Decided on February 22,1965


Referred Judgements :-



Satish Chandra, J. - (1.)THIS is a petition by two contributories of a company in liquidation. It purports to be under Section 216 of the Indian Companies Act, 1913. It prays that the official liquidator be directed not to deduct any income-tax from the third dividend which he proposes to distribute among the shareholders of the company. It also prays that the liquidator be directed to pay back to the shareholders the deduction of 30 per cent. made out of the second dividend.
(2.)THE petitioners hold ten thousand fully paid up shares of rupees ten each in the Lower Ganges Jamuna Electricity Distributing Co. (hereinafter called the company in liquidation). THE company was compulsorily wound up by an order of this court passed in September, 1934. From the particulars given by the official liquidators it appears that at the commencement of the winding up of this company in September, 1934, the assets amounted to Rs. 11,72,762 10 as. 5 ps., whereas the liabilities were to the tune of Rs. 12,58,686 11 as. 5 ps. THE official liquidator carried on the business of the company and he made up the loss and showed profit. In the balance-sheet ending 30th June, 1961, a profit of Rs. 3,79,316.30 nP. was shown. In or about June, 1961, the entire assets of the company were sold to the U.P. State Electricity Board for a sum of Rs. 13,80,096.00 nP.
The official liquidator further states that he thus came in possession of two sums: the net profit of rupees three lakhs and odd and the sale price, totalling to Rs. 17,59,412.30 nP. Out of this amount the first dividend was declared and paid at the rate of rupees ten per share. The amount paid out as first dividend in all was Rs. 5,82,340. The first dividend included the amount of profit earned by the official liquidator. Under this court's order dated November 21, 1962, the second dividend was declared at the rate of rupees five per share totalling to Rs. 2,91,170. The official liquidator states in paragraph 5 of his report that the second dividend was declared out of the sale proceeds of the assets of the company. The official liquidator made a deduction of thirty per cent. on account of income-tax from the second dividend. The petitioner's grievance is that the official liquidator was in error in making this deduction. The official liquidator has stated that he had paid the deduction made by him on account of income-tax to the credit of the income-tax department.

When the case came up for hearing on 22nd October, 1964, the learned company judge thought it desirable that the relevant income-tax authorities be impleaded as parties to the petition for a satisfactory decision of the dispute raised. Thereupon, the Union of India through the Income-tax Officer, A-Ward, Allahabad, was impleaded as respondent No. 2. It appears that the Income-tax Officer, A-Ward, Allahabad, is the officer who deals with the assessment of the petitioners as well as of the company. The inspector attached to this officer has filed a counter-affidavit on his behalf. It states that on account of the mismanagement and misappropriation of funds by the said managing agents, the company could not pay its dues to the U.P. Government for the purchase of electrical energy in full and that in or about September, 1934, the company's outstanding dues to the U.P. Government amounted to Rs. 1,65,214. It states that, at the instance of the U.P. Government, the company was compulsorily wound up by an order of this court dated 23rd September, 1934, and that " the deponent is not in a position to state as to what was the financial position of the company on that date, whether it had any accumulated profits or not. This could also be appropriately replied to by the official liquidator." It further stated that the official liquidator continued the business of the company and made profits on which the company paid substantial income-tax and that the dividends that have been paid by the official liquidator have been paid out of the accumulated profits made by the company. The main point stressed in the counter-affidavit, and which was also pressed in argument by the learned counsel, is that a payment made by the liquidator of the company to its shareholders out of the profits earned by him, after the commencement of the liquidation proceedings but before the " final liquidation ", are dividends and taxable.

(3.)IT is thus apparent that the company had no accumulated profits in September, 1934, when the winding up commenced. The company did make profits during liquidation, the total whereof amounted to Rs. 3,79,316. 30 nP. The question is whether distribution of this profit is dividend so as to attract liability of deduction of tax at source. Chapter 176 of the Income-tax Act, 1961, deals with "deduction at source". Section 194 relates to dividends. This section imposes upon a company a liability to deduct income-tax and super-tax at the current rates from the amount of dividend before paying or distributing it. The dividend to which this liability is attached is dividend within the meaning of Sub-clause (a) or (b) or (c) or (d) or (e) of Clause (22) of Section 2 alone. Before deduction at source can be made the dividend must conform to any one of these sub-clauses.
Section 2(22) defines " dividend ". This sub-section corresponds to Section 2(6A) of the Income-tax Act, 1922. It may perhaps be not out of place to recapitulate the legislative history of this provision. In the case of a company which made profits but did not distribute them to the shareholders but continued to keep it with itself from year to year, and distributed them later on, the distribution so made was dividend within the meaning of Section 2(6A)(a) of the 1922 Act. The decision in Commissioners of Inland Revenue v. Burrell, 1924 9 Tax Cas. 27 declared that the position was different in a case where the company went in liquidation with an accumulation of profits in its bag, but before having distributed them. It was held that, after the commencement of liquidation, whatever properties remained with the company after the payment of its liabilities, were surplus assets of the company which were divisible among the shareholders as capital. They were not distribution of dividends. No part of the total funds at the disposal of the company in liquidation could be earmarked or appropriated to its profits account as apart from its capital account. The entire fund was "capital" and divisible as such. To remove this anomaly sub- Clause (c) was added to Section 2(6A) in 1939. It runs as follows :

" 2. (6A) " dividend " includes-- . . .

(c) any distribution made to the shareholders of a company out of the accumulated profits of the company on the liquidation of the company :

Provided that only the accumulated profit so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included. "


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