TMI Blog1965 (11) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... old it in February, 1946, to Mysore Spun Silk Mills Limited for ₹ 7,92,750. The company thus made a profit of ₹ 3,41,586 out of the transaction. For the assessment year 1947-48, this sum was brought to tax treating the same as business profits and a tax of ₹ 1,49,444 was charged which was paid at the end of 1953. Eventually, this court in Ajax Products Ltd. v. Commissioner of Income-tax [1961] 43 I.T.R. 297 held on March 7, 1960, that the sum of ₹ 3,41,586 was not assessable to tax because it could not be regarded as pertaining to business profits. In 1960, the company accordingly received refund of the sum paid as tax. On October 31, 1954, the company went into liquidation. The accounting year of the company was the calendar year and for the period from January 1, 1954, to October 31, 1954, it made a profit of ₹ 1,79,704 which, after payment of the tax assessed thereon, was reduced to the net sum of ₹ 81,611. The assessees were some of the shareholders of the company. On March 10, 1955, the liquidators of the company made a distribution to the shareholders of ₹ 100 per share by allotment of a share in Carborundum Universal Limited to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be carried forward, and in this case there was no such decision, and that the section did not say undistributed profits of the company but accumulated profits. Before we refer to the relevant statutory provision, we may advert to what is of historical interest in connection with it. In Commissioners of Inland Revenue v. Burrell*, which turned on super-tax, Rowlatt J., in the context of winding up of a company, observed that in liquidation there was neither capital nor profits and that all that happened was that the net assets of the company in the course of administration in liquidation were distributed to the shareholders. This view was accepted and reiterated in Commissioner of Income-tax v. P.R.A.L. Muthu Karuppan Chettiar [1935] 3 I.T.R. 208 (P.C.). There Lord Atkin referred to Commissioner of Inland Revenue v. Burrell* and pointed out that, according to that decision, a company was a separate entity to the shareholders, that during the continuance of the company, its shareholders had no right to the profits except so far as they were distributed on a regular declaration of dividend and that on winding up their sole right was to share in the assets available after winding up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay refer to the further development in relation to this clause. In 1956, by the Finance Act of that year, clause (c) was somewhat recast so as to read: (c) 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, whether capitalised or not. Clause (c) of sub-section (22) of section 2 of the Income-tax Act, 1961, is in identical terms. But sub-section (22) has a second Explanation which is to the effect that the expression accumulated profits in sub-clause (c) shall include all profits of the company up to the date of liquidation. The question is whether accumulated profits in clause (c) by itself as it stood in 1955 after the amendment in that year carried the same meaning as the said second Explanation. Clause (c) by itself was without any limitation as to the time during which the profits were accumulated, and so evidently the legislature considered that there should be a limit fixed. That was why the proviso was put in, in the first instance, in 1939. Dhandhania Kedia Co. v. Commissioner of Income-tax [1959] 35 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with clause (c) as amended in 1956 and held that in view of the word immediately used before the words its liquidation in the clause, current profits would also be included in the accumulated profits. But the learned judges also observed at page 320: We believe that the reason why this word (immediately) has been put in is to emphasise the position that all distribution made by the company on liquidation, except to the extent to which it might be otherwise dealt with, must be taken to be of accumulated profits, and if that is so, current profits which arose to the company during the accounting year up to the date of liquidation must necessarily form part of the accumulated profits referred to in the section. Mr. Balasubrahmanyan for the revenue relies on this observation and contends that it meant that, in the view of the Division Bench, the ambit of clause (c), even before its amendment in 1956 and without its proviso, was to bring in the entire profits undistributed on the date of liquidation. We are unable to accept the argument of Mr. Balasubrahmanyan. Learned counsel apparently reads more into that observation than it could bear in the context in which it was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt, the object of clause (c) is to bring to tax any distribution to the shareholders of a company in liquidation out of its accumulated profits. Clause (c), be it noted, used not the expression profits but accumulated profits . Accumulated normally means heaped up, stored up, or put by . It also, to our minds, indicates an effort 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 means to relate to the past. Mr. Balasubrahmanyan 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. Though, as we said, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.J. observed: But 'accumulation' plainly refers to the past and not to a current period. We are aware that the learned Chief Justice made that observation while construing section 24 of the War-time (Company) Tax Assessment Act, 1940-41, and deciding whether accumulated profits in that section included accumulated profits of a continuous account. But it is of significance that as opined by Latham C.J. accumulation by itself in the nature of things must refer to the past and not what is current. This distinction between accumulated and current profits must have been borne in mind in Girdhardas Co. Ltd. v. Commissioner of Income-tax, for Chagla C.J., though the learned Chief Justice was dealing with the proviso to clause (c), stated: Further, it refers to a distribution of accumulated profits and what we are dealing with here is not accumulated profits but current profits. Learned counsel for the assessees invited our attention to Sheth Haridas Achratlal v. Commissioner of Income-tax which was decided on February 15, 1955, just before the amendment of 1955 was made, dropping the proviso, and contended that though in that case the court had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing to show that the tax was paid only out of accumulated profits and not from other sources. But the factual position as disclosed by the record which we referred to a little earlier is a sufficient answer against the contention. His further argument is that when this court in Ajax Products Ltd. v. Commissioner of Income-tax held that the tax was not legally levied, and the refund of it was, therefore, made, it must be taken as if there was never any tax levied and the same paid, and, if that be the position, there should be no difficulty in holding that this sum was part of the accumulated profits. The argument involves a fiction which can only be justified by an appropriate legislative provision. We cannot import into clause (c) such a fiction or a distribution out of a notional amount which in point of fact did not exist on the date of distribution. Mr. Balasubrahmanyan, however, relies on Neptune Assurance Co. v. Life Insurance Corporation and says that the right to a refund of the tax existed even on the date when the tax was paid and could not be said to have arisen only on the date when it was refunded. Learned counsel is right here and has the support of Neptune Assurance ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
