Messrs. Dhandhania Kedia & Co. Vs.
The Commissioner of Income-Tax  INSC 104 (17 October 1958)
AIYYAR, T.L. VENKATARAMA GAJENDRAGADKAR, P.B.
CITATION: 1959 AIR 219 1959 SCR Supl. (1) 204
CITATOR INFO :
R 1965 SC1358 (21) RF 1966 SC1285 (7) R 1966
Income-tax-Dividend, tax on-Distribution of
accumulated profits of previous years-" Previous years", meaning of lndian
Income-Tax Act, 192-2 (XI Of 1922), ss. 2(6A)(c) and 2(ii).
The appellant, a resident of the once
independent State of Udaipur, held 266 shares in the Mewar Industries Ltd., a
company registered in that State. There was no law in the State of Udaipur
imposing tax on income and it was on April 1, 1950that for the first time the
residents of Rajasthan, in which the State had merged, became liable to pay
such a tax. On January 18, 1950, the Company went into liquidation and on April
22, 1950, -the liquidator distributed a portion of the assets among the
shareholders, the appellant receiving a sum of Rs. 26,000. This sum represented
the undistributed profits of the company which had accrued during the six
accounting years preceding the liquidation.
The income-tax authorities included this sum
in the taxable income of the appellant for the assessment year 1051-52 holding
that it was dividend as defined in S. 2(6A)(c) of the Indian Income-tax Act.
Under S. 2(6A)(c) the distribution of accumulated profits which arose during
the " six previous years " preceding the date of liquidationwould be
dividend. Section 2(1) defined " previous year " to mean the year
which was previous to the assessment year.
The appellant contended that " previous
years " in S. 2(6A)(c) must be read in the light of the definition is S. 2(1)
and as in the present case there had been no law imposing a tax prior to April
1, 1950, the profit for the years 1943-44 to 1948-49 cannot be held to be
profits which " arose during the six previous years ", and
consequently could not be taxed as dividend as defined in S. 2(6A)(c) of the
Indian Income-tax Act.
Held, that the said sum was dividend within
the meaning of S. 2(6A)(c) of the Act and was liable to tax. The definitions
given in S. 2 Of the Act applied unless there was anything repugnant in the
subject or context. It would be repugnant to the definition of " dividend
" in s. 2(6A)(c) to import into the expression " six previous years
" the definition of " previous year " in s. 2(ii) of the Act. By
the expression "previous years " in s. 2(6A)(c) of the Act was meant
the financial years preceding the year in which liquidation took-place.
Commissioner of Income-tax, Madras v. K.
Srisivasan and Gopalan,  S.C.R. 486, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 433 of 1957.
Appeal from the judgment and order dated
August 24, 1956, of the Rajasthan High Court at Jodhpur in Civil Misc. Case No.
17 of 1955.
B. D. Sharma, for the appellant.
A. N. Kripal, R. H. Dhebar and D. Gupta, for
the respondent 1958. October 17. The Judgment of the Court was delivered by
VENKATARAMA AIYAR J.-This is an appeal against the judgment of the High Court
of Rajasthan in a reference under s. 66(1) of the Indian Income-tax Act, 1922,
hereinafter referred to as the Act.
The facts, so far as they are material, are
these The appellant is a resident of what was once the independent State of
Udaipur. There was in that State a Company called the Mewar Industries, Ltd.,
registered under the provisions of the law in force in that State, and the
appellant held 266 shares in that Company. On January 18, 1950, the Company
went into liquidation, and on April 22, 1950, the liquidator distributed a
portion of the assets among the shareholders, and the appellant was paid a sum
of Rs. 26,000 under this distribution. It is common ground that this sum
represents the undistributed profits of the Company which had accrued during
the six accounting years preceding the liquidation. It should be mentioned that
there was in the State of Udaipur no law imposing tax on income, and that it
was only under the Indian Finance Act, 1950 that the residents of the State of
Rajasthan, in which the State of Udaipur had merged, became liable for the
first time to pay tax on their income. That Act came into force on April 1,
1950. We are concerned in these proceedings with the assessment of tax for the
year 1951-52, and that, under s. 3 of the Act, has to be on the income of the
previous year, i.e., 1950-51. Now, the dispute in the present case relates to
the sum of Rs. 26,000 paid by the liquidator to the appellant on April 22,
1950. By his order dated July 3, 1952, the Income-tax Officer held 206 that
this was dividend as defined in s. 2(6A)(c) of the Act and included it in the
taxable income of the appellant in the year of account. The appellant took this
order in appeal to the Appellate Assistant Commissioner who by his order dated
January 12, 1953, confirmed the assessment.
There was a further appeal by the appellant
to the Appellate Tribunal, who also dismissed it on November 10, 1953. On the
application of the appellant, the Appellate Tribunal referred the following
question for the decision of the High Court:
" Whether on the facts and in the
circumstances of this case, the aforesaid sum of Rs. 26,000 was liable to be
taxed in the assessee's hands as dividend within the meaning of that term in s.
2(6A)(c) of the Indian Income-tax Act." The reference was heard by
Wanchoo, C. J. and Modi, J. who by their judgment dated August 24, 1956,
answered it in the affirmative. It is against this judgment that the present
appeal has been -preferred on a certificate granted by the High Court under s.
66A(2) of the Act.
The sole point for determination in this
appeal is whether the sum of Rs. 26,000 received by the appellant on April 22,
1950, is dividend as defined in. s. 2(6A)(c) of the Act.
That definition, as it stood on the relevant
date and omitting what is not material, was in these terms:
" 6(A) 'dividend' includes(a) any
distribution by a company of accumulated profits whether capitalised or not if
such distribution entails the release by the company to its shareholders of all
or any part of the assets of the company ;
(c) any distribution made to the shareholders
of a company out of accumulated profits of the company on the liquidation of
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;".
207 The definition of " previous year
" as given in s. 2(l 1), omitting what is not material, is as follows:
" Previous year " means in respect
of any separate source of income, profits and gains (a) the twelve months
ending on the 31st day of March next preceding the year for which the
assessment is to be made..." On these provisions, the contention of the
appellant is that under the definition in s. 2(6A)(c) the assets of a company
distributed after it has gone into liquidation will be dividend only if they
represented the profits thereof accumulated during the six previous years
preceding the date of the liquidation, and that, in the present case, though
the amounts distributed came out of the accumulated profits of the Company,
those profits had not been accumulated within the six previous years of the
liquidation of the Company. It is not in dispute that the profits which were
distributed had been accumulated during the years 1943-44 to 1948-49, i.e.,
during the six years preceding the liquidation. The point in controversy is
whether those years can be said to be " previous years " within s.
2(6A)(c) of the Act. The appellant contends that " previous year " as
defined in s. 2(l 1) of the Act means the year which is previous to the
assessment year, that accordingly when there is no year of assessment, there
can be no previous year, that construing the words " six previous years
" in s. 2(6A)(c) in the light of the definition of "previous
year" in s. 2(l 1) of the Act, the years 1943-44 to 1948-49 cannot be held
to be previous years, because the Indian Income-tax Act came into force in the
State of Rajasthan only on April 1, 1950, and prior to that date there was at
no time any law imposing tax on income in the State of Udaipur, that there was
therefore no year of assessment, and that, in consequence, the sum of Rs. 26,000
received by the appellant on April 22, 1950, is not a dividend as defined in s.
The contention of the respondent which has
been accepted by the Income-tax authorities and by the learned Judges in the
Court below is that the expression " six previous years" is used in
s. 2(6A)(c) not in the technical and restricted sense in which the 208 words
" previous year " are used in s. 2(11) of the Act, and that, in the
context, it means six consecutive accounting years preceding the liquidation of
the company. The question is which of these two interpretations is the right
one to be put on the language of s. 2(6A)(c).
The argument of Mr. Sharma for the appellant
is that s. 2(11) having defined the meaning which the expression 'previous
year" has to bear in the Act, that meaning should, according to the
well-settled rules of construction, be given to those words wherever they might
occur in the statute, and that that is the meaning which must be given to the
words " six previous years " in s. 2(6A)(c). It is to be noticed that
the definitions given in s. 2 of the Act are, as provided therein, to govern
" unless there is anything repugnant in the subject or context ".
Now, the appellant contends that the words " unless there is anything
repugnant " are much more emphatic than words such as " unless the
subject or context otherwise requires ", and that before the definition in
the interpretation clause is rejected as repugnant to the subject or context,
it must be clearly shown that if that is adopted, it will lead to absurd or
anomalous results. And our attention was invited to authorities in which the
above rules of construction have been laid down. It is unnecessary to refer to
these decisions as the rules themselves are established beyond all controversy,
and the point to be decided ultimately is whether the application of the
definition ins. 2(l 1) is repelled in the context of s. 2(6A)(c).
Turning to the language of s. 2(II), we have
this that according to the definition contained therein, " previous year
" is the year which is previous to the year of assessment, and that means
that there can be only one previous year to a given year of assessment. When s.
2(6A) (c) speaks of six previous years, it is obvious that it uses the
expression " previous year " in a sense different from that which is
given to it in s. 2(l 1), because it would be a contradiction in terms to speak
of six previous years in relation to any specific assessment year. It was
argued that under s. 13(2) of 209 the General Clauses Act, 1897, words in the
singular should be read as including the plural, and that, therefore, the
definition of "previous year" in s. 2(l 1) could be read as meaning
" previous years ". But s. 13 only enacts a rule of construction
which is to apply " unless there is anything repugnant in the and to read
a " previous year " in s. 2(l 1) would be to nullify the previous
year " enacted therein, and such a construction must therefore be rejected
as repugnant to the context. It was then suggested that all the six previous
years might be regarded as previous each to the next following year if that was
itself a year of assessment, and that such a construction would, consistently
with the contention of the appellant, give full effect to the definition in s.
2(11) of the Act. But this argument overlooks that while there may be several
preceding years to a given year of assessment there can be only one previous
year in relation to it, and that it would make no sense to speak of six
previous years with reference to a year of assessment. We are satisfied that it
would be repugnant to the definition of " dividend " in s. 2(6A)(c)
to import into the words " six previous years " the definition of
previous year" in s. 2(l 1) of the Act.
An examination of the policy underlying s.
2(6A)(c) also leads to the same conclusion. When a company makes profits and
instead of distributing them as dividend accumulates them from year to year and
at a later date distributes them to the shareholders, the amounts so
distributed would be dividend under s. 2(6A) (a), but when a company which has
so accumulated the profits goes into liquidation before declaring a dividend
and the liquidator distributes those profits to the shareholders, it was held
in Commissioners o Inland Revenue v. Burrell (1) that such distribution was not
a dividend because when once liquidation intervenes, there was no question of
distribution of dividends, and all the assets of the company remaining after the
discharge of its obligations were surplus divisible among (1) (1924) 9 T.C. 27210
the shareholders as capital. It was to remove this anomaly that the Indian
legislature, following similar legislation by British Parliament in the year
1927, enacted s. 2(6A) (1) in 1939. The effect of this provision is to
assimilate the distribution of accumulated profits by a liquidator to a similar
distribution by a company which is working; but subject to this limitation that
while in the latter the profits distributed will be dividend whenever they
might have been accumulated, in the former such profits would be dividend only
in so far as they came out of profits accumulated within six years prior to
liquidation. Now, the reason of it requires that those years must be a cycle of
six years preceding the liquidation, arid that is what is meant by the words
" previous years ". It was argued for the appellant that if that was
what was intended by the legislature, that was sufficiently expressed by the
words " preceding the liquidation ", and that the words previous
years " would be redundant. But the words preceding years " would
have meant calendar years, whereas the accounting years of the company for
ascertainment of profits and loss might be different from the calendar years,
and the words " previous year " would be more appropriate to connote
the financial year of a company. Now, it should be mentioned that when a
company in liquidation distributes its current profits,, that would also be not
dividend as held in Burrell's case (1), and the law to that extent has been
left untouched by s. 2(6A)(c). And it has accordingly been held by the High
Courts that the current profits of a company in liquidation which are
distributed to the shareholders are not dividend within s. 2(6A)(c), Vide
Appavu Chettiar v. Commissioner of Income-tax (2) and Girdhardas & Co. Ltd.
v. Commissioner of Incometax (3). Therefore, accumulated profits which are
sought to be caught in s. 2(6A) (c) would be the profits accumulated in the
financial years preceding the year in which the liquidation takes place, and it
is this that is sought to be expressed by the words " previous years
" in s. 2(6A) (c). In the present case, as the Company went into
liquidation on January 18, 1950, (1) (1924) 9 T.C. 27. (2)  29 I.T.R.
(3)  3i I.T.R. 82.
211 excluding the current year which
commenced on April 1, 1949, the six previous years will be the years 1943-44 to
So far, we have considered the question on
the language of s. 2(6A)(c) and the policy underlying it. On behalf of the
respondent, certain authorities were cited as supporting his contention that
the expression it previous years " in s. 2(6A) (c) is not to be
interpreted in the sense in which the expression " previous year" is
defined in s. 2(l 1) of the Act. It is sufficient to refer to one of them, -and
that is the decision of this Court in Commissioner of Income-tax, Madras v. K.
Srinivasan and K. Gopalan (1). There, the point for decision was as to the
interpretation to be put on the words " end of the previous year " in
s. 25, sub-ss. (3) and (4) of the Act which dealt with discontinuance of or
succession to a business, and it was held that the expression " previous
year " in those provisions meant an accounting year expiring immediately
preceding the date of discontinuance or succession. The decision is not itself
relevant to the present discussion, but certain observations therein are relied
on as bearing on the point now under consideration. Mahajan, J. delivering the
judgment of the Court observed:
" The expression 'previous year'
substantially means an accounting year comprised of a full period of twelve
months and usually corresponding to a financial year preceding the financial
year of assessment. It also means an accounting year comprised of a full period
of twelve months adopted by the assessee for maintaining his accounts but
different from the financial year and preceding a financial year. For purposes
of the charging sections of the Act unless otherwise provided for it is
co-related to a year of assessment immediately following, but it is not
necessarily wedded to an assessment year in all cases and it cannot be said
that the expression 'previous year' has no meaning unless it is used in
relation to a financial year. In a certain context it may well mean a completed
accounting year immediately preceding the happening of a contingency." (I)
 S.C.R. 486, 501 212 The learned Judges in the Court below have relied on
these observations, and quite rightly, as supporting their conclusion that the
expression " six previous years " in. s. 2(6A) (c) means only the six
accounting years of a company preceding the date of liquidation.
The appellant sought to raise one other
contention, and that is that the Indian Companies Act came into operation in
the Udaipur territory on April 1, 1951, only by force of the Part B Stater,
Laws Act (111 of 1951), that during the relevant period the Mewar Industries
Ltd. was not a company as defined in s. 2(5A) of the Act, and that therefore the
distribution of assets made by that Company on April 22, 1950, could not be
held to be a dividend as defined in s. 2 (6A) (c). But that is not a question
which was referred for the opinion of the High Court under s. 66(1) of the Act;
nor is it even dealt with by the Tribunal and therefore cannot be said to arise
out of its order. Moreover, whether the Mewar Industries Ltd., is a Company as
defined in the Indian Income-tax Act is itself a question over which the
parties are in controversy. The definition of " Company " under the
Indian Income-tax Act has undergone several changes from time to time, and on
the relevant date it stood as follows:
" 2(6) 'Company' -means (i) any Indian
Company or (ii) any association, whether incorporated or not and whether Indian
or non-Indian, which is or was assessable or was assessed as a company for the
assessment for the year ending on the 31st day of March, 1948, or which is
declared by general or special order of the Central Board of Revenue to be a
company for the purposes of this Act." It is contended for the respondent
that the Mewar Industries Ltd., was an association which was assessable as a
Company for the year ending March 31, 1948, and that it was, in fact, assessed;
but the appellant disputes this. As the point turns on disputed question of
fact., it cannot be allowed to be raised at this stage.
213 In the result, we hold that the sum of
Rs. 26,000 received by the appellant on April 22, 1950, ",as dividend as
defined in s. 2(6A) (c) of the Act and is chargeable to tax.
The appeal fails, and is dismissed with