Case: First Income-tax Officer, Salem Vs. Short Brothers Private Limited

distributed by a liquidator of a company to escape liability to tax. In Inland Revenue Commissioners v. George Burrell, 1924-2 KB 52, it was held that on the undivided profits of past years and of the year in which the winding up of a company occurred which were distributed among the shareholders, super-tax was not payable because in the winding up they had ceased to be profits and were assets only. It was observed in Burrells case, 1924-2 KB 52, that the only thing the liquidator of a company in liquidation may do is to turn the assets into money and divide the money among the shareholders in proportion to their shares. Surplus of trading profit made in a particular year are distributable rateably among all the shareholders as capital, and it is not right to split up the sums received by the shareholders into capital and income, by examining the accounts of the company when it carried on business, and disintegrating the sum received by the shareholders subsequently into component parts based on an estimate of what might possibly have been done, but was not done. As the Indian Companies Act, 1913, closely followed the scheme of the English Companies Act, and the view expressed in Burrells case, 1924-2 KB 52, applied to the Indian income-tax Act, a special definition of "dividend" was devised by the Parliament by the enactment of Income-tax (Amendment) Act 7 of 1939, with a view to supersede the view in Burrells case, 1924-2 KB 52. Clause (c) of sub-s. (6A) as originally enacted stood as follows :"dividend includes -(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation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 the Finance Act, 1955 the proviso to sub-cl. (c) of Cl. (6A) was omitted. There was a further amendment made by the Finance Act, 1956 and Cl. (c) to the amended section read as follows :"dividend includes -(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,"Under Act 7 of 1989 profits which arose within six previous years preceding the date of liquidation when distributed were to be deemed dividends. But the effect of the definition was that distribution of profits accumulated after the last day of the previous year whatever their nature could not be regarded as distribution of dividend: Haridas Achratlal v. Commissioner of Income-tax, 1955-27 ITR 684 : (AIR 1955 Bom 388). It was held in that case by the Bombay High Court that for the purpose of S. 2 (6A) (c) as it stood in 1949, a broken period between the last day of the previous year of a company, and the commencement of winding up- could not be considered "a previous year". The Parliament with a view to supersede the view in Haridas Achratlals case. 1955-27 ITR 684 : (AIR 1955 Bom 338 ), deleted by the Finance Act 1055, the proviso to sub-cl. (c).To make its meaning more clear the Parliament by the Finance Act 1956, recast the substantive Cl. (c). Viewed in the context of this legislative history, there is no doubt that "current profits", i.e., profits of a company in liquidation arising after the end of the last previous year and before liquidation commenced, were brought within the net of taxation as dividend. The contention raised by counsel for the Company on this part of the case must fail.10. The question which remains to be considered is whether capital appreciation in respect of the lands from which the income derived is agricultural income and which was not taxable in the hands of the company as capital gains would still on distribution be liable to be taxed as dividend under S. 12 of the Income-tax Act.As we have already pointed out capital gains under S. 12B are chargeable in respect of any profits arising from transfer of "capital assets" and "capital assets" do not include lands from which the income derived is agricultural income. Profits derived by transfer of lands from which the income derived is agricultural income-would not, therefore, be chargeable on a combined reading of S. 12B with S. 2 (4A) of the Income-tax Act under the head "capital gain" The expression "accumulated profits" does not include capital gains arising within the excepted periods : vide Explanation to Section 2 (6A). "Accumulated profits" are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act. Realization of appreciated value of assets in commercial practice is regarded as realization of capital rise, and not of profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act.11. Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income-tax, Bombay, 1955-27 ITR 1 : (AIR 1955 SC 74 ), that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to pay tax under Section 4 (3) (viii), dividend distributed from profits earned out of sale of capital assets inclusive of lands from which the income derived is agricultural income is also not exempt from income-tax. But the Company does not claim exemption from liability to tax under S. 4 (3) (viii): it claims exemption because the receipt is not income which is chargeable to tax under S 12 under the head "dividend" The case of Mrs. Bacha F. Guzder, 1955-27 ITR 1 : (AIR 1955 SC 74 ), has, therefore, no application to this case.12

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Under Act 7 of 1989 profits which arose within six previous years preceding the date of liquidation when distributed were to be deemed dividends. But the effect of the definition was that distribution of profits accumulated after the last day of the previous year whatever their nature could not be regarded as distribution of dividend: Haridas Achratlal v. Commissioner of Income-tax, 1955-27 ITR 684  : (AIR 1955 Bom 388). It was held in that case by the Bombay High Court that for the purpose of S. 2 (6A) (c) as it stood in 1949, a broken period between the last day of the previous year of a company, and the commencement of winding up- could not be considered "a previous year". The Parliament with a view to supersede the view in Haridas Achratlals case. 1955-27 ITR 684  : (AIR 1955 Bom 338  ), deleted by the Finance Act 1055, the proviso to sub-cl. (c).To make its meaning more clear the Parliament by the Finance Act 1956, recast the substantive Cl. (c). Viewed in the context of this legislative history, there is no doubt that "current profits", i.e., profits of a company in liquidation arising after the end of the last previous year and before liquidation commenced, were brought within the net of taxation as dividend. The contention raised by counsel for the Company on this part of the case must fail.The question which remains to be considered is whether capital appreciation in respect of the lands from which the income derived is agricultural income and which was not taxable in the hands of the company as capital gains would still on distribution be liable to be taxed as dividend under S. 12 of the Income-taxwe have already pointed out capital gains under S. 12B are chargeable in respect of any profits arising from transfer of "capital assets" and "capital assets" do not include lands from which the income derived is agricultural income. Profits derived by transfer of lands from which the income derived is agricultural income-would not, therefore, be chargeable on a combined reading of S. 12B with S. 2 (4A) of the Income-tax Act under the head "capital gain" The expression "accumulated profits" does not include capital gains arising within the excepted periods : vide Explanation to Section 2 (6A). "Accumulated profits" are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act. Realization of appreciated value of assets in commercial practice is regarded as realization of capital rise, and not of profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act.11. Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income-tax, Bombay, 1955-27 ITR 1  : (AIR 1955 SC 74  ), that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to pay tax under Section 4 (3) (viii), dividend distributed from profits earned out of sale of capital assets inclusive of lands from which the income derived is agricultural income is also not exempt from income-tax. But the Company does not claim exemption from liability to tax under S. 4 (3) (viii): it claims exemption because the receipt is not income which is chargeable to tax under S 12 under the head "dividend" The case of Mrs. Bacha F. Guzder, 1955-27 ITR 1  : (AIR 1955 SC 74  ), has, therefore, no application to this case.