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PETITIONER: THE COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: M.   V. MURUGAPPAN & ORS.

DATE OF JUDGMENT: 24/04/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 1712            1971 SCR  (1) 377  1970 SCC  (2) 145  CITATOR INFO :  D          1980 SC 478  (8,9)

ACT: Income Tax Act 1922, s. 2(6-4) (c)--Company in  liquidation- Distribution  of  profits earned in year of  liquidation  to shareholders if liable to tax as dividend.

HEADNOTE: The  respondents  were  shareholders  of  a  public  limited company.   The Company maintained its accounts according  to the  Calendar  Year.  The company went into  liquidation  on October   31,  1954.   The  Liquidators  of   the   company, distributed  on  March 10, 1955 among the  shareholders  for each  share  of the company a share of another company  a  I share of equal face value.  The distribution was made out of profits  earned by the company between January 1,  1954  and October 31, 1954.  The Income-tax officer brought the  value of  the  shares received by the shareholders to tax  on  the footing   that  it  represented  "accumulated  profits"   as contemplated by s. 2(6A)(c) of the Income-tax Act. 1922.  In appeal  the Appellate Assistant Commissioner held  that  the profits earned between January 1, 1954 and October 31,  1954 were not accumulated profits and when distributed the amount in  question represented capital in the hands of the  share- holders.  This order was confirmed by the Tribunal and  upon a reference, by the High Court.  On appeal to this Court, HELD:Dismissing the appeal, The question whether the distribution was dividend had to be determined in the light of the provisions of s. 2(6A) (c) of the  Income-tax Act as amended by the Finance Act  of  1955. The amount distributed by the liquidator on March 10,  1955, represented  the  current  profits and  not  profits  earned before January 1, 1954.  The amount distributed as  dividend out of the current profits could not, in the state of law in force in the year of assessment 1955-56, be deemed  dividend in the bands of the shareholders. [381 A-B] Birch  v. Cropper (1889) L.R. 14 A.C. 525;  Commissioner  of Inland   Revenue  v.  George  Burral  (1924)  2   K.B.   52; Staffordshire Coal and Iron Co. Ltd. v. Brogan (Inspector of Taxes)  54  I.T.R. 555; Appavu Chettiar v.  Commissioner  of

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Income-tax, Madras 29 I.T.R. 768; Girdhardas & Company  Ltd. v. Commissioner of Income-tax Ahmedabad 31 I.T.R. 82;  First Income-tax  Officer,  Salem v. Short Brothers  (P)  Ltd.  60 I.T.R. 82, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 566 of 1967. Appeal  from the judgment and order dated November 18,  1965 of the Madras High Court in Tax Case No. 162 of 1963. Jagadish Swarup, Solicitor-General, G. C. Sharma and B.  D.- Sharma, for the appellant. 378 K.   Srinivasan and R., Gopalakrishnan, for respondents Nos. 1 to 10. The judgment of the Court was delivered by Shah,  J. Income-tax Appellate Tribunal submitted the  under s.  66(1) of the Indian Income-tax Act, Court of Madras  for opinion:               "Whether on the facts and in the circumstances               of the case the Tribunal was right in  holding               that  the sum of Rs. 81,611 and Rs.  1,491,444               were  not the part of the accumulated  profits               of  the  Company as on December  31,  1954  as               contemplated under s. 2(6A)(c) of the  Income-               tax Act of 1922 The  High  Court answered the question in  the  affirmative. The  Commissioner  of Income-tax asked for  and  obtained  a certificate  from  the  High Court only in  respect  of  the amount  of Rs. 81,61 1. This appeal is therefore  restricted to  the claim of the Revenue that the amount of  Rs.  81,611 was  not part of the "accumulated profits of the Company  as on  October 31, 1954 as contemplated by s. 2(6A)(c)  of  the Income-tax Act. 1922." Ajax Products Ltd. was a public limited company incorporated in 1939.  It  maintained  its  accounts  according  to   the calendar year.  The respondents  to this appeal were  share- holders of the Company.  The Company "went into  liquidation on  October  31,  1954".  The  liquidators  of  the  Company distributed  on March 10, 1955 to the shareholders for  each share  Rs.  100  by allotment of  a  share  in  Carborurndum Universal  Ltd. of the same face value.  Between January  1, 1954 and October 31, 1954 the Company earned a profit of Rs. 1,79,704.   On  the profit of Rs. 1,79,704 the  Company  was assessed to pay Rs. 98,093 as tax, leaving a balance of  Rs. 81,611  which  formed part of the amount  distributed.   The Income-tax  Officer brought the value of the share  received by  the  shareholders  to  tax,  on  the  footing  that   it represented "accumulated profits".  In appeal the  Appellate Assistant  Commissioner  held that under relay  as  it  then stood, the amount of Rs. 81,611 was not accumulated  profits and  when  distributed it was capital in the hands  of,  the shareholders.   This  order was confirmed by  the  Tribunal. The  High  Court agreed with the view of the  Tribunal  that under  the definition of the expression "dividend" in  s.  2 (6A)  (c)  in  force  in  the  year  of  assessment  1955-56 distribution of the current profits in the year in which the Company was ordered to be wound up was not dividend and  was on that account not liable to be taxed as dividend, 379 Under  the Indian Companies Act, 1913, no dividend could  be paid   otherwise  than  out  of  profits  of  the  year   or undistributed  profits  of previous years.  A Company  as  a going  concern  may  distribute by way of  dividend  to  the

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shareholders  profits of the year or accumulated profits  of the  previous  years.   But a share in the assets  of  the Company  distributed in the course of winding up is  of  the nature  of  capital and not of dividend, and  it  cannot  be apportioned into capital and accumulated profits. In Birch v. Cropper(1), Lord Macnaghten observed               "I think it rather leads to confusion 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." This  view was affirmed in a later judgment in  Commissioner of Inland Revenue v. George Burrell,(2) where Pollock, M. R. observed               ".......  it is a misapprehension,  after  the               liquidator has assumed his duties to  continue               the  distinction between surplus  profits  and               capital." This decision was recently affirmed by the House of Lords in Staffordshire  Coal and Iron Co. Ltd. v. Brogan  (Inspector, of  Taxes) (3).  The House of Lords held that there  was  no ground for making an exception to the general rule that  the surplus  assets  of  a  company,  after  providing  for  all liabilities.  were divisible among its members  as  capital. Accordingly,  the  receipt by a constituent company  of  its appropriate  proportions  of the distributed surplus  was  a receipt  of a capital nature.  Lord Evershed observed at  p. 5-65               "It cannot now be in doubt that surplus assets               in  the hands of the liquidator of  a  limited               liability  company  whether limited  by  share               capital  or  by  guarantee-are  in  his  hands               capital.   Such a conclusion was laid down  by               the   Court  of  Appeal  in   Inland   Revenue               Commissioners  v. Burrel-(1924)2 K.B. 52  (see               especialy  per Atkin L.J.), and it  has  never               since been questioned." (1)  (1899) L.R. 14 A.C. 525. (3)  54 I.T.R. 555. (2) (1924) 2 K.B. 52. 380 The  Indian Income-tax Act, 1922, when  originally  enacted, contained  no  definition  of "dividend"  :  the  expression "dividend"  had therefore the same meaning as it had in  the Indian Companies Act, 1913, and the amount distributed among the shareholders by the liquidator out of the assets of  the company  after  meeting the liabilities was  regarded  as  a capital’ receipt in the hands of the shareholders.  In  1939 the  Indian Legislature incorporated by s. 2 of  the  Indian Income-tax   (Amendment)  Act  7  of  1939,   an   inclusive definition  of the express "dividend".  Clause (c)  of  that definition read :               "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  1  six               previous  years of the company  preceding  the               date of liquidation shall be so included;" But  the  profits  of the year in the course  of  which  the

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Company  was  ordered to be wound up not  being  accumulated profits  were not part of the dividend : Appavu Chettiar  v. Commissioner of Income-tax, Madras;(1) Girdhardas &  Company Ltd.  v. Commissioner of Income-tax, Ahmedabad;(2) and  also the observations of this Court in First Income-tax Officer,- Salem x. Short Brothers (P)   Ltd.(6) at pp 88 & 89. Clause (c) to s. 2(6A) was amended by the Finance Act of 1955  and  the  proviso to ci. (c) was  deleted.   The  only effect of deleting the proviso was to remove the  limitation providing  that distribution of profits of the six  previous years preceding the date of liquidation only was dividend. By  the  Finance Act of 1956, cl. (c) was  replaced  by  the following clause :               "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;" This amendment came into operation as from April 1, 1956. We  are in this case concerned with the distribution of  Rs. 100  by  allotment of a share in the  Carborundum  Universal Ltd. made (1)  29 I.T.R. 768. (3)  60 I.T.R. 83 (2) 31 I.T. R. 82. 381 on  March 10, 1955.  The question whether  the  distribution was  dividend  had  to be determined in  the  light  of  the Income-tax  Act as amended by the Finance Act of 1956.   The amount of Rs. 81,611 distributed by the liquidator on  March 10, 1955, represented by the current profits and not profits earned  before January 1, 1954.  The amount  distributed  as dividend out of the current profits could not, in the  state of  the law in force in the year of assessment  1955-56,  be deemed dividend in the hands of the shareholders. The appeal therefore falls and is dismissed with costs. R.K.P.S.                      Appeal dismissed. 382