1. This is a petition by two contributories of a company in liquidation. It purports to be under Section 216 of the Indian Companies Act, 1913. It prays that the official liquidator be directed not to deduct any income-tax from the third dividend which he proposes to distribute among the shareholders of the company. It also prays that the liquidator be directed to pay back to the shareholders the deduction of 30 per cent. made out of the second dividend.
2. The petitioners hold ten thousand fully paid up shares of rupees ten each in the Lower Ganges Jamuna Electricity Distributing Co. (hereinafter called the company in liquidation). The company was compulsorily wound up by an order of this court passed in September, 1934. From the particulars given by the official liquidators it appears that at the commencement of the winding up of this company in September, 1934, the assets amounted to Rs. 11,72,762 10 as. 5 ps., whereas the liabilities were to the tune of Rs. 12,58,686 11 as. 5 ps. The official liquidator carried on the business of the company and he made up the loss and showed profit. In the balance-sheet ending 30th June, 1961, a profit of Rs. 3,79,316.30 nP. was shown. In or about June, 1961, the entire assets of the company were sold to the U.P. State Electricity Board for a sum of Rs. 13,80,096.00 nP.
3. The official liquidator further states that he thus came in possession of two sums: the net profit of rupees three lakhs and odd and the sale price, totalling to Rs. 17,59,412.30 nP. Out of this amount the first dividend was declared and paid at the rate of rupees ten per share. The amount paid out as first dividend in all was Rs. 5,82,340. The first dividend included the amount of profit earned by the official liquidator. Under this court's order dated November 21, 1962, the second dividend was declared at the rate of rupees five per share totalling to Rs. 2,91,170. The official liquidator states in paragraph 5 of his report that the second dividend was declared out of the sale proceeds of the assets of the company. The official liquidator made a deduction of thirty per cent. on account of income-tax from the second dividend. The petitioner's grievance is that the official liquidator was in error in making this deduction. The official liquidator has stated that he had paid the deduction made by him on account of income-tax to the credit of the income-tax department.
4. When the case came up for hearing on 22nd October, 1964, the learned company judge thought it desirable that the relevant income-tax authorities be impleaded as parties to the petition for a satisfactory decision of the dispute raised. Thereupon, the Union of India through the Income-tax Officer, A-Ward, Allahabad, was impleaded as respondent No. 2. It appears that the Income-tax Officer, A-Ward, Allahabad, is the officer who deals with the assessment of the petitioners as well as of the company. The inspector attached to this officer has filed a counter-affidavit on his behalf. It states that on account of the mismanagement and misappropriation of funds by the said managing agents, the company could not pay its dues to the U.P. Government for the purchase of electrical energy in full and that in or about September, 1934, the company's outstanding dues to the U.P. Government amounted to Rs. 1,65,214. It states that, at the instance of the U.P. Government, the company was compulsorily wound up by an order of this court dated 23rd September, 1934, and that " the deponent is not in a position to state as to what was the financial position of the company on that date, whether it had any accumulated profits or not. This could also be appropriately replied to by the official liquidator." It further stated that the official liquidator continued the business of the company and made profits on which the company paid substantial income-tax and that the dividends that have been paid by the official liquidator have been paid out of the accumulated profits made by the company. The main point stressed in the counter-affidavit, and which was also pressed in argument by the learned counsel, is that a payment made by the liquidator of the company to its shareholders out of the profits earned by him, after the commencement of the liquidation proceedings but before the " final liquidation ", are dividends and taxable.
5. It is thus apparent that the company had no accumulated profits in September, 1934, when the winding up commenced. The company did make profits during liquidation, the total whereof amounted to Rs. 3,79,316. 30 nP. The question is whether distribution of this profit is dividend so as to attract liability of deduction of tax at source. Chapter 176 of the Income-tax Act, 1961, deals with "deduction at source". Section 194 relates to dividends. This section imposes upon a company a liability to deduct income-tax and super-tax at the current rates from the amount of dividend before paying or distributing it. The dividend to which this liability is attached is dividend within the meaning of Sub-clause (a) or (b) or (c) or (d) or (e) of Clause (22) of Section 2 alone. Before deduction at source can be made the dividend must conform to any one of these sub-clauses.
6. Section 2(22) defines " dividend ". This sub-section corresponds to Section 2(6A) of the Income-tax Act, 1922. It may perhaps be not out of place to recapitulate the legislative history of this provision. In the case of a company which made profits but did not distribute them to the shareholders but continued to keep it with itself from year to year, and distributed them later on, the distribution so made was dividend within the meaning of section 2(6a)(a) of the 1922 act. The decision in Commissioners of Inland Revenue v. Burrell, (1924) 9 Tax Cas. 27 declared that the position was different in a case where the company went in liquidation with an accumulation of profits in its bag, but before having distributed them. It was held that, after the commencement of liquidation, whatever properties remained with the company after the payment of its liabilities, were surplus assets of the company which were divisible among the shareholders as capital. They were not distribution of dividends. No part of the total funds at the disposal of the company in liquidation could be earmarked or appropriated to its profits account as apart from its capital account. The entire fund was "capital" and divisible as such. To remove this anomaly sub- Clause (c) was added to Section 2(6A) in 1939. It runs as follows :
" 2. (6A) " dividend " includes-- . . .
(c) any distribution made to the shareholders of a company out of the accumulated profits of the company on the liquidation of the company :
Provided that only the accumulated profit so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included. "
7. According to Venkatarama Aiyar J., speaking for the Supreme Court in Dhandhania Kedia & Co. v. Commissioner of Income-tax, [1959] 35 I.T.R. 400, 405; [1959] Supp. 1 S.C.R. 204 :
" 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."
8. The question whether profits earned by a company in liquidation during the continuance of the liquidation would on distribution be dividend within the meaning of section 2(6a)(c) or not has been answered in the negative by the Madras High Court in T. Appavu Chettiar v. Commissioner of Income-tax, [1956] 29 I.T.R. 768 and the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax, [1957] 31 I.T.R. 82.
9. This point came up for consideration before the Supreme Court in Dhandhania's case . It was held that:
" 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 and the law to that extent has been left untouched by
section 2(6a)(c)."
10. The Supreme Court approved of the decision of the High Court mentioned above. It further observed :
"... accumulated profits which are sought to be caught in
section 2(6a)(c) would be the profits accumulated in the financial years preceding the year in which the liquidation takes place ... In the present case, as the company went into liquidation on January 18, 1950, excluding the current year which commenced on April 1, 1949, the six previous years will be the years 1943-44 to 1948-49."
11. Thus the phrase "six previous years preceding the date of liquidation" was interpreted not to include the year in which the winding up commenced.
12. By the Finance Act, 1955, the proviso to Clause (c) was deleted. The result was that, with effect from and subsequent to the assessment year 1955-56, the limitation time of six years disappeared. But the position of current profits became obscure. Clause (c) was further amended by the Finance Act of 1956, which took effect on 1st April, 1956. After this amendment Clause (c) was 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 ..."
13. The significance of this amendment is that it clarifies and qualifies the " accumulated profits ", which are dividends, to mean only such profits as have accumulated " immediately before the liquidation " of the company. The effect of the law declared by Burrell's case was partially abrogated by the introduction of Clause (c) originally. The profits which had accrued during six years prior to liquidation alone were sought to be taxed by artificially treating them as dividend. This six years' limitation was taken away by the 1955 amendment. After that amendment, Clause (c) did not specifically say whether it would include current profits of the company in liquidation. The 1956 amendment solved this ambiguity. It used the phrase " immediately before its liquidation." Prior to the 1955 amendment the provision was " preceding the date of liquidation". To my mind," preceding the date " and " immediately before " are interchangeable terms conveying the same idea. " Preceding the date " was held by the Supreme Court to mean prior to commencement of the liquidation. The same meaning will hold good for " immediately before ".
14. The Supreme Court had in Dhandhania Kedia's case also held that " six previous years" did not include the year in which liquidation commenced. While enacting the 1961 Act the legislature did not accept this limitation. Section 2(22)(c) of the Income-tax Act, 1961, reproduces verbatim Section 2(6A)(c) of the 1922 Act. But it also enacts a new provision in the shape of Explanation 2 to Section 2(22). This is as follows :
" The expression ' accumulated profits ' in Sub-clauses (a), (b), (d) and (e) shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in Sub-clause (c) shall include all profits of the company up to the date of liquidation."
15. Profits earned and accumulated up to the date of liquidation are thus covered by Sub-clause (c). Obviously profits accruing after the date of liquidation are excluded.
16. The learned counsel for the income-tax department as well as for the official liquidator have urged that the word " liquidation " as well as the phrase " the date of liquidation " in these provisions do not refer to the commencement of the winding up proceedings but to the point of time when the company is ultimately liquidated. This point of time is in company law jurisdiction technically called the " dissolution " of the company. The liquidation and dissolution of a company mark different stages of its existence. Liquidation commences with the winding up of a company. When the affairs of a company have been completely wound up and finished, the court makes an order that the company be dissolved and the company stands dissolved from the date of that order (vide Section 194, Indian Companies Act, 1913, and Section 481, Companies Act, 1956). On the passing of the order of dissolution the company incurs a civil death and the very existence of the company comes to an end. The statutory duty of the liquidator to the creditors and contributories of the company finishes. No distribution of assets or profits is made thereafter. As such the date of liquidation under Section 2(22)(c) of the Income-tax Act cannot be interpreted to mean the date of dissolution.
17. A scrutiny of Explanation 2 also leads to this conclusion. For purposes of Sub-clauses (a), (b), (d) and (e), accumulated profits includes profits up to the date of distribution or payment, but not so for purposes of Sub-clause (c); for Sub-clause (c), profits made only up to the date of liquidation are included. In the scheme of this Explanation, this is a date prior to distribution or payment. The date of dissolution comes long after distribution or payments of profits to the shareholders. In Dhandhania Kedia's case , the winding up commenced on January 18, 1950, and the company had not been dissolved. It was held that the phrase " six previous years of the company preceding the date of liquidation " will be the years 1943-44 to 1948-49. In this case the Supreme Court thus declared that the date of liquidation refers to the date of the commencement of the winding up.
18. The result is that profits earned after the commencement of the winding up of a company are not dividends and cannot be the subject-matter of any deduction of income-tax or super-tax at source under Section 194 of the Income-tax Act, 1961. In the instant case the liquidation commenced in 1934. The company had accumulated no profits till that time. The profit of rupees three lakhs and odd in question have all been earned by the liquidator during the liquidation of the company. All this profit is not dividend and nothing can be deducted at source by the liquidator under Section 194 of the Act. The liquidator was in error in making the deduction at the rate of 30% from the second dividend. Sri Deoki Nandan, learned counsel for the petitioner, did not press the second part of the prayer. He stated that his client will take appropriate proceedings before the Income-tax Officer for refund as the deducted income-tax has already been paid by the liquidator to the department. It is, therefore, not necessary to make any direction in respect of the deduction already made from the second dividend. The official liquidator is directed not to deduct anything by way of income-tax or super-tax from the dividends that are to be declared and distributed in respect of this company. The parties shall bear their own costs.