Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.R 76 of 1977

Attorney(S)

For the Appellant: C.M. Devan

Judges

Gopalan Nambiyar, C.J
M.P Menon, J.

Acts

clause (vib) of sub-section (2) of S. 10 of the Indian Income-tax Act, 1922
provisions of Ss. 210 and 211 of the Companies Act and Rules 298
Finance Act, 1956 to the provisions of the Indian Income-tax Act.
Indian Income-tax Act, 1922, or the Income-tax Act, 1961
Income-tax ((1955) 27 I.T.R 684). By the Finance Act, 1955,
sub-section (3) of S. 34 of the Income-tax Act, 1961,
clause (iii) or clause (vi) or clause (viii) of rule 1
Schedule.7. And S. 27 is the exemption Section
INDIAN INCOME TAX ACT
Finance Act, 1956, recast clause (c).
Act 7 of 1933 as S. 2(6A).
Indian Companies Act
INCOME TAX ACT 1961
rule 1 and rule 2
Finance Act, 1955,
Finance Act, 1956,

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Smart Summary

Legal-Analytic Summary of the Judgment delivered by Gopalan Nambiyar, C.J.

Factual and Procedural Background

The question referred to this Court arose from a reference by the Income-tax Appellate Tribunal, Cochin Bench, asking whether the Tribunal was justified in holding that no assessment under the Super-Profits Tax Act, 1963, could be made on the assessee company which was in liquidation. The assessee was the Palai Central Bank Ltd., which had gone into liquidation on 8-8-1960 and whose assets and liabilities were taken over by the Official Liquidator on that date. For the assessment year 1963-1964 (previous year ended 31-3-1963) the Income-tax Officer determined taxable income at Rs. 5,79,678/-. A notice under S. 9(a) of the Super-Profits Tax Act was issued; the assessee returned 'nil' chargeable profits on the basis that the standard deduction left no chargeable profits.

The Income-tax Officer rejected the assessee's method of computing the standard deduction based on capital and reserves as on the date of liquidation, observing that the Official Liquidator had been making disbursements and that reserves could not be assumed to stand as before winding up. The Officer instead applied the alternative minimum standard deduction of Rs. 50,000 and assessed chargeable profits at Rs. 2,04,740/-. The Appellate Assistant Commissioner confirmed that assessment. The Appellate Tribunal reversed, holding that (a) S.27 of the Super-Profits Tax Act (exemption where a company has no share capital) applied to a company in liquidation which had no identifiable share capital, relying on the Supreme Court's decision in Girdhardas' case, and (b) alternatively, if S.27 did not apply the standard deduction was incapable of ascertainment for a company in liquidation. The Revenue sought the opinion of this Court on the question of law so framed by the Tribunal.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no assessment under the Super-Profits Tax Act, 1963 can be made on the assessee company (in liquidation)?

Arguments of the Parties

Assessee's Arguments

The assessee (Palai Central Bank Ltd., in liquidation) submitted a return showing 'nil' chargeable profits, contending that after allowing the prescribed standard deduction there were no chargeable profits for the assessment year 1963-1964.
Specifically, it argued that if the standard deduction were calculated on the share capital and reserves as on the date of liquidation the result would be a deficiency (i.e., no chargeable profits), quantified in the papers as Rs. 23,411/-. (Thus no super-profits tax liability arose.)

Revenue's / Income-tax Officer's Arguments

The Income-tax Officer rejected the assessee's method of computing the standard deduction by reference to pre-liquidation share capital and reserves, pointing out that the Official Liquidator had been making disbursements to creditors in instalments from the commencement of liquidation and therefore it was unreasonable to assume reserves were unchanged.
The Officer applied the statutory minimum alternative standard deduction of Rs. 50,000 and assessed chargeable profits at Rs. 2,04,740/-. The Appellate Assistant Commissioner confirmed this assessment.
At the appellate stage the Revenue challenged the Tribunal's conclusions and sought the question of law to be referred to this Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Girdhardas' case (63 I.T.R. 300)	That in the hands of the Liquidator there is only one consolidated fund which cannot be disintegrated into share capital and profits for the purposes of distribution/taxation.	The Tribunal relied on this decision to support the view that S.27 (exemption where a company has no share capital) applied to a company in liquidation; this Court accepted that the Girdhardas reasoning supports the Tribunal's conclusion.
Inland Revenue Commissioners v. William Burrell (9 Tax Cases 27)	English decision invoked to show that after liquidation the distinction between surplus profits and capital disappears and there is a single fund in the liquidator's hands.	The Court stated that this English decision supports the Tribunal's reasoning and conclusion that a liquidator's fund cannot be disintegrated in the manner assumed for computing the standard deduction under the Super-Profits Tax Act.
Commissioners of Inland Revenue v. George Burrell ((1924) 2 K.B. 52)	Pollock M.R.'s observation that it is a misapprehension after the liquidator assumes duties to continue the distinction between surplus profits and capital; the assets are a joint stock or common fund.	The Court quoted this decision (as explained in Girdhardas' case) to show the foundational English authority for the single-fund principle relied upon by the Tribunal.
Birch v. Cropper ((1889) L.R. 14 App. Cas. 525)	Lord Macnaghten's statement that it is confusing to speak of surplus assets as an accretion to capital; they form part of the joint stock or common fund at winding up.	Quoted in the Court's exposition (via George Burrell and Girdhardas) to illustrate the classical common-fund view of a liquidator's assets relied upon in deciding whether capital and profits can be disaggregated.
Sheth Haridas Achratlal v. Commissioner of Income-tax ((1955) 27 I.T.R. 684)	Held that profits of the current year during which the company was ordered or resolved to be wound up could not be included in the expression "dividend" (as earlier framed).	Cited in the Court's historical account of legislative changes to the Income-tax Act dealing with distributions by liquidators and the limits of previous formulations of "dividend."

Court's Reasoning and Analysis

The Court proceeded in a stepwise statutory and doctrinal analysis based on the Super-Profits Tax Act and the relevant schedules and the practical legal effect of liquidation:

Statutory framework: The Court identified key statutory provisions of the Super-Profits Tax Act that governed liability:
- S.2(5): defines "chargeable profits" as total income computed under the Income-tax Act, 1961, adjusted as per the First Schedule.
- S.2(9): defines "standard deduction" as six per cent of capital (as computed per the Second Schedule) or Rs.50,000 whichever is greater (with proportional adjustments for year length).
- S.4: the charging provision — super profits tax is charged only on so much of chargeable profits as exceed the standard deduction.
- S.27: exemption provision — the Act shall not apply to any company which has no share capital.
Dependence of tax charge on ascertainment of standard deduction: Because S.4 charges tax only on chargeable profits exceeding the standard deduction, the Court observed that where the standard deduction itself cannot be ascertained, the statutory charge cannot be fairly or lawfully levied.
The Second Schedule and the problem of computation in liquidation: The Court examined Rule 1 of the Second Schedule defining capital for super tax purposes — capital is to be computed by reference to paid up share capital and certain reserves "as on the first day of the previous year." The Court held that for a company in liquidation the concept of share capital (as an accounting and legal category) is effectively unknown in the liquidator's accounts.
Companies Act and liquidation practice: By reference to Companies Act Ss. 210 and 211 and Company Court Rules 298 and 299 (as analyzed in the opinion), the Court noted that a liquidator files accounts in the form of receipts and payments; those accounts do not show the capital or reserves in the form required by the Second Schedule for computing the standard deduction.
Consequence for the present Act: Given (a) the statutory reliance on capital/reserves computed as required by the Second Schedule, and (b) the practical impossibility of computing those items from a liquidator's accounts, the Court agreed with the Tribunal that the standard deduction is incapable of ascertainment for a company in liquidation and therefore S.4 could not be applied to impose super-profits tax.
Doctrinal support from case law and legislative contrast: The Tribunal had relied on English authority (Burrell) and the Supreme Court's exposition in Girdhardas' case that a liquidator's fund is a single consolidated fund that cannot be disintegrated into capital and profits. The Court accepted that these authorities support the Tribunal's approach.
Legislative developments in the Income-tax Act do not affect the Super-Profits Tax Act: The Court observed that Parliament amended the Income-tax Act (notably by Act 7 of 1933 and later by the Finance Acts of 1955 and 1956) to permit, for income-tax purposes, a notional disintegration of distributions by liquidators into capital and accumulated profits (S.2(6A) as amended). However, the Court noted that there had been no corresponding amendment to the Super-Profits Tax Act. Therefore the special disintegration principle enacted for income-tax purposes does not apply to super-profits tax; this reinforced the view that the Burrell principle (single fund in liquidation) remains applicable to the Super-Profits Tax Act.
Overall conclusion of reasoned analysis: On both routes relied upon by the Tribunal — (i) S.27 exemption where the company has no identifiable share capital in liquidation, and (ii) impossibility of computing the standard deduction required by S.4 and the Second Schedule — the Tribunal's conclusion that no assessment could be made under the Super-Profits Tax Act in respect of the company in liquidation was supported by statutory construction, the nature of liquidation accounts, and precedent.

Holding and Implications

Holding: The Court answered the referred question in the affirmative — in favour of the assessee and against the Revenue. The Tribunal was justified in holding that no assessment under the Super-Profits Tax Act, 1963 could be made on the assessee company in liquidation.

Implications:

Direct effect: The assessee (Palai Central Bank Ltd., in liquidation) cannot be assessed to super-profits tax for the assessment year in question under the Super-Profits Tax Act on the bases considered by the Tribunal. The Court expressly recorded that there would be no order as to costs.
Reasoning scope: The Court's decision rests on (i) the textual requirement that the standard deduction be calculated by reference to capital and reserves as computed under the Second Schedule, and (ii) the practical and legal reality that a liquidator's accounts do not present capital and reserves in the required form — making the standard deduction incapable of ascertainment — and, alternatively, on the operation of S.27 where no share capital is identifiable in liquidation.
Broader statutory point noted by the Court: The Court emphasized that while the Income-tax Act had been amended (by Finance Act provisions) to permit notional disaggregation of a liquidator's distributions into capital and profits for income-tax purposes, there was no parallel amendment to the Super-Profits Tax Act. Thus the legislative device that permits disaggregation for income-tax liability does not apply to super-profits tax under the Act being considered.
On precedent and novelty: The Court applied existing authorities (English and Indian decisions) and statutory construction to resolve the question; the opinion does not purport to create a new legislative policy and is confined to the textual and precedent-based conclusions stated above.

No information beyond the text of the provided opinion was used in this summary. Where the opinion itself relied upon legislation and case law, those materials have been summarized strictly as they appear in the judgment.

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Commr. Of Incometax v. Official Liquidator, Palai Central Bank Ltd.

The Judgment of the Court was delivered by

Gopalan Nambiyar, C.J:— The Income-tax Appellate Tribunal, Cochin Bench, has along with its statement of the case, forwarded the following question of law for our opinion, viz.

“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, 1963 can be made on the assessee company (in liquidation)?”

2. The assessment year with which we are concerned is 1963-1964, that is, the year ended 31-3-1963. The assessee is a Banking Company, namely, the Palai Central Bank Ltd., which went into liquidation on 8-8-1960. On that date the Official Liquidator took charge of the assets and liabilities of the Company. A balance-sheet had been prepared on that date. Thereafter, for every year, the Liquidator used to prepare an Income and Expenditure Statement for submission to the Reserve Bank of India. For the year in question, the assessment year 1963-1964, the taxable income of the assessee was determined by the Income-tax Officer at Rs. 5,79,678/-. The Officer was of the view that this amount would attract liability for super profit tax. As the assessee had not submitted any return under the Super-Profit Tax Act, a notice under S. 9(a) of the Act calling for return was issued. The assessee submitted the return showing the chargeable profits as ‘nil’. The return was sought to be supported by the contention that there was no chargeable profit after considering the ‘standard deduction’ allowable to the assessee and hence no liability to super tax. It was the assessee's contention that if the standard deduction be calculated on the share capital and reserve as on the date of liquidation, there would be a deficiency of Rs. 23,411/-. The Income-tax Officer overruled this contention pointing out that the Official Liquidator was making disbursements to creditors in instalments from the commencement of liquidation proceedings, and it is unreasonable to believe that the general reserves and other reserves stood at the same figures as they were prior to the winding up of the Company. He therefore granted the alternative minimum standard deduction of Rs. 50,000/-, and worked out the chargeable profit at Rs. 2,04,740/-. The Appellate Assistant Commissioner confirmed the said order of the Income-tax Officer. On appeal, the Appellate Tribunal found that liquidation had not changed or affected the status of the Company, and that the surplus was chargeable to super profit tax only under S. 4 of the Act.

3. It was of the view that S. 27 of the Act exempted a Company from the provisions of the Act if it had no share capital; and that the exemption could not be confined to the Companies under S. 12(b) or 25 alone, but would cover cases of Company going into liquidation which has no identifiable share capital. The Tribunal referred to the Supreme Court's decision in Girdhardas's case (63 I.T.R 300) that in the hands of the Liquidator there is only one fund which cannot be disintegranted into share capital in the Liquidator's hands, and therefore the exemption under S. 27 of the Act was attracted. There was again another reason given by the Tribunal, namely, that even if the exemption under S. 27 is not attracted, the charging Section, S. 4, would not apply to the Company as the standard deduction was incapable of ascertainment. The Tribunal referred to the decision of the Supreme Court and held that as there was only one consolidated fund in the hands of the Liquidators, it would not be possible to view the fund as entirely composed of profits or of capital. To the argument that on these two alternative assumptions, that the fund was composed of either the one or the other, the liability could be worked out, the Tribunal answered that the submission was unacceptable and that it cannot be assumed that the Company had no capital at all. At the instance of the Revenue, it submitted the question of law for our opinion.

4. S. 2(5) of the Act defines chargeable profits as follows:

“2. Definitions

In this Act, unless the context otherwise requires,—

(5) ‘chargeable profits’ means the total income of an assessee computed under the Income-tax Act, 1961 for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule;

5. And S. 2(9) defines the standard deduction thus:

“(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, as the case may be, of fifty thousand rupees shall be increased or decreased proportionately:

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; and

6. S. 4 is the charging Section which 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.”

7. And S. 27 is the exemption Section which provides that the Act shall not apply to any Company which has no share capital. Turning to the Second Schedule, the mode of computation of the capital of a Company for the purposes of super tax is provided thus:

“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 (vib) of sub-section (2) of S. 10 of the Indian Income-tax Act, 1922 or under sub-section (3) of S. 34 of the Income-tax Act, 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 purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 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 includable 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 reserve as is not to be taken into account in computing the capital under this rule.

Explanation 1.—A paid up share catital of reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the 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.

(Rules 2 and 3 omitted as unnecessary)

8. It will be seen from the charging Section, S. 4, that super tax was imposable only on so much of the chargeable profits of the Company as exceeds the standard deduction at the rates specified in the Third Schedule. It follows therefore that where the standard deduction itself is incapable of ascertainment, the charge to tax cannot be levied. The standard deduction has to be computed in accordance with the Second Schedule, with respect to the share capital and the reserve of the Company in the modes sanctioned by Rule 1 of the Schedule. In the case of a Company in liquidation, it is clear on an analysis of the provisions of Ss. 210 and 211 of the Companies Act and Rules 298 and 299 of the Company Court Rules that the concept of share capital is unknown to a company in liquidation and that after liquidation the Liquidator is to file accounts, merely showing receipts and payments and that the accounts do not show the capital or reserve with respect to which the capital of the Company is to be worked out as provided in the Schedule. It appears to us therefore that the view taken by the Tribunal is correct having regard to the provisions of the Act.

9. The Tribunal based its conclusions on the English decision in Inland Revenue Commissioners v. William Burrell (9 Tax Cases 27). We do not propose to examine the case in full or in detail. We think the decision supports the reasoning and the conclusion of the Tribunal. It is enough for us to refer to the decision of the Supreme Court in Girdhardas' case (63 I.T.R 300) where this English decision is referred to with respect to the provisions of the Indian Income-tax Act, for distribution of dividend income. The Court observed:

“In Commissioners of Inland Revenue v. George Burrell ((1924) 2 K.B 52, 63), 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 ((1889) L.R 14 App. Cas. 525, 546), the case which finally determined the rights inter se of the preference and ordinary shareholders in the Bridge Water Canal, said: ‘I think it rather leads to confusion 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 company.””

The amounts distributed to the shareholders by a liquidator are therefore distributed as capital of the company, since the liquidator has no power to distribute dividend, and the sums received by the shareholders cannot be disintegrated into capital and profits by examining the accounts of the company when it was a going concern.

The scheme of the Indian Companies Act closely followed the English Companies Act and the view expressed in George Burrell's case ((1924) 2 K.B 52, 63) applied to distributions made by liquidators, and those distributions were not liable to be taxed as dividend. Parliament, with a view to avoid escapement of tax, devised a special definition of the word “dividend” and incorporated it by Act 7 of 1933 as S. 2(6A). The effect of the provision was to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company as a going concern, but subject to the limitation that while in the latter the profits distributed will be dividend whatever the length of the period for which they were accumulated, in the former such profits may be dividend only in so far as they come out of profits accumulated within six years prior to liquidation. It also appeared from the language used that profits of the current year during which the company was ordered or resolved to be wound up could not be included in the expression “dividend”: see Sheth Haridas Achratlal v. Commissioner of Income-tax ((1955) 27 I.T.R 684). By the Finance Act, 1955, the proviso to clause (c) was deleted and in consequence thereof the limitation relating to the period during which the profits were accumulated ceased to apply in the determination whether the amount distributed by the liquidator was dividend. Even after the amendment by the Finance Act, 1955, the language of the clause was found to be somewhat inapt and the legislature, by the Finance Act, 1956, recast clause (c).

“The language used by the legislature in S. 2(6A)(e), as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components—capital and accumulated profits—as they existed immediately before the commencement of liquidation. In any distribution made to the shareholders of a company by the liquidator, that part which is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and liable to tax under the Act. The provision was intended to supersede the application of the principle of George Burrell's case ((1924) 2 K.B 52), that is, to enact that even though on a winding up of a company the distinction between the assets and the accumulated profits disappears, the taxing authority may disintengrate the amount distributed into its component parts and determine the share attributable to accumulated profits. The amount distributed would therefore be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, the proportion being the same which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding up, and that part of the receipt which is attributable to the accumulated profits would be taxable. The Income-tax Officer has therefore in the first instance to determine the accumulated profits in the hands of the company, whether capitalised or not, and the rest of the capital immediately before the liquidation: he has then to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the component attributable to accumulated profits. There is in S. 2(6A)(c) no warrant for the view that in the course of liquidation the accumulated profits exist as a separate fund even in a notional sense. Each distribution is of a consolidated amount which represents both capital and accumulated profits. There is also nothing in the clause which supports the view that whatever is brought to tax by the taxing authorities in a given year is dividend, and the rest represents the assets of the company. The fund in the hands of the liquidator is one: when the fund or a part of it is distributed, the distribution is deemed to take place in the same proportion in which the capital and accumulated profits stood in the accounts of the company immediately before-the winding up.”

10. The above reasoning makes it clear that the principle of the decision in Burrell's case was got over under the Indian Income-tax Act by the amendment effected by the Finance Act, 1956 to the provisions of the Indian Income-tax Act. There is no such corresponding amendment to the provisions of the Super Tax Act. In this view again, the reasoning of the Tribunal following the principle in Burrel's case appears correct.

11. We answer the question referred in the affirmative, that is, in favour of the assessee and against the Revenue. There will be no order as to costs.

Commr. Of Incometax v. Official Liquidator, Palai Central Bank Ltd.

Legal-Analytic Summary of the Judgment delivered by Gopalan Nambiyar, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's / Income-tax Officer's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commr. Of Incometax v. Official Liquidator, Palai Central Bank Ltd.

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