TMI Blog1980 (10) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... went into liquidation on 1st March, 1960. During the/previous years relevant to each of the two assessment years 1963-64 and 1964-65, the official liquidator paid to the assessee-company a total sum of Rs. 1,00,750 and the point arose as to whether this amount in each of these two years could be treated as " deemed dividend " income under s. 2(22)(c) of the I.T. Act, 1961. The ITO did not accept the assessee's contention that in working out the accumulated profits of M/s. Upper Ganges Valley Electricity Co. Ltd. immediately before its liquidation on 1st March, 1960 to which the distribution by the official liquidator could be attributed as " deemed dividend " (i) the tariffs and dividends control reserve, (ii) contingencies reserve, and (iii) development reserve, should be excluded. Aggrieved by the said order of the ITO, the assessee-company went up in appeal before the AAC. The AAC while giving relief on some other point upheld the action of the ITO on this point. There was a further appeal to the Appellate Tribunal. The Tribunal noted the basic facts, as we have mentioned before and observed that these three reserves had been handed over to the U.P. State Electricity Board un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Co. P. Ltd. [1967] 63 ITR 300. There, the Supreme Court was considering s. 2(6A)(c) of the Indian I.T. Act, 1922, after it was amended in 1956. The Supreme Court observed that under s.2(6A)(c) of the Indian I.T. Act, 1922, as amended in 1956, the amount distributed in every distribution by the liquidator of a company was to be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, in the proportion which the accumulated profits bore to the capital in the accounts of the company at the commencement of the winding-up and that part of the receipt which was attributable to the accumulated profits would be taxable as dividends. The ITO, the Supreme Court noted, had, 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 its liquidation, he had then to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the components attributable to the accumulated profits. The Supreme Court noted further that there was nothing in s. 2(6A)(c) to support the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company as going concern but subject to the limitation that while in the latter the profits distributed would be dividend whatever the length of the period for which they were accumulated, in the former such profits might be dividend only in so far as they come out of profits accumulated, according to the Supreme Court, within six years prior to liquidation. We may incidentally mention that the Supreme Court had to observe this because of the Explanation in the old Act. Respectfully following the aforesaid observations of the Supreme Court, we must further point out that that principle, even if it, was applied to the facts and circumstances of the case, would not be relevant. Here, as we have indicated, the distribution that took place was out of the amount that was received by the liquidator from the compensation money and the compensation money was paid to the company by deducting the amounts covered by the three reserves with which we are concerned. Therefore, whether these three reserves could be attributable to the accumulated profits of the company really do not fall for our consideration because the amount that was distributed on liquidation was not in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id Part II of the same Schedule. On 31 March, 1956, certain amounts stood to the credit of these three reserves. These amounts were admittedly appropriation made out of the profits of the company from year to year. The electrical undertaking was taken over by the Andhra Government with effect from 1st May, 1956. In the year 1957, the company prepared the Government acquisition account in which, among others, three reserve amounts were transferred. The company was paid the compensation for the undertaking which was taken over by the Andhra Govt. Taking into account the compensation received by the, company, the profits for the year ended 31st March, 1958, were computed at Rs. 15,58,055. The company then went into voluntary liquidation on 28th March, 1959. The liquidator made certain distribution to the shareholders on 1st April, 1959, 28th February, 1961, and 29th September, 1961. The total amount thus distributed on 1st April, 1959, was Rs. 8,81,000 and the total amount distributed on 28th February, 1961, and 29th September, 1961, was Rs. 8,63,800. The assessee in that case who was a shareholder of the company was subjected to assessment on the amounts received by him during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually deducted by the statutory authority when compensation was ultimately paid to the assessee-company during which distribution had taken place which is the subject-matter being treated as dividend. This aspect, in our opinion, is important. In this connection, reference may be made to certain provisions of the Indian Electricity Act, 1910. Section 5 of the Act deals with the provisions where the licence of a licensee is revoked. Section 6 of the Act deals with the provisions relating to the purchase of undertakings. And s. 7A of the said Act deals with the determination of purchase price. Sub. section (4) of s. 7A of the said Act makes the provisions of sub-ss. (1) and (2) of s. 7A of the said Act liable to be attracted even in a case where the purchase of the undertaking is made under s. 6 of the Indian Electricity Act, 1910. The fact of this compensation is that in case of the purchase of the undertaking, the compensation that has to be paid by the purchaser of the undertaking is determined under the provisions of the Sixth Schedule of the Electricity (Supply) Act, 1948. The said Schedule regulates the determination of the compensation. We may, for instance, refer to cl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppearing at p. 794 of the report. But the said observations relate to whether this could be treated as attributable to the accumulated profits. But as we have pointed out before, that on the facts found that the amount standing to the credit of these reserves had been deducted in paying the compensation money to the assessee out of which this amount had been deducted, the question whether this could be attributable to the profits of the company does not really fall for our consideration. Our attention was also drawn to the decision of the Supreme Court in the case of P. K. Badiani v. CIT [1976] 105 ITR 642. There the Supreme Court observed that the development rebate reserve created by a company by duly charging the amount to the profit and loss account, although the, rebate was allowable as a deduction under the Indian I.T. Act, constituted accumulated profits of a company within the meaning of s. 2(6A)(e) of the Indian I.T. Act, 1922. It was held that for the purpose of assessment to tax the amounts advanced by a private company to the assessee, who was a major shareholder, and also its managing director, as " dividend " under s. 2(6A)(e) of the Indian I.T. Act, 1922, developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before, a good deal of argument was also advanced on the question whether these reserves could be said to be attributable to the accumulated profits of the company immediately before its liquidation which are represented by these reserves. On this aspect certain arguments were advanced before us on the meaning of the expression " attributable to ". Our attention was drawn to certain observations of Mr. Justice Denning, as the Master of Rolls then was, in the case of Marshall v. Minister of Pensions [1947] 2 All ER 706 (KB), where the question arose of paying compensation to a certain person due to war services under the relevant English Act, because he had suffered from hernia. In that context, Denning J. observed at p. 708 of the report as follows: " I tried a case the other day of a man who hit another on the nose. The blow was not such as to do harm to an ordinary individual, but, unknown to all concerned, this injured man had a septic antrum. He might have gone on for quite a long time-years without it causing him much trouble, but the effect of the blow was to release the poison from the antrum into his system so that he died within a few days. One cause of his death, perh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was certainly wider in import than the expression " derived from ". In the view we have taken on the facts of the case, that is to say, that this distribution out of which the assessee-company was in receipt of a certain sum of money which is the subject-matter for consideration as due dividend was paid out of the purchase money on account of the electricity undertaking received by the distributing company after a deduction of the amount standing to the credit of these three reserves, in our opinion, it is not necessary for us to decide the true import of the expression " attributable to " to the accumulated profits of the company immediately before liquidation occurring in cl. (c) of s. 2(22) of the "I.T. Act, 1961. Under s. 2(22) certain amounts are actually not distributed as are brought within the net dividend for the purpose of taxability. Therefore, it must receive a strict construction and in view of the facts found by the Tribunal that these three reserves deducted from the compensation money and after that the compensation money was paid, in our opinion, the Tribunal was right in its conclusion that the amount received in the instant case in the subject-matter of the refer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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