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Girdhardas And Co. Ltd. v. Commissioner Of Income-Tax, Bombay North, Kutch & Saurashtra, Ahmedabad
Summary of Opinion by Chagla, C.J.
Factual and Procedural Background
The assessee company entered liquidation on 23-8-1952. Its accounting year ended on 30-9-1952 and the assessment year in issue is 1953-1954. Prior to liquidation, the company made profits of Rs. 98,000/-. The company had accumulated profits of Rs. 50,000/- for the six years prior to its previous year. In computing profits the Income-tax Officer also included a notional profit under S. 23A of Rs. 21,142/-.
The liquidator made distributions to the shareholders: Rs. 15,000,00/- on 9-9-1952 and Rs. 2,25,000/- on 25-9-1952. The central dispute was whether the liquidator, in making these distributions, had in effect distributed the Rs. 98,000/- of current-year profits as a dividend taxable as dividend. There was no dispute as to the sum of Rs. 50,500/-. The Tribunal held that the notional profit of Rs. 21,142/- was not in fact distributable and therefore not distributed; it held that the Rs. 98,000/- had been distributed and constituted dividend. Questions of law were referred to the High Court.
Legal Issues Presented
- Whether the distribution by the liquidator of the company's profits of Rs. 98,000/- (current-year profits) constituted a "dividend" within the meaning of S. 2(6A) of the Income-tax Act and therefore was taxable as dividend.
- Whether the notional profit of Rs. 21,142/- under S. 23A was distributable by the liquidator and thus could be treated as dividend for tax purposes.
- Whether the Commissioner could raise (and have referred) a question of law arising from the Tribunal's order when the application for reference had been made by the assessee.
Arguments of the Parties
Assessee / Mr. Joshi
- Argued that the statutory definition of "dividend" in S. 2(6A) is inclusive (not exhaustive), so that if a particular distribution falls within the ordinary meaning of "dividend" it should be treated as such even if it is not expressly captured by S. 2(6A).
- Contended that there is no reason why current-year profits distributed by the liquidator should not be regarded as dividend and be taxable in the hands of the shareholder.
Commissioner / Department
- Contended (as to the notional sum of Rs. 21,142/-) that it should be included in computing distributable profits (the Tribunal overruled this contention and held the notional sum was not in fact distributable).
- The Commissioner raised a question of law before the High Court relating to the notional sum and distribution treatment, notwithstanding that the reference application to the High Court had been made by the assessee.
Preliminary Objection — Mr. Palkhivala
- Argued preliminarily that because the assessee had applied for a reference, the Commissioner could not on his part ask for a reference on a question of law arising from the Tribunal's order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Haridas Achratlal v. Commissioner of Income-tax, (1955) 27 ITR 684 : AIR 1955 Bom 338 | Established the proposition that on liquidation assets realised cease to bear the distinct character of profits or capital; and that only particular assets (i.e., those referable to accumulated profits of the six previous years) were to be treated as dividends under S. 2(6A). | The court relied on this decision to support a strict construction of S. 2(6A), holding that only distributions out of accumulated profits of the six previous years fall within sub-clause (c) and are taxable as dividends. It was used to reject the submission that all distributions in liquidation are dividends. |
| Commissioners of Inland Revenue v. Burrell, (1924) 9 Tax Cas 27 | English authority that when liquidation begins the distinction between capital and profits disappears; surplus assets distributed on liquidation do not bear the character of profits liable to income tax. | Referred to as foundational authority for the proposition that assets distributed in liquidation are not, by ordinary law, taxable as profits/dividends; this informed the interpretation that the Legislature deliberately limited taxable distributions in S. 2(6A)(c). |
| Appavu Chettiar v. Commissioner of Income-tax, Madras, (1956) 29 ITR 768 : AIR 1956 Mad 474 | Held similarly that current profits are not included in the expression "accumulated profits" in S. 2(6A)(c); and applied the proviso to exclude profits accrued in the company's year of account specified. | The court treated this decision as directly in point and consistent with the view that current-year profits cannot be taxed as dividends under S. 2(6A)(c) on distribution in liquidation. |
| I.T. Ref. No. 20 of 1950 Dated 10-10-1950 (Bombay) | Addressed whether only the party who requests a reference can suggest questions of law; held that once a reference is determined upon, all questions of law arising out of the Tribunal's order may be referred, irrespective of which party sought the reference. | The court relied on this precedent to overrule the preliminary objection and held that the Commissioner could raise questions of law on the reference even though the assessee had made the application for reference. |
Court's Reasoning and Analysis
The Court examined the statutory definition of "dividend" in S. 2(6A) and analyzed the relevant clauses. Clause (a) refers to distributions by a company not in liquidation of accumulated profits; the Court found that clause (a) did not apply because the company here was in liquidation and the disputed sums were not accumulated profits but current profits.
Clause (c) was identified as the only potentially applicable provision. Clause (c) covers "any distribution made to the shareholders ... out of the accumulated profits of the company on the liquidation of the company" and limits the accumulated profits to those "which arose during the six previous years preceding the date of liquidation." The Court emphasized that the Legislature thereby limited taxable distributions on liquidation to a specific category: accumulated profits of the six previous years.
The Court considered the assessee's inclusive-definition argument (advanced by Mr. Joshi) that the statutory definition does not exclude distributions that would fall within the ordinary meaning of "dividend." The Court accepted that S. 2(6A) is an inclusive definition but rejected the contention that, independently of S. 2(6A)(c), assets distributed by a liquidator could be treated as dividends under ordinary law. The Court reasoned that, as a matter of ordinary law, when a company goes into liquidation the distinction between capital and profits disappears and the liquidator distributes assets (surplus assets), which no longer bear the character of profits.
Because of that ordinary-law principle, the Legislature expressly carved out by statute a portion of such distributions to be treated as dividends — specifically the accumulated profits of the six previous years — and the Court held that S. 2(6A)(c) must be strictly construed as creating that limited statutory exception. On that basis the Court concluded that distributions of current-year profits (such as the Rs. 98,000/-) are not covered by S. 2(6A)(c) and thus cannot be treated as dividends for tax purposes merely because they were distributed in liquidation.
The Court also addressed the notional profit of Rs. 21,142/-. It agreed with the Tribunal that because that amount was merely notional and was not in fact available for distribution by the liquidator, it could not be said to have been distributed and therefore could not bear the character of dividend.
On the procedural point, the Court applied the principle from I.T. Ref. No. 20 of 1950: once a reference is determined upon, all questions of law arising out of the Tribunal's order can be referred and any party (winning or losing) may suggest such questions. The Court therefore overruled the preliminary objection that the Commissioner could not raise a question because the assessee had applied for the reference.
Holding and Implications
Holding: All questions referred to in this matter were answered in the negative; the Commissioner must pay the costs of the reference.
Implications (direct consequences):
- The Tribunal's view that the notional amount of Rs. 21,142/- was not in fact distributable and therefore not a dividend was affirmed.
- The Court held that distributions by a liquidator of current-year profits (the Rs. 98,000/-) do not fall within S. 2(6A)(c) (which applies only to accumulated profits of the six previous years) and therefore cannot be treated as dividends by virtue of that provision; accordingly the question whether those amounts were taxable as dividends under S. 2(6A)(c) was answered negatively.
- The Commissioner was permitted to raise a question of law on reference notwithstanding that the assessee had applied for the reference; the preliminary objection on this ground was overruled.
- The Commissioner was ordered to pay the costs of the reference.
The opinion did not purport to lay down a broader novel principle beyond its statutory interpretation and the application of precedents cited; the decision is framed by a strict construction of S. 2(6A)(c) and by established authorities that distinguish ordinary liquidation distributions from dividends unless specifically covered by statute.
H.G.P
Questions answered.
Chagla, C.J:— The assessee company went into liquidation on 23-8-1952. Its accounting year ended on 30-9-1952, and we are concerned with the assessment year 1953-1954. Prior to liquidation the profits made by the company were Rs. 98,000/-. The accumulated profits of the company for six years prior to its previous year were Rs. 50,000/-, and the Income-tax Officer in computing its profits also included a sum of Rs. 21,142/- which was a notional profit under S. 23A, Income-tax Act.
2. Now the liquidator distributed Rs. 15,000,00/- to the share-holders on 9-9-1952 and Rs. 2,25,000/- on 25-9-1952, and the question that arose was whether in making this distribution he had distributed Rs. 98,000/- as part of the dividend of the company which was liable to tax as dividend. There was no dispute as to the sum of Rs. 50,500/-.
3. It was conceded by the company that amount fell within the definition of “dividend” in S. 2(6A)(c). With regard to the notional dividend of Rs. 21,142/- the Tribunal overruled the contention of the Department and held that as the income was only notional it was not available for distribution and therefore it was not in fact distributed by the liquidator. The real controversy centered round the sum of Rs. 98,000/-.
4. Admittedly, these were profits of the current year, admittedly they were distributed by the liquidator and the Tribunal contrary to the contention of the assessee came to the conclusion that this amount constituted dividend and it was distributed as dividend by the liquidator. The question assumed importance because if this amount was distributed as dividend then the company would become liable to the payment of tax on excess dividend. When we turn to the definition of “dividend” contained in S. 2(6A) it is clear that the case does not fall under Cl. (a). That clause states:
“Any distribution by a company of accumulated profits whether capitalised or not, if such distribution entails the release by the company to its share-holders of all or any part of the assets of the company.”
5. In the first place, looking to the scheme of this sub-section, this distribution refers to the distribution by a company which is not in liquidation. Further, it refers to a distribution of accumulated profits, and what we are dealing with here is not accumulated profits tout current profits. Then turning to Cl. (c), which is the only clause which has any application, it states:—
“any distribution made to the share-holders of the company out of the accumulated profits of the company on the liquidation of the company:
Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included.”
6. Therefore, when the company goes into liquidation and a distribution is made out of accumulated profits, which accumulated profits are restricted to six previous years, then that distribution would be dividend. Therefore, under S. 2(6A)(c) the Legislature has limited and restricted the distribution of only certain type of profits which should be included in the definition of dividend. It is not all profits or any profits distributed by the liquidator which constitute dividend.
7. The limitation imposed by the Legislature is that the profits must in the first place be accumulated in contradistinction to the profits being current, and in the second place the accumulated profits must be of six previous years and not beyond that. It seems to us that on the clear language used by the Legislature it is not possible to take any other view of this sub-section.
8. What is urged by Mr. Joshi is that the definition of “dividend” in S. 2(6A) is an inclusive definition and not an exhaustive definition and therefore if he could satisfy us that what is distributed is dividend independently of S. 2(6A) he must succeed. In a sense the definition of “dividend” in S. 2(6A) gives to dividend an extended meaning. It constitutes something which is not dividend as artificial dividend and therefore Mr. Joshi is right that if any particular distribution can fall within the ordinary meaning of “dividend”, the definition given in S. 2(6A) will not exclude that distribution from being dividend.
9. But can it possibly be said that under the ordinary meaning of “dividend” what the liquidator distributed was dividend? It is well settled law that when a company goes into liquidation the distinction between capital and profits disappears and everything that the liquidator distributes is the assets of the company which is in liquidation.
10. Therefore, if we exclude the definition under S. 2(6A) under the ordinary law what the liquidator would be distributing would be assets of the company which is in liquidation. All the profits of the company, accumulated or current, and for whatever period, distributed by the liquidator would be a distribution by him of the assets of the company.
11. The Legislature therefore had to step in and mark out a portion of these assets distributed by the liquidator as artifically constituting dividend. Therefore, we must strictly construe S. 2(6A) as carving out of the assets distributed by the liquidator a certain portion as constituting dividend. If that be the true view of the law, then independently of S. 2(6A)(c) no part of the assets distributed by the liquidator can ever be dividend under the ordinary law, and if in order to succeed the Department must come within the ambit of S. 2(6A)(c), then it is clear that this is not a case of a distribution of accumulated profits of the company for six previous years preceding the date of liquidation.
12. This view of the law was indicated by us in — ‘Haridas Achratlal v. Commissioner of Income-tax’, (1955) 27 ITR 684 : ((S) AIR 1955 Bom 338) (A). At page 689 (of ITR): (at p. 339 of AIR), we stated:
“The contention of the Advocate General is that once the company goes into liquidation the duty of the liquidator is to realise the assets of the company and the assets of the company so realised do not bear any particular impress. They are neither profits nor capital, and according to the Advocate General the intention of the Legislature was that when these, assets are distributed they should be looked upon as dividend and liable to tax.
It is impossible to accept that contention because the Legislature has clearly subjected only particular kinds of assets distributed by the liquidator to tax. It is not all assets distributed by the liquidator which are liable to tax or which can fall in the category of dividends as defined by S. 2(6-A).
It is only those assets distributed by the liquidator which are referable to accumulated profits of the six previous years preceding the date of liquidation that fall in the category of dividend and are liable to tax.”
13. And on the same page we referred to an old English decision, Commissioners of Inland Revenue v. Burrell, (1924) 9 Tax Cas 27 (B), which case laid down that when the liquidation of a company begins all distinction disappears and there are only surplus assets and the share-holder only gets this money in that character and that money no longer bears the character of profits which are liable to tax; and it was because of this view that the Court held that the surplus assets on liquidation distributed to a share-holder were not liable to income-tax. We also pointed out that it was because of this decision that the Legislature incorporated sub-cl. (c) in S. 2(6-A), Income-tax Act.
14. We find that the Madras High Court has taken the same view as we took of the law in Appavu Chettiar v. Commissioner of Income-tax, Madras, (1956) 29 ITR 768 : (AIR 1956 Mad 474) (C), and the decision of the Madras High Court is directly in point because they held that assuming that the distribution by the liquidator was out of accumulated profits of the company, the proviso to sub-cl. (c) of S. 2(6-A) excluded the profits which accrued to it in its year of account ending with 31-3-1947.
15. The view, therefore, of the Madras High Court was that current profits could not be included in the expression “accumulated profits” used in S. 2(6-A)(c), and if current profits were distributed they did not constitute dividend. Mr. Joshi says that there is no reason or logic why profits of the current year distributed by the liquidator should not constitute dividend and should not be liable to tax in the hands of the share-holder as dividend.
16. It is always a mistake to try and look for logic or reason in the provisions of any taxing statute. It may be that the Legislature did not want to subject all the assets distributed by the Liquidator to tax and therefore it enacted that only those assets which represented accumulated profits of six previous years should be artificially looked upon as dividends and be liable to tax as dividend.
17. Another question has been submitted to us by the Tribunal which was raised by the Commissioner, and Mr. Palkhivala has a preliminary objection to take to the raising of this question. His contention is that the application for a reference was made by the assessee and it was on that application that a question of law was submitted to us.
18. As the Commissioner had made no application for reference it was not open to the Commissioner on his application to ask for a reference of a question of law which according to him arose from the order of the Tribunal. Now, this point was considered by us in I.T Ref. No. 20 of 1950 D/- 10-10-1950 (Bom) (D), and we said there:
“Whoever may be the party who asks for a reference, once a reference is determined upon, all questions of law which arise out of the order of the Tribunal can be referred to the High Court for its determination. Questions may be suggested either by the party which wants a reference or by the party which is content with the decision of the Tribunal.
Once the decision of the Tribunal is assailed and is to come before the High Court, there is no reason why the party that loses should be given the sole right of suggesting questions of law that arise from the order of the Tribunal. It is equally open to the winning party to point out to the Tribunal that other questions of law arise from the order made by the Tribunal which may well be considered by the High Court.”
19. It is obvious that there may be cases where a winning party would be seriously prejudiced if it was precluded from raising a question of law merely because it had not made an application for a reference and the reference was asked for at the instance of the losing party. The winning party can never apply for a reference.
20. But it may happen that if the Court takes a particular view on the reference asked for by the losing party, certain other questions of law may arise which may have to be decided in the interest of the winning party. Therefore, it would not be proper to shut out a party before the Tribunal from raising a question of law which clearly arises from the order of the Tribunal merely because it so happens that it has not made an application for a reference.
21. In this particular case, undoubtedly, the Commissioner could have made an application for a reference, but there may be cases, as we have just pointed out, where the Commissioner could not have made an application for a reference because he had won before the Tribunal. We therefore overrule the preliminary objection taken by Mr. Palkhivala.
22. Coming to the question raised by the Commissioner, which deals with the sum of Rs. 21,142/- to which reference has been made, in our opinion, the Tribunal was right in the view that it took that amount cannot be considered to have been distributed when the distribution was made by the liquidator, and therefore that amount cannot possibly bear the impress of dividend in any view of the case.
23. The result is that we will answer the question raised at the instance of the assessee in the negative, and the question raised at the Instance of the Commissioner also in the negative. The Commissioner must pay the costs of the reference.
H.G.P
Questions answered.
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