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PETITIONER: COMMISSIONER OF INCOME-TAX, GUJARAT

       Vs.

RESPONDENT: VADILAL LALLUBHAI ETC.  ETC.

DATE OF JUDGMENT29/08/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR 1016            1973 SCR  (1)1058  1973 SCC  (3)  17  CITATOR INFO :  F          1976 SC  10  (35)  RF         1982 SC 149  (238)  F          1984 SC 790  (17)  RF         1986 SC 649  (43)  R          1989 SC2113  (28)

ACT: Income-Tax Act (11 of 1922) ss. 2 (6A .) (c), 2(6C) and 44F- Deemed dividend, if income under s. 44F.

HEADNOTE: The  assessee  sold his share holdings in  certain  managing agency companies.  A few days thereafter the managing agency companies  went into voluntary  liquidation.   Consequently, the  assets  of those companies were distributed  among  the shareholders  then on the registers of the companies.   They included  the  persons who had newly purchased  the  shares. They  were either not liable to pay any income-tax  or  were liable  to  pay tax at a rate lower than what  the  assessee would   have  had  to  pay  had  he  received   the   amount distributed.  The Department and the Appellate Tribunal held that  the  amounts  distributed were  dividends  within  the meaning of s. 2(6A)(c) of the Income-tax Act, 1922, that the assessee sold his shares with a view to avoid income-tax and super  tax, and that, consequently, the assets  distributed, which  would  have fallen to his share had he not  sold  his shares, were liable to be brought to tax under s. 44F of the Act.   The High Court, on reference, held in favour  of  the assessee. Dismissing the appeal to this Court, HELD  :  (1) Section 2(6C) of the Income-tax  Act  gives  an inclus;  definition  of ’income’ and  dividend  is  included therein.   Therefore,  if  receipt  can  be  considered  as. dividend  it  has  to be  considered  as  incomunder  2(6C). Section 2(6A) gives an inclusive definition of ’dividend and under sub-cl. (c), any distribution made to the shareholders of  a  company  on ’its liquidation would be  deemed  to  be dividend;  but,  this definition applies only  if  there  is nothing repugnant in the ’subject or context. [1061G-H; 1062 A-B] (2)Legal fictions are only for a definite purpose and they

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are limited to thepurpose  for which they are created  and should not be extended beyondtheir  legitimate  field.   In the  case of deemed dividend under s. 2(6A) (c)  the  assets distributed will be considered as income in the account year in which it is distributed but that conception would be  in- applicable in cases coming under s. 44F. [1064 C-E] Commissioner  of Income-tax, Andhra Pradesh v. C.P.  Sarathy Mudaliar,  82  I.T.R. 170; and Commissioner  of  Income-tax, Bombay  City-1  v.  Amar-. chand N. Shroff,  48  I.T.R.  59, referred to. (3)Under s. 44F (1) to (3) the income referred to  therein should  arise from shares or securities during a  period  of time.   Further,  it must be a periodical  income  which  is capable of being apportioned on the basis that it is  deemed to have accrued from day to day.  In the case of interest on securities  or dividends on shares they are paid at  certain intervals  and  hence they can be deemed as  having  accrued from  day  to day; but in the case of  distribution  of  the assets  of  a company on liquidation it is not  possible  to deem  it as having accrued from day to day.  When a  company goes  into  liquidation the share scripts  are  nothing  but pieces of paper and no income arises from those shares after the liquidation.  What the share holder gets on  liquidation is not any income ’from shares but 1059 a  share  of the assets of the quondam company  and  such  a receipt  is incapable of being deemed to have  accrued  from day to day.  Moreover, ,the company may go into  liquidation long after the accounting year ends and there is nothing  to indicate what period the income-tax officer should take into consideration for applying the fiction that "the income  had deemed to accrue from day to day." [1065A-C] (4)The  two  provisions, namely, s. 2(6A)(c)  and  s.  44F cannot be dovetailed unless three assumptions are made,  (a) that the- fictional dividend contemplated by s. 2(6A)(c)  is ’incame’ within the meaning of s. 44F; (b) that the dividend is  capable of being deemed to have accrued day to day;  and (c) that the day to day distribution contemplated in s.  44F commences  on  the commencement of the  relevant  accounting year  and ends with the distribution of the assets.   To  do so,  words would have to be read into the section  which  is impermissible in construing a provision of law.  Hence,  the deemed  dividend  contemplated by s. 2  (6A)(c),  cannot  be considered as income under s. 44F. [1064 G-H] Commissioner of Income-tax Madras v. Ajax Products Ltd.  55, 1.T.R. 741, referred to. (6)The legislative intent in enacting s. 44F is clear from the  report  of  the Select Committee.  It  was  to  prevent avoidance  of  tax  by certain devices  to  convert  revenue receipts  into  capital  receipts known  as  ’bond  washing’ transactions.   The marginal note to the section also  shows that  that was the intention of the  Legislature.  [1065C-D; 1067B] Commissioner  of  Income-tax, Madhya Pradesh and  Bhopal  v. Sodra Devi etc., 32 I.T.R. 615, 627, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : C.A. Nos. 2348-2349 of  1969, 1139 of 1969 and Civil Appeals Nos. 2006 & 2007 of 1971. Appeals   by   certificate  under  Article   133   ’of   the Constitution  of  India from the judgment  and  order  dated January- 15, 1966 of the Gujarat High Court in Ahmedabad  in I.T.R. Nos. 2 and 1 of 1966.

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B.Sen,  B. B. A huja and-B.  D. Sharma for the  appellant (in C.A. Nos. 2348-2349/69 & 2006-2007/71.) B.Sen and B. D. Sharma, for the appellant (in C.A. No.  1 139/69). N.   A.  Palkhivala,  S.  T.  Desai, M.  C.  Chagla,  V.  M. Tarkunde, A.   K.  Verma, J. B. Dadachanji, O. C. Mathur and  Ravinder Narain,  for the respondents (in C.A. Nos. 2348-2349/69  and 2006-2007/71). N.A.  Palkhivala, A. K. Verina, J. B. Dadachanji,  0.  C. Mathur  and Ravinder Narain, for the respondent in C.A.  No. 1139/69). 1060 The Judgment of the Court was delivered by Hegde,  J.  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  s. 44-F read with s.  2(6A)(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. For  deciding the said question of law, it is sufficient  if we  take  up the facts of any one of these cases.   For  the sake  of  convenience, we shall set out the facts  in  Civil Appeal  No.  2348  of 1969.  The assessee in  that  case  is Vadilal  Lallubhai.  He is assessed as an  individual.   The relevant  assessment  year is 1958-59, the  accounting  year being the year ending on March 31, 1958. 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 of the 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  em- ployees.   In  addition he sold some shares to  one  of  the family  trusts.   A few days after the  sales  in  question, those   managing  agency  employees  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  shareholders  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  bad be received the amount distributed by the liquidators. 1061           The  Income-tax Officer brought to tax a  portion of the assets       distributed  on liquidation by  applying s.  44-F read with s. 2 (6A) (c) of the Act.  The  Appellate

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Assistant Commissioner agreed with this view. The assessee’s appeal   to   the   Income-tax   Appellate   Tribiunal   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  neces- sary  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, s. 44-F read with  s.  2 (6A) (c) was inapplicable.           It was contended on behalf of the Revenue that the distribution  of the assets of the various  managing  agency companies  on liquidation is ’-dividend" within the  meaning of s. 2 (6A) (c) and consequently as "income" as defined  in s.  2(6C). Further the assessee sold his shares with a  view to avoid income-tax and  super-tax   and  consequently   the assets distributed which would have fallen to his share  had he not sold his share are liable to be brought to tax  under the provisions of s. 44-F of the Act.        On  the   other hand, it was contended on behalf of the assessee       that the definitions contained in. s. 2 are only to be applied  " unless  there  is  anything  repugnant  in  the  subject  or context". The  definition of "dividend" given in s.  2  (6A) (c) is repugnant    to the subject dealt with under s.  44-F and consequently the     distribution   of  the  assets   in liquidation of the several managing agencies concerns cannot be considered as "income" within the         meaning  of  s. 44-F.  It  was urged that s. 44-F concerns itself  with  the income  from securities or shares which are of a  periodical nature  but  which an assessee may seek to  convert  into  a capital  receipt  by adopting  certain  devices.         The provisions          therein    do   not   deal   with    the compensation  received  for  the  very  destruction  of  the income-yielding assets viz. the securities or     shares. We shall  now  consider which one of these two  contentions  is acceptable.   But before doing so it will be  convenient  to make reference to the relevant provisions in the Act. Section  2, the definitions section, starts by  saying  that the  definitions  given  therein  apply  ’unless  there   is anything repugnant in the subject or context".  Hence if the definition  of  "dividend" found in s.  2(6A)(c)  is  either repugnant  to  the  subject or context with  which  we are dealing,  that definition will not be  applicable.   Section 2(6A) gives an inclusive definition of "dividend".  In  this case we are concerned with s. 2(6A)(c)  which reads :               "   any distribution made to the  shareholders               of a company on its liquidation, to the extent               to which the dis-               1062               tribution  is attributable to the  accumulated               profits of the company immediately before  its               liquidation whether capitalised or not." Section  2(6C)  gives an inclusive definition  of  "income". Dividend  is  included therein.  Hence if a receipt  can  be considered  as a "dividend", it has to be considered  as  an "income" under s.   2(6C).  This takes us to S. 44-F,  which reads:               "(1) Any person upon whom notice is served  by               the   Income-tax  Officer  requiring  him   to               furnish  a statement of particulars  relating,               to any securities in which, at any time during               the period specified in the notice he has  had               any  beneficial  interest, and in  respect  of               which,  within such period, either  no  income               was received by him or the income received ’by

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             him was less than the sum to which the  income               would  have amounted if the income  from  such               securities  had  accrued from day to  day  and               been  apportioned accordingly, shall,  whether               an  assessment to income-tax or  Super-tax  in               respect  of  his total income has or  has  not               been  made for the relevant year or  years  of               assessment, furnish such a statement and  such               particulars  in the form and within  the  time               (not   being  less  than   twentyeight   days)               required by the notice.               (2) If it appears to the Income-tax Officer by               reference to all the circumstances in relation               to   the   securities  of  any   such   person               (including   circumstances  with  respect   to               sales,    purchases,   dealings,    contracts,               arrangements,   transfers,   or   any    other               transactions relating to such securities) that               such person has thereby avoided or would avoid               more  than ten per cent of the amount  of  the               income-tax  or  super-tax for any  year  which               would have been payable in his case in respect               of  the  income from those securities  if  the               income had ’been deemed to accrue from day  to               day and had been apportioned accordingly,  and               the income so deemed to have been  apportioned               to  him had been treated as part of his  total               income  from all sources for the  purposes  of               income-tax or super-tax, then those securities               shall be deemed to be securities to which sub-               section (3) applies.               (3)   For   the  purposes  of  assessment   to               income-,tax  or super-tax in the case  of  any               such person, the income from any securities to               which this sub-section applies shall be deemed               to accrue from day-to-day and               10 63               in  the  case of the sale or transfer  of  any               such  securities by or to him shall be  deemed               to have been received as and when it is deemed               to have accrued :               Provided that this section shall not apply  if               such person proves to the satisfaction of  the               Income-tax  Officer  that  the  avoidance   of               income-,tax  or super-tax was exceptional  and               not  systematic and that there was not in  his               case  in any of the three preceding years  any               such avoidance of income-tax or super tax,  or               that the provisions of section 44-E have  been               applied in his case in respect of such income.               (4)               (5)               (6)  For  the  purpose  of  this  section  the               expression  "securities"includes  stocks   and               shares." From  a reading of sub-ss.  1 to 3 of s. 44-F, it  is  clear that  the  income  referred to therein  should  arise from shares  or  securities.   Further it must  be  a  periodical income  which is capable of being apportioned on  the  basis that it is deemed to have accrued from day to day.   Section 44-F(1) empowers the Income-tax Officer to serve a notice on any  person  "requiring  him  to  furnish  a  statement   of particulars relating to any securities in which at any  time during  the  period specified in the notice he has  had  any beneficial  interest  and in respect of which,  within  such

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period  either no income was received by him or  the  income received  by him was less than the sum to which  the  income would  have amounted if the income from such securities  has accrued  from  day to day and had been  apportioned  accord- ingly. The  power  conferred on the Income-tax Officer  under  this provision is not confined to any stipulated period. Now turning to subs.(2) of s.44-F, it speaks of "the  amount of the income-tax or super-tax for any year which would have been  payable  in his cause in respect of  the  income  from those  securities  if the income had been deemed  to  accrue from day to day and had been apportioned accordingly. Again  sub-(3)  of s.44-F speaks of ",the  income  from  any securities to which this sub-section applies shall be deemed to  accrue from day to day, and in the case of the  sale  or transfer of any such securities by or to him shall be deemed to  have  been  received as and when it is  deemed  to  have accrued.. ." 1064 It is clear from what we have said earlier that s.44-F  con- cerns itself with income arising from securities or  shares, during  a  period  of  time.   When  a  company  goes   into liquidation,  the share-scripts 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 accure 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(6A) are only deemed dividends.  They  are not real dividends.  By a legal fiction, they are deemed  as dividends.   This Court held in Commissioner of  Income-Tax, Andhra  Pradesh  v.  C.P.  Sarathy  Mudaliar,(1)  that   the definition  of "dividend" contained in s. 2 (6A) (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 s. 2 (6A) (c).  As  held  by this  Court in Commissioner of Income-tax, Bombay City-1  v. Amarchand  N.  Shroff,(2)  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. It  is established on high authorities that the  subject  is not  to  be  taxed unless  the  charging  provision  clearly imposes the obligation see Commissioner of Income-tax Madras v.  Ajax  Products  Ltd.  (3)  As  is  often  said  that  in interpreting  a taxing provision one has merely to  look  to the words of the provision.  The language employed in S. 44- F  cannot  be said to be plain enough to bring to  tax  the receipts  of  the character with which we are  concerned  in these appeals. To  accept the contention of the Revenue, we have  to  adopt threefold  assumptions.   Firstly  the  fictional   dividend contemplated  by  s. 2 (6A) (c) is an  "income"  within  the meaning  of  S.  44-F.  Secondly we must  assume  that  that dividend is capable of being deemed to accrue day to day and lastly  we  must  assume that the day  to  day  distribution contemplated  in S. 44-F commences from the commencement  of

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the relevant accounting year and ends with the  distribution of the assets as contended on behalf of the Department.   To do so we have to read into the section many more (1) 82 I.T.R. 170. (2) 48 I.T.R. 59. (3) 55 I.T.R. 741. 1065 words   than  it  contains  at  present  which   is   wholly impermissible in construing any provision much less a taxing provision.   In the case of deemed dividend under  s.  2(6A) (c), the assets distributed will be considered as income  in the  account  year  in  which it  is  distributed  but  that conception  would be inapplicable in cases coming  under  s. 44-F.   A  company may go into liquidation  long  after  the accounting  year ends.  What period the  Income-tax  Officer should take into consideration for applying the fiction that "the  income  had deemed to accrue from day to  day  ?"  The scheme of s. 2(6A) (c) is incompatible with the scheme of s. 44-F.   The  two  provisions are intended  to  meet  totally different  situations.   The  former  provision  cannot   be dovetailed into the latter. In order to find out the legislative intent, we have to find out  what  was the mischief that the legislature  wanted  to remedy.   The Act was extensively amended in the year  1939. Section  44-F was not in the draft bill.  That  section  was recommended  by  the  Select Committee  consisting  of  very eminent  lawyers.  It will not be inappropriate to find  out the   reasons  which  persuaded  the  Select  Committee   to recommend  the  inclusion  of s. 44-F,  if  the  section  is considered  as  ambiguous-see  Commissioner  of  Income-tax, Madhya  Pradesh and Bhopal v. Sodra Devi etc.(1). In  recom- mending  the inclusion of s. 44-F, this is what  the  Select Committee observed :                     "The  new  Sections  44E  and  44F   are               designed  to prevent avoidance of tax by  what               -are  known  as  "bondwashing"   transactions,               involving  the manipulation of  securities  so               that  the securities will pass temporarily  in               the legal ownership of some second person  who               is  either  not liable at all or liable  in  a               lessor  degree to tax, under  such  conditions               that  the  interest on the securities  is  the               income  of this second person.  A common  form               of the process is the sale of  securities-cum-               interest  with  a  simultaneous  contract   to               purchase  them  ex-interest.   Where   foreign               securities  are concerned this  second  person               may be a foreigner resident abroad entitled to               claim exemption from the tax on the  interest.               More  often  a financial concern in  India  is               utilised whose computation of profits includes               the  results of realising securities, so  that               the   concern  can  profitably  offer   "bond-               washing" facilities to the owner of securities               bearing fixed interest where the owner himself               is  not liable to taxation on the  realisation               of the securities."   Section  44-F of the Act, immaterial changes apart,  is  a reproduction of s. 33 of the English Finance Act, 1927 which was (1)  32 I.T.R. 615 at p. 627. 1066 subsequently  replaced  by s.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

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Wheateroft at p. 1669 (Paragraph 1-1358) :               We  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 "exdividend" 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  "exdiv."  it  will  then  normally  fall               sharply  by a sum appropriately equals 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 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 percent 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  com-               puting  his  surtax.  If  the  individual  can               prove that the 1067 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 assessees  to  convert their revenue receipts  into  capital

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receipts.   The  marginal  note also throws  light  on  the- intention ’of the legislature. From what has been stated above, it is clear that the deemed dividend contemplated by s. 2 (6A) (c) cannot be  considered as "income" under s. 44-F. For the reasons mentioned above we agree with the High Court that  s.44-F is inapplicable to the facts of the  assessee’s case.  This  question is common to all  the  above-mentioned appeals.   Hence  we need not go into the  other  subsidiary questions arising for decision in any of those appeals. In the result these appeals fail and they are dismissed with costs.  One hearing fee. V.P.S. Appeal dismissed..               1068