Case: Commissioner Of Income-Tax, Gujarat Vs. Vadilal Lallubhai Etc. Etc

1. The principal question of law arising in these appeals by certificate is whether on the facts and in the circumstances of each of these cases the Department was right in applying Section 44-F read with Section 2 (6-A) (c) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act). The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal answered that question in favour of the Department but the High Court answered the same in favour of the assessee. As we are in agreement with the conclusion reached by the High Court, we do not think it necessary to examine the other questions arising in these appeals.The assessee belongs to the well-known family of Vadilal Lallubhai Mehta of Ahmedabad. The members of this family (who for the sake of convenience will hereinafter be referred to as the "Mehta Group") owned shares in and controlled several companies including certain managing agency companies. Those managing agency companies were Private Ltd. companies. The managed companies were also companies in which the members of the "Mehta Group" had controlling interest. This Group had also selling agency rights in the companies which they were managing. On the coming into force ofthe Companies Act, 1956, the managing agency companies gave up their managing agency rights in order to safeguard their selling agency rights. Thereafter the assessee sold his share holdings to the employees of some "Mehta Group" companies or the relations of such employees. In addition he sold some shares to one of the family trusts. A few days after the sales in question, those manging agency companies went into voluntary liquidation. Consequently the assets of those companies were distributed among the shareholders who were borne on the registers of the companies as on the dates of liquidation. These shareholders included those persons who had newly purchased the shares. One of the new shareholders as mentioned earlier was a charitable trust which was not liable to pay any tax. The remaining sharesholders were either not liable to pay any tax or were liable to pay tax at a lower rate than the assessee would have had to pay had he received the amount distrubed by the liquidators.4. The Income-tax Officer brought to tax a portion of the assets distributed on liquidation by applying Section 44-F read with Section 2 (6-A) (c) of the Act. The Appellate Assistant Commissioner agreed with this view. The assessees appeal to the Income-tax Appellate Tribunal was unsuccessful. Thereafter at the instance of the assessee, certain questions were referred to the High Court for its opinion. Various contentions were advanced before the High Court on behalf of the assessee. We do not think it necessary to refer to those contentions as in our view the High Court was right in taking the view that to the facts and circumstances of the case, Sec. 44-F read with Section 2 (6-A) (c) was inapplicable.

Court's reasoning:
12.It is clear from what we have said earlier that Section 44-F concerns itself with income arising from securities or shares during a period of time. When a company goes into liquidation, the share-scrips are no more income yielding assets. They are mere pieces of paper. No income arises from those shares thereafter. What the shareholder gets on liquidation is not any income from shares but a share of the assets of the quondam company. Such a receipt is incapable of being deemed to accrue from day to day. In the case of interest on securities or dividends on shares, they are paid at certain intervals. Hence it is possible to deem them as having accrued from day to day but in the case of distribution of assets of a company in liquidation, it is not possible to deem the same to have accrued from day to day. We have to bear in mind that some of the dividends mentioned in S. 2 (6-A) are only deemed dividends. They are not real dividends. By a legal fiction, they are deemed as dividends. This Court held in Commr. of Income-tax, Andhra Pradesh v. C. P. Sarathy Mudaliar, 83 ITR 170   = (1972 Tax LR 1006 (SC) ) that the definition of "dividend" contained in S. 2 (6-A) (c) is an artificial definition of "dividend". It does not take in dividend actually declared or received. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The same would be the position in the case of the "dividend" mentioned in Section 2 (6-A) (c). As held by this Court in Commr. of Income-tax Bombay City 1 v. Amarchand N. Shroff, 48 ITR 59   = (AIR 1963 SC 1448  ) legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field.Section 44-F of the Act, immaterial changes apart, is a reproduction of Section 33 of the English Finance Act, 1927 which was subsequently replaced by Section 237 of the English Income-tax Act, 1952. Dealing with that section this is what is observed in the Law of Income-tax, Surtax and Profits Tax by Wheat croft at page 1669 (paragraph 1-1358)now come to the more difficult problem which arises when a taxpayer sells, for a capital sum, securities which are about to pay interest and the purchaser acquires the right both to the securities and the interest.It is the custom on British stock exchanges to notify in advance the dates in respect of each security before which a buyer of that security will be entitled to the next income payment. Up to that date the security is sold "cum dividend"; after that date the security is sold "ex dividend" and the next income payment when received after the sale, will remain the property of the seller. Apart from the general market fluctuations the price will gradually rise up to the day when the security goes "ex div." it will then normally fall sharply by a sum approximately equal to the anticipated income payment less tax at standard rate, as the average investor values the income at its net amount. If the amount is at a fixed rate, such as on Government stock, the likely fall for this reason can be calculated with considerable accuracy in advance.A surtax payer, who pays more than the standard rate of tax, can thus find it profitable to sell his securities just before they go "ex div." as he will receive as capital the equivalent of the net dividend, instead of receiving a dividend subject to tax in his hands at a higher rate than that deducted from the dividend.To deal with taxpayers who used this, and similar devices on a substantial scale it was provided by the Finance Act, 1927, that if it appears to the Revenue by reference to all the circumstances in relation to the assets of any individual (including circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions relating to such assets) that the individual has thereby avoided or would avoid more than 10 per cent. of the amount of surtax for any year which would have been payable in his case if the income from those assets had been deemed to accrue from day to day and had been apportioned to him as part of his total income, then such income is to be so apportioned to him for the purpose of computing his surtax. If the individual can prove that the avoidance was exceptional and not systematic and that there was no such avoidance in the following three years, he can avoid liability under this provision. Extensive powers are given to the Revenue to obtain information for the purpose of this provision.The marginal note for S. 44-F reads avoidance of tax by sales cum dividend". This marginal note also gives an indication as to what exactly was the mischief that was intended to be remedied. The legislature was evidently trying to circumvent the devices adopted by some of the assesses to convert their revenue receipts into capital receipts. The marginal note also throws light on the intention of the legislature.18. From what has been stated above, it is clear that the deemed dividend contemplated by Section 2 (6-A) (c) cannot be considered as "income" under Section 44-F.