Civil Appeal No 2090 of 1980 973 Appeal by Special leave from the Judgment and order dated the 30th January 1979 of the Kerala High Court in l
TR No 76 of 1977
Abdul Khadder and Miss A Subhashini for the Appellant
P Gobindan Nair N Sudhakaran and Mrs Baby Krishnan for the Respondent
The Judgment of the Court was delivered by BALAKRISHNA ERADI J
Whether a company in liquidation is chargeable to super profits tax under the Super Profits Tax Act 1963 Act XIV of 1963 hereinafter called the Act  is the short question arising for determination in this appeal
The answer thereto will depend upon whether during the period subsequent to the date of winding up any part of the funds in the hands of the official liquidator can be distinctly classified as representing paid up share capital of the company as on the first day of the year of account relevant to assessment year and whether any portion of the fund can be similarly identified as forming as reserve
The assessee is a banking company namely The Palai Central Bank Ltd which went into liquidation on August 8 1960
On that date the official Liquidator took charge of the assets and liabilities of the company and a balance sheet had been prepared as on the same date
Thereafter for every year the liquidator used to prepare only an income and expenditure statement for submission to the Reserve Bank of India
The assessment year with which we are concerned is 1963 64 ie the year ended March 31 1963
For the said assessment year the taxable income of the assessee was determined by the Income tax officer at Rs 576678
The officer was of the opinion that this amount would attract liability for super profits tax also and since the assessee had not submitted any return under the Act a notice under section 9 a of the Act calling for the return was issued
The assessee thereupon submitted a return showing the chargeable profits as nil 
In support of the said return the assessee contended inter alia before the officer that there could be not liability to super profits tax in respect of a company in liquidation since the formula laid down in the Second Schedule to the Act for calculation of the standard deduction  was inapplicable on account of the fact that a company in liquidation could not be said to have paid up share capital as on the first day of 974 the previous year relevant to the assessment year which was long subsequent to the winding up
Certain other contentions were put forward by the since they are not of any material relevance at this State it is unnecessary to refer to them
The Income tax Officer overruled the contentions raised by the assessee and worked out the chargeable profits at Rs 204740 after adopting minimum amount of Rs 50000 mentioned in 2 9 of the Act as a standard deduction applicable to the case
The Appellate Assistant Commissioner before whom the assessee filed an appeal confirmed the order of the Income tax officer
The assessee carried the matter in further appeal before the Income tax Appellate Tribunal Cochin Bench
The Tribunal held that in the hands of the liquidator there is only one integral fund which could not be split up into share capital reserve and profits
In the opinion of the Tribunal the exemption provision contained in section 27 of the Act which states that nothing contained in the Act shall apply to any company which has no share capital was clearly attracted to the case
It was further held by the Tribunal that even if the exemption under section 27 of the Act did not get attracted section 4 of the Act which is the charging section would not apply to the assessee company in liquidation as the standard deduction  was incapable of ascertainment
The Tribunal accordingly allowed the appeal of the assessee and held that no assessment to super profits tax could be made on a company in liquidation
Thereafter at the instance of the revenue the Tribunal referred the following question of law to the High Court of Kerala for its opinion Whether on the facts and in the circumstances of the case was the Tribunal justified in holding that no assessment under the Super Profits Tax Act 1961 can be made on the assessee company in liquidation  The High Court agreed with the view taken by the Tribunal that after a company has gone into liquidation there cannot be said to be in the hands of the liquidator any amount that can be distinctly designated as paid up share capital of the company or as reserve  with respect to which the capital of the company is to be worked out as provided in Second Schedule to the Act in order to arrive at the amount or standard deduction The question referred 975 was accordingly answered by the High Court in the affirmative that is in favour of the assessee and against the revenue
Aggrieved by the said decision the revenue has preferred this appeal to this Court by special leave
After hearing Counsel appearing on both sides we have unhesitatingly come to the conclusion that the view taken by the High Court is perfectly correct and that this appeal is devoid of merit
Section 4 of the Act which is the charging section reads 4
Charge of tax Subject to the provisions contained in this Act there shall be charged on every company for every assessment year commencing on and from the 1st day of April 1963 a tax in this Act referred to as the super profits tax in respect of so much of its chargeable profits of the previous year or previous years as the case may be as exceed the standard deduction at the rate or rates specified in the Third Schedule
 The expression chargeable profits has been defined in clause 5 of section 2 thus 25 Chargeable profits means the total income of an assessee computed under the Income tax Act 1961 XLIII of 1961 for any previous year of years as the case may be and adjusted in accordance with the provisions of the First Schedule
 The next definition that is relevant is contained in clause 9 of the same section which deals with the expression standard deduction
That clause reads as follows 29 Standard deduction means an amount equal to six per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of fifty thousand rupees whichever is greater Provided that where the previous year is longer or shorter than a period of twelve months the aforesaid amount of six per cent or the case may be of fifty thousand rupees shall be increased or decreased proportionately 976 Provided further that where a company has different previous years in respect of its income profits and gains the aforesaid increase or decrease as the case may be shall be calculated with reference to the length of the previous year of the longest duration
It is seen from the above definition that for the calculation of standard deduction  one has to ascertain the capital of the company as computed in the manner specified in second Schedule
That makes it necessary for us to examine the provisions of Second Schedule of the Act which contains the rules for computing the a capital of a company for the purpose of levy of super profits tax
The relevant provision is contained in rule I of the said Schedule which is in the following terms  1
Subject to the other provisions contained in this Schedule the capital of a company shall be the sum of the amounts as on the first day of the previous year relevant to the assessment year of its paid up share capital and of its reserve if any created under the proviso b to clause vi b of sub section 2 of section 10 of the Indian Income tax Act 1922 XI of 1922 or under sub section 3 of section 34 of the Income tax Act 1961 XLIII of 1961 and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purpose of the Indian Income tax Act 1922 XI of 1922 or the Income tax Act 1961 XLIII of 1961 diminished by the amount by which the cost to it of the assets the income from which in accordance with clause iii or clause vi or clause viii of rule 1 of the First Schedule is not includible in its chargeable profits exceeds the aggregate of i any money borrowed by it which remains outstanding and ii the amount of any fund any surplus and any such reserves is not to be taken into account in computing the capital under this rule
Explanation 1 A paid up share capital or reserve brought into existence by creating or increasing by revaluation or otherwise any book asset is not capital for computing the 977 capital of a company for the purposes of this Act
Explanation 2 Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid up share capital
Explanation 3 Where a company has different previous years in respect of its income profits and gains the computation of capital under rule 1 and rule 2 of this Schedule shall be made with reference to the previous year which commenced first
 It is manifest from the terms of rule that the essential components which will together go to make up the capital of a company are i Its paid up share capital on the first day of the previous year relevant to the assessment year
ii Its reserves if any created under the proviso b to clause vi b of sub section 2 of section 10 of the Indian Income tax Act 1922 or under sub section 3 of section 34 of the Income tax Act 1961 and iii Other reserves in so far as the amounts credited there to have not been allowed in computing the profits of the company for the purposes of the assessment to income tax
From the aggregate of the aforesaid amounts certain deductions as specified in the section have to be made but the details of such deductions are not relevant for the purposes of the present case
What is important to notice is that unless the company can be said to have a paid up share capital as on the first day of the previous year relevant to the assessment year the formula laid down in the rule for computation of capital of the company cannot have any application and calculation of standard deduction being based wholly on the capital of the company it becomes wholly incapable of ascertainment
After a company has gone into liquidation can it be said that as on the first day in any subsequent year forming the previous year relevant to the assessment year there exists in the hands of the liquidator any amount distinctly forming the paid up share capital of the company or any sum that can be 978 characterized as reserve In our opinion the answer must clearly be in the negative
In Commissioners of Inland Revenue vs George Burrell Pollock MR 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 vs cropper 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 conclusion 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 above statement of the law was cited with approval and adopted by this Court in Commissioner of Income tax vs Girdharas and Co Private Ltd and it was held that in respect of a company in liquidation after the date of its winding up the distinction between capital reserve and the accumulated profits disappears and there is only one integrated or consolidated fund in the hands of the liquidator
The concept of a fluctuating share capital or reserve which is the basic premise necessary to attract the applicability of rule 1 of the Second Schedule is wholly foreign in respect of a company in liquidation
In Commissioner of Income tax Bangalore vs BC Srinivasa Setty this Court pointed out that under the scheme of the Income tax Act 1961 charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisions
The character of the computation provisions in each case bears a relationship to the nature of the charge
Thus the charging section and the computation provisions together 979 constitute an integrated code
When there is a case to which the computation provisions cannot apply at all it is evident that such a case was not intended to fall within the charging section
Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it
The legislative pattern discernible in the Act is against such a conclusion
Exactly similar being the scheme of the  the above observations fully apply to case before us
Hence it has to be held that inasmuch as the provisions contained in the Act for computing the capital of the company and its reserves and cannot have any application in respect of a company in liquidation and consequently the standard deduction  is incapable of ascertainment the charge of super profits tax under section 4 of the Act is not attracted to such a case
The judgment of the High Court does not therefore call for any interference
This appeal is accordingly dismissed with costs
MLA Appeal dismissed


Summary:
The assessee company went into liquidation on August 8 1960
The Income tax officer while determining the taxable income of the assessee company at Rs 579978 for the assessment year 1963 64 was of the opinion that this amount would attract liability for super profits tax also and therefore asked the assessee company to file its return
The assessee company submitted its return showing the chargeable profits as nil  contending that there could be no liability to super profits tax in respect of a company in liquidation since the formula laid down in the Second Schedule to the for calculation of the standard deduction  was inapplicable on account of the fact that a company in liquidation could not be said to have paid up share capital as on the first day of the previous year relevant to the assessment year which was long subsequent to the winding up
The Income Tax officer however overruled the aforesaid contention and worked out the chargeable profits at Rs 204740 after adopting a minimum amount of Rs 50000 mentioned in s2 9 of tho Act as a standard deduction
The said order was confirmed in appeal by the Appellate Assistant Commissioner
But on further appeal by the assessee company the Income tax Appellate Tribunal while allowing the appeal held 1 that in the hands of the liquidator there is only one integral fund which could not be split up into share capital reserve profits and therefore s27 of the Act was clearly attracted to the case and ii that no assessment to super profits could be made on a company in liquidation since section 4 of the Act would not apply to the assessee company in liquidation as the standard deduction was incapable of ascertainment
The High Court rejected the reference made at the instance of the Revenue
972 Dismissing the appeal by the Revenue  HELD 1 After a company has gone into liquidation it cannot be said that as on the first day in any subsequent year forming the previous year relevant to the assessment year there exists in the hands of the liquidator any amount distinctly forming the paid up share capital of the company or any sum that can be characterized as reserve
 The distinction between capital reserve and tho accumulated profits disappears in respect of a company in liquidation after the date of its winding up and there is only one integrated or consolidated fund in the hands of the liquidator
The concept of a fluctuating share capital or reserve which is the basic premise necessary to attract the applicability of rule 1 of the Second Schedule is wholly foreign in respect of a company in liquidation
977H 978E F 2 It is clear from the definition of standard deduction that for the purpose of calculation of standard deduction one has to ascertain the capital of the company as computed in the manner specified in Second Schedule
But it is important to notice from the terms of Rule I of Second Schedule that unless the company can be said to have a paid up share capital as on the first day of the previous year relevant to the assessment year the formula laid down in the rule for computation of capital of the company cannot have any application and the calculation of standard deduction being based wholly on the capital of the company it becomes wholly incapable of ascertainment
976B 977F G Commissioner of Inland Revenue vs George Burrell 1924 2 KB 52 63 and Birch vs Cropper 1889 LR 14 App
525 546 referred to
Commissioner of Income tax vs Girdhars and Co Private Ltd  followed
3 Under the scheme of the Income tax Act 1961 charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisions
The character of the computation provisions in each case bears a relationship to the nature of the charge
Thus the charging section and the computation provisions together constitute an integrated code
When there is a case to which the computation provisions cannot apply at all
it is evident that such a case was not intended to fall Within the charging section
The scheme of the being similar to that of the Income tax Act 1961 it has to be held that inasmuch as the provisions contained in the Act for computing the capital of the company and its reserves and cannot have any application in respect of a company in liquidation and consequently the standard deduction  is incapable of ascertainment the charge of super profits tax under section 4 of the Act is not attracted to such a cases
978G H  979A C Commissioners of Income tax Bangalore vs BC Srinivasa Setty   referred to