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PETITIONER: HARI PRASAD JAYANTILAL & CO.  LTD.

       Vs.

RESPONDENT: INCOME-TAX OFFICER, SPECIAL INVESTIGATION CIRCLE-B.

DATE OF JUDGMENT: 25/11/1965

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M.

CITATION:  1966 AIR 1481            1966 SCR  (2) 732

ACT:      Income-tax  Act  (11 of 1922), ss. 2(6A)C  and  35(10)- Voluntary liquidation of company-Distribution of accumulated profits   by  liquidator-If  declaration  of  dividends   by company.

HEADNOTE:      The  appellant-company  was  assessed  to  tax  in  the assessment  years  1948-49, to 1953-54, in  respect  of  its profits,  and  was  allowed  rebate  on  the   undistributed profits.  It was resolved to voluntarily wind up the company with  effect from October 1, 1957.  The  liquidator,  during the  years 1957 to 1959 distributed, from time to time,  the accumulated  profits  to the shareholders  and  also  issued income-tax  refund  certificates.  The  Income-tax  Officer, under  s. 35(10) of the Income-Tax Act, 1922,  withdrew  the rebate  granted in respect of each of the  assessment  years 1948-49 to 1953-54 and demanded payment of tax.  The company applied  for a writ quashing the order, but the  High  Court dismissed the petition.      In  appeal to this Court, the company contended that  : (i) Section 35(10) did not authorise the Income-tax  Officer to  bring to tax the amount on which rebate tax was  granted in assessment years commencing prior to 1st April 1956,  and (ii)  the  distribution  by the  liquidator  of  accumulated profits could not be regarded as declaration of dividend  by the company within the meaning of s. 35(10).      HELD : (i) The power to withdraw rebate was exercisable within  4 years from the end of the financial year in  which the amount on which rebate was allowed was availed of by the company for declaring dividends. 1735 B-C]      Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. S.G. Mehta, [1963]  Supp. 2 S.C.R. 92, followed,      (ii) Distribution   of  accumulated  profits   by   the liquidator together with the income-tax refund certificates, in  the course of voluntary winding up, can be  regarded  as declaration of dividend, so as to attract the  applicability of  provisions enabling the withdrawal of rebate and  demand for tax. [739 C]       On  the passing of a resolution for voluntary  winding up  the  company does not stand dissolved and  its  property

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does  not  vest  in the  liquidator.  lit  distributing  the assets,  including accumulated profits, the liquidator  acts merely as an agent or administrator for and on behalf of the company.   Therefore,  distribution  by  the  liquidator  is distribution by the company. [736 B-C, E]       There is nothing in S. 35(10) which suggests that  the expression dividend was to have a meaning different from the meaning  assigned  to it by s. 2(6A) in  the  interpretation clause.   By the omission of the proviso to s.  2(6A)(c)  by the Finance Act, 1955, distribution of accumulated  profits, whether capitalised or not and without any restriction as to time,  was brought within the definition of  dividend.   The provisions  of ss. 35(10) and 2(6A)(c) are part of a  single scheme  to  declare  distribution  of  accumulated  profits, capitalized or not, as dividends, and 733 to  bring  the  undistributed profits on  which  rebate  was granted  to  tax,  if availed-of by the  liquidator  of  the company for distributing dividends. [737 F, H; 738C-D]     Power  under s. 35(10) may be exercised  if  accumulated profits  are  availed  of  by  the  company  "for  declaring dividends  in  any  year",  that  is,  after  following  the procedure in Art. 95 of Table A of the Companies Act,  1913, under   which  the  assessee  was  registered.    But,   the distribution  made by the liquidator, was a distribution  of interim  dividend,  and, in the matter  of  distribution  of interim  dividend,  the Companies Act does not  set  up  any special  machinery nor does it impose any special  condition before power in that behalf may be exercised. [739 A-C]

JUDGMENT:      CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 871  of 1964.      Appeal  from the judgment and order dated  January  16, 17,  1961  of  the  Gujarat  High  Court  in  Special  Civil Application No. 233 of 1960.       N.  D.  Karkhanis, T. A. Ramachandran, 0.  C.  Mathur, Ravinder Narain and J. B. Dadachanii, for the appellant.       A.  V. Viswanatha Sastri, R. Ganapathy Iyer, B. R.  G. K. A char and R. N. Sachthey, for the respondents.       The Judgment of the Court was delivered by       Shah,  J. The appellants 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  &  21,  1957  the liquidator  distributed  to the shareholders  thereafter  on February  21  &  22,  1958; July  27,  1959  the  liquidator distributed  to  the  shareholders.   In  respect  of   each liquidator issued an "income-tax refund that the amount  was distributed out of accumulated profits of earlier years. 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,

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734 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.                   Two questions are raised for determination               in this appeal                   (1)    Whether  S. 35(10)  authorises  the               Income-tax  Officer  to bring  to  tax  rebate               granted  in assessment years commencing  prior               to April 1, 1956; and                    (2)   whether    distribution   by    the               liquidator  of  accumulated  profits  in   the               previous   years   could   be   regarded    as               declaration of dividend within the meaning  of               S.  35(10) so as to attract the  applicability               of  the  provisions  enabling  withdrawal   of               rebate and demand for tax.      The first question is concluded by a recent judgment of this  Court in Ahmedabad Manufacturing and  Calico  Printing Co. Ltd. v. S. G. Mehta, Income-tax Officer and  Another(1). In  that  case this Court held that s. 35(10)  applied  even though dividend was declared before April 1, 1956.   Counsel for  the Company urged that in the  Ahmedabad  Manufacturing and  Calico  Printing Co.’s case it was held that  power  to withdraw rebate granted in the year before April 1, 1952 was not exercisable by the Incometax Officer under S. 35(10) and consistently with that view withdrawal of rebate granted  in the   years  ending  on  and  before  March  31,  1952   was unauthorised.    In  Ahmedabad  Manufacturing   and   Calico Printing  Co.’s case(1) declaration of dividend by the  Com- pany  was  made on April 20, 1953.  The  financial  year  in which  the amount on which rebate of income-tax was  allowed was  availed of by the Company for declaring  dividends  was 1953-54, and within four years from the end of that year  an order  calling  upon the Company to show  cause  why  action should   not  be  taken  under  s.  35(10)  to  recall   the proportionate part of the rebate was issued.  It was said by Hidayatullah, J. :                  "Since  the  power commenced  on  April  1,               1956,  the  utmost  reach  of  the  Income-tax               Officer  would  be the end of  the  assessment               year 1952.  Any declaration of (1) [1963] Supp. 2 S.C.R. 92. 735 dividend  after 1st day of April, 1952, out  of  accumulated profits of any of the years in which rebate was earned would be  within  the time for the recall of any  rebate.   But  a declaration  prior  to April 1, 1952, would  be  beyond  the power of the Income-tax Officer to recall." Power  to withdraw rebate was in that case held  exercisable within  four  years from the end of the  financial  year  in which the amount of rebate was availed of : it was not  held that the power was exercisable in respect of rebate  granted only  in  respect  of four years before  April,  1956.   The argument  raised by counsel importing a limitation  contrary to  the  plain  words  of  the  statute  must  therefore  be rejected. Sub-section (10) of s. 35 was inserted in the Income-tax Act by s. 19 of the Finance Act, 19@6, with effect from April 1,

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1956.  It provides                  "Where,  in any of the assessments for  the               years beginning on the 1st day of April of the               years  1948  to 1955 inclusive,  a  rebate  of               income-tax was allowed to a company on a  part               of  its total income under clause (i)  of  the               proviso  to  Paragraph  B of  Part  I  of  the               relevant   Schedules  to  the   Finance   Acts               specifying  the rates of tax for the  relevant               year, and subsequently the amount on which the               rebate of income-tax was allowed as  aforesaid               is  availed  of  by  the  company,  wholly  or               partly,  for declaring dividends in any  year,               the amount or that part of the amount  availed               of as aforesaid, as the case may be, shall, by               reason  of the rebate of incometax allowed  to               the company and to the extent to which it  has               not  actually been subjected to an  additional               income-tax  in accordance with the  provisions               of  clause (ii) of the proviso to Paragraph  B               of Part I of the Schedules to the Finance Acts               above  referred  to,. be deemed to  have  been               made  the  subject of incorrect  relief  under               this  Act,  and the Income-tax  Officer  shall               recompute  the tax payable by the  company  by               reducing the rebate originally allowed, as  if               the  recomputation  is a  rectification  of  a               mistake  apparent from the record  within  the               meaning of this section and the provisions  of               sub-section  (1) shall apply accordingly,  the               period  of four years specified therein  being               reckoned from the end of the financial year in               which the amount on which rebate of 736               income-tax   was  allowed  as  aforesaid   was               availed of by the company wholly or partly for               declaring dividends." It is urged by counsel for the Company that power under sub- s. (10) of s. 35 cannot be exercised because distribution of accumulated profits by the liquidator is not distribution by the Company.  The argument is wholly without substance.   On the  passing of a special resolution by the Company that  it be  wound up voluntarily under the Companies Act 1 of  1956, the Company does not stand dissolved.  That is so  expressly provided  by s. 487, of the Companies Act.  A Company  which has resolved to be voluntarily wound up may be dissolved  in the manner provided by s. 497(5) : till then the Company has corporate  existence and corporate powers.  The property  of the  Company does not vest in the liquidator : it  continues to  remain vested in the Company.  On the appointment  of  a liquidator, all the powers of the Board of directors and  of the  managing  or  whole-time  directors,  managing  agents, secretaries   and  treasurers  cease  (s.  491),   and   the liquidator  may  exercise the powers mentioned  in  s.  512, including  the power to do such things as may  be  necessary for  winding up the affairs of the Company and  distributing its assets.  The liquidator appointed in a members’  winding up  is  merely  an agent of the Company  to  administer  the property  of  the  Company for purposes  prescribed  by  the statute.   In distributing the assets including  accumulated profits   the  liquidator  acts  merely  as  an   agent   or administrator for and on behalf of the Company.      It  is then urged that on the commencement  of  winding up, distinction between the capital and accumulated  profits of the Company disappears, and what remains in the hands  of

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the   liquidator  are  the  assets  of  the   Company,   and distributions  made by the liquidator are  distributions  of capital,  regardless of the source from which the funds  are distributed   is   capital  or  accumulated   profits.    In distributing the surplus assets in his hands, the liquidator is therefore not "declaring dividends" within the meaning of s.  35(10).   In support of this  contention,  reliance  was placed   upon   Inland  Revenue  Commissioners   v.   George Burrell(1).  The Court in that case held that on the winding up  of a limited company the undivided profits of  the  past year  and  the year in which winding up occurred  were  only assets  of  the  company and  on  distribution  amongst  the shareholders  supertax  was  not payable  on  the  undivided profits as income. (1) [1924] 2 K.B. 52. 737      Under the Companies Act, 1956, accumulated  profits  of the  Company  at the commencement of the winding up  of  the Company undoubtedly come into the hands of the liquidator as assets  for  the  purpose of  satisfying  liability  of  the Company  and for distribution among the  shareholders.   But the  rule  in Burrell’s cave(1) since the amendment  of  the definition  of  "dividend" in s. 2(6A) by the  Finance  Act, 1956, no longer applies, when the liability to assessment of income-tax   in  respect  of  amounts  distributed  out   of accumulated profits by a liquidator in a winding up falls to be  determined.   The Parliament had devised by  the  Indian Income-tax  (Amendment) Act 7 of 1939, a  special  inclusive definition for the Income-tax Act, 1922 of "dividend" in  s. 2(6A).   Being  an  inclusive  definition,  the   expression "dividend" means dividend as ordinarily understood under the Companies Act and also the heads of payment or  distribution specified   therein.  Clause  (c)  as  originally   enacted, included distributions made to the shareholders of a Company out  of  accumulated  profits  on  the  liquidation  of  the Company.  This was clearly an attempt to supersede the  rule in  Burrell’s case(1).  It was pointed out by this Court  in Dhandhania Kedia & Co. v. Commissioner of Income-tax(2) that s.  2 (6A) (c) was enacted to remove the anomaly  which  was created  by  the  judgment  in  Burrell’s  case(1),  and  to assimilate  the  distribution of accumulated  profits  by  a liquidator  to a similar distribution by a Company which  is working.   But  the language of the clause and  the  proviso thereto  included only those accumulated profits  which  had not  been  capitalized,  and  which  arose  during  the  six previous  years  preceding the date of commencement  of  the year of account in which the liquidation commenced.  By  the Finance  Act,  1955, the proviso to cl. (c)  was  omitted  : thereby  accumulated profits whether capitalized or not  and without  any restriction as to time were brought within  the definition.  By the Finance Act, 1956, cl. (c) was recast as follows :                   "    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 capitalized or not." Amendment to cl. (c) in s. 2(6A) was made and s. 35(10)  was inserted in the Income-tax Act simultaneously by the Finance Act, 1956.  It would be reasonable to regard the  provisions of  s. 35(10) and amended cl. (c) of sub-s. (6A) of s. 2  as part of a (1) [1924] 2 K.B. 52. L3Sup.  CI/66-18

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(2) 35 I.T.R. 400. 738 single   scheme  to  declare  distribution  of   accumulated profits, capitalized or not, as dividends, and to bring  the rebate granted on undistributed profits to tax if availed of by  the  company  or  by the liquidator  of  a  company  for distributing dividends.     Counsel  for  the  Company  contended  that  the  amount distributed out of accumulated profits by the liquidator  is not  dividend  in  the  hands  of  the  Company.   For  this distinction  again  there is no  warrant.   Distribution  of accumulated  profits by a Company not subject to winding  up is  distribution of dividend by virtue of S. 2(6A) (a),  and distribution  of  accumulated  profits  in  the  course   of liquidation  is  dividend by virtue of s. 2(6A)(c).   It  is true  that the definition of "dividend" in s.  2(6A)(c)  win apply  only if there is nothing repugnant in the subject  or context  in  which the expression "dividend"  occurs  in  s. 35(10),  but  there is nothing in s. 35(10)  which  suggests that  the  expression  "dividend"  was  to  have  a  meaning different   from   the  meaning  assigned  to  it   by   the interpretation clause.      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 divi- dends, 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. 739       The liquidator of the appellant company did from  time to  time  distribute  accumulated profits,  and  within  the meaning  of  s.  2(6A)(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  impose  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

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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(6A)(c), be  regarded  as declaration of dividend.        The  appeal  therefore fails and  is  dismissed  with costs.                             Appeal dismissed. 740