Case: Hari Prasad Jayantilal &amp; Co. Ltd Vs. Income-Tax Officer, Special Investigation Circle-B

1. The appellant-a company registered under the Indian Companies Act, 1913- was assessed in the assessment years 1948-49 to 1953-54 in respect of the profits earned in its business, and was allowed rebate under the appropriate provisions contained in the Schedules to the relevant Finance Acts on the undistributed profits of the previous years. On December 31, 1956 at an annual general meeting of the shareholders the Company declared an aggregate sum of Rs. 2,15,232 as dividend for the year ending December 31, 1956. Thereafter a special resolution was passed for voluntary winding up of the company with effect from October 1, 1957, and for appointing a liquidator to wind up the affairs of the Company. On October 20 and 21 1957 the liquidator distributed to the shareholders Rs. 5,17,171-20 and thereafter on February 21 and 22, 1958; March 31, 1958 and July 27, 1959 the liquidator distributed diverse other amounts to the shares-holders. In respect of each such distribution the liquidator issued an "income-tax refund certificate certifying  certifying that the amount was distributed out of reserves formed out of accumulated profits of earlier years.2. The Income-tax Officer, Special Investigation Circle-B, Ahmedabad in exercise of the power under S. 35(10) of the Indian Income-tax Act, 1922. passed an order withdrawing the rebate granted in respect of each of the six assessment years 1948-49 to 1953-54 and demanded payment of tax on the amount of the rebate. The appellant then applied to the High Court of Bombay for writs quashing the orders of the Income-tax Officer and the notice of demand and directing the Income-tax Officer to withdraw and cancel the order and notice of demand. The petition was dismissed by the High Court. With certificate granted by the High Court, this appeal has been preferred.

Reasoning: 9. It was urged that assuming that accumulated profits of a Company distributed by the liquidator may be regarded as dividends, power under S. 35(10) cannot be exercised in respect of those profits, because the liquidator is not in distributing the profits "declaring dividends. But the assumption underlying the argument that the Companies Act provides that dividends may be deemed to be declared only if certain mandatory provisions are complied with is without substance. By S. 205 of the Indian Companies Act, 1956 (before it was amended in 1960) it was provided that no dividend shall be declared or paid except out of the profits of the company or out of moneys provided by the Central or a State Government for the payment of the dividend in pursuance of a guarantee given by such Government. The Company in the present case was registered under the Indian Companies Act, 1913. The Articles of Association of the Company are not before us, but the Articles relating to distribution of dividend being under S. 17 (2) of the Companies Act, 1913, obligatory, Arts. 95, 96 and 97 in Table A of Act 7 of 1913 applied. By Art. 95 it was provided that a company in general meeting may declare dividends, but no dividends shall exceed the amount recommended. But to the distribution of interim dividends, the condition that it must be declared in general meeting of the Company did not apply, and such interim dividends as appeared to the directors to be justified by the profits of the company could be distributed (Art. 96).The only other relevant condition was in Art. 97 that no dividend shall be paid otherwise than out of profits of the year or any other undistributed profits.10. The liquidator of the appellant company did from time to time distribute accumulated profits, and within the meaning of S. 2(6-A) (c) read with the provisions of the Companies Act, they were distribution of interim dividends. It is true that power under S. 35(10) may be exercised if accumulated profits are availed of by the Company "for declaring dividends in any year, but since the Companies Act does not in the matter of distribution of interim dividends set up any special machinery, nor imposed any special condition before power in that behalf may be exercised, no artificial meaning can be attached to the word "declaring dividends. Distribution of accumulated profits by the liquidator together with the income-tax refund certificate in the course of voluntary winding up may therefore, for the purpose of S. 2(6-A)(c), be regarded as declaration of dividend.