing dividend among the shareholders, but if the company is wound up before distributing its accumulated profits, any distribution of profits by the liquidator is not regarded under the Companies Act as dividend. In Commisssioners of lnland Revenue v. George Burrell, Pollock, M. R., observed: ` . . it is a misapprehension, after the liquidator has assumed his duties, to continue the distinction between surplus profits and capital. Lord Macnaghten in Birch v. Cropper (14 App. Cas. 525, 546), the case which finally determined the rights inter se of the preference and ordinary shareholders in the Bridgewater Canal, said: 'I think it rather leads to confusion to speak of the assets which are the subject of this application as 'surplus assets' as if they were an accretion or addition to the capital of the company capable of being distinguished from it and open to different considerations. They are part and parcel of the property of the company-part and parcel of the joint stock or common fund-which at the date of the winding up represented the capital of the company. The amounts distributed to the shareholders by a liquidator are therefore distributed as capital of the company, since the liquidator has no power to distribute dividend, and the sums received by the shareholders cannot be disintegrated into capital and profits, by examining the accounts of the Company when it was a going concern. The scheme of the Indian Companies Act closely followed the English Companies Act and the view expressed in George Burrell's case(') applied to distributions made by liquidators, and those distributions were not liable to be taxed as dividend. The Parliament with a view to avoid escapement of tax devised a special definition of the word 'dividend' and incorporated it by Act 7 of 1939 as s. 2(6A)(c). The effect of the provision was to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company as a going concern, but subject to the limitation that while in the latter the profits distributed will be dividend whatever the length of the period for which they were accumulated, in the former such profits may be dividend only insofar as they come out of profits accumulated within six years prior to liquidation. It also appeared from the language used that profits of the current year during which the Company was ordered or resolved to be wound up could not be included in the expression `dividend`: see Sheth Haridas Achratlal v. Commissioner of Income-tax, Bombay North, Kutch and Saurashtra, Baroda(2). By the Finance Act, 1955, the proviso to cl. (c) was deleted and in consequence thereof the limitation relating 'to the period during which the profits were accumulated ceased to apply in the determination whether the amount distributed by the liquidator was dividend. Even after the amendment by the Finance Act, 1955, the language of the clause was found to be somewhat inapt and the Legislature by the Finance Act 1956 recast cl. (c).;