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PETITIONER: THE COMMISSIONER OF INCOME-TAX,MADRAS

       Vs.

RESPONDENT: URMILA RAMESH ETC.

DATE OF JUDGMENT:       04/02/1997

BENCH: B.P. JEEVAN REDDY, K.S. PARIPOORNAN

ACT:

HEADNOTE:

JUDGMENT:                THE 4TH DAY OF FEBRUARY, 1997 Present:             Hon’ble Mr.Justice B.P.Jeevan Reddy             Hon’ble Mr.Justice K.S.Paripoornan Dr.V.Gaurishankar, Sr.Adv., S.Rajappa and B.K.Prasad, Advs. with him for the appellant T.A. Ramachandran,  Sr. Adv,  and A.T.M.  Sampath, Adv. with him for the Respondent in C.A.No.2150-52/82 J.Ramamurthy, Sr.Adv. Ms.Janki Ramachandran, Adv.with him for the Respondent in C.A.No.3274/84                          O R D E R      The following order of the Court was delivered:                             WITH    CIVIL APPEAL NOS. 2144-46/82, 2147-49/82, 2150-52/82,               2153-55/82, 4204/82 AND 3274/84.                          O R D E R      In this  batch of cases, the following two questions of law arise for consideration: (i)  Whether, On  the facts  and in the Circumstances of the      case,  the   Appellate  Tribunal   was   justified   in      confirming the  deletion  of  the  income  assessed  as      deemed dividends under the Provisions of s. 2(22)(c) in      the assessees’ case? (ii) Whether, on  the facts  and in the circumstances of the      case, the  Appellate  Tribunal  was  right  in  law  in      holding  that   the  sum  of  Rs.7,28,760  representing      profits assessed  under section  41(2) in the preceding      years cannot  form part  of the accumulated profits for      the purpose  of section 2(22)(c) of the Income-tax Act,      196? 2.   The Revenue  has preferred  the appeals from the common judgment rendered by the High Court of Madras dated 9.3.1979 reported as Commissioner of Income-tax. Tamil Nadu I v. T.S. Rajam [(1980) 125 ITR 207]. 3.   We heard counsel at some length. The main facts are not in dispute.  The respondents ate assessees under the Income- tax Act.  They were  shareholders  of  a  company  Known  as "Tinnevelly Motor Service Company Private Ltd.". The company carried on  transport business. Government took over all the Vehicles  owned  by  the  company.  The  company  went  into

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liquidation. The  Liquidator distributed  the dividends from time to  time. Assessments  were made for the years 1970-71, 1971-72 and  1972-73. The  Income-tax officer assessed a sum of  Rs.7,28,760/-,   as  representing  profits  on  sale  of company’s  capital  assets,  which  had  been  subjected  to depreciation and  not trading  or business  profits, and the company had  shown it  as a capital reserve. The plea of the Revenue was  that though  the amount  was shown  as  capital reserve, it  was purely  the accumulation of profits, either assessed or  equal to  the amounts  assessed  under  Section 41(2) of  the Act from 1962-63 to 1969-70. On this basis, it was concluded that the said amount represented the income of the shareholders  under  Section  2(24)  read  with  Section 2(22)(c) of  the Income-tax  Act. The  plea of the assessees was that the amounts assessed under Section 41(2) of the Act cannot be treated as ‘commercial profits’ at all in the real sense and  so, it cannot come within the mischief of Section 2(22)(c) of the Act. 4.   The High Court of Madras held that Section 41(2) of the 1961 Act  creates a  legal fiction under which the balancing charge is  treated as  "business income"  Chargeable to tax. The legal  fiction should  be limited  for the  purpose  for which it  was created. The receipt of excess on written down value on  the sale  of capital  assets cannot  be held to be profit apart from the legal fiction created by Section 41(2) of the Act. It cannot form part of commercial profit. So, it cannot from part of "accumulated profits" within the meaning of Section  2(22)(c) read  with Section 2(24) of the Act and any distribution  out of  such amount  cannot be assessed in the hands  of shareholders as "deemed dividends". If at all, it represents only a capital receipt. The above decision was rendered placing  reliance on  the decisions  of this  Court rendered in  (1) CIT  V. Bipinchandra  Maganlal  &  Co  Ltd. [(1961 41  ITR 290 (SC)], (2) CIT V. Express Newspapers Ltd. [(1964)  53   ITR  250   (SC)],(3)  Cambay  Electric  Supply Industrial Co  Ltd. v.  CIT [(1978) 119 ITR 113.]. The first two  decisions  were  rendered  with  reference  to  Section 10(2)(vii) of  the Income-tax  Act, 1922. The said provision clearly created  a legal  fiction. The  third  decision  was rendered in  the context  of Section 41(2) of the Income-tax Act, 1961. 5.   Dr. Gaurishanker,  Senior Counsel for Revenue submitted as follow:-      The language of Section 41(2) of 1961 Act is different. Under Section  41(2) of the Act, if the amount for which the asset is sold exceeds the written down value, so much of the excess as  does not exceed the difference between the actual cost and  the written  down value,  shall be  chargeable  to income-tax as  income of  the business  or profession of the previous year.  There is  no fiction,  similar to the second proviso   to Section 10(2)(vii) of the Income-tax Act, 1922. Even so,  as stated in Cambay Electric Supply Industrial Co. Ltd. V. Commissioner of Income-tax, Gujarat-II (113 ITR 84); the fiction  should be  applied to  its logical limit. If so done, the  receipt of  excess on  written down  value of the capital of  assets, is  "income" for  all purposes under the Act. There is no dichotomy in applying the above concept  as "profits simpliciter" and "commercial profits". The language of Section  2(22)(c) "accumulated  profits" taken along with Section 2(24) and Section 2(45) of the Act defining "income" and "total income" read with Section 5 of the Act, should be given its  plain meaning  and the  balancing charge assessed under Section 41(2) of the Act, is "profit" and distribution thereof to the shareholders should be assessed a "dividend". Placing reliance  on the  decision in  Bishop v.  Smyrna and

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Cassaba Railway  Company (No.  2) (1895  2 ch. 596), counsel contended that the income brought to tax under section 41(2) of the  Act is  one by  way of  restitution; what  had  been written off (allowed) for the purpose of accounts, has later been made good by the increase in value. In occuring at page 601 of the said decision:      "It is writing back what was before      written  off;   and  I  cannot  for      myself see  why, since  the  amount      written  off   was  treated   as  a      deduction from  profits  in  former      accounts, the  amount that  is  now      written up should not be treated as      profits in  the same  way. It seems      to me  to be  not   an accretion of      principal, but  restitution of what      was before  taken away-- taken away      from  profits,   and  therefore   a      restitution to profits."      On the other hand, counsel for the assessees, Mr. T. A. Ramachandran and  Mr. J. Ramamurthy, contended that there is difference between  "Profits" and  "commercial profits", and dividend can be declared only out of commercial profits. The meaning to  be given  to  the  words  "accumulated  profits" should be construed in that background. The balancing charge in the  instant case  is merely a capital reserve and cannot be treated  as commercial  profits and  so,  will  not  come within Section 2(22)(c) of the Act. It was also contended by Sri J.  Ramamurty, that  Section 41(2)  of the  Act contains words which are similar or akin to a legal fiction and so it is not  correct to  say that  the  language  and  import  of Section 10(2)(vii)  proviso of 1922 Act and Section 41(2) of 1961 Act are different. 6.   On hearing  the rival  pleas urged  before us,  we  are prima facie  of the  view  that  the  language  employed  in Section 10(2)(vii)  of the  Income Tax  Act, 1922  and  that employed in  Section 41(2)  of the Income-tax Act, 1961, are materially different.  It is  doubtful, whether the language used in  Section 41(2)  of the  1961 Act  is akin to a legal fiction.  The   earlier  decisions   reported  in   CIT   v. Bipinchandra Maganlal & Co. Ltd. [(1961 41 ITR 290 (SC)] and CIV v. Express Newspapers Ltd. [(1964) 53 ITR     250  (SC)] were based  on the  relevant provisions  of  1922  Act.  The decision in  Cambay Electric  Supply Industrial  Co. Ltd. v. Commissioner of Income-tax. Gujarat-II (113 ITR 84) was with reference to Section 41(2) of the Income-tax Act, 1961. This later decision  was  rendered  mainly  placing  emphasis  on Section 80E  of the  Income-tax Act, 1961. Incidentally, the language used  in Section  41(2) of  the Act  has also  been referred to as a fiction. We are prima facie inclined to the view that  when once  certain amount  is treated  as  income under the Act, it should be so for all intents and purposes- and in  all situations  arising under the Act. Based on this approach, it  will be  difficult to hold that the receipt of excess on  written down value on the sale of capital assets, is a "fictional income" and cannot form part of the profits. Once it  is profit,  it is  so for  all  purposes,  and  any distribution made  out of  such an amount should be assessed in the  hands of shareholders as dividends. Section 41(2) of 1961 Act  plainly makes  the "excess" amount "chargeable" as "income". If  it is so, it will be taken in by Section 2(24) read with  Section 2(22)(c)  of the Act. An indepth analysis of the provisions of the Income-tax Act, 1922, vis-a-vis the provisions of the Income-tax Act, 1961, is called for in the circumstances. The  matter is  not free from difficulty. The

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earlier  decisions   of  this   Court  reported  in  CIT  v. Bipinchandra Maganlal & Co. Ltd. [(1961 41 ITR 290 (SC)] and CIT v. Express Newspapers Ltd. [(1964) 53 ITR 250 (SC)] were rendered by a Bench of three-judges while the later decision in  Cambay   Electric  Supply   Industrial   Co.   Ltd.   v. Commissioner of  Income-tax, Gujarat-II  (113  ITR  84)  was rendered by a Bench of two-judges. 7.   In the  circumstances and  in view of the importance of the questions involved in this batch of cases. We think that it is only appropriate that this batch of cases be heard and disposed of  by a  larger Bench.  Accordingly, We direct the Registry to  place the  matter before  the Hon’ble the Chief Justice for appropriate orders in this behalf.