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PETITIONER: FIRST INCOME-TAX OFFICER, SALEM

       Vs.

RESPONDENT: M/S.  SHORT BROTHERS (P) Ltd.

DATE OF JUDGMENT: 15/12/1965

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

CITATION:  1967 AIR   81            1966 SCR  (3)  84  CITATOR INFO :  E          1970 SC1712  (5)  R          1976 SC1790  (9,19)

ACT: Income-tax Act (11 of 1922), ss. 2(6-A)and  12-B-Accumulated Profits", meaning of-If includes capital gains from sale  of lands yielding Agricultural income.

HEADNOTE: After the respondent-company sold its assets, which included agricultural  lands and buildings, it was resolved  that  it should  be  voluntarily  wound  up.   On  30th  March,   the liquidator  distributed Rs. 850,000 to  share-holders.   The appellant (Income-tax Officer) proposed to treat the amounts distributed as dividends and to call upon the liquidators to pay  the tax    under s. 18(3D) of the Income-tax Act, 1922. The liquidators     contended  that the amount  was  capital appreciation realised by the sale  of agricultural lands and buildings and therefore not liable to tax; and    that    in any  event the amounts represented "current profits" of  the year  in which it was resolved that the company be wound  up and  so were not dividends within the meaning of s. 2  (6-A) (c).  As the appellant did not agree, the liquidators  moved the  High  Court for a writ of prohibition to  restrain  him from taking further action.  The High Court issued the  writ holding  that  the  demand  by  the  appellant  was  not  in conformity with law in that the amount of Rs. 850,000  could not  be  deemed  to  be  distributed  as  dividend   without determining  whether any portion of it  represented  capital gains,  which  arose  out of the  sale  of capital  assets consisting  of  lands  from which  agricultural  income  was derived. In appeal to this Court. HELD  : (i) Normally the High Court should not  entertain  a petition under Art. 226, when the party claiming relief has an adequate alternative remedy, but as the matter is one  of discretion  and not jurisdiction of the High Court,  if  the High  Court  thought  that the case was  one  in  which  its jurisdiction  could be invoked, this Court would  ordinarily not interfere with the exercise of the discretion. [86 F] (ii) The decision in Bacha Guzdur v. Commissioner of Income-

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tax,  (27  I.T.R.  1), wherein it  was  held  that  dividend received  by  a  share-holder  out  of  profits  tamed  from agricultural  income was not exempt from liability under  8. 4(3)(viii), has no application to the present case  because, the  claim of the respondent to exemption from liability  to tax  was not under s. 4(3)(viii), but on the basis that  the receipt by the shareholder was not income chargeable to  tax under s. 12 as dividend. [92 B] (iii)     By  s. 12 tax is payable by an assessee under  the head  "income from other sources" which includes  dividends. "Dividend" is defined in s. 2(6-A) and cl. (c) declares that accumulated  profits immediately before the  liquidation  of the company are dividends.  Since it does not say that  only accumulated   profits   upto  end  of  the   previous   year immediately proceeding the year in which liquidation of  the of the company commences are dividend all profit earned till immediately before liquidation, if they are distributed will be brought to tax if they consist of accumulated profits  or partly  to the extent they are attributable  to  accumulated profits.in  giving  effect to the definition   the  taxing authority may have to com- 85 pute profits of the company for a part of the year but there is nothing in the Act which prohibits assessment of  profits for   a   part  only  of  the  previous  year   in   special circumstances.  In fact, the legislative history of s.  2(6- A)(c)  shows that "current profits", that is, profits  of  a company  in  liquidation arising after the end of  the  last previous  year and before liquidation commenced are  brought within  the  net  of taxation  as  dividend.   Further,  the explanation  to the section plainly implies that within  the expression  "accumulated profits"are included capital  gains outside  the excepted periods specified therein.  But  under s. 12-B while capital gains are chargeable in respect of any profits  arising from transfer of "capital assets’  "capital assets"  do not include lands from which the income  derived is agricultural income.  Therefore, on a combined reading of s.  12-B and the definition, of capital asset in s.  2(4-A), profits  derived by transfer of lands from which the  income derived  is agricultural income would not be  chargeable  to tax. [87 F, 88 C, H; 89 A-C, E; 91 B-C, D-E]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 97 of 1965. Appeal  by special leave from the judgment and  order  dated October  3, 1963 of the Madras High Court in  Writ  Petition No. 1242 of 1962. S.   T.  Desai, N. D. Karkhanis and R. N. Sachthey, for  the appellant. A.   V. Viswanatha Sastri, B. R. Agarwal and H. K. Puri, for the respondent. The Judgment of the Court was delivered by Shah,  J.  On  December  24,  1959,  M/s.   Short   Brothers (Private) Ltd. sold its coffee estates and other assets, and by resolution, dated February 6, 1960, it was resolved  that it  be voluntarily wound up and liquidators be appointed  to administer  its  affairs.  Out of the proceeds  realized  by sale   of  its  assets,  the  liquidators  of  the   Company distributed   on  March  30,  1960  Rs.  8,50,000   to   the shareholders.   By  letter,  dated December  19,  1960,  the Income-tax Officer, Salem, informed the liquidators that  he proposed  to treat that amount distributed as  dividends  in the  hands  of  the  shareholders,  and  to  call  upon  the

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liquidators  to  pay the amount of tax deductible  under  S. 18(3D)  of  the Income-tax Act.  The  liquidators  submitted that the amount distributed to the shareholders was  capital appreciation  realised  by sale of  agricultural  lands  and buildings  of  the Company, and was not liable to  tax,  and that  in  any  event  the  amounts  distributed  represented "current profits" of the year in which it was resolved  that the  Company  be  wound  up and were  on  that  account  not dividend   within  the  meaning  of  S.  2(6A)(c)   of   the Income..tax  Act.  After some correspondence the  Income-tax Officer, Salem by his 86 order,  dated  October  18, 1962, finally  called  upon  the liquidators  to pay Rs. 4,11,700 which was retained  by  the liquidators from the distribution made to the shareholders. The liquidators then moved the High Court of  Judicature  at Madras,  for  a writ of prohibition  restraining  the  First Income-tax  Officer  from taking further action  to  enforce collection  of  the  amount  referred  to  by  him  in   his communication,  dated  October 18, 1962.  Holding  that  the demand made by the Income-tax Officer was "not in conformity with the law" in that the amount of Rs.. 8,50,000 which  had been  distributed could not be deemed to be  distributed  as dividend  without  determining whether any  portion  of  the amount  represented  capital gains, which arose out  of  the sale of capital assets consisting of lands from which  agri- cultural  income was derived, the High Court issued  a  writ restraining  the  Income-tax,  Officer  from  enforcing  the demand  for  tax.  The High Court reserved  liberty  to  the Income-tax  Officer to examine the question afresh,  and  to determine "the correct amount of dividend within the meaning of  S. 2(6A)(c)".  With special leave, the First  Income-tax Officer has appealed to this Court. It  was submitted on behalf of the Income-tax  Officer  that the  High Court in entertaining the petition in  its  extra- ordinary  jurisdiction under Art. 226 of  the  Constitution, bypassed  the machinery of assessment and  rectification  of orders of assessment prescribed by the Indian Income-tax Act which is both adequate and efficacious.  But the High  Court has under Art. 226 of the Constitution jurisdiction to issue to  any  person  or  authority  within  the  territories  in relation  to  which it exercises  jurisdiction,  directions, orders, or writs in the nature, amongst others of  mandamus, prohibition and certiorari for the enforcement of any of the rights conferred by Part III and for any other purpose.   It is  true that normally the High Court will not  entertain  a petition  in exercise of its jurisdiction under Art. 226  of the  Constitution  when  the party claiming  relief  has  an alternative remedy which is adequate and ’efficacious.   The question however is one of discretion of the High Court  and not  of its jurisdiction, and if the High Court in  exercise of its discretion thought that the case was one in which its jurisdiction  may  be permitted to be  invoked,  this  Court would  normally  not  interfere with the  exercise  of  that discretion. The High Court was of the view that all profits  accumulated in the previous years and the profits till the date on which it  was  resolved that the Company be voluntarily  wound  up would be 87 included  in the expression "accumulated profits"  under  s. 2(6A)  (c)  of  the  Indian Income-tax  Act  read  with  the Explanation.   They  held that even  capital  gains  taxable under  S.  12B  except  for  the  period  mentioned  in  the Explanation  were  when distributed, "dividend"  within  the

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definition,  but  profits realised by transfer  of  property used   for   agricultural   purposes   and   which   yielded agricultural  income not being capital gains  taxable  under the law are not "dividend", and on that account the order of the  Income-tax  Officer bringing to tax the  entire  amount distributed without determining whether any portion of  that amount  represented capital gains arising from the  sale  of capital  assets Consisting of lands from which  agricultural income was derived was not within his authority. Counsel for the liquidators contended in the first  instance that all profits whatever may be their character arising  in the  year in which the Company is voluntarily wound  up  are not  liable  to  be taxed as they did not  fall  within  the definition  of "dividend" in S. 2(6A)(c).  Counsel  for  the Department  while  supporting  the view of  the  High  Court relating  to the chargeability to tax of "current  profits", contended that the entire amount of Rs. 8,50,000 distributed to  the shareholders, whatever may be the source from  which the  profits  were earned, was liable to be brought  to  tax under S. 12 of the Income-tax Act as dividend distributed. By  S.  12  of  the Income-tax Act, tax  is  payable  by  an assessee  under  the  head "Income from  other  sources"  in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the  preceding heads in ss. 7 to 10 of the Act.   By  sub-s. (1A)   "income  from  other  sources"  includes   dividends. Section  2(6A)  defined "dividend"and at the  relevant  time cl. (c) and the Explanation to the clause stood as follows : " ’dividend’ includes-               (c)   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;               Explanation.-The    expression    "accumulated               profits"  wherever it occurs in  this  clause,               shall not include               88               capital  gains arising before the 1st  day  of               April,  1946, or after the 31st day of  March,               1948, and before the 1st day of April, 1956." By  the Explanation to S. 2(6A) accumulated profits  include capital  gains not arising within the excepted period.   The Explanation  is  undoubtedly couched in negative  form,  but there  is  no ground for accepting the argument  of  counsel that   in  the  substantive  clauses  of   the   definition, accumulated  profits  do  not include  capital  gains.   The Explanation  plainly  implies  that  within  the  expression "accumulated  profits" are included capital gains  outside the  excepted periods.  On the interpretation contended  for by  counsel, the Explanation which seeks to exclude  capital gains" from the content of accumulated profits would have no meaning.    By  sub-s. (1) of s. 12B tax is  payable  by  an assessee  under  the head "capital gains" in respect of  any profits or gains    arising   from   the   sale,   exchange, relinquishment or transfer of a    capital  asset   effected after  the  31st day of March, 1956, and  such  profits  and gains  shall be deemed to be income of the previous year  in which  the sale, exchange, relinquishment or ’transfer  took place.   Under the Indian Income-tax Act, 1922,  "   capital gains" arising after March 31, 1946 were made charge:able by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which  inserted S. 12B in the Act.  The levy  was,  however, abolished by the Finance Act, 1949, and the operation of  S.

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12B  as enacted by the Amendment Act of 1947 was  restricted to  capital  gains  arising before April 1,  1948.   By  the Finance Act 3 of 1956 which introduced a new s. 12B, capital gains  were  again made chargeable to tax with  effect  from April  1,  1957  on the profits or gains  arising  from  the transfer of capital assets, which expression is defined  in s.  2(4A)  as  meaning  "property of any  kind  held  by  an assessee,  whether  or  not connected  with  ’his  business, profession or vocation, but does not include-               (i)               (ii)               (iii) any  land from which the income  derived               is agricultural income;" The  contention raised by counsel for the Company  that  the profits earned in the "current year" i.e., the year in which it  was  resolved  that the Company  be  wound  up,were  not "dividend"  within  the meaning of S. 2(6A) (c) of  the  Act cannot  be  accepted.  Sub-clause (c) of s.  2(6A)  declares that accumulated profits immediately before the  liquidation of the company, are 89 dividend  : it does not say that accumulated profits  up  to the end of the previous year immediately preceding the  year in which liquidation of the company commences are  dividend. It  is  true that in giving effect to  the  definition,  the taxing  authorities have to compute profits of  the  company for a part of the year, but that is not a ground for reading the  plain  words  of the statute in  an  artificial  sense. Under s. 3 of the Act read with S. 4, the charge to  income- tax  is  on the total income of the previous  year,  and  in accordance with and subject to the provisions of the  Indian Income-tax  Act.   But  there is nothing in  the  Act  which prohibits  assessment  of  profits for a part  only  of  the previous   year  in  certain  special  circumstances.    For instance, under s. 26(2) it is provided that in the case  of succession to a person carrying on any business,  profession or vocation, in such capacity by another person, such person and  such other person shall each be assessed in respect  of his actual share of the profits of the previous year. In  amending the definition in s. 2 (6A) (c) by the  Finance Acts of 1955 and 1956, the Parliament has sought to  clarify its meaning and to avoid the argument which was successfully raised in certain cases on the interpretation of the statute before  if  was amended.  By the terms  of  the  definition, distribution  which  is  attributable  to  the   accumulated profits of the Company immediately before its liquidation is to  be  deemed dividend.  Thereby all  profits  earned  till immediately  before  liquidation, if they  are  distributed, will be brought to tax wholly if they consist of accumulated profits, or partially to the extent they are attributable to accumulated profits. Amendments which have been made from time to time in the Act clearly disclose the intention of the Parliament that it was not  intended  to  allow the profits  of  the  current  year distributed by a liquidator of a company to escape liability to   tax.   In  Inland  Revenue  Commissioners   v.   George Burrell,(1)  it  was held that on the undivided  profits  of past  years  and of the year in which the winding  up  of  a company   occurred   which  were   distributed   among   the shareholders,  super-tax  was not payable,  because  in  the winding  up they had ceased to be profits and  were  assets only.   It was observed in Burrell’s case(1) that  the  only thing  the liquidator of a company in liquidation may do  is to  turn the assets into money, and divide the  money  among the shareholders in proportion to their shares.  Surplus  of

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trading  profit made in a particular year are  distributable ratably among all the (1) [1934] 2 K.R 52. L9Sup.  Cl/66-7 90 shareholders as capital, and it is not right to split up the sum.-, received by the shareholders into capital and income, by examining the accounts of the company when it carried  on business,  and  disintegrating  the  sum  received  by   the shareholders  subsequently into component parts based on  an estimate of what might possibly have been done, but was  not done.   As the Indian Companies Act, 1913, closely  followed the  scheme  of  the English Companies  Act,  and  the  view expressed in Burrell’s case(1) applied to the Indian Income- tax  Act, a special definition of "dividend’ was devised  by Parliament by the enactment of Income-tax (Amendment) Act  7 of  1939,  with a view to supersede the  view  in  Burrell’s case(1).   Clause (c) of sub-s. (6A) as  originally  enacted stood as follows               ’dividend’ includes-               (c)   any    distribution    made    to    the               shareholders  of a company out of  accumulated               profits  of the company on the liquidation  of               the company :               Provided that only the accumulated profits  so               distributed   which  arose  during   the   six               previous  years of the company  preceding  the               date of liquidation shall be so included               By  the Finance Act, 1955 the proviso to  sub-               cl. (c) of cl. (6A) was omitted.  There was  a               further  amendment made by the  Finance  Act,.               1956  and cl. (c) to the amended section  read               as follows :               " ’dividend’ includes-               (c)   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 capitalised or not;" Under Act 7 of 1939 profits which arose within six  previous years  preceding  the date of liquidation  when  distributed were  to  be  deemed  dividends.   But  the  effect  of  the definition  was  that distribution  of  profits  accumulated after  the  last  day of the previous  year  whatever  their nature  could not be regarded as distribution of dividend  : Sheth  Haridas  Achratlal  v.  The  Commissioner  of  Income taX.( 2)  It was held in that case by the Bombay High  Court that for the purpose of s. 2 (6A) (c) as it (1) (1924] 2 K.B. 52. (2) 27.  I.T.R. 684. 91 stood  in 1949, a broken period between the last day of  the previous year of a company, and the commencement of  winding up   could  not  be  considered  "a  previous  year".    The Parliament  with  a  view to supersede  the  view  in  Sheth Haridas  Achratlal’s  case(1) deleted by  the  Finance  Act, 1955,  the-proviso to sub-clause (c).  To make  its  meaning more  clear Parliament by the Finance Act. 1956, recast  the substantive  clause  (c).   Viewed in the  context  of  this legislative  history,  there  is no  doubt  that  "  current profits"  i.e., profits of a company in liquidation  arising after  the  end  of  the  last  previous  year  and   before liquidation  commenced,  Were  brought  within  the  net  of taxation as dividend.  The contention raised by counsel  for

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the Company on this part. of the case must fail. The  question  which  remains to be  considered  is  whether capital appreciation in respect of the lands from which  the income  derived  is agricultural income and  which  was  not taxable  in the hands of the company as capital gains  would still  on  distribution be liable to be  taxed  as  dividend under  s.  12  of the Income-tax Act.  As  we  have  already pointed  out  capital gains under s. 12B are  chargeable  in respect  of  any profits arising from transfer  of  "capital assets",  and  "capital assets" do not include.  lands  from which  the income derived is agricultural _ income,  Profits derived by transfer of lands from which the income,  derived is agricultural income would not therefore be chargeable  on a  combined reading of s. 12B with s. 2 (4A) of the  Income- tax  Act  under the head "capital  gains"..  The  expression "accumulated profits" does not include capital gains arising within the excepted periods : vide Explanation to s. 2 (6A). "Accumulated  profits"  are therefore profits which  are  so regarded  in  commercial  practice,  and  capital  gains  as defined  in the Income-tax Act.  Realization of  appreciated value  of  assets  in commercial  practice  is  regarded  as realization  of  capital rise,. and not of  profits  of  the business.   Unless, therefore, appreciation in the value  of capital   assets   is  included  in   the   capital   gains, distribution  by the liquidator of the rise in  the  capital value  will  not be deemed dividend for the purpose  of  the Income-tax Act. Counsel for the Department contended, relying upon  MrsBacha F.  Guzdar, Bombay v. Commissioner of  Income-tax  Bombay(2) that  since dividend received by a shareholder of a  company out  of the profits earned from agricultural income  is  not exempt  from  liability  to pay tax under  s.  4(3)  (viii), dividend (1) 27 I.T.R. 684. (2) 27 I.T.R. 1. 92 distributed  from  profits  earned out of  sale  of  capital assets  inclusive of lands from which the income derived  is agricultural income is also not exempt from income-tax.  But the  Company does not claim exemption from liability to  tax under  S.  4(3)  (viii): it  claims  exemption  because  the receipt is not income which is chargeable to tax under s. 12 under  the  bead  "dividence.  The case  of  Mrs.  Bacha  F. Guzdar(1) has therefore no application to this case. The appeal therefore fails and is dismissed with costs. Appeal dismissed. (1) 27 I.T.R. 1. 93