Full Judgment Text
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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
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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
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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