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PETITIONER: COMMISSIONER OF INCOME TAX KERALA, ERNAKULAM

       Vs.

RESPONDENT: V. DAMODARAN, TRIVANDRUM

DATE OF JUDGMENT15/10/1979

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L.

CITATION:  1980 AIR  478            1980 SCR  (1) 944  1980 SCC  (1) 173

ACT:      Indian  Income   Tax  Act,   1922-Sections  2(6A)  (e)- Interpretation of  "accumulated profits"  if include current profits-Section 256(i)-Scope of.

HEADNOTE:      The assessee  was the  Managing Director  of a  Company originally assessed on a total income of Rs. 43407/- for the assessment year  1959-60. Thereafter  the Income-Tax Officer came to  know that  the assessee had been withdrawing moneys from the  Company and  that those  amounts were liable to be treated as  dividend under  section 2(6A)(e)  of the Act, he re-opened the assessment. In the assessment proceedings that followed, the  assessee claimed that the accumulated profits of the  Company amounted  to Rs.  1050 only  and that amount alone could be considered as dividend under section 2(6A)(e) of the  Act. The figure was worked out on the basis that Rs. 11,000 as  a provision  for tax and Rs. 6,900 as a provision for dividend  had to  be adjusted against the balance of Rs. 18,950 in  the Profit  and  Loss  Account.  The  Income  Tax Officer  rejected   the  contention  of  the  assessee.  The Appellate Assistant  Commissioner dismissed the appeal filed by the assessee. The Income Tax Appellate Tribunal in second appeal, upheld  the claim  of the  assessee that  the  words "accumulated profits"  in section 2(6A) (e) of the Act could not be construed as including current profit but it rejected the contention that the two sums of Rs. 11,000 and Rs. 6,900 had to  be taken  into account  in determining the figure of the "accumulated  profits". It  determined the  "accumulated profits" at  Rs. 18,950. The Revenue obtained a reference to the High  Court on  the  question:  "Whether  the  Appellate Tribunal was legally correct in holding that the accumulated profit will not include "current profits" for the purpose of section 2(6A) of the Act."      A second question was referred to the High Court at the instance of  the assessee  : "Whether the Tribunal was right in holding  that Rs.  18,950 constituted accumulated profits for the purpose of section 2(6A) of the Act." The High Court answered both  the questions  in favour of the assessee, the first question in the affirmative and the second question in the negative.      On appeal to this Court,

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^      HELD: 1.  "Current profits"  that is  to  say,  profits earned by  the Company  during the  year in  which the loans were advanced to the assessee cannot be regarded as included within the  "accumulated profits"  of a  Company within  the meaning of section 2(6A) (e) of the Act. [947G-948E]      Commissioner of  Income-Tax, Madras v. M. V. Murugappan JUDGMENT:      2. The  Appellate Tribunal  was not  competent to refer the second  question, and  the reference to that extent must be considered void. Section 256(1) of 945 the Income  Tax Act,  1961  entitles  the  assessee  or  the Commissioner, as the  case may be, to apply to the Appellate Tribunal to  refer to  the High  Court any  question of  law arising out  of the  order made  by the  Appellate  Tribunal under section  254. It  is clear  that the statute expressly contemplates an  application  in  that  behalf  by  a  party desiring a preference to the High Court. The application has to be filed within a prescribed period of limitation. If the application is rejected by the Appellate Tribunal, it is the applicant thus  refused who is entitled to apply to the High Court. The  form of reference application prescribed by rule 48 of  the Income  Tax Rules, 1962 specifically requires the applicant to  state the questions of law which he desires to be referred to the High Court. In every case, it is only the party applying  for a  reference who  is entitled to specify the questions  of law which should be referred. Nowhere does the statute  confer a  right in  the non-applicant (a phrase used here  for  convenience)  to  ask  for  a  reference  of questions of  law on  the applicant.  [950 A, C-D E, F-G and 952 E]      The party  who is  aggrieved and who desire a reference to the High Court must file a reference application for that purpose.  It  is  not  open  to  him  to  make  a  reference application filed  by the other party the basis of his claim that a question of law sought by him should be referred. But on a  reference application  filed by the aggrieved party it is open  to the  non-applicant who  is not  aggrieved by the result of  the appeal,  to ask  for  a  reference  of  those questions of law which arise on its submissions negatived in appeal by the Appellate Tribunal. [951 A-B, C]

&      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2099 of 1972. From  the Judgment  and Order  dated 18-1-1972  of the Kerala High Court in I.T.R. No. 88/1969.      B. B. Ahuja and Miss A. Subhashini for the Appellant.      Nemo for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.-This  is  an  appeal  by  certificate  under section 261 of the Income Tax Act, 1961 against the judgment of  the   High  Court   of  Kerala  interpreting  the  words "accumulated profits"  in section  2(6A)(e)  of  the  Indian Income Tax Act, 1922.      The assessee  is the  Managing Director  of  a  private limited company called R. K. V. Motors & Timber (P) Limited. The company  maintains an  accounts pertaining to him in its books. The  accounts showed  that as on March 31, 1958 a sum of Rs.  36,546.17 np.  was due  to him  by the  company.  In January, 1959  for the  first time he became indebted to the company  in  the  sum  of  Rs.  3,757.04  np.  His  drawings increased, and  as on March 31, 1959 the total amount due by

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him stood  at Rs.  25,107.22np. It is also relevant to state that the  Balance Sheet  of the company as on March 31, 1958 showed a net profit of Rs. 18,950.98 np. 946      The assessee was originally assessed for the assessment year 1959-60  (the relevant  previous year  being  the  year ended March  31, 1959)  on a  total income  of  Rs.  43,407. Thereafter, the  Income Tax  Officer came  to know  that the assessee had  been withdrawing  moneys from the company, and in the  belief that  those amounts were liable to be treated as "dividend"  under section  2(6A) (e) of the Indian Income Tax Act,  1922, he  reopened the  assessment  by  virtue  of section 147  of the  Income Tax Act, 1961. In the assessment proceedings which  followed, the  assessee claimed  that the accumulated profits  of the  company amounted  to Rs.  1,050 only,  and   that  amount   alone  could  be  considered  as "dividend" under section 2(6A)(e). The figure was worked out on the basis that a sum of Rs. 11,000 as a provision for tax and of  Rs. 6,900  as a  provision for  dividend had  to  be adjusted against  the balance  of Rs. 18,950 in the Profit & Loss Account. The Income Tax Officer rejected the contention of the  assessee and  determined a  sum  of  Rs.  25,107  as dividend under  section 2(6A) (e). He arrived at this figure by including  the current  profits of  the company  for  the account year  ending March 31, 1959. The Appellate Assistant Commissioner dismissed  an appeal filed by the assessee. The Income Tax  Appellate Tribunal, in second appeal, upheld the claim of  the assessee  that the words "accumulated profits" in section  2(6A)(e) could  not be  construed  as  including current profits, but it rejected the contention that the two sums of  Rs. 11,000  and Rs.  6,900 had  to  be  taken  into account  in   determining  the  figure  of  the  accumulated profits. Accordingly,  it determined the accumulated profits at Rs. 18,950.      The Revenue  applied for  a reference to the High Court of Kerala,  and at  its instance  the Tribunal  referred the following question to the High Court:           "Whether, on the facts and in the circumstances of      this case,  the Appellate  Tribunal was legally correct      in holding that the accumulated profit will not include      current profits for the purpose of section 2(6A) of the      Indian Income Tax Act, 1922 ?"      The  assessee   also  requested   the  inclusion  of  a question, and  therefore the second question referred to the High Court was:           "Whether, on the facts and in the circumstances of      the case,  the Tribunal  was right  in holding that Rs.      18,950 constituted  accumulated profits for the purpose      of section 2(6A) of the Indian Income Tax Act, 1922 ?" 947 The High  Court, by  its judgment dated January 18, 1972 has answered the  first question  in  the  affirmative  and  the second  question  in  the  negative,  both  questions  being answered in  favour of  the assessee.  And now,  the present appeal by the Revenue.      We have heard Shri B. B. Ahuja, for the Revenue. No one appears for the assessee.      The Indian  Income Tax  Act, 1922  did  not  originally contain any  definition of  "dividend", and  the meaning  of that word  was confined to the connotation it held under the law relating  to companies.  By  section  2  of  the  Indian Income-Tax (Amendment)  Act, 1939,  the  Indian  Legislature inserted sub-section  (6A) in  section 2  of the Act and set forth an  inclusive definition.  Certain clauses of the sub- section were  amended thereafter, and in their ultimate form

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section 2(6A)(c) and section 2(6A)(e) read as follows:      "6(A)     "Dividend" includes-        (c)     Any distribution  made to the shareholders by                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.        (e)     Any payment by a company, not being a company                in  which   the  public   are   substantially                interested within the meaning of section 23A,                of any sum (whether as representing a part of                the assets  of the  company or  otherwise) by                way of  advance or  loan to  a shareholder or                any payment  by any such company on behalf or                for the  individual benefit of a shareholder,                to the  extent to which the company in either                case possesses accumulated profits."      The question  is whether  the  profits  earned  by  the company during  the year in which the loans were advanced to the assessee,  that is  to say  the current  profits, can be regarded as  included within  the accumulated profits of the company. It will be noticed that the expression "accumulated profits" occurs  in section 2(6A) (c) of the Act. Construing that clause  in Girdhardas  & Co.  Ltd., v.  Commissioner of Income Tax,  Ahmedabad, the  Bombay High  Court said  : "The limitation imposed  by the  Legislature is  that the profits must in the first place be accumulated in contradistinc- 948 tion to  the profits  being current...."...The  Madras  High Court in  Commissioner  of  Income  Tax,  Madras  v.  M.  V. Murugappan and Others and Commissioner of Income-tax, Madras v. A.  M. M. V. Valliammai Achi & Others took the same view. It analysed the concept of "accumulated profits" and in that connection particularly  referred  to  the  observations  of Isaacs and  Rich  JJ.  in  Hooper  &  Harrison  Limited  (In Liquidation) v.  Federal Commissioner of Taxation who relied on Hollins v. Allen and Sproule v. Bouch and Commissioner of Inland  Revenue  v.  Blott  where  the  distinction  between current profits  and  accumulated  profits  was  graphically brought out.  The decision  of the  Madras  High  Court  was affirmed in  appeal by  this Court in Commissioner of Income tax, Madras  v. M.  V. Murugappan & Ors. and it was observed that "The  profits of  the year  in the  course of which the company was  ordered to  be wound  up not  being accumulated profits were  not part  of the  dividend."  Thereafter,  the Bombay High  Court in  Commissioner of  Income Tax (Central) Bombay v.  P. K.  Badiani, while  interpreting section 2(6A) (e) of  the Act, applied the same construction and held that the expression  "accumulated profits"  in that  clause  must mean profits  which had  accumulated prior to the accounting year of  which the  income  profits  and  gains  were  being assessed, while current profit would mean the profits of the accounting year   In  a recent  case, Commissioner of Income Tax, Madras-II  v. G.  Sankaran, the  Madras High  Court has reaffirmed that  the  expression  "accumulated  profits"  in section 2(6A) (e) cannot take in current profits.      The position  appears to be well-settled. Except for T. Sundaram Chettiar  v. Commissioner of Income Tax, Madras and T. Manickavasagam  Chettiar v.  Commissioner of  Income-tax, Madras, in which the ratio is far from clear, a long line of judicial  decisions  has  taken  the  view  that  the  words "accumulated profits"  in section 6(2A) of the Indian Income Tax Act, 1922 cannot be construed 949

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to include  current profits.  We are  in agreement with that view, being  persuaded in that behalf by the reasoning which has prevailed  in the  aforementioned cases. The distinction between "accumulated profits" and "current profits" has long held the  field, and as the learned judges of the High Court of  Australia   observed  in  Hooper  &  Harrison  Ltd.  (In Liquidation) (supra),  it has  been well  known in  judicial decision and  in  the  mercantile  world  for  well  over  a century. Moreover,  this Court  in M.  V. Murugappan (supra) has also  taken the  view that  current  profits  cannot  be included in  accumulated profits.  It appears  to be now the established law  of the  land. An attractive submission  was raised on  behalf of  the Revenue that in the Twelfth Report of the  Law Commission  of India,  the authors of the Report consider that  the  intention  of  the  Legislature  was  to include  current  profits  in  the  expression  "accumulated profits" in section 2(6A) and that the present definition of "accumulated profits"  by Explanation  2 to section 2(22) of the Income Tax Act. 1961 only clarifies what the true intent was all  along. In  the view which has found favour with us, we are not persuaded by that submission.      Accordingly, we  hold that  the High Court was right in answering the  first question  in favour of the assessee and against the Revenue.      The  second  question  is  whether  the  provision  for payment of  tax and  dividend can be taken into account when computing the  accumulated profits as on March 31, 1958. The Revenue contends  that this  question should  not have  been referred by  the Appellate Tribunal to the High Court at the instance of  the assessee  because no  reference application was made by the assessee. The only reference application, it is pointed  out,  before  the  Appellate  Tribunal  was  the reference application  filed by  the Commissioner  of Income Tax. We  are of  opinion that  the  Revenue  is  right.  The objection was  taken by  the Revenue  before  the  Appellate Tribunal when  the statement of case was being prepared, but the Appellate  Tribunal overruled  the objection, relying on Girdhardas  &  Co.  Ltd.  v.  Commissioner  of  Income  Tax, Ahmedabad. It  does not  appear that  the Revenue  contended before the  High Court  that the reference made to it by the Appellate Tribunal  was incompetent  insofar as  the  second question  was   concerned.  Since,  however,  the  objection pertains to  the competence  of the  reference to the extent that it  covers the  second question and, therefore, relates to the jurisdiction of the High Court to 950 consider and  decide that  question, we  are of opinion that the Revenue is entitled to raise that question before us.      Section 256(1) of the Income Tax Act, 1961 entitles the assessee or  the Commissioner,  as the case may be, to apply to the  Appellate. Tribunal  to refer  to the High Court any question of  law arising  out  of  the  order  made  by  the Appellate Tribunal under section 254. A period of limitation for  making   such  application   is  prescribed.   If   the application  is  rejected  by  the  Appellate  Tribunal  the applicant is  entitled to  apply to  the High  Court,  again within a prescribed period of limitation, and the High Court may, if  it is  not satisfied  of  the  correctness  of  the decision of  the Appellate  Tribunal, require  the Appellate Tribunal to  state the  case and  refer it. It is clear that the   statute expressly  contemplates an application in that behalf by  a party  desiring a  reference to the High Court. The application  has to  be filed within a prescribed period of  limitation.  If  the  Application  is  rejected  by  the Appellate Tribunal,  it is the applicant thus refused who is

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entitled to  apply to  the  High  Court.  If  the  Appellate Tribunal allows  the  application  made  to  it,  s.  256(1) requires it  to draw  up the statement of the case and refer it to  the High Court. The statement of the case is drawn up on the  basis of  the application made by the applicant, who in that application must specify the questions of law which, he claims,  arise out of the order of the Appellate Tribunal made  under  s.  254.  The  form  of  reference  application prescribed  by  rule  48  of  the  Income  Tax  Rules,  1962 specifically requires  the applicant  to state the questions of law which he desires to be referred to the High Court. He may, in  appropriate cases,  be permitted  by the  Appellate Tribunal, to  raise further  questions of law at the hearing of the  reference application. But in every case, it is only the party  applying for  a  reference  who  is  entitled  to specify the  questions of  law  which  should  be  referred. Nowhere in  the statute  do we  find a  right  in  the  non- applicant (a  phrase used here for convenience) to ask for a reference of questions of law on the application made by the applicant.      In this  connection, two  categories of  cases  can  be envisaged. One  consists of  cases where  the order  of  the Tribunal under  section 254  has decided  the appeal  partly against one  party and partly against the other. This may be so whether the appeal consists of a single subject matter or there are more than one independent claims in the appeal. In the former,  one party  may be  aggrieved by  the  grant  of relief,  even   though  partial,  while  the  other  may  be aggrieved by  the refusal  to grant  total  relief.  In  the latter, relief may be granted or 951 refused with  reference to  individual items in dispute, and accordingly one  party or  the other  will be  aggrieved. In either case,  the party  who is  aggrieved and who desires a reference  to   the  High   Court  must   file  a  reference application for  that purpose. It is not open to him to make a reference  application filed  by the other party the basis of his  claim that a question of law sought by him should be referred. The  second category  consists of  cases where the order made  by the  Appellate Tribunal under s. 254 operates entirely in  favour of  one party, although in the course of making the  order the  Appellate Tribunal may have negatived some points  of law  raised by that party. Not being a party aggrieved by  the result  of the  appeal, it  is not open to that party  to  file  a  reference  application.  But  on  a reference application  being filed by the aggrieved party it is open  to the non-applicant, in the event of the Appellate Tribunal agreeing  to refer  the case  to the High Court, to ask for  a reference  of those  questions of  law also which arise  on   its  submissions  negatived  in  appeal  by  the Appellate Tribunal.  It is,  as it were, recognising a right in the  winning party  to support the order of the Appellate Tribunal  also   on  grounds  raised  before  the  Appellate Tribunal but negatived by it.      There are,  therefore, those  two  categories,  one  in which a non-applicant can ask for the reference of questions of law  suggested by it and the other in which it cannot. To the extent  to which the Courts have omitted to consider the distinction between  these two  categories, they have erred. There are  cases where  it has  been held  that there  is an absolute bar  against a non-applicant seeking a reference of questions of  law on  a reference  application made  by  the other party.  They include  : Commissioner  of  Income  Tax, Madras v.  S. K.  Srinivasan and Commissioner of Income Tax, Madras v. Ramdas Pharmacy. cases taking the opposite extreme

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view are  : Commissioner of Income Tax v. Bantiah Bank Ltd., followed in Girdhar Das & Co. Ltd. (supra) and Educational & Civil List Reserve Fund No. 1 through H. H. Maharana Bhagwat Singhji of  Udaipur &  Ors. v.  Commissioner of  Income Tax, Delhi and  Rajasthan Smt.  Dhirajben R. Amin v. Commissioner of Income  Tax, Gujarat  II, Ahmedabad  and Commissioner  of Wealth Tax,  Gujarat II  v. Mrs.  Arundhati Balkrishna.  The judgment in  the last  case was  affirmed by  this Court  in Commissioner of Wealth Tax, Gujarat v. Arundhati 952 Balkrishna but the point raised before us does not appeal to have been  taken there.  The observations  in  Bantiah  Bank Limited (supra)  seem to  show that the High Court was alive to the  possibility of a winning party being deprived of the right to  raise questions  of law which could properly arise as  further  questions  because  they  would  be  intimately involved in  a decision  on the  questions referred  at  the instance of  the applicant, but it failed to classify such a case separately from the case where a non-applicant seeks to raise independent  and unassociated  questions of law. Cases in  which   a  distinction   was  noticed  between  the  two categories but  no opinion  was expressed  on the right of a winning party to raise questions of law without applying for a reference  are Commissioner  of Income  Tax v.  Jiwaji Rao Sugar Co. Ltd., followed in Commissioner of Income Tax, M.P. v. Dr.  Fida Hussain  G. Abbasi  and Commissioner  of Income Tax, Madras  v. K.  Rathnam Nadar.  Some attention  has been given to  the distinction  between  the  two  categories  in Commissioner of Income Tax, West Bengal v. A. K. Das.      In the present case, the question whether the provision of Rs.  11,000 for  tax and  Rs. 6,900  for dividend  can be taken into  account when determining the accumulated profits as on  March 31,  1958 is not relate to the question whether accumulated profits  can take  in current  profits. The  two questions involve the grant of separate and distinct reliefs and the  decision  on  one  question  does  not  affect  the decision on the other.      Accordingly, we  hold that  the Appellate  Tribunal was not  competent   to  refer  the  second  question,  and  the reference to  that extent  must be  considered void.  In the circumstances, it  is not  necessary to  examine the  second question on  its merits. The judgment of the High Court must be set  aside so  far as  it incorporates its opinion on the second question.      Accordingly, the  appeal is  allowed to the extent that the judgment of the High Court on the second question is set aside while  the appeal  is  dismissed  in  respect  of  the judgment on the first question. There will be no order as to costs. N.K.A.                               Appeal allowed in part. 953