Hari Prasad Jayantilal & Co. Ltd.
Vs. Income-Tax Officer, Special Investigation Circle-B [1965] INSC 261 (25
November 1965)
25/11/1965 SHAH, J.C.
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION: 1966 AIR 1481 1966 SCR (2) 732
ACT:
Income-tax Act (11 of 1922), ss. 2(6A)C and
35(10)Voluntary liquidation of company-Distribution of accumulated profits by
liquidator-If declaration of dividends by company.
HEADNOTE:
The appellant-company was assessed to tax in
the assessment years 1948-49, to 1953-54, in respect of its profits, and was
allowed rebate on the undistributed profits. It was resolved to voluntarily
wind up the company with effect from October 1, 1957. The liquidator, during
the years 1957 to 1959 distributed, from time to time, the accumulated profits
to the shareholders and also issued income-tax refund certificates. The
Income-tax Officer, under s. 35(10) of the Income-Tax Act, 1922, withdrew the
rebate granted in respect of each of the assessment years 1948-49 to 1953-54
and demanded payment of tax. The company applied for a writ quashing the order,
but the High Court dismissed the petition.
In appeal to this Court, the company
contended that :
(i) Section 35(10) did not authorise the
Income-tax Officer to bring to tax the amount on which rebate tax was granted
in assessment years commencing prior to 1st April 1956, and (ii) the
distribution by the liquidator of accumulated profits could not be regarded as
declaration of dividend by the company within the meaning of s. 35(10).
HELD : (i) The power to withdraw rebate was
exercisable within 4 years from the end of the financial year in which the
amount on which rebate was allowed was availed of by the company for declaring
dividends. 1735 B-C] Ahmadabad Manufacturing and Calico Printing Co. Ltd. v.
S.G. Mehta, [1963] Supp. 2 S.C.R. 92,
followed, (ii) Distribution of accumulated profits by the liquidator together
with the income-tax refund certificates, in the course of voluntary winding up,
can be regarded as declaration of dividend, so as to attract the applicability
of provisions enabling the withdrawal of rebate and demand for tax. [739 C] On
the passing of a resolution for voluntary winding up the company does not stand
dissolved and its property does not vest in the liquidator. lit distributing
the assets, including accumulated profits, the liquidator acts merely as an
agent or administrator for and on behalf of the company. Therefore,
distribution by the liquidator is distribution by the company. [736 B-C, E]
There is nothing in S. 35(10) which suggests that the expression dividend was
to have a meaning different from the meaning assigned to it by s. 2(6A) in the
interpretation clause. By the omission of the proviso to s. 2(6A)(c) by the
Finance Act, 1955, distribution of accumulated profits, whether capitalised or
not and without any restriction as to time, was brought within the definition
of dividend. The provisions of ss. 35(10) and 2(6A)(c) are part of a single
scheme to declare distribution of accumulated profits, capitalized or not, as dividends,
and 733 to bring the undistributed profits on which rebate was granted to tax,
if availed-of by the liquidator of the company for distributing dividends. [737
F, H; 738C-D] Power under s. 35(10) may be exercised if accumulated profits are
availed of by the company "for declaring dividends in any year", that
is, after following the procedure in Art. 95 of Table A of the Companies Act,
1913, under which the assessee was registered. But, the distribution made by
the liquidator, was a distribution of interim dividend, and, in the matter of
distribution of interim dividend, the Companies Act does not set up any special
machinery nor does it impose any special condition before power in that behalf
may be exercised. [739 A-C]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 871 of 1964.
Appeal from the judgment and order dated
January 16, 17, 1961 of the Gujarat High Court in Special Civil Application No.
233 of 1960.
N. D. Karkhanis, T. A. Ramachandran, 0. C.
Mathur, Ravinder Narain and J. B. Dadachanii, for the appellant.
A. V. Viswanatha Sastri, R. Ganapathy Iyer,
B. R. G.
K. A char and R. N. Sachthey, for the
respondents.
The Judgment of the Court was delivered by
Shah, J. The appellants Company registered under the Indian Companies Act, 1913
was assessed in the assessment years 1948-49 to 1953-54 in respect of the
profits earned in its business, and was allowed rebate under the appropriate
provisions contained in the Schedules to the relevant Finance Acts on the
undistributed profits of the previous years. On December 31, 1956 at an annual
general meeting of the shareholders the Company declared an aggregate sum of
Rs. 2,15,232/as dividend for the year ending December 31, 1956. Thereafter a
special resolution was passed for voluntary winding up of the Company with
effect from October 1, 1957, and for appointing a liquidator to wind up the
affairs of the Company. On October 20 & 21, 1957 the liquidator distributed
to the shareholders thereafter on February 21 & 22, 1958; July 27, 1959 the
liquidator distributed to the shareholders. In respect of each liquidator
issued an "income-tax refund that the amount was distributed out of
accumulated profits of earlier years.
The Income-tax Officer, Special Investigation
Circle-B, Ahmadabad in exercise of the power under s. 35(10) of the Indian
Income-tax Act, 1922, passed an order withdrawing the rebate, 734 granted in
respect of each of the six assessment years 194849 to 1953-54 and demanded
payment of tax on the amount of the rebate. The appellant then applied to the
High Court of Bombay for writs quashing the orders of the Income-tax Officer
and the notice of demand and directing the Incometax Officer to withdraw and
cancel the order and notice of demand. The petition was dismissed by the High
Court. With certificate granted by the High Court, this appeal has been
preferred.
Two questions are raised for determination in
this appeal (1) Whether S. 35(10) authorises the Income-tax Officer to bring to
tax rebate granted in assessment years commencing prior to April 1, 1956; and
(2) whether distribution by the liquidator of accumulated profits in the
previous years could be regarded as declaration of dividend within the meaning
of S. 35(10) so as to attract the applicability of the provisions enabling
withdrawal of rebate and demand for tax.
The first question is concluded by a recent
judgment of this Court in Ahmadabad Manufacturing and Calico Printing Co. Ltd.
v. S. G. Mehta, Income-tax Officer and Another(1).
In that case this Court held that s. 35(10)
applied even though dividend was declared before April 1, 1956. Counsel for the
Company urged that in the Ahmadabad Manufacturing and Calico Printing Co.'s
case it was held that power to withdraw rebate granted in the year before April
1, 1952 was not exercisable by the Income tax Officer under S. 35(10) and
consistently with that view withdrawal of rebate granted in the years ending on
and before March 31, 1952 was unauthorised. In Ahmadabad Manufacturing and
Calico Printing Co.'s case(1) declaration of dividend by the Company was made
on April 20, 1953. The financial year in which the amount on which rebate of
income-tax was allowed was availed of by the Company for declaring dividends
was 1953-54, and within four years from the end of that year an order calling
upon the Company to show cause why action should not be taken under s. 35(10)
to recall the proportionate part of the rebate was issued. It was said by
Hidayatullah, J. :
"Since the power commenced on April 1,
1956, the utmost reach of the Income-tax Officer would be the end of the
assessment year 1952. Any declaration of (1) [1963] Supp. 2 S.C.R. 92.
735 dividend after 1st day of April, 1952,
out of accumulated profits of any of the years in which rebate was earned would
be within the time for the recall of any rebate. But a declaration prior to
April 1, 1952, would be beyond the power of the Income-tax Officer to
recall." Power to withdraw rebate was in that case held exercisable within
four years from the end of the financial year in which the amount of rebate was
availed of : it was not held that the power was exercisable in respect of
rebate granted only in respect of four years before April, 1956. The argument
raised by counsel importing a limitation contrary to the plain words of the
statute must therefore be rejected.
Sub-section (10) of s. 35 was inserted in the
Income-tax Act by s. 19 of the Finance Act, 19@6, with effect from April 1,
1956. It provides "Where, in any of the assessments for the years
beginning on the 1st day of April of the years 1948 to 1955 inclusive, a rebate
of income-tax was allowed to a company on a part of its total income under
clause (i) of the proviso to Paragraph B of Part I of the relevant Schedules to
the Finance Acts specifying the rates of tax for the relevant year, and
subsequently the amount on which the rebate of income-tax was allowed as
aforesaid is availed of by the company, wholly or partly, for declaring
dividends in any year, the amount or that part of the amount availed of as
aforesaid, as the case may be, shall, by reason of the rebate of incometax
allowed to the company and to the extent to which it has not actually been
subjected to an additional income-tax in accordance with the provisions of
clause (ii) of the proviso to Paragraph B of Part I of the Schedules to the
Finance Acts above referred to,. be deemed to have been made the subject of
incorrect relief under this Act, and the Income-tax Officer shall recompute the
tax payable by the company by reducing the rebate originally allowed, as if the
recomputation is a rectification of a mistake apparent from the record within
the meaning of this section and the provisions of sub-section (1) shall apply
accordingly, the period of four years specified therein being reckoned from the
end of the financial year in which the amount on which rebate of 736 income-tax
was allowed as aforesaid was availed of by the company wholly or partly for
declaring dividends." It is urged by counsel for the Company that power
under subs. (10) of s. 35 cannot be exercised because distribution of
accumulated profits by the liquidator is not distribution by the Company. The
argument is wholly without substance. On the passing of a special resolution by
the Company that it be wound up voluntarily under the Companies Act 1 of 1956,
the Company does not stand dissolved. That is so expressly provided by s. 487,
of the Companies Act. A Company which has resolved to be voluntarily wound up
may be dissolved in the manner provided by s. 497(5) : till then the Company
has corporate existence and corporate powers. The property of the Company does
not vest in the liquidator : it continues to remain vested in the Company. On
the appointment of a liquidator, all the powers of the Board of directors and
of the managing or whole-time directors, managing agents, secretaries and
treasurers cease (s. 491), and the liquidator may exercise the powers mentioned
in s. 512, including the power to do such things as may be necessary for
winding up the affairs of the Company and distributing its assets. The
liquidator appointed in a members' winding up is merely an agent of the Company
to administer the property of the Company for purposes prescribed by the
statute. In distributing the assets including accumulated profits the
liquidator acts merely as an agent or administrator for and on behalf of the
Company.
It is then urged that on the commencement of
winding up, distinction between the capital and accumulated profits of the
Company disappears, and what remains in the hands of the liquidator are the assets
of the Company, and distributions made by the liquidator are distributions of
capital, regardless of the source from which the funds are distributed is
capital or accumulated profits. In distributing the surplus assets in his
hands, the liquidator is therefore not "declaring dividends" within
the meaning of s. 35(10). In support of this contention, reliance was placed
upon Inland Revenue Commissioners v. George Burrell(1). The Court in that case
held that on the winding up of a limited company the undivided profits of the
past year and the year in which winding up occurred were only assets of the
company and on distribution amongst the shareholders super tax was not payable
on the undivided profits as income.
(1) [1924] 2 K.B. 52.
737 Under the Companies Act, 1956,
accumulated profits of the Company at the commencement of the winding up of the
Company undoubtedly come into the hands of the liquidator as assets for the
purpose of satisfying liability of the Company and for distribution among the
shareholders. But the rule in Burrell's cave(1) since the amendment of the
definition of "dividend" in s. 2(6A) by the Finance Act, 1956, no
longer applies, when the liability to assessment of income-tax in respect of
amounts distributed out of accumulated profits by a liquidator in a winding up
falls to be determined. The Parliament had devised by the Indian Income-tax
(Amendment) Act 7 of 1939, a special inclusive definition for the Income-tax Act,
1922 of "dividend" in s. 2(6A). Being an inclusive definition, the
expression "dividend" means dividend as ordinarily understood under
the Companies Act and also the heads of payment or distribution specified
therein. Clause (c) as originally enacted, included distributions made to the
shareholders of a Company out of accumulated profits on the liquidation of the
Company. This was clearly an attempt to supersede the rule in Burrell's case(1).
It was pointed out by this Court in Dhandhania Kedia & Co. v. Commissioner
of Income-tax(2) that s. 2 (6A) (c) was enacted to remove the anomaly which was
created by the judgment in Burrell's case(1), and to assimilate the
distribution of accumulated profits by a liquidator to a similar distribution
by a Company which is working. But the language of the clause and the proviso
thereto included only those accumulated profits which had not been capitalized,
and which arose during the six previous years preceding the date of
commencement of the year of account in which the liquidation commenced. By the
Finance Act, 1955, the proviso to cl. (c) was omitted :
thereby accumulated profits whether
capitalized or not and without any restriction as to time were brought within
the definition. By the Finance Act, 1956, cl. (c) was recast as follows :
" 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." Amendment
to cl. (c) in s. 2(6A) was made and s. 35(10) was inserted in the Income-tax
Act simultaneously by the Finance Act, 1956. It would be reasonable to regard
the provisions of s. 35(10) and amended cl. (c) of sub-s. (6A) of s. 2 as part
of a (1) [1924] 2 K.B. 52.
L3Sup. CI/66-18 (2) 35 I.T.R. 400.
738 single scheme to declare distribution of
accumulated profits, capitalized or not, as dividends, and to bring the rebate
granted on undistributed profits to tax if availed of by the company or by the
liquidator of a company for distributing dividends.
Counsel for the Company contended that the
amount distributed out of accumulated profits by the liquidator is not dividend
in the hands of the Company. For this distinction again there is no warrant.
Distribution of accumulated profits by a Company not subject to winding up is
distribution of dividend by virtue of S. 2(6A) (a), and distribution of
accumulated profits in the course of liquidation is dividend by virtue of s.
2(6A)(c). It is true that the definition of "dividend" in s. 2(6A)(c)
win apply only if there is nothing repugnant in the subject or context in which
the expression "dividend" occurs in s. 35(10), but there is nothing
in s. 35(10) which suggests that the expression "dividend" was to
have a meaning different from the meaning assigned to it by the interpretation
clause.
It was urged that assuming that accumulated
profits of a Company distributed by the liquidator may be regarded as
dividends, power under s. 35(10) cannot be exercised in respect of those
profits, because the liquidator is not in distributing the profits
"declaring dividends". But the assumption underlying the argument
that the Companies Act provides that dividends may be deemed to be declared
only if certain mandatory provisions are complied with is without substance. By
S. 205 of the Indian Companies Act, 1956 (before it was amended in 1960) it was
provided that no dividend shall be declared or paid except out of the profits
of the company or out of moneys provided by the Central or a State Government
for the payment of the dividend in pursuance of a guarantee given by such
Government. The Company in the present case was registered under the Indian
Companies Act, 1913. The Articles of Association of the Company are not before
us, but the Articles relating to distribution of dividend being under S. 17(2)
of the Companies Act, 1913, obligatory, Arts. 95, 96 and 97 in Table A of Act 7
of 1913 applied. By Art. 95 it was provided that a company in general meeting
may declare dividends, but no dividends shall exceed the amount recommended.
But to the distribution of interim dividends,
the condition that it must be declared in general meeting of the Company did
not apply, and such interim dividends as appeared to the directors to be
justified by the profits of the company could be distributed (Art. 96). The
only other relevant condition was in Art. 97 that no dividend shall be paid
otherwise than out of profits of the year or any other undistributed profits.
739 The liquidator of the appellant company
did from time to time distribute accumulated profits, and within the meaning of
s. 2(6A)(c) read with the provisions of the Companies Act, they were
distribution of interim dividends.
It is true that power under s. 35(10) may be
exercised if accumulated profits are availed of by the Company "for
declaring dividends in any year", but since the Companies Act does not in
the matter of distribution of interim dividends set up any special machinery,
nor impose any special condition before power in that behalf may be exercised,
no artificial meaning can be attached to the word "declaring dividends".
Distribution of accumulated profits by the liquidator together with the
income-tax refund certificate in the course of voluntary winding up may
therefore, for the purpose of s. 2(6A)(c), be regarded as declaration of
dividend.
The appeal therefore fails and is dismissed
with costs.
Appeal dismissed.
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