Gautam Sarabhai And Others v. Commissioner Of Income-Tax, Gujarat.

1. This is a reference under section 66(1) of the India Income-tax Act, 1922. The assessment year with which we are concerned is the year 1955-56, the accounting year being the calendar year 1954. The assessees were shareholders in a company incorporated in accordance with the law prevailing in East Africa called Kawampe Cotton Co. Ltd., Kampala. Having regard to the provisions contained in the Indian Income-tax Act, 1922, this company was regarded as a company for the purpose of the Indian Income-tax Act. This company went into voluntary liquidation on 22nd July, 1954. In the month of August 1954, the liquidator of the company made payments to the assessees who were the shareholders in that company. The amounts paid to the assessees were received by the assessees on 27th August, 1954. The following tabular statement shows the names of the assessees, the number of shares of the company held by them, the amounts received by them referable to the share capital, the amount received by them referable to capital profit, the amount of accumulated profits treated as dividend, the amount of total distribution and the amounts referable to accumulated profits of six previous years of the company preceding the date of liquidatio :

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2. The Income-tax Officer held that the amounts distributed as aforesaid referable to the accumulated profits of previous years of the company fell within the category of "dividend" under section 2(6A)(c) of the Indian Income-tax Act, 1922, as it stood prior to the amendment made therein by the Finance Act, 1955, and were liable to be taxed as dividend. The matter was carried in appeal before the Appellate Assistant Commissioner who upheld the decision of the Income-tax Officer and dismissed the appeal. The matter was carried further before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal upheld the decision of the Income-tax Officer and dismissed the appeal. The matter has now been referred to us for the determination of the following question :

"(1) Whether for the assessment years 1955-56, any portion of the amount received by the applicant from the liquidator of Kawampe Cotton Co. Ltd. is at all taxable as 'dividend' by virtue of section 2(6a)(c) of Indian Income-tax Act?

(2) If the answer to the above question is in the affirmative, whether the said clause (c) as it stood before its amendment by the Finance Act, 1955, or as it stood after such amendment, is applicable to the present case?"

3. section 2(6a)(c), as it stood before the amendment made therein by the Finance Act, 1955, ran as unde :

"2. (6A) 'dividend' includes - ........

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the compan :

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."

4. By Section 3 of the Finance Act, 1955, from the aforesaid sub-clause (c) the proviso was deleted. By section 20 of the Finance Act, 1955, the amendment to the Income-tax Act made by the aforesaid section 3 was to have effect on and from the 1st day of April, 1955. The contention urged before us related to the interpretation of section 2(6a)(c). The words used in the section are that any distribution made to shareholders of a company "out of accumulated profits of the company" on the liquidation of the company are liable to be regarded as dividend. It was urged by Mr. Palkhivala, learned counsel for the assessees, that once a company goes into liquidation, it is not possible to say that there were any assets in the hands of the liquidator which could be regarded as constituting accumulated profits of the company. He urged that upon the liquidation of a company, profits shed their character as profits and the entire net assets of the company become a surplus fund in which the element of profit as distinguished from capital, did not exist. he further urged that since the section charges only the post-liquidation distribution which has been made out of accumulated profits, the legislation has misfired, because no such profits can be said to exist after such liquidation. Strong reliance in support of this contention has been placed upon a decision in the case of Inland Revenue Commissioners v. George Burrell. In that case, on the winding up of a company, distribution was made by the liquidator amongst the shareholders and the amount so distributed was referable to undivided profits of the previous years and if the year in which the winding-up occurred. It was held that super-tax was not payable on the undivided profits as income, because in the winding-up they had ceased to be profits and were assets only. In the judgment of Pollock, Master of the Rolls, it has been stated at page 62 that the problem that had to be solved in that case was whether the quota received by each shareholder was a part of his annual profits or gains and so subject to super-tax. In considering this question the Master of Rolls observed that it was a misapprehension, after the liquidator had assumed his duties, to continue the distinction between surplus profits and capital. He quoted with approval, the remarks of Lord Justice Lindley in the case of In re Armitage, at page 346 where it had been observed that the moment the company got into liquidation there was an end of all power of declaring dividends and of equalizing dividends, and the only thing that the liquidator had to do was to turn the assets into money, and divide the money among the shareholders in proportion to their shares. The Master of Rolls further observed that it was not right to split up the sums received by the shareholders into capital and income, by examining the accounts of the company when it carried on business, and disintegrating the sum received by the shareholders subsequently into component parts, based on an estimate of what might possibly have been done, but was not done, Lord Justice Atkin, in the course of his judgment, observed that when the company capitalizes undivided profits and distributes them as capital, say as bonus shares, the shareholder does not bring into account for super-tax the income-tax paid by the company thereon, so in the case of accumulated profits which have become surplus assets and are distributed and received as such.

5. Mr. Palkhivala is right when he contends that when a distribution is made by the liquidators of a company in liquidation, the distribution is made out of the assets of the company and that if the provisions contained in section 2(6A)(c) had not been enacted by the legislature, it was not possible to regard the dividend distributed by a liquidator out of the assets of the company in liquidation as a dividend for the purpose of taxation. As observed by the Supreme Court in the case Dhandhania Kedia & Co. v. Commissioner of Income-tax, it was to remove the anomalous situation which arose out of the decision in the case of Inland Revenue Commissioners v. George Burrell that the Indian legislature, following similar legislation by British Parliament in the year 1927, enacted section 2(6a)(c) in the year 1939. The question we have now to consider is whether the legislature has carried out its intent in an effective manner by the way in which section 2(6a)(c) has been enacted. We have to read the provisions contained in section 2(6A)(c) as a whole. Reading the section as a whole, it is clear that what the legislature intended to hit at was a distribution made to the shareholders of a company which is referable to accumulated profits which arose during the six previous years of the company preceding the date of liquidation. The language used in sub-section (c) of section 2(6A), namely, "distribution made to the shareholders of a company out of accumulated profits of the company", is not apt. Once a company goes into liquidation, all the assets of the company go into the hands of the liquidator and it is out of these assets that a distribution has to be made. The Privy Council had to consider the question of the nature of such distribution whilst dealing with the case of a firm in the case Commissioner of Income-tax v. P.R.A.L. Muthu Karuppan Chettiyar. In the course of its judgment, the Privy Council has observed that the liquidator may apply sums earned as profits in paying capital liabilities and capital assets in paying revenue liabilities. What he distributes is a lump sum, and no reconstruction into a division of capital and profits is necessary or in many cases possible. It thereafter proceeds to consider that when distribution is made on the dissolution of a firm the nature of such distribution is distinct and different from the distribution made on the winding up of a company by the liquidator. The question which we will now proceed to consider, having regard to the use of inapt language by the legislature's intent has been expressed with sufficient certainty to make the provisions applicable to any set of circumstances. As observed in the speech of Viscount Simon in the case of Rex v. General Commissioners of Income Tax for the City of Londo : Ex parte Gibbs, at page 244, our duty is to find out what the legislature must be taken to have really meant by the expression which it has used, without necessarily attribution to it a precise appreciation of the technical appropriateness of its language. We have to read the language of the proviso and see what light is thrown upon the earlier words used by the legislature having regard to what is stated in the proviso. The proviso makes it abundantly clear that only the accumulated profits which have been distributed, on the liquidation of the company and which arose during the six previous years of the company preceding the date of liquidation are intended to be covered by the expression "dividend" as used by the legislature. When we read the provisions contained in sub-section (c) and the words used in the proviso, the intention of the legislature is clear that what was sought to be drawn into the net cast by the use of the word "dividend" was the distribution made to the shareholders of a company referable to accumulated profits of the company which arose during six previous years of the company preceding the date of liquidation. What the legislature intended to convey by the words "out of accumulated profits of the company" was to indicate the source from which the money distributed came. If the distribution is referable to the accumulated profits of the company, then such distribution would be a distribution covered by the expression "dividend". Even though it would not be proper to describe such distribution as a distribution made out of the accumulated profits of the company and it would not be possible on the winding up of a company to say that any distribution has been made by the liquidator out of the accumulated profits of the company, the legislative intention is clear and leaves no room for doubt that what was intended to be covered was a distribution referable to the accumulated profits of the company of the previous six years of the company preceding the date of liquidation.

6. Reliance was placed by Mr. Palkhivala upon the observations of Bhagwati J. in the in the Supreme Court case at page 661, A.V. Fernandez v. State of Kerala. Justice Bhagwati in that case has observed as unde :

"It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter."

7. We have also been reminded of the words of Lord Simonds in the case of Wolfson v. Commissioners of Inland Revenue, in his speech where he has observed that it is not the function of a court of law to give to words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which, had the legislature though of it, would have been covered by appropriate words.

8. It the present case, what we are seeking to do is not to strain the language which has been used by the legislature or to give the language an unnatural meaning. The meaning sought to be given by the legislature to the words used by the legislature has been clearly stated by the legislature when enacting the proviso. The proviso in express terms lays down that only the accumulated profits which arose during the six previous years of the company preceding the date of liquidation which constitute the accumulated profits referred to in the earlier part of the section.

9. Our attention was drawn by the learned Advocate-General, who appears on behalf of the Commissioner, to two decisions in the case of Sheth Haridas Achratlal v. Commissioner of Income-tax, and the case Hariprasad Jayantilal & Co. Ltd. v. Income-tax Officer, Ahmedabad. It both these case, the provisions contained in section 2(6A)(c) came up for consideration before the court. There are general words used in both these decisions which support the case of the Advocate-General, but the precise point which has been raised before us was not raised in any of the said cases and those cases cannot be relied upon for the purpose of throwing light upon the questions which we have to deal with in the present case. In our view, the words "out of accumulated profits of the company" used in the section under construction merely refer to the source from which the moneys distributed by the liquidator of a company came, and even though, on the liquidation of a company, profits may shed their character as profits and the entire net assets of the company become a surplus fund in the hands of the liquidator of the company, the provisions of the section would be satisfied if, for the purpose of distribution to the shareholders, moneys distributed are attributable to this source.

10. The answer to the first question, therefore, will be that in respect of each applicant, the portion of the amount received by the applicant from the liquidator of the Kawampe Cotton Co. Ltd., which is referable to the accumulated profits of the company, is taxable as dividend by virtue of section 2(6A)(c) of the Indian Income-tax Act.

11. We shall now proceed to deal with the second question that has been raised. The answer to that question depends upon whether the amendment made in the definition of the expression "dividend" in section 2(6A)(c) by the Finance Act, 1955, is applicable to the facts of the case. The question in short is whether the definition as it stood after the amendment made by the Finance Act, 1955, is applicable, or the definition as it stood immediately prior thereto, is applicable. By the amendment made by the Finance Act, 1955, the proviso has been deleted, with the result that after the coming into force of the Finance Act, 1955, the distribution made to the shareholders of a company referable to accumulated profits of the company is regarded as dividend and made subject to tax. The limitation of six years imposed by the proviso has been done away with. Section 3 of the Finance Act, 1955, whereby the amendment has been effected, came into force from 1st April, 1955. The provisions of the Finance Act, 1955, apply to assessments made for the assessment year 1955-56. In view of the provisions contained in section 3 of the Indian Income-tax Act, 1922, the provisions of the Finance Act, 1955, will apply when considering the income of an assessee in respect of the "previous year in the calendar year 1054" of the assessee. It is not disputed that the Income-tax Act as amended at the date of the relevant Finance Act, applies for the purpose of assessment and any alteration which comes into force on the 1st of April of a finance year must apply to the assessment for that year. The law on the subject is now well settled by the decisions in Maharaja of Pithapuram v. Commissioner of Income-tax, Scindia Steam Navigation Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Scindia Stem Navigation Co. Ltd.

12. Our answer to the second question is that clause (c) as it stood after its amendment by the Finance Act, 1955, is applicable to the present case in respect of each of the assessees.

13. The assessees will pay to the Commissioner the costs of the reference.