Commissioner of Income-Tax, Gujarat Vs.
Vadilal Lallubhai [1972] INSC 199 (29 August 1972)
HEGDE, K.S.
HEGDE, K.S.
REDDY, P. JAGANMOHAN KHANNA, HANS RAJ
CITATION: 1973 AIR 1016 1973 SCR (1)1058 1973
SCC (3) 17
CITATOR INFO:
F 1976 SC 10 (35) RF 1982 SC 149 (238) F 1984
SC 790 (17) RF 1986 SC 649 (43) R 1989 SC2113 (28)
ACT:
Income-Tax Act (11 of 1922) ss. 2 (6A .) (c),
2(6C) and 44FDeemed dividend, if income under s. 44F.
HEADNOTE:
The assessee sold his share holdings in
certain managing agency companies. A few days thereafter the managing agency
companies went into voluntary liquidation. Consequently, the assets of those
companies were distributed among the shareholders then on the registers of the
companies. They included the persons who had newly purchased the shares.
They were either not liable to pay any
income-tax or were liable to pay tax at a rate lower than what the assessee
would have had to pay had he received the amount distributed. The Department
and the Appellate Tribunal held that the amounts distributed were dividends
within the meaning of s. 2(6A)(c) of the Income-tax Act, 1922, that the
assessee sold his shares with a view to avoid income-tax and super tax, and
that, consequently, the assets distributed, which would have fallen to his share
had he not sold his shares, were liable to be brought to tax under s. 44F of
the Act. The High Court, on reference, held in favour of the assessee.
Dismissing the appeal to this Court,
HELD : (1) Section 2(6C) of the Income-tax
Act gives an in clus; definition of 'income' and dividend is included therein.
Therefore, if receipt can be considered as.
dividend it has to be considered as income under
2(6C).
Section 2(6A) gives an inclusive definition
of 'dividend and under sub-cl. (c), any distribution made to the shareholders
of a company on 'its liquidation would be deemed to be dividend; but, this
definition applies only if there is nothing repugnant in the 'subject or
context. [1061G-H; 1062 A-B] (2)Legal fictions are only for a definite purpose
and they are limited to the purpose for which they are created and should not
be extended beyond heir legitimate field. In the case of deemed dividend under
s. 2(6A) (c) the assets distributed will be considered as income in the account
year in which it is distributed but that conception would be inapplicable in
cases coming under s. 44F. [1064 C-E] Commissioner of Income-tax, Andhra
Pradesh v. C.P. Sarathy Mudaliar, 82 I.T.R. 170; and Commissioner of
Income-tax, Bombay City-1 v. Amar-. chand N. Shroff, 48 I.T.R. 59, referred to.
(3)Under s. 44F (1) to (3) the income
referred to therein should arise from shares or securities during a period of
time. Further, it must be a periodical income which is capable of being
apportioned on the basis that it is deemed to have accrued from day to day. In
the case of interest on securities or dividends on shares they are paid at
certain intervals and hence they can be deemed as having accrued from day to
day; but in the case of distribution of the assets of a company on liquidation
it is not possible to deem it as having accrued from day to day. When a company
goes into liquidation the share scripts are nothing but pieces of paper and no
income arises from those shares after the liquidation. What the share holder
gets on liquidation is not any income 'from shares but 1059 a share of the
assets of the quondam company and such a receipt is incapable of being deemed
to have accrued from day to day. Moreover, ,the company may go into liquidation
long after the accounting year ends and there is nothing to indicate what
period the income-tax officer should take into consideration for applying the
fiction that "the income had deemed to accrue from day to day."
[1065A-C] (4)The two provisions, namely, s. 2(6A)(c) and s. 44F cannot be
dovetailed unless three assumptions are made, (a) that thefictional dividend
contemplated by s. 2(6A)(c) is 'in came' within the meaning of s. 44F; (b) that
the dividend is capable of being deemed to have accrued day to day; and (c)
that the day to day distribution contemplated in s. 44F commences on the
commencement of the relevant accounting year and ends with the distribution of
the assets. To do so, words would have to be read into the section which is
impermissible in construing a provision of law. Hence, the deemed dividend
contemplated by s. 2 (6A)(c), cannot be considered as income under s. 44F.
[1064 G-H] Commissioner of Income-tax Madras v. Ajax Products Ltd. 55, 1.T.R.
741, referred to.
(6)The legislative intent in enacting s. 44F
is clear from the report of the Select Committee. It was to prevent avoidance
of tax by certain devices to convert revenue receipts into capital receipts
known as 'bond washing' transactions. The marginal note to the section also
shows that that was the intention of the Legislature. [1065C-D;
1067B] Commissioner of Income-tax, Madhya
Pradesh and Bhopal v. Sodra Devi etc., 32 I.T.R. 615, 627, referred to.
CIVIL APPELLATE JURISDICTION: C.A. Nos.
2348-2349 of 1969, 1139 of 1969 and Civil Appeals Nos. 2006 & 2007 of 1971.
Appeals by certificate under Article 133 'of
the Constitution of India from the judgment and order dated January15, 1966 of
the Gujarat High Court in Ahmedabad in I.T.R. Nos. 2 and 1 of 1966.
B.Sen, B. B. A huja and-B. D. Sharma for the
appellant (in C.A. Nos. 2348-2349/69 & 2006-2007/71.) B.Sen and B. D.
Sharma, for the appellant (in C.A. No. 1 139/69).
N. A. Palkhivala, S. T. Desai, M. C. Chagla,
V. M. Tarkunde, A. K. Verma, J. B. Dadachanji, O. C. Mathur and Ravinder
Narain, for the respondents (in C.A. Nos. 2348-2349/69 and 2006-2007/71).
N.A. Palkhivala, A. K. Verina, J. B.
Dadachanji, 0. C.Mathur and Ravinder Narain, for the respondent in C.A. No. 1139/69).
1060 The Judgment of the Court was delivered
by Hegde, J. The principal question of law arising in these appeals by
certificate is whether on the facts and in the circumstances of each of these
cases the Department was right in applying s. 44-F read with s. 2(6A)(c) of the
Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act). The
Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax
Appellate Tribunal answered that question in favour of the Department but the
High Court answered the same in favour of the assessee. As we are in agreement
with the conclusion reached by the High Court, we do not think it necessary to
examine the other questions arising in these appeals.
For deciding the said question of law, it is
sufficient if we take up the facts of any one of these cases. For the sake of
convenience, we shall set out the facts in Civil Appeal No. 2348 of 1969. The
assessee in that case is Vadilal Lallubhai. He is assessed as an individual.
The relevant assessment year is 1958-59, the accounting year being the year
ending on March 31, 1958.
The assessee belongs to the well-known family
of Vadilal Lallubhai Mehta of Ahmedabad. The members of this family (who for
the sake of convenience will hereinafter be referred to as the "Mehta
Group") owned shares in and controlled several companies including certain
managing agency companies, Those managing agency companies were Private Ltd.
companies. The managed companies were also companies in which the members of
the "Mehta Group" had controlling interest. This Group had also
selling agency rights in the companies which they were managing. On the coming
into force of the Companies Act, 1956, the managing agency companies gave up
their managing agency rights in order to safeguard their selling agency rights.
Thereafter the assessee sold his share holdings to the employees of some
"Mehta Group" companies or the relations of such employees. In
addition he sold some shares to one of the family trusts. A few days after the
sales in question, those managing agency employees went into voluntary
liquidation. Consequently the assets of those companies were distributed among
the shareholders who were born on the registers of the companies as on the
dates of liquidation. These shareholders included those persons who had newly
purchased the shares. One of the new shareholders as mentioned earlier was a
charitable trust which was not liable to pay any tax. The remaining
shareholders were either not liable to pay any tax or were liable to pay tax at
a lower rate than the assessee would have had to pay bad be received the amount
distributed by the liquidators.
1061 The Income-tax Officer brought to tax a
portion of the assets distributed on liquidation by applying s. 44-F read with
s. 2 (6A) (c) of the Act. The Appellate Assistant Commissioner agreed with this
view. The assessee's appeal to the Income-tax Appellate Tribiunal was
unsuccessful. Thereafter at the instance of the assessee, certain questions
were referred to the High Court for its opinion. Various contentions were advanced
before the High Court on behalf of the assessee. We do not think it necessary
to refer to those contentions as in our view the High Court was right in taking
the view that to the facts and circumstances of the case, s. 44-F read with s.
2 (6A) (c) was inapplicable.
It was contended on behalf of the Revenue
that the distribution of the assets of the various managing agency companies on
liquidation is '-dividend" within the meaning of s. 2 (6A) (c) and
consequently as "income" as defined in s. 2(6C). Further the assessee
sold his shares with a view to avoid income-tax and super-tax and consequently
the assets distributed which would have fallen to his share had he not sold his
share are liable to be brought to tax under the provisions of s. 44-F of the Act.
On the other hand, it was contended on behalf of the assessee that the
definitions contained in. s. 2 are only to be applied " unless there is
anything repugnant in the subject or context". The definition of
"dividend" given in s. 2 (6A) (c) is repugnant to the subject dealt
with under s. 44-F and consequently the distribution of the assets in
liquidation of the several managing agencies concerns cannot be considered as
"income" within the meaning of s.
44-F. It was urged that s. 44-F concerns
itself with the income from securities or shares which are of a periodical
nature but which an assessee may seek to convert into a capital receipt by
adopting certain devices. The provisions therein do not deal with the
compensation received for the very destruction of the income-yielding assets
viz. the securities or shares. We shall now consider which one of these two
contentions is acceptable. But before doing so it will be convenient to make
reference to the relevant provisions in the Act.
Section 2, the definitions section, starts by
saying that the definitions given therein apply 'unless there is anything
repugnant in the subject or context". Hence if the definition of
"dividend" found in s. 2(6A)(c) is either repugnant to the subject or
context with which we are dealing, that definition will not be applicable.
Section 2(6A) gives an inclusive definition of "dividend". In this
case we are concerned with s. 2(6A)(c) which reads :
" 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." Section 2(6C) gives an
inclusive definition of "income".
Dividend is included therein. Hence if a
receipt can be considered as a "dividend", it has to be considered as
an "income" under s. 2(6C). This takes us to S. 44-F, which reads:
"(1) Any person upon whom notice is
served by the Income-tax Officer requiring him to furnish a statement of particulars
relating, to any securities in which, at any time during the period specified
in the notice he has had any beneficial interest, and in respect of which,
within such period, either no income was received by him or the income received
'by him was less than the sum to which the income would have amounted if the
income from such securities had accrued from day to day and been apportioned
accordingly, shall, whether an assessment to income-tax or Super-tax in respect
of his total income has or has not been made for the relevant year or years of
assessment, furnish such a statement and such particulars in the form and
within the time (not being less than twenty eight days) required by the notice.
(2) If it appears to the Income-tax Officer
by reference to all the circumstances in relation to the securities of any such
person (including circumstances with respect to sales, purchases, dealings,
contracts, arrangements, transfers, or any other transactions relating to such
securities) that such person has thereby avoided or would avoid more than ten
per cent of the amount of the income-tax or super-tax for any year which would
have been payable in his case in respect of the income from those securities if
the income had 'been deemed to accrue from day to day and had been apportioned
accordingly, and the income so deemed to have been apportioned to him had been
treated as part of his total income from all sources for the purposes of
income-tax or super-tax, then those securities shall be deemed to be securities
to which subsection (3) applies.
(3) For the purposes of assessment to
income-,tax or super-tax in the case of any such person, the income from any
securities to which this sub-section applies shall be deemed to accrue from
day-to-day and 10 63 in the case of the sale or transfer of any such securities
by or to him shall be deemed to have been received as and when it is deemed to
have accrued :
Provided that this section shall not apply if
such person proves to the satisfaction of the Income-tax Officer that the
avoidance of income-,tax or super-tax was exceptional and not systematic and
that there was not in his case in any of the three preceding years any such
avoidance of income-tax or super tax, or that the provisions of section 44-E
have been applied in his case in respect of such income.
(4) (5) (6) For the purpose of this section
the expression "securities “includes stocks and shares." From a
reading of sub-ss. 1 to 3 of s. 44-F, it is clear that the income referred to
therein should arise from shares or securities. Further it must be a periodical
income which is capable of being apportioned on the basis that it is deemed to
have accrued from day to day. Section 44-F(1) empowers the Income-tax Officer
to serve a notice on any person "requiring him to furnish a statement of
particulars relating to any securities in which at any time during the period
specified in the notice he has had any beneficial interest and in respect of
which, within such period either no income was received by him or the income
received by him was less than the sum to which the income would have amounted
if the income from such securities has accrued from day to day and had been
apportioned accordingly.
The power conferred on the Income-tax Officer
under this provision is not confined to any stipulated period.
Now turning to subs.(2) of s.44-F, it speaks
of "the amount of the income-tax or super-tax for any year which would
have been payable in his cause in respect of the income from those securities
if the income had been deemed to accrue from day to day and had been
apportioned accordingly.
Again sub-(3) of s.44-F speaks of ",the
income from any securities to which this sub-section applies shall be deemed to
accrue from day to day, and in the case of the sale or transfer of any such securities
by or to him shall be deemed to have been received as and when it is deemed to
have accrued.. ." 1064 It is clear from what we have said earlier that
s.44-F concerns itself with income arising from securities or shares, during a
period of time. When a company goes into liquidation, the share-scripts are no
more income yielding -assets, They are mere pieces of paper. No income arises
from those shares thereafter. What the shareholder gets on liquidation is not
any income from shares but a share of the assets of the quondam company. Such a
receipt is incapable of being deemed to accrue from day to day. In the case of
interest on securities or dividends on shares, they are paid at certain
intervals. Hence it is possible to deem them as having accrued from day to day
but in the case of distribution of assets of a company in liquidation, it is
not possible to deem the same to have accrued from day to day. We have to bear
in mind that some of the 'dividends' mentioned in s. 2(6A) are only deemed dividends.
They are not real dividends. By a legal fiction, they are deemed as dividends.
This Court held in Commissioner of Income-Tax, Andhra Pradesh v. C.P. Sarathy
Mudaliar,(1) that the definition of "dividend" contained in s. 2 (6A)
(c) is an artificial definition of "dividend". It does not take in
dividend actually declared or received. The dividend taken note of by that
provision is a deemed dividend and not a real dividend. The same would be the
position in the case of the 'dividend" mentioned in s. 2 (6A) (c). As held
by this Court in Commissioner of Income-tax, Bombay City-1 v.
Amarchand N. Shroff,(2) legal fictions are
only for a definite purpose and they are limited to the purpose for which they
are created and should not be extended beyond their legitimate field.
It is established on high authorities that
the subject is not to be taxed unless the charging provision clearly imposes
the obligation see Commissioner of Income-tax Madras v. Ajax Products Ltd. (3)
As is often said that in interpreting a taxing provision one has merely to look
to the words of the provision. The language employed in S. 44F cannot be said
to be plain enough to bring to tax the receipts of the character with which we
are concerned in these appeals.
To accept the contention of the Revenue, we
have to adopt threefold assumptions. Firstly the fictional dividend
contemplated by s. 2 (6A) (c) is an "income" within the meaning of S.
44-F. Secondly we must assume that that dividend is capable of being deemed to
accrue day to day and lastly we must assume that the day to day distribution
contemplated in S. 44-F commences from the commencement of the relevant
accounting year and ends with the distribution of the assets as contended on
behalf of the Department. To do so we have to read into the section many more
(1) 82 I.T.R. 170.
(2) 48 I.T.R. 59.
(3) 55 I.T.R. 741.
1065 words than it contains at present which
is wholly impermissible in construing any provision much less a taxing
provision. In the case of deemed dividend under s. 2(6A) (c), the assets
distributed will be considered as income in the account year in which it is
distributed but that conception would be inapplicable in cases coming under s. 44-F.
A company may go into liquidation long after the accounting year ends. What
period the Income-tax Officer should take into consideration for applying the
fiction that "the income had deemed to accrue from day to day ?" The
scheme of s. 2(6A) (c) is incompatible with the scheme of s.
44-F. The two provisions are intended to meet
totally different situations. The former provision cannot be dovetailed into
the latter.
In order to find out the legislative intent,
we have to find out what was the mischief that the legislature wanted to
remedy. The Act was extensively amended in the year 1939.
Section 44-F was not in the draft bill. That
section was recommended by the Select Committee consisting of very eminent
lawyers. It will not be inappropriate to find out the reasons which persuaded
the Select Committee to recommend the inclusion of s. 44-F, if the section is
considered as ambiguous-see Commissioner of Income-tax, Madhya Pradesh and
Bhopal v. Sodra Devi etc.(1). In recommending the inclusion of s. 44-F, this is
what the Select Committee observed :
"The new Sections 44E and 44F are
designed to prevent avoidance of tax by what -are known as "bond washing"
transactions, involving the manipulation of securities so that the securities
will pass temporarily in the legal ownership of some second person who is
either not liable at all or liable in a lessor degree to tax, under such
conditions that the interest on the securities is the income of this second
person. A common form of the process is the sale of securities-cum interest
with a simultaneous contract to purchase them ex-interest. Where foreign
securities are concerned this second person may be a foreigner resident abroad
entitled to claim exemption from the tax on the interest.
More often a financial concern in India is
utilised whose computation of profits includes the results of realising
securities, so that the concern can profitably offer "bond washing"
facilities to the owner of securities bearing fixed interest where the owner
himself is not liable to taxation on the realisation of the securities."
Section 44-F of the Act, immaterial changes apart, is a reproduction of s. 33
of the English Finance Act, 1927 which was (1) 32 I.T.R. 615 at p. 627.
1066 subsequently replaced by s.237 of the
English Income-tax Act, 1952. Dealing with that section this is what is
observed in the law of Income-tax, Surtax and Profits Tax by Wheateroft at p.
1669 (Paragraph 1-1358) :
We now come to the more difficult problem
which arises when a taxpayer sells, for a capital sum, securities which are
about to pay interest, and the purchaser acquires the right both to the
securities and the interest.
It is the custom on British stock exchanges
to notify in advance the dates in respect of each security before which a buyer
of that security will be entitled to the next income payment.
Up to that date the security is sold Cum
dividend"; after that date the security is sold "ex-dividend"
and the next income payment when received after the sale will remain the
property of the seller. Apart from the general market fluctuations, the price
will gradually rise up to the day when the security goes "ex div." it
will then normally fall sharply by a sum appropriately equals to the
anticipated income payment less tax at standard rate, as the average investor
values the income at its net amount. If the amount is at a fixed rate, such as
on Government stock, the likely fall for this reason can be calculated with
considerable accuracy in advance.
A surtax payer, who pays more than the
standard rate of tax, can thus find it profitable to sell his securities just
before they go "ex div." as he will receive as capital the equivalent
of the net dividend, instead of receiving a dividend subject to tax in his
hands at higher rate than that deducted from the dividend.
To deal with taxpayers who used this, and
similar devices, on a substantial scale, it was provided by the Finance Act,
1927, that if it appears to the Revenue by reference to all the circumstances
in relation to the assets of any individual (including circumstances with
respect to sales, purchases, dealings, contracts, arrangements, transfers or
any other transactions relating to such assets) that the individual has thereby
avoided or would avoid more than 10 percent of the amount of surtax for any
year which would have been payable in his case if the income from those assets
had been deemed to accrue from day to day and had been apportioned to him as
part of his total income, then such income is to be so apportioned to him for
the purpose of computing his surtax. If the individual can prove that the 1067
avoidance was exceptional and not systematic, and that there was no such,
avoidance in the following three years, he can avoid liability under this
provision. Extensive powers are given to the Revenue to obtain information for
the purpose of this provision." The marginal note for S.44-F reads
"avoidance of tax by sales cum dividend". This marginal note also
gives an indication as to what exactly was the mischief that was intended to-be
remedied. The legislature was evidently trying to circumvent the devices
adopted by some of the assessees to convert their revenue receipts into capital
receipts. The marginal note also throws light on the intention 'of the
legislature.
From what has been stated above, it is clear
that the deemed dividend contemplated by s. 2 (6A) (c) cannot be considered as
"income" under s. 44-F.
For the reasons mentioned above we agree with
the High Court that s.44-F is inapplicable to the facts of the assessee's case.
This question is common to all the above-mentioned appeals. Hence we need not
go into the other subsidiary questions arising for decision in any of those
appeals.
In the result these appeals fail and they are
dismissed with costs. One hearing fee.
V.P.S.
Appeal dismissed..
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