Case: Commissioner Of Income-Tax, Gujarat Vs. Girdhardas &amp; Company Private Ltd

1. By a resolution dated August 23, 1952 it was resolved to wind up the respondent company and to appoint a liquidator for that purpose. Thep capital of the assessee was Rs. 25 lakhs, and on the date of commencement of winding up it had an accumulated profit of Rs. .5,34,041. 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:        Assesment YearDistribution per shareDate of distributionAmount distributedOut of the distribution made on September 9, 1952, thex Officer brought, in the assessment year, to tax Rupees 52,400 as "dividend" within the meaning of S. 2 (6A) (c) of thex Act, 1922, as it then stood. On July 24, 1957, the liquidator distributed Rs. 30 per share among the shareholders. Thex Officer in the course of assessment for the year9 sought to bring the entire amount of Rs. 75,000 distributed to tax as dividend" within the meaning of S. 2 (6A) (c) of thex 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 thex Officer. In appeal to the Tribunal on behalf of the assessee, it was urged that the entire accumulated profit was exhausted when Rs. 17,25 000 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 must be deemed to be distributed in the same proportion in which the accumulated profit 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. (1) of thex Act, 1922:"Whether on the facts and in the circumstances of the case the sum of Rupee 75,000 or any part thereof could be treated as dividend under S. 2(6A)(c) of the Indianx 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.

Reasoning:
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 concern10. The language used by the Legislature in S. 2(6A)(c) as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its componentscapital and accumulated profitsas they existed immediately before the commencement of liquidation. In any distribution made to the shareholders of a company by the liquidator, that part which is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and liable to tax under the Act.The provision was intended to supersede the application of the principle of George Burrells case, that is to enact that even though on a winding up of a company the distinction between the assets and the accumulated profits disappears, the taxing authority may disintegrate the amount distributed into its component parts and determine the share attributable to accumulate profits. The amount distributed would therefore be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, the proportion being the same which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding up, and that part of the receipt which is attributable to the accumulated profits would be taxable. Thex Officer has therefore in the first instance to determine the accumulated profits in the hands of the Company whether capitalised or not and the rest of the capital immediately before the liquidation; he has then to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the component attributable to accumulated profits. There is in S. 2(6A)(c) no warrant for the view that in the course of liquidation the accumulated profits exist as a separate fund even in a notional sense. Each distribution is of a consolidated amount which represents bothcapital and accumulatedprofits. There isalso nothing in the clause which supports the view that whatever is brought to tax by the taxing authorities in a given year is dividend, and the rest represents the assets of the company. The fund in the hands of the liquidator is one: when the fund or a part of it is distributed, the distribution is deemed to take place in the same proportion in which thecapital and accumulatedprofitsstood in the accounts of the company immediately before the winding up11. We discharge the answer recorded by the High Court, and record the answer that "that part of Rs. 75,000 which bears the same ratio to Rs. 75,000 which the accumulatedprofitsat the date of liquidation bore to the total assets of the company immediately before liquidation is dividend". In the present case the Tribunal has not determined what part of Rs. 75,000 represents accumulated. But on the view we have taken of the true meaning of S. 2 (6A)(c) of the Act, the Tribunal was bound to do so.