Commissioner of Income Tax, Ernakulam
(Kerela) Vs. The Official Liquidator, Palai Central Bank Ltd. [1984] INSC 193
(16 October 1984)
ERADI, V. BALAKRISHNA (J) ERADI, V.
BALAKRISHNA (J) TULZAPURKAR, V.D.
MADON, D.P.
CITATION: 1985 AIR 146 1985 SCR (1) 971 1985
SCC (1) 45 1984 SCALE (2)646
ACT:
Super Profit Tax Act, 1963 (Act XIV of 1963)
ss.2 (5), 2 (9) and 4 read with second Schedule to the Act-Company in
liquidation-Whether chargeable to super profits tax.
Capital, reserve and accumulated profits-Distinction
between-Whether chargeable on winding up of company.
HEADNOTE:
The assessee-company went into liquidation on
August 8, 1960. The Income-tax officer, while determining the taxable income of
the assessee-company at Rs. 5,79,978 for the assessment year 1963-64, was of
the opinion that this amount would attract liability for super profits tax also
and therefore asked the assessee company to file its return. The
assessee-company submitted its return showing the chargeable profits as 'nil',
contending that there could be no liability to super profits tax in respect of
a company in liquidation since the formula laid down in the Second Schedule to
the Super Profits Tax Act 1963 for calculation of the 'standard deduction' was
inapplicable on account of the fact that a company in liquidation could not be
said to have paid-up share capital as on the first day of the previous year
relevant to the assessment year which was long subsequent to the winding up.
The Income-Tax officer however overruled the aforesaid contention and worked
out the chargeable profits at Rs. 2,04,740 after adopting a minimum amount of
Rs. 50,000 mentioned in s.2 (9) of tho Act as a "standard deduction".
The said order was confirmed in appeal by the Appellate Assistant Commissioner.
But, on further appeal by the assessee company the Income-tax Appellate
Tribunal while allowing the appeal held: (1) that in the hands of the
liquidator there is only one integral fund which could not be split up into
share capital, reserve profits and therefore s.27 of the Act was clearly
attracted to the case; and (ii) that no assessment to super profits could be
made on a company in liquidation since section 4 of the Act would not apply to
the assessee company in liquidation as the standard deduction was incapable of
ascertainment. The High Court, rejected the reference made at the instance of
the Revenue.
972 Dismissing the appeal by the Revenue,
HELD: (1) After a company has gone into
liquidation it cannot be said that as on the first day in any subsequent year
forming the previous year relevant to the assessment year, there exists in the
hands of the liquidator any amount distinctly forming the paid-up share capital
of the company or any sum that can be characterized as "reserve." The
distinction between capital, reserve and the accumulated profits disappears in
respect of a company in liquidation after the date of its winding up and there
is only one integrated or consolidated fund in the hands of the liquidator. The
concept of a fluctuating share capital or reserve which is the basic premise
necessary to attract the applicability of rule 1 of the Second Schedule is
wholly foreign in respect of a company in liquidation. [977H; 978E- F] (2) It
is clear from the definition of "standard deduction" that for the
purpose of calculation of "standard deduction" one has to ascertain
the capital of the company as computed in the manner specified in Second
Schedule. But, it is important to notice from the terms of Rule I of Second
Schedule that unless the company can be said to have a paid- up share capital
as on the first day of the previous year relevant to the assessment year the
formula laid down in the rule for computation of capital of the company cannot
have any application and the calculation of "standard deduction"
being based wholly on the capital of the company, it becomes wholly incapable
of ascertainment. [976B; 977F-G] Commissioner of Inland Revenue v. George
Burrell, 1924 2 [K.B.] 52, 63 and Birch v. Cropper [1889] L.R. 14 App. Cas.
525, 546 referred to.
Commissioner of Income-tax v. Girdhars and
Co. Private Ltd, 63 I.T.R. 300; followed.
(3) Under the scheme of the Income-tax Act
1961, charge of tax will not get attracted unless the case or transaction falls
under the governance of the relevant computation provisions. The character of
the computation provisions in each case bears a relationship to the nature of
the charge.
Thus, the charging section and the
computation provisions together constitute an integrated code. When there is a
case to which the computation provisions cannot apply at all. it is evident
that such a case was not intended to fall Within the charging section. The
scheme of the Super Profits Tax Act 1963 being similar to that of the
Income-tax Act 1961, it has to be held that inasmuch as the provisions
contained in the Act for computing the capital of the company and its reserves
and cannot have any application in respect of a company in liquidation and
consequently the 'standard deduction' is incapable of ascertainment, the charge
of super profits tax under section 4 of the Act is not attracted to such a
cases. [978G-H ; 979A-C] Commissioners of Income-tax, Bangalore v. B.C. Srinivasa
Setty, 128 I.T.R 294; referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2090 of 1980 973 Appeal by Special leave from the Judgment and order dated
the 30th January, 1979 of the Kerala High Court in l.T.R. No. 76 of 1977.
Abdul Khadder and Miss. A. Subhashini for the
Appellant.
P. Gobindan Nair, N. Sudhakaran and Mrs. Baby
Krishnan for the Respondent.
The Judgment of the Court was delivered by
BALAKRISHNA ERADI, J. Whether a company in liquidation is chargeable to super
profits tax under the Super Profits Tax Act, 1963-Act XIV of 1963 (hereinafter
called 'the Act') is the short question arising for determination in this
appeal. The answer thereto will depend upon whether during the period
subsequent to the date of winding up, any part of the funds in the hands of the
official liquidator can be distinctly classified as representing paid-up share
capital of the company as on the first day of the year of account relevant to
assessment year and whether any portion of the fund can be similarly identified
as forming as, "reserve".
The assessee is a banking company, namely,
The Palai Central Bank Ltd., which went into liquidation on August 8, 1960. On
that date the official Liquidator took charge of the assets and liabilities of
the company and a balance- sheet had been prepared as on the same date.
Thereafter, for every year, the liquidator used to prepare only an income and
expenditure statement for submission to the Reserve Bank of India. The
assessment year, with which we are concerned is 1963-64 i.e., the year ended
March 31, 1963. For the said assessment year the taxable income of the assessee
was determined by the Income-tax officer at Rs. 5,76,678. The officer was of
the opinion that this amount would attract liability for super profits tax also
and since the assessee had not submitted any return under the Act, a notice
under section 9 (a) of the Act calling for the return was issued.
The assessee thereupon, submitted a return
showing the chargeable profits as 'nil'. In support of the said return the
assessee contended inter alia before the officer that there could be not
liability to super profits tax in respect of a company in liquidation since the
formula laid down in the Second Schedule to the Act for calculation of the
'standard deduction' was inapplicable on account of the fact that a company in
liquidation could not be said to have paid-up share capital as on the first day
of 974 the previous year relevant to the assessment year which was long
subsequent to the winding up. Certain other contentions were put forward by the
since they are not of any material relevance at this State, it is unnecessary
to refer to them.
The Income-tax Officer overruled the
contentions raised by the assessee and worked out the chargeable profits at Rs.
2,04,740 after adopting minimum amount of Rs. 50,000 mentioned in 2 (9) of the
Act as a "standard deduction" applicable to the case. The Appellate
Assistant Commissioner, before whom the assessee filed an appeal, confirmed the
order of the Income-tax officer. The assessee carried the matter in further
appeal before the Income-tax Appellate Tribunal, Cochin Bench. The Tribunal
held that in the hands of the liquidator, there is only one integral fund which
could not be split up into share capital, reserve and profits. In the opinion
of the Tribunal the exemption provision contained in section 27 of the Act
which states that nothing contained in the Act shall apply to any company which
has no share capital was clearly attracted to the case. It was further held by
the Tribunal that even if the exemption under section 27 of the Act did not get
attracted, section 4 of the Act, which is the charging section would not apply
to the assessee company in liquidation as the 'standard deduction' was
incapable of ascertainment. The Tribunal, accordingly, allowed the appeal of
the assessee and held that no assessment to super profits tax could be made on
a company in liquidation.
Thereafter, at the instance of the revenue,
the Tribunal referred the following question of law to the High Court of Kerala
for its opinion:
"Whether, on the facts and in the
circumstances of the case, was the Tribunal justified in holding that no assessment
under the Super Profits Tax Act, 1961, can be made on the assessee company (in
liquidation)" ? The High Court agreed with the view taken by the Tribunal
that after a company has gone into liquidation there cannot be said to be in
the hands of the liquidator any amount that can be distinctly designated as
paid-up share capital of the company or as 'reserve' with respect to which the
capital of the company is to be worked out as provided in Second Schedule to
the Act in order to arrive at the amount or standard deduction, The question
referred 975 was accordingly answered by the High Court in the affirmative,
that is, in favour of the assessee and against the revenue. Aggrieved by the
said decision, the revenue has preferred this appeal to this Court by special
leave.
After hearing Counsel appearing on both
sides, we have unhesitatingly come to the conclusion that the view taken by the
High Court is perfectly correct and that this appeal is devoid of merit.
Section 4 of the Act which is the charging
section reads:
"4. Charge of tax-Subject to the
provisions contained in this Act, there shall be charged on every company for
every assessment year commencing on and from the 1st day of April, 1963, a tax
(in this Act referred to as the super profits tax) in respect of so much of its
chargeable profits of the previous year or previous years, as the case may be,
as exceed the standard deduction, at the rate or rates specified in the Third
Schedule." The expression "chargeable profits" has been defined
in clause (5) of section 2 thus:
"2(5) "Chargeable profits"
means the total income of an assessee computed under the Income-tax Act, 1961
(XLIII of 1961), for any previous year of years as the case may be, and
adjusted in accordance with the provisions of the First Schedule." The
next definition, that is relevant is contained in clause (9) of the same
section which deals with the expression "standard deduction". That
clause reads as follows:
2(9) "Standard deduction" means an
amount equal to six per cent, of the capital of the company as computed in
accordance with the provisions of the Second Schedule or an amount of fifty
thousand rupees, whichever is greater:
Provided that where the previous year is
longer or shorter than a period of twelve months, the aforesaid amount of six
per cent or, the case may be, of fifty thousand rupees shall be increased or
decreased proportionately:
976 Provided further that where a company has
different previous years in respect of its income, profits and gains, the
aforesaid increase or decrease, as the case may be, shall be calculated with
reference to the length of the previous year of the longest duration.
It is seen from the above definition that for
the calculation of 'standard deduction' one has to ascertain the capital of the
company as computed in the manner specified in second Schedule. That makes it
necessary for us to examine the provisions of Second Schedule of the Act which
contains the rules for computing the a capital of a company for the purpose of
levy of super profits tax. The relevant provision is contained in rule I of the
said Schedule which is in the following terms:- " 1. Subject to the other
provisions contained in this Schedule, the capital of a company shall be the
sum of the amounts, as on the first day of the previous year relevant to the
assessment year, of its paid-up share capital and of its reserve, if any,
created under the proviso (b) to clause (vi-b) of sub-section (2) of section 10
of the Indian Income tax Act, 1922 (XI of 1922), or under sub-section (3) of
section 34 of the Income-tax Act, 1961 (XLIII of 1961), and of its other
reserves in so far as the amounts credited to such other reserves have not been
allowed in computing its profits for the purpose of the Indian Income-tax Act,
1922 (XI of 1922) or the Income-tax Act, 1961 (XLIII of 1961), diminished by
the amount by which the cost to it of the assets the income from which in
accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the
First Schedule is not includible in its chargeable profits, exceeds the
aggregate of- (i) any money borrowed by it which remains outstanding, and (ii)
the amount of any fund, any surplus and any such reserves is not to be taken
into account in computing the capital under this rule.
Explanation 1-A paid-up share capital or
reserve brought into existence by creating or increasing (by revaluation or
otherwise) any book asset is not capital for computing the 977 capital of a
company for the purposes of this Act.
Explanation 2-Any premium received in cash by
the company on the issue of its shares standing to the credit of the share
premium account shall be regarded as forming part of its paid-up share capital.
Explanation 3-Where a company has different
previous years in respect of its income, profits and gains, the computation of
capital under rule 1 and rule 2 of this Schedule shall be made with reference
to the previous year which commenced first." It is manifest from the terms
of rule that the essential components which will together go to make up the
capital of a company are:
(i) Its paid-up share capital on the first
day of the previous year relevant to the assessment year.
(ii) Its reserves, if any, created under the
proviso (b) to clause (vi-b) of sub-section (2) of section 10 of the Indian
Income-tax Act, 1922 or under sub-section (3) of section 34 of the Income-tax
Act, 1961; and (iii) Other reserves in so far as the amounts credited there to
have not been allowed in computing the profits of the company for the purposes
of the assessment to income-tax.
From the aggregate of the aforesaid amounts
certain deductions as specified in the section have to be made but the details
of such deductions are not relevant for the purposes of the present case. What
is important to notice is that unless the company can be said to have a paid-up
share capital as on the first day of the previous year relevant to the
assessment year the formula laid down in the rule for computation of capital of
the company cannot have any application and calculation of "standard
deduction" being based wholly on the capital of the company it becomes
wholly incapable of ascertainment. After a company has gone into liquidation,
can it be said that as on the first day in any subsequent year forming the
previous year relevant to the assessment year, there exists in the hands of the
liquidator any amount distinctly forming the paid up share capital of the
company or any sum that can be 978 characterized as "reserve"? In our
opinion the answer must clearly be in the negative.
In Commissioners of Inland Revenue v. George
Burrell, Pollock M.R. Observed:
"...... it is a misapprehension, after
the liquidator has assumed his duties, to continue the distinction between
surplus profits and capital. Lord Macnaghten in Birch v. cropper the case which
finally determined the rights inter se of the preference and ordinary
shareholders in the Bridgewater Canal, said': I think it rather leads to
conclusion to speak of the assets which are the subject of this application as
"surplus assets" as if they were an accretion or addition to the
capital of the company capable of being distinguished from it and open to
different considerations. They are part and parcel of the property of the
company part and parcel of the joint stock or common fund-which at the date of
the winding up represented the capital of the company." The above
statement of the law was cited with approval and adopted by this Court in
Commissioner of Income-tax v. Girdharas and Co. Private Ltd., and it was held
that in respect of a company in liquidation after the date of its winding up,
the distinction between capital, reserve and the accumulated profits disappears
and there is only one integrated or consolidated fund in the hands of the
liquidator. The concept of a fluctuating share capital or reserve which is the
basic premise necessary to attract the applicability of rule 1 of the Second
Schedule is wholly foreign in respect of a company in liquidation.
In Commissioner of Income-tax, Bangalore v.
B.C. Srinivasa Setty, this Court pointed out that under the scheme of the
Income-tax Act, 1961, charge of tax will not get attracted unless the case or
transaction falls under the governance of the relevant computation provisions.
"The character of the computation provisions in each case bears a
relationship to the nature of the charge. Thus, the charging section and the
computation provisions together 979 constitute an integrated code. When there
is a case to which the computation provisions cannot apply at all, it is
evident that such a case was not intended to fall within the charging section.
Otherwise, one would be driven to conclude that while a certain income seems to
fall within the charging section there is no scheme of computation for
quantifying it. The legislative pattern discernible in the Act is against such
a conclusion". Exactly similar being the scheme of the Super Profits Tax
Act, 1963; the above observations fully apply to case before us. Hence, it has to
be held that inasmuch as the provisions contained in the Act for computing the
capital of the company and its reserves and cannot have any application in
respect of a company in liquidation and consequently the 'standard deduction'
is incapable of ascertainment, the charge of super profits tax under section 4
of the Act is not attracted to such a case.
The judgment of the High Court does not,
therefore, call for any interference.
This appeal is accordingly dismissed with
costs.
M.L.A. Appeal dismissed.
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