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PETITIONER: COMMISSIONER OF INCOME TAX, ERNAKULAM. (KERELA)

       Vs.

RESPONDENT: THE OFFICIAL LIQUIDATOR, PALAI CENTRAL BANK LTD,(IN LIQUIDAT

DATE OF JUDGMENT16/10/1984

BENCH: ERADI, V. BALAKRISHNA (J) BENCH: ERADI, V. BALAKRISHNA (J) TULZAPURKAR, V.D. MADON, D.P.

CITATION:  1985 AIR  146            1985 SCR  (1) 971  1985 SCC  (1)  45        1984 SCALE  (2)646

ACT:      Super Profit  Tax Act, 1963 (Act XIV of 1963) ss.2 (5), 2 (9)  and 4 read with second Schedule to the Act-Company in liquidation-Whether chargeable to super profits tax.      Capital, reserve  and  accumulated  profits-Distinction between-Whether chargeable on winding up of company.

HEADNOTE:      The assessee-company went into liquidation on August 8, 1960. The  Income-tax officer, while determining the taxable income of  the assessee-company  at  Rs.  5,79,978  for  the assessment year 1963-64, was of the opinion that this amount would attract  liability for  super  profits  tax  also  and therefore asked the assessee company to file its return. The assessee-company submitted its return showing the chargeable profits  as   ’nil’,  contending  that  there  could  be  no liability to  super profits  tax in  respect of a company in liquidation since  the  formula  laid  down  in  the  Second Schedule to  the Super  Profits Tax Act 1963 for calculation of the  ’standard deduction’  was inapplicable on account of the fact  that a company in liquidation could not be said to have paid-up  share capital  as on  the  first  day  of  the previous year relevant to the assessment year which was long subsequent to the winding up. The Income-Tax officer however overruled  the  aforesaid  contention  and  worked  out  the chargeable profits  at Rs. 2,04,740 after adopting a minimum amount of  Rs. 50,000  mentioned in  s.2 (9) of tho Act as a "standard deduction". The said order was confirmed in appeal by the  Appellate Assistant  Commissioner. But,  on  further appeal by  the assessee  company  the  Income-tax  Appellate Tribunal while  allowing the  appeal held:  (1) that  in the hands of  the liquidator  there is  only one  integral  fund which could  not be  split up  into share  capital,  reserve profits and  therefore s.27 of the Act was clearly attracted to the  case; and  (ii) that  no assessment to super profits could be made on a company in liquidation since section 4 of the  Act   would  not  apply  to  the  assessee  company  in liquidation as  the  standard  deduction  was  incapable  of ascertainment. The High Court, rejected the      reference made at the instance of the Revenue. 972

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    Dismissing the appeal by the Revenue, ^      HELD: (1)  After a company has gone into liquidation it cannot be  said that  as on  the first day in any subsequent year forming  the previous  year relevant  to the assessment year, there exists in the hands of the liquidator any amount distinctly forming  the paid-up share capital of the company or any  sum that  can be  characterized  as  "reserve."  The distinction between  capital, reserve  and  tho  accumulated profits disappears  in respect  of a  company in liquidation after the  date of  its winding  up and  there is  only  one integrated  or   consolidated  fund  in  the  hands  of  the liquidator. The  concept of  a fluctuating  share capital or reserve which  is the basic premise necessary to attract the applicability of  rule 1  of the  Second Schedule  is wholly foreign in respect of a company in liquidation. [977H; 978E- F]      (2) It  is  clear  from  the  definition  of  "standard deduction" that  for the purpose of calculation of "standard deduction" one  has to  ascertain the capital of the company as computed in the manner specified in Second Schedule. But, it is important to notice from the terms of Rule I of Second Schedule that unless the company can be said to have a paid- up share  capital as  on the  first day of the previous year relevant to the assessment year the formula laid down in the rule for  computation of  capital of the company cannot have any application  and the calculation of "standard deduction" being based wholly on the capital of the company, it becomes wholly incapable of ascertainment. [976B; 977F-G]      Commissioner of  Inland Revenue v. George Burrell, 1924 2 [K.B.]  52, 63  and Birch  v. Cropper  [1889] L.R. 14 App. Cas. 525, 546 referred to.      Commissioner of  Income-tax v. Girdhars and Co. Private Ltd, 63 I.T.R. 300; followed.      (3) Under the scheme of the Income-tax Act 1961, charge of tax will not get attracted unless the case or transaction falls under  the  governance  of  the  relevant  computation provisions. The  character of  the computation provisions in each case  bears a relationship to the nature of the charge. Thus, the  charging section  and the  computation provisions together constitute an integrated code. When there is a case to which  the computation provisions cannot apply at all. it is evident  that such a case was not intended to fall Within the charging  section. The  scheme of  the Super Profits Tax Act 1963  being similar  to that of the Income-tax Act 1961, it has  to be held that inasmuch as the provisions contained in the  Act for computing the capital of the company and its reserves and  cannot have  any application  in respect  of a company  in   liquidation  and  consequently  the  ’standard deduction’ is  incapable of  ascertainment,  the  charge  of super profits  tax  under  section  4  of  the  Act  is  not attracted to such a cases. [978G-H ; 979A-C]      Commissioners  of   Income-tax,   Bangalore   v.   B.C. Srinivasa Setty, 128 I.T.R 294; referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2090 of 1980 973      Appeal by  Special leave  from the  Judgment and  order dated the  30th January,  1979 of  the Kerala  High Court in l.T.R. No. 76 of 1977.      Abdul  Khadder   and  Miss.   A.  Subhashini   for  the

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Appellant.      P. Gobindan  Nair, N. Sudhakaran and Mrs. Baby Krishnan for the Respondent.      The Judgment of the Court was delivered by      BALAKRISHNA ERADI,  J. Whether a company in liquidation is chargeable  to super  profits tax under the Super Profits Tax Act, 1963-Act XIV of 1963 (hereinafter called ’the Act’) is the  short question  arising for  determination  in  this appeal. The  answer thereto  will depend upon whether during the period subsequent to the date of winding up, any part of the funds  in the  hands of  the official  liquidator can be distinctly classified  as representing paid-up share capital of the  company as  on the  first day of the year of account relevant to  assessment year  and whether any portion of the fund can be similarly identified as forming as, "reserve".      The assessee  is a  banking company,  namely, The Palai Central Bank  Ltd., which went into liquidation on August 8, 1960. On  that date  the official  Liquidator took charge of the assets  and liabilities  of the  company and  a balance- sheet had been prepared as on the same date. Thereafter, for every year,  the liquidator  used to  prepare only an income and expenditure statement for submission to the Reserve Bank of India.  The assessment  year, with which we are concerned is 1963-64 i.e., the year ended March 31, 1963. For the said assessment year  the taxable  income  of  the  assessee  was determined by  the Income-tax  officer at  Rs. 5,76,678. The officer was  of the  opinion that  this amount would attract liability for  super profits tax also and since the assessee had not  submitted any  return under the Act, a notice under section 9  (a) of the Act calling for the return was issued. The assessee  thereupon,  submitted  a  return  showing  the chargeable profits  as ’nil’.  In support of the said return the assessee  contended inter  alia before  the officer that there could be not liability to super profits tax in respect of a  company in  liquidation since the formula laid down in the Second  Schedule to  the  Act  for  calculation  of  the ’standard deduction’ was inapplicable on account of the fact that a  company in  liquidation could  not be  said to  have paid-up share capital as on the first day of 974 the previous  year relevant to the assessment year which was long subsequent to the winding up. Certain other contentions were put  forward by  the since they are not of any material relevance at this State, it is unnecessary to refer to them.      The Income-tax Officer overruled the contentions raised by the assessee and worked out the chargeable profits at Rs. 2,04,740  after   adopting  minimum  amount  of  Rs.  50,000 mentioned in  2 (9)  of the  Act as  a "standard  deduction" applicable   to    the   case.   The   Appellate   Assistant Commissioner, before  whom the  assessee  filed  an  appeal, confirmed the  order of the Income-tax officer. The assessee carried the  matter in  further appeal before the Income-tax Appellate Tribunal,  Cochin Bench. The Tribunal held that in the hands of the liquidator, there is only one integral fund which could  not be split up into share capital, reserve and profits. In  the  opinion  of  the  Tribunal  the  exemption provision contained  in section  27 of  the Act which states that nothing contained in the Act shall apply to any company which has  no share  capital was  clearly attracted  to  the case. It  was further  held by the Tribunal that even if the exemption under section 27 of the Act did not get attracted, section 4  of the  Act, which  is the charging section would not apply  to the  assessee company  in liquidation  as  the ’standard deduction’  was incapable  of  ascertainment.  The Tribunal, accordingly,  allowed the  appeal of  the assessee

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and held  that no  assessment to  super profits tax could be made on a company in liquidation.      Thereafter,  at   the  instance  of  the  revenue,  the Tribunal referred  the following question of law to the High Court of Kerala for its opinion:           "Whether, on the facts and in the circumstances of      the case, was the Tribunal justified in holding that no      assessment under  the Super  Profits Tax Act, 1961, can      be made on the assessee company (in liquidation)" ?      The High  Court agreed  with  the  view  taken  by  the Tribunal that  after a  company has  gone  into  liquidation there cannot  be said  to be  in the hands of the liquidator any amount  that can  be distinctly  designated  as  paid-up share capital of the company or as ’reserve’ with respect to which the  capital of  the company  is to  be worked  out as provided in Second Schedule to the Act in order to arrive at the amount or standard deduction, The question referred 975 was  accordingly   answered  by   the  High   Court  in  the affirmative, that  is, in favour of the assessee and against the revenue. Aggrieved by the said decision, the revenue has preferred this appeal to this Court by special leave.      After hearing  Counsel appearing on both sides, we have unhesitatingly come to the conclusion that the view taken by the High  Court is perfectly correct and that this appeal is devoid of merit.      Section 4  of the  Act which  is the  charging  section reads:      "4. Charge  of tax-Subject  to the provisions contained      in this  Act, there  shall be  charged on every company      for every  assessment year  commencing on  and from the      1st day  of April, 1963, a tax (in this Act referred to      as the  super profits tax) in respect of so much of its      chargeable profits  of the  previous year  or  previous      years, as  the case  may be,  as  exceed  the  standard      deduction, at  the rate or rates specified in the Third      Schedule."       The  expression "chargeable  profits" has been defined in clause (5) of section 2 thus:      "2(5) "Chargeable profits" means the total income of an      assessee computed under the Income-tax Act, 1961 (XLIII      of 1961),  for any  previous year  of years as the case      may be,  and adjusted in accordance with the provisions      of the First Schedule."      The next  definition, that  is relevant is contained in      clause (9)  of the  same section  which deals  with the      expression "standard  deduction". That  clause reads as      follows:       2(9) "Standard deduction" means an amount equal to six      per cent,  of the capital of the company as computed in      accordance with  the provisions  of the Second Schedule      or an  amount of  fifty thousand  rupees, whichever  is      greater:      Provided that  where the  previous year  is  longer  or      shorter than  a period  of twelve months, the aforesaid      amount of  six per  cent or,  the case may be, of fifty      thousand  rupees   shall  be   increased  or  decreased      proportionately: 976      Provided further  that where  a company  has  different      previous years  in respect  of its  income, profits and      gains, the  aforesaid increase or decrease, as the case      may be,  shall be  calculated  with  reference  to  the      length of the previous year of the longest duration.      It is  seen from  the above  definition  that  for  the

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calculation of ’standard deduction’ one has to ascertain the capital of  the company  as computed in the manner specified in second  Schedule. That  makes  it  necessary  for  us  to examine the  provisions of  Second Schedule of the Act which contains the  rules for computing the a capital of a company for the  purpose of  levy of super profits tax. The relevant provision is  contained in rule I of the said Schedule which is in the following terms:-      " 1.  Subject to the other provisions contained in this      Schedule, the  capital of a company shall be the sum of      the amounts,  as on  the first day of the previous year      relevant to  the assessment  year, of its paid-up share      capital and  of its  reserve, if any, created under the      proviso (b)  to clause  (vi-b) of  sub-section  (2)  of      section 10  of the  Indian Income  tax Act, 1922 (XI of      1922), or  under sub-section  (3) of  section 34 of the      Income-tax Act,  1961 (XLIII of 1961), and of its other      reserves in  so far  as the  amounts credited  to  such      other reserves  have not  been allowed in computing its      profits for  the purpose  of the Indian Income-tax Act,      1922 (XI of 1922) or the Income-tax Act, 1961 (XLIII of      1961), diminished by the amount by which the cost to it      of the  assets the income from which in accordance with      clause (iii)  or clause (vi) or clause (viii) of rule 1      of  the   First  Schedule  is  not  includible  in  its      chargeable profits, exceeds the aggregate of-      (i)  any   money   borrowed   by   it   which   remains           outstanding, and      (ii) the amount  of any  fund, any surplus and any such           reserves is  not  to  be  taken  into  account  in           computing the capital under this rule.      Explanation  1-A   paid-up  share  capital  or  reserve      brought into  existence by  creating or  increasing (by      revaluation or otherwise) any book asset is not capital      for computing the 977      capital of a company for the purposes of this Act.      Explanation 2-Any  premium  received  in  cash  by  the      company on  the issue  of its  shares standing  to  the      credit of  the share  premium account shall be regarded      as forming part of its paid-up share capital.      Explanation 3-Where  a company  has different  previous      years in  respect of its income, profits and gains, the      computation of  capital under rule 1 and rule 2 of this      Schedule shall  be made  with reference to the previous      year which commenced first."      It  is  manifest  from  the  terms  of  rule  that  the essential components  which will  together go to make up the capital of a company are:      (i)   Its paid-up share capital on the first day of the           previous year relevant to the assessment year.      (ii) Its  reserves, if  any, created  under the proviso           (b) to clause (vi-b) of sub-section (2) of section           10 of  the Indian  Income-tax Act,  1922 or  under           sub-section (3)  of section  34 of  the Income-tax           Act, 1961; and     (iii) Other reserves  in so  far as the amounts credited           there to  have not  been allowed  in computing the           profits of  the company  for the  purposes of  the           assessment to income-tax.      From the  aggregate of  the aforesaid  amounts  certain deductions as  specified in  the section have to be made but the details  of such  deductions are  not relevant  for  the purposes of the present case. What is important to notice is that unless  the company can be said to have a paid-up share

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capital as on the first day of the previous year relevant to the assessment  year the  formula laid  down in the rule for computation of  capital  of  the  company  cannot  have  any application and  calculation of  "standard deduction"  being based wholly on the capital of the company it becomes wholly incapable of  ascertainment. After  a company  has gone into liquidation, can  it be said that as on the first day in any subsequent year  forming the  previous year  relevant to the assessment year, there exists in the hands of the liquidator any amount  distinctly forming  the paid up share capital of the company or any sum that can be 978 characterized as  "reserve"? In  our opinion the answer must clearly be in the negative.      In Commissioners  of Inland  Revenue v. George Burrell, Pollock M.R. Observed:      "...... it  is a  misapprehension, after the liquidator      has assumed  his duties,  to continue  the  distinction      between surplus profits and capital. Lord Macnaghten in      Birch v.  cropper the case which finally determined the      rights  inter   se  of   the  preference  and  ordinary      shareholders in  the Bridgewater  Canal, said’: I think      it rather  leads to  conclusion to  speak of the assets      which are  the subject  of this application as "surplus      assets" as if they were an accretion or addition to the      capital of  the company  capable of being distinguished      from it  and open to different considerations. They are      part and parcel of the property of the company part and      parcel of  the joint  stock or common fund-which at the      date of  the winding  up represented the capital of the      company."      The above  statement of the law was cited with approval and adopted  by this  Court in Commissioner of Income-tax v. Girdharas and  Co. Private  Ltd., and  it was  held that  in respect of  a company  in liquidation  after the date of its winding up, the distinction between capital, reserve and the accumulated  profits   disappears  and  there  is  only  one integrated  or   consolidated  fund  in  the  hands  of  the liquidator. The  concept of  a fluctuating  share capital or reserve which  is the basic premise necessary to attract the applicability of  rule 1  of the  Second Schedule  is wholly foreign in respect of a company in liquidation.      In  Commissioner   of  Income-tax,  Bangalore  v.  B.C. Srinivasa Setty,  this Court  pointed  out  that  under  the scheme of  the Income-tax  Act, 1961, charge of tax will not get attracted unless the case or transaction falls under the governance of  the  relevant  computation  provisions.  "The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together 979 constitute an integrated code. When there is a case to which the computation  provisions  cannot  apply  at  all,  it  is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while  a  certain  income  seems  to  fall  within  the charging section  there is  no  scheme  of  computation  for quantifying it.  The legislative  pattern discernible in the Act is against such a conclusion". Exactly similar being the scheme of  the  Super  Profits  Tax  Act,  1963;  the  above observations fully apply to case before us. Hence, it has to be held that inasmuch as the provisions contained in the Act for computing  the capital  of the  company and its reserves and cannot  have any  application in respect of a company in liquidation and  consequently the  ’standard  deduction’  is

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incapable of  ascertainment, the charge of super profits tax under section  4 of the Act is not attracted to such a case. The judgment of the High Court does not, therefore, call for any interference.      This appeal is accordingly dismissed with costs. M.L.A.                                     Appeal dismissed. 980