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TMI Blog1956 (8) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... it from 23rd March, 1952, to the end of September, 1952. 3. Undistributed profits for six years ending 30th September, 1951, amounted to ₹ 50,500 and were available with the liquidator for distribution. In the assessment year 1949-50 a sum of ₹ 21,142 was assessed to tax in the hands of the assessee company under section 23A of the Income-tax Act. This amount was held by the Income-tax Authorities to be deemed to be income of the assessee. The assessee company had never received it. The Income-tax Authorities also treated this amount as the sum available for declaring dividend out of profits. The Tribunal disagreed with that view and held that as this amount was never received by the assessee company, it could not be available with the liquidator for the purpose of declaring the dividend to the shareholders. 4. The second contention of the assessee was that the profit of ₹ 98,000 which accrued to the assessee from the commencement of the year of account up to the date of liquidation could not form part of the accumulated profits under the proviso to section 2(6A)(c). Reliance was placed on the decision of the Bombay High Court where it has been held that six yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 99,968 Profit of the year 1,10,216 Tax thereon would be 48,220 The excess profit distributed by the company therefore would be ₹ 99,968 less ₹ 61,996 37,972 Tax thereon @ 1 anna in the rupee would be 2,373 The Tribunal directed that the excess tax to be charged as provided in the Finance Act would be ₹ 2,373, and against ₹ 5,963 computed by the Income-tax Officer. 8. The assessee contended that the profit of ₹ 98,000 of the year of account should not be considered to have been distributed as dividend by the liquidator. According to the assessee the total profit which could be held to have been declared as dividend could not exceed ₹ 50,500. As this amount would be less that the profits of the year of account as reduced by the tax ₹ 61,996 (Rs. 1,10,216 less ₹ 48,220) no extra tax was payable. 9. The question of law which arises is: "Whether on the facts and circumstances of the case the distribution of ₹ 98,000 being the profits from 1st October, 1951, to 23rd August, 1952, to the shareholders is the distribution of dividend within the meaning of section 2(6A)?" 10. The Department has raised another q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of liquidation the profits could only be taxed up to 6 years prior to the date of the liquidation. In the year in which the liquidation takes place the profits will have to be assessed in the hands of the liquidator and would be covered by sub-section (6A) and that will be a distribution made by a company out of the profits of that year. There could be no question of excluding the profits of the broken period ending with the date of the liquidation as not available for the purpose of dividend. The Bombay High Court has held that the 6 years exemption is in respect of the six preceding years prior to the year in which the liquidation occurs. The restriction, therefore, is only in respect of the profits which have not been assessed in the hands of the liquidator. As far as the profits of the year of account in which the liquidation takes place are concerned, those profits will be assessed in the hands of the company and after the appointment of the liquidator. There could be no question of exempting any profits of a broken period. As we have stated hereinbefore it may be that the liquidator has to carry on a business for a number of years and in those years profits are mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15,00,000 to the shareholders on the 9th September, 1952, and ₹ 2,25,000 on the 25th September, 1952, and the question that arose was whether in making this distribution he had distributed ₹ 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 ₹ 50,500. It was conceded by the company that that amount fell within the definition of "dividend" in section 2(6A)(c). With regard to the notional dividend of ₹ 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 ₹ 98,000. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 2(6A) will not exclude that distribution from being dividend. 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. Therefore, if we exclude the definition under section 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. The Legislature therefore had to step in and mark out a portion of these assets distributed by the liquidator as artificially constituting dividend. Therefore, we must strictly construe section 2(6A) as carving out of the assets distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hettiar v. Commissioner of Income-tax [1956] 29 I.T.R. 768 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-clause (c) of section 2(6A) excluded the profits which accrued to it in its year of account ending with 31st March, 1947. The view, therefore, of the Madras High Court was that current profits could not be included in the expression "accumulated profits" used in section 2(6A)(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 shareholder as dividend. 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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