Commissioner of Income-Tax, Madras Vs. Urmila
Ramesh  INSC 119 (4 February 1997)
JEEVAN REDDY, K.S. PARIPOORNAN
4TH DAY OF FEBRUARY, 1997 Present:
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:
APPEAL NOS. 2144-46/82, 2147-49/82, 2150-52/82, 2153-55/82, 4204/82 AND
O R D E
batch of cases, the following two questions of law arise for consideration:
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
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].
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 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.
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.
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.
41 ITR 290 (SC)], (2) CIT V. Express Newspapers Ltd.
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.
Gaurishanker, Senior Counsel for Revenue submitted as follow:- The language of
Section 41(2) of 1961 Act is different.
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.
so, as stated in Cambay Electric Supply Industrial Co. Ltd. V. Commissioner of
Income-tax, Gujarat-II (113 ITR 84);
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".
reliance on the decision in Bishop v. Smyrna and 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:
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
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.
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 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.
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.