TMI Blog1972 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2(6A) of the Indian Income-tax.Act, ,1922 ?" Question No. 1 was referred at the instance of the Commissioner of Income-tax, Kerala, while question No. 2 was referred at the instance of the assessee. The reference relates to the assessment year 1959-60, the accounting year being the year ending on March 31, 1959. The assessee is the managing director of a private limited company, called R.K.V. Motors and Timber (P.) Ltd. As on March 31, 1959, he had drawn a sum of Rs. 25,107.22 from the company. The Income-tax Officer as well as the Appellate Assistant Commissioner treated the sum of Rs. 25,107.22 withdrawn by the assessee as dividend within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922, and assessed the same to tax. It was contended by the assessee that the profits of the company for the year ending March 31, 1959, do not form part of the "accumulated profits" for ascertaining the dividend under section 2(6A)(e) of the Income-tax Act, 1922, and in arriving at the accumulated profits Rs. 11,000 provided towards tax liability and Rs. 6,900 for payment of dividend already declared should be deducted from Rs. 18,950.98 representing the profits of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 31, 1958, and the company had not set apart any amount towards tax liability. We are concerned with the position as disclosed by the company's accounts and not what it should have or ought to have done. If any special reserve had been created it will be possible to say that such amounts had been taken out of accumulated profits. But, as we stated earlier, the company had not created any such specific reserve as on March 31, 1958. Even if it had set apart any amount as provision towards taxation, there is nothing in the company law which would prevent the company from retransferring and utilising it in the distribution of dividend. The only restriction under the Companies's Act is that no dividend shall be paid except out of profits. Such reserve would still form part of the accumulated profits. The payment of dividend of Rs. 6,900 is also an appropriation and cannot go to reduce the accumulated profits and a set-off is possible only in terms of section 2(6A)(e)(iii)." The question for consideration is whether the disputed sum of Rs. 25,107.22 is dividend within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922. Section 2(6A)(e) of the Indian Income-tax Act, 192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income-tax, the Madras High Court had to examine the meaning of the term "accumulated profits" in section 2(6A)(c) of the Indian Income-tax Act, 1922, as it stood before 1955. The said provision read : " 'Dividend' includes- any distribution made to the shareholders of a compary out of 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." The Madras High Court held: " Assuming that the distribution by the liquidator was out of accumulated profits of the company', the proviso to sub-clause (c) of section 2(6A) would exclude the profits of the company which accrued to it in its year of account ending with 31st March, 1947." According to the Madras High Court, therefore, current profits could not be included in the expression "accumulated profits" used in section 2(6A)(c) of the Indian Income-tax Act, 1922. Chagla C.J., following this decision in Girdhardas Co. Ltd v. Commissioner of Income-tax observed : " Therefore, under section 2(6A)(c), the legislature has limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of a person in that direction. It seems to us to be inappropriate to call a current profit as a profit 'heaped up, stored up or put by'. Current profit is what accrues in praesenti : accumulated, profit is meant to relate to the past. Mr. Balasubrabmanyan for the revenue suggested that the word 'accumulated' in clause (c) only means 'undistributed' or 'what is not appropriated.' If that were the meaning, nothing would have been easier for the legislature to stop short of using the expression 'accumulated', and the word 'profits' by itself would have conveyed that sense. We think that the word 'accumulated' in clause (c) cannot be given that meaning and that something more than mere profits was meant. The legislature confined the clause to a particular kind of profits and did not extend it to all kinds of profits." In coming to this conclusion their Lordships relied on the decision of the High Court of Australia in Hooper Harrison Ltd. (In liquidation) v. Federal Commissioner of Taxation, construing the words "accumulated trading profits" in section 17(l) of the Australian War-time Profits Tax Assessment Act, 1917-18. The learned judges of the High Court of Australia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(6A)(c) of the 1922 Act and they were not concerned with section 2(6A)(e) of the Act. In our view, there is no substance in this contention for the reason that on a fair reading of section 2(6A) the term "accumulated profits" in sections 2(6A)(c) and 2(6A)(e), as it stood before the Finance Act of 1956, should bear the same meaning. In Commissioner of Income-tax v. P. K. Badiani, the Bombay High Court explained the term "accumulated profits" in section 2(6A)(e) of the Indian Income-tax Act, 1922, thus : " Now, the word 'accumulated' in the phrase 'accumulated profits' in section 2(6A)(e) clearly indicates that 'accumulated profits' mean, profits which have been accumulated before the beginning of the accounting year which would be the previous year relevant to the assessment year. The provision of section 2(6A)(e) may fall for consideration during that previous year and at that point of time it would not be even possible to know whether in that previous year there were any profits or to ascertain their amount and even if there were profits of that previous year up to that point of time, whether they would not be wiped out during the subsequent period of that previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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