Commissioner of Income Tax Kerala,
Ernakulam Vs. V. Damodaran, Trivandrum [1979] INSC 207 (15 October 1979)
PATHAK, R.S.
PATHAK, R.S.
UNTWALIA, N.L.
CITATION: 1980 AIR 478 1980 SCR (1) 944 1980
SCC (1) 173
ACT:
Indian Income Tax Act, 1922-Sections 2(6A)
(e)- Interpretation of "accumulated profits" if include current
profits-Section 256(i)-Scope of.
HEADNOTE:
The assessee was the Managing Director of a
Company originally assessed on a total income of Rs. 43407/- for the assessment
year 1959-60. Thereafter the Income-Tax Officer came to know that the assessee
had been withdrawing moneys from the Company and that those amounts were liable
to be treated as dividend under section 2(6A)(e) of the Act, he re-opened the
assessment. In the assessment proceedings that followed, the assessee claimed
that the accumulated profits of the Company amounted to Rs. 1050 only and that
amount alone could be considered as dividend under section 2(6A)(e) of the Act.
The figure was worked out on the basis that Rs. 11,000 as a provision for tax
and Rs. 6,900 as a provision for dividend had to be adjusted against the
balance of Rs. 18,950 in the Profit and Loss Account. The Income Tax Officer
rejected the contention of the assessee. The Appellate Assistant Commissioner
dismissed the appeal filed by the assessee. The Income Tax Appellate Tribunal
in second appeal, upheld the claim of the assessee that the words
"accumulated profits" in section 2(6A) (e) of the Act could not be
construed as including current profit but it rejected the contention that the
two sums of Rs. 11,000 and Rs. 6,900 had to be taken into account in
determining the figure of the "accumulated profits". It determined
the "accumulated profits" at Rs. 18,950. The Revenue obtained a
reference to the High Court on the question: "Whether the Appellate
Tribunal was legally correct in holding that the accumulated profit will not
include "current profits" for the purpose of section 2(6A) of the
Act." A second question was referred to the High Court at the instance of the
assessee : "Whether the Tribunal was right in holding that Rs. 18,950
constituted accumulated profits for the purpose of section 2(6A) of the
Act." The High Court answered both the questions in favour of the
assessee, the first question in the affirmative and the second question in the
negative.
On appeal to this Court,
HELD: 1. "Current profits" that is
to say, profits earned by the Company during the year in which the loans were
advanced to the assessee cannot be regarded as included within the "accumulated
profits" of a Company within the meaning of section 2(6A) (e) of the Act.
[947G-948E] Commissioner of Income-Tax, Madras v. M. V. Murugappan
2. The Appellate Tribunal was not competent
to refer the second question, and the reference to that extent must be
considered void. Section 256(1) of 945 the Income Tax Act, 1961 entitles the
assessee or the Commissioner, as the case may be, to apply to the Appellate
Tribunal to refer to the High Court any question of law arising out of the
order made by the Appellate Tribunal under section 254. It is clear that the
statute expressly contemplates an application in that behalf by a party
desiring a preference to the High Court. The application has to be filed within
a prescribed period of limitation. If the application is rejected by the
Appellate Tribunal, it is the applicant thus refused who is entitled to apply
to the High Court. The form of reference application prescribed by rule 48 of
the Income Tax Rules, 1962 specifically requires the applicant to state the
questions of law which he desires to be referred to the High Court. In every
case, it is only the party applying for a reference who is entitled to specify
the questions of law which should be referred. Nowhere does the statute confer
a right in the non-applicant (a phrase used here for convenience) to ask for a
reference of questions of law on the applicant. [950 A, C-D E, F-G and 952 E]
The party who is aggrieved and who desire a reference to the High Court must
file a reference application for that purpose. It is not open to him to make a
reference application filed by the other party the basis of his claim that a
question of law sought by him should be referred. But on a reference
application filed by the aggrieved party it is open to the non-applicant who is
not aggrieved by the result of the appeal, to ask for a reference of those
questions of law which arise on its submissions negatived in appeal by the
Appellate Tribunal. [951 A-B, C] & CIVIL APPELLATE JURISDICTION: Civil
Appeal No. 2099 of 1972. From the Judgment and Order dated 18-1-1972 of the
Kerala High Court in I.T.R. No. 88/1969.
B. B. Ahuja and Miss A. Subhashini for the
Appellant.
Nemo for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J.-This is an appeal by certificate under section 261 of the Income Tax
Act, 1961 against the judgment of the High Court of Kerala interpreting the
words "accumulated profits" in section 2(6A)(e) of the Indian Income
Tax Act, 1922.
The assessee is the Managing Director of a
private limited company called R. K. V. Motors & Timber (P) Limited.
The company maintains an accounts pertaining
to him in its books. The accounts showed that as on March 31, 1958 a sum of Rs.
36,546.17 np. was due to him by the company. In January, 1959 for the first
time he became indebted to the company in the sum of Rs. 3,757.04 np. His
drawings increased, and as on March 31, 1959 the total amount due by him stood
at Rs. 25,107.22np. It is also relevant to state that the Balance Sheet of the
company as on March 31, 1958 showed a net profit of Rs. 18,950.98 np.
946 The assessee was originally assessed for
the assessment year 1959-60 (the relevant previous year being the year ended
March 31, 1959) on a total income of Rs. 43,407.
Thereafter, the Income Tax Officer came to
know that the assessee had been withdrawing moneys from the company, and in the
belief that those amounts were liable to be treated as "dividend"
under section 2(6A) (e) of the Indian Income Tax Act, 1922, he reopened the
assessment by virtue of section 147 of the Income Tax Act, 1961. In the
assessment proceedings which followed, the assessee claimed that the
accumulated profits of the company amounted to Rs. 1,050 only, and that amount
alone could be considered as "dividend" under section 2(6A)(e). The
figure was worked out on the basis that a sum of Rs. 11,000 as a provision for
tax and of Rs. 6,900 as a provision for dividend had to be adjusted against the
balance of Rs. 18,950 in the Profit & Loss Account. The Income Tax Officer
rejected the contention of the assessee and determined a sum of Rs. 25,107 as
dividend under section 2(6A) (e). He arrived at this figure by including the
current profits of the company for the account year ending March 31, 1959. The
Appellate Assistant Commissioner dismissed an appeal filed by the assessee. The
Income Tax Appellate Tribunal, in second appeal, upheld the claim of the
assessee that the words "accumulated profits" in section 2(6A)(e)
could not be construed as including current profits, but it rejected the
contention that the two sums of Rs. 11,000 and Rs. 6,900 had to be taken into
account in determining the figure of the accumulated profits. Accordingly, it
determined the accumulated profits at Rs. 18,950.
The Revenue applied for a reference to the
High Court of Kerala, and at its instance the Tribunal referred the following
question to the High Court:
"Whether, on the facts and in the
circumstances of this case, the Appellate Tribunal was legally correct in
holding that the accumulated profit will not include current profits for the
purpose of section 2(6A) of the Indian Income Tax Act, 1922 ?" The
assessee also requested the inclusion of a question, and therefore the second
question referred to the High Court was:
"Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding that Rs. 18,950 constituted
accumulated profits for the purpose of section 2(6A) of the Indian Income Tax
Act, 1922 ?" 947 The High Court, by its judgment dated January 18, 1972
has answered the first question in the affirmative and the second question in
the negative, both questions being answered in favour of the assessee. And now,
the present appeal by the Revenue.
We have heard Shri B. B. Ahuja, for the
Revenue. No one appears for the assessee.
The Indian Income Tax Act, 1922 did not
originally contain any definition of "dividend", and the meaning of
that word was confined to the connotation it held under the law relating to
companies. By section 2 of the Indian Income-Tax (Amendment) Act, 1939, the
Indian Legislature inserted sub-section (6A) in section 2 of the Act and set
forth an inclusive definition. Certain clauses of the sub- section were amended
thereafter, and in their ultimate form section 2(6A)(c) and section 2(6A)(e)
read as follows:
"6(A) "Dividend" includes- (c)
Any distribution made to the shareholders by 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.
(e) Any payment by a company, not being a
company in which the public are substantially interested within the meaning of
section 23A, of any sum (whether as representing a part of the assets of the
company or otherwise) by way of advance or loan to a shareholder or any payment
by any such company on behalf or for the individual benefit of a shareholder,
to the extent to which the company in either case possesses accumulated
profits." The question is whether the profits earned by the company during
the year in which the loans were advanced to the assessee, that is to say the
current profits, can be regarded as included within the accumulated profits of
the company. It will be noticed that the expression "accumulated
profits" occurs in section 2(6A) (c) of the Act. Construing that clause in
Girdhardas & Co. Ltd., v. Commissioner of Income Tax, Ahmedabad, the Bombay
High Court said : "The limitation imposed by the Legislature is that the
profits must in the first place be accumulated in contradistinc- 948 tion to
the profits being current...."...The Madras High Court in Commissioner of
Income Tax, Madras v. M. V. Murugappan and Others and Commissioner of
Income-tax, Madras v. A. M. M. V. Valliammai Achi & Others took the same
view.
It analysed the concept of "accumulated
profits" and in that connection particularly referred to the observations
of Isaacs and Rich JJ. in Hooper & Harrison Limited (In Liquidation) v.
Federal Commissioner of Taxation who relied on Hollins v. Allen and Sproule v.
Bouch and Commissioner of Inland Revenue v. Blott where the distinction between
current profits and accumulated profits was graphically brought out. The
decision of the Madras High Court was affirmed in appeal by this Court in
Commissioner of Income tax, Madras v. M. V. Murugappan & Ors. and it was
observed that "The profits of the year in the course of which the company
was ordered to be wound up not being accumulated profits were not part of the
dividend." Thereafter, the Bombay High Court in Commissioner of Income Tax
(Central) Bombay v. P. K. Badiani, while interpreting section 2(6A) (e) of the
Act, applied the same construction and held that the expression
"accumulated profits" in that clause must mean profits which had
accumulated prior to the accounting year of which the income profits and gains
were being assessed, while current profit would mean the profits of the
accounting year In a recent case, Commissioner of Income Tax, Madras-II v. G.
Sankaran, the Madras High Court has reaffirmed that the expression
"accumulated profits" in section 2(6A) (e) cannot take in current
profits.
The position appears to be well-settled.
Except for T. Sundaram Chettiar v. Commissioner of Income Tax, Madras and T.
Manickavasagam Chettiar v. Commissioner of Income-tax, Madras, in which the
ratio is far from clear, a long line of judicial decisions has taken the view
that the words "accumulated profits" in section 6(2A) of the Indian
Income Tax Act, 1922 cannot be construed 949 to include current profits. We are
in agreement with that view, being persuaded in that behalf by the reasoning
which has prevailed in the aforementioned cases. The distinction between
"accumulated profits" and "current profits" has long held
the field, and as the learned judges of the High Court of Australia observed in
Hooper & Harrison Ltd. (In Liquidation) (supra), it has been well known in
judicial decision and in the mercantile world for well over a century.
Moreover, this Court in M. V. Murugappan (supra) has also taken the view that
current profits cannot be included in accumulated profits. It appears to be now
the established law of the land. An attractive submission was raised on behalf
of the Revenue that in the Twelfth Report of the Law Commission of India, the
authors of the Report consider that the intention of the Legislature was to
include current profits in the expression "accumulated profits" in
section 2(6A) and that the present definition of "accumulated
profits" by Explanation 2 to section 2(22) of the Income Tax Act. 1961
only clarifies what the true intent was all along. In the view which has found
favour with us, we are not persuaded by that submission.
Accordingly, we hold that the High Court was
right in answering the first question in favour of the assessee and against the
Revenue.
The second question is whether the provision
for payment of tax and dividend can be taken into account when computing the
accumulated profits as on March 31, 1958. The Revenue contends that this
question should not have been referred by the Appellate Tribunal to the High
Court at the instance of the assessee because no reference application was made
by the assessee. The only reference application, it is pointed out, before the
Appellate Tribunal was the reference application filed by the Commissioner of
Income Tax. We are of opinion that the Revenue is right. The objection was
taken by the Revenue before the Appellate Tribunal when the statement of case
was being prepared, but the Appellate Tribunal overruled the objection, relying
on Girdhardas & Co. Ltd. v. Commissioner of Income Tax, Ahmedabad. It does
not appear that the Revenue contended before the High Court that the reference
made to it by the Appellate Tribunal was incompetent insofar as the second
question was concerned. Since, however, the objection pertains to the
competence of the reference to the extent that it covers the second question
and, therefore, relates to the jurisdiction of the High Court to 950 consider
and decide that question, we are of opinion that the Revenue is entitled to raise
that question before us.
Section 256(1) of the Income Tax Act, 1961
entitles the assessee or the Commissioner, as the case may be, to apply to the
Appellate. Tribunal to refer to the High Court any question of law arising out
of the order made by the Appellate Tribunal under section 254. A period of
limitation for making such application is prescribed. If the application is
rejected by the Appellate Tribunal the applicant is entitled to apply to the
High Court, again within a prescribed period of limitation, and the High Court
may, if it is not satisfied of the correctness of the decision of the Appellate
Tribunal, require the Appellate Tribunal to state the case and refer it. It is
clear that the statute expressly contemplates an application in that behalf by
a party desiring a reference to the High Court.
The application has to be filed within a
prescribed period of limitation. If the Application is rejected by the
Appellate Tribunal, it is the applicant thus refused who is entitled to apply
to the High Court. If the Appellate Tribunal allows the application made to it,
s. 256(1) requires it to draw up the statement of the case and refer it to the
High Court. The statement of the case is drawn up on the basis of the
application made by the applicant, who in that application must specify the
questions of law which, he claims, arise out of the order of the Appellate
Tribunal made under s. 254. The form of reference application prescribed by
rule 48 of the Income Tax Rules, 1962 specifically requires the applicant to
state the questions of law which he desires to be referred to the High Court.
He may, in appropriate cases, be permitted by the Appellate Tribunal, to raise
further questions of law at the hearing of the reference application. But in
every case, it is only the party applying for a reference who is entitled to
specify the questions of law which should be referred.
Nowhere in the statute do we find a right in
the non- applicant (a phrase used here for convenience) to ask for a reference
of questions of law on the application made by the applicant.
In this connection, two categories of cases
can be envisaged. One consists of cases where the order of the Tribunal under
section 254 has decided the appeal partly against one party and partly against
the other. This may be so whether the appeal consists of a single subject
matter or there are more than one independent claims in the appeal. In the
former, one party may be aggrieved by the grant of relief, even though partial,
while the other may be aggrieved by the refusal to grant total relief. In the
latter, relief may be granted or 951 refused with reference to individual items
in dispute, and accordingly one party or the other will be aggrieved. In either
case, the party who is aggrieved and who desires a reference to the High Court
must file a reference application for that purpose. It is not open to him to
make a reference application filed by the other party the basis of his claim
that a question of law sought by him should be referred. The second category
consists of cases where the order made by the Appellate Tribunal under s. 254
operates entirely in favour of one party, although in the course of making the
order the Appellate Tribunal may have negatived some points of law raised by
that party. Not being a party aggrieved by the result of the appeal, it is not
open to that party to file a reference application. But on a reference
application being filed by the aggrieved party it is open to the non-applicant,
in the event of the Appellate Tribunal agreeing to refer the case to the High
Court, to ask for a reference of those questions of law also which arise on its
submissions negatived in appeal by the Appellate Tribunal. It is, as it were,
recognising a right in the winning party to support the order of the Appellate
Tribunal also on grounds raised before the Appellate Tribunal but negatived by
it.
There are, therefore, those two categories,
one in which a non-applicant can ask for the reference of questions of law
suggested by it and the other in which it cannot. To the extent to which the
Courts have omitted to consider the distinction between these two categories,
they have erred.
There are cases where it has been held that
there is an absolute bar against a non-applicant seeking a reference of questions
of law on a reference application made by the other party. They include :
Commissioner of Income Tax, Madras v. S. K. Srinivasan and Commissioner of
Income Tax, Madras v. Ramdas Pharmacy. cases taking the opposite extreme view
are : Commissioner of Income Tax v. Bantiah Bank Ltd., followed in Girdhar Das
& Co. Ltd. (supra) and Educational & Civil List Reserve Fund No. 1
through H. H. Maharana Bhagwat Singhji of Udaipur & Ors. v. Commissioner of
Income Tax, Delhi and Rajasthan Smt. Dhirajben R. Amin v. Commissioner of
Income Tax, Gujarat II, Ahmedabad and Commissioner of Wealth Tax, Gujarat II v.
Mrs. Arundhati Balkrishna. The judgment in the last case was affirmed by this
Court in Commissioner of Wealth Tax, Gujarat v. Arundhati 952 Balkrishna but the
point raised before us does not appeal to have been taken there. The
observations in Bantiah Bank Limited (supra) seem to show that the High Court
was alive to the possibility of a winning party being deprived of the right to
raise questions of law which could properly arise as further questions because
they would be intimately involved in a decision on the questions referred at
the instance of the applicant, but it failed to classify such a case separately
from the case where a non-applicant seeks to raise independent and unassociated
questions of law. Cases in which a distinction was noticed between the two
categories but no opinion was expressed on the right of a winning party to
raise questions of law without applying for a reference are Commissioner of
Income Tax v. Jiwaji Rao Sugar Co. Ltd., followed in Commissioner of Income
Tax, M.P. v. Dr. Fida Hussain G. Abbasi and Commissioner of Income Tax, Madras
v. K. Rathnam Nadar. Some attention has been given to the distinction between
the two categories in Commissioner of Income Tax, West Bengal v. A. K. Das.
In the present case, the question whether the
provision of Rs. 11,000 for tax and Rs. 6,900 for dividend can be taken into
account when determining the accumulated profits as on March 31, 1958 is not relate
to the question whether accumulated profits can take in current profits. The
two questions involve the grant of separate and distinct reliefs and the
decision on one question does not affect the decision on the other.
Accordingly, we hold that the Appellate
Tribunal was not competent to refer the second question, and the reference to
that extent must be considered void. In the circumstances, it is not necessary
to examine the second question on its merits. The judgment of the High Court
must be set aside so far as it incorporates its opinion on the second question.
Accordingly, the appeal is allowed to the
extent that the judgment of the High Court on the second question is set aside
while the appeal is dismissed in respect of the judgment on the first question.
There will be no order as to costs.
N.K.A. Appeal allowed in part.
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