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TMI Blog1972 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 The Income-tax Officer as well as the Appellate Assistant Commissioner treated the sum of Rs. 25,107.22 withdrawn by the assessee as dividend within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922, and assessed the same to tax.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 company as on March 31, 1958, and if so the accumulated profit is only Rs. 1,050. The sum of Rs. 1,050 was worked out by the assessee in the following manner : Rs. Balance as per profit & loss account ending 31-3-1958 18,950 Less provision fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1922, as it stood at the relevant time, reads as follows : " 'dividend' includes- (e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 and restricted the distribution of only certain type of profits which should be included in the definition of dividend. It is not all profits or anv profits distributed by the liquidator which constitute dividend. The limitation imposed by the legislature is that the profits must in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 said : " The expression 'accumulated profits' is familiar in judicial decisions and well known in the mercantile world for over 150 years. But for present purposes it will be sufficient to refer to very few cases, namely, Hollins v. Allen, decided by Kindersley V.C. in 1866, and Sproule v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 year. The profits of that previous year would be current profits as distinguished from "accumulated profits". Therefore, the profits of that previous year cannot be included in 'accumulated profits'." In view of these decisions, we are not inclined with great respect to adapt the reasoning in Sundara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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