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PETITIONER:

FIRST INCOME-TAX OFFICER, SALEM

Vs.

RESPONDENT:

M/S. SHORT BROTHERS (P) Ltd.

DATE OF JUDGMENT:

15/12/1965

BENCH:

SHAH, J.C.

BENCH:

SHAH, J.C.

SUBBARAO, K.

SIKRI, S.M.

CITATION:

1967 AIR 81 1966 SCR (3) 84

CITATOR INFO :

E 1970 SC1712 (5)

R 1976 SC1790 (9,19)

ACT:

Income-tax Act (11 of 1922), ss. 2(6-A)and 12-B-Accumulated

Profits", meaning of-If includes capital gains from sale of

lands yielding Agricultural income.

HEADNOTE:

After the respondent-company sold its assets, which included

agricultural lands and buildings, it was resolved that it

should be voluntarily wound up. On 30th March, the

liquidator distributed Rs. 850,000 to share-holders. The

appellant (Income-tax Officer) proposed to treat the amounts

distributed as dividends and to call upon the liquidators to

pay the tax under s. 18(3D) of the Income-tax Act, 1922.

The liquidators contended that the amount was capital

appreciation realised by the sale of agricultural lands and

buildings and therefore not liable to tax; and that in

any event the amounts represented "current profits" of the

year in which it was resolved that the company be wound up

and so were not dividends within the meaning of s. 2 (6-A)

(c). As the appellant did not agree, the liquidators moved

the High Court for a writ of prohibition to restrain him

from taking further action. The High Court issued the writ

holding that the demand by the appellant was not in

conformity with law in that the amount of Rs. 850,000 could

not be deemed to be distributed as dividend without

determining whether any portion of it represented capital

gains, which arose out of the sale of capital assets

consisting of lands from which agricultural income was

derived.

In appeal to this Court.

HELD : (i) Normally the High Court should not entertain a

petition under Art. 226, when the party claiming relief has

an adequate alternative remedy, but as the matter is one of

discretion and not jurisdiction of the High Court, if the

High Court thought that the case was one in which its

jurisdiction could be invoked, this Court would ordinarily

not interfere with the exercise of the discretion. [86 F]

(ii) The decision in Bacha Guzdur v. Commissioner of Income-

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tax, (27 I.T.R. 1), wherein it was held that dividend

received by a share-holder out of profits tamed from

agricultural income was not exempt from liability under 8.

4(3)(viii), has no application to the present case because,

the claim of the respondent to exemption from liability to

tax was not under s. 4(3)(viii), but on the basis that the

receipt by the shareholder was not income chargeable to tax

under s. 12 as dividend. [92 B]

(iii) By s. 12 tax is payable by an assessee under the

head "income from other sources" which includes dividends.

"Dividend" is defined in s. 2(6-A) and cl. (c) declares that

accumulated profits immediately before the liquidation of

the company are dividends. Since it does not say that only

accumulated profits upto end of the previous year

immediately proceeding the year in which liquidation of the

of the company commences are dividend all profit earned till

immediately before liquidation, if they are distributed will

be brought to tax if they consist of accumulated profits or

partly to the extent they are attributable to accumulated

profits.in giving effect to the definition the taxing

authority may have to com-

85

pute profits of the company for a part of the year but there

is nothing in the Act which prohibits assessment of profits

for a part only of the previous year in special

circumstances. In fact, the legislative history of s. 2(6-

A)(c) shows that "current profits", that is, profits of a

company in liquidation arising after the end of the last

previous year and before liquidation commenced are brought

within the net of taxation as dividend. Further, the

explanation to the section plainly implies that within the

expression "accumulated profits"are included capital gains

outside the excepted periods specified therein. But under

s. 12-B while capital gains are chargeable in respect of any

profits arising from transfer of "capital assets' "capital

assets" do not include lands from which the income derived

is agricultural income. Therefore, on a combined reading of

s. 12-B and the definition, of capital asset in s. 2(4-A),

profits derived by transfer of lands from which the income

derived is agricultural income would not be chargeable to

tax. [87 F, 88 C, H; 89 A-C, E; 91 B-C, D-E]

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 97 of 1965.

Appeal by special leave from the judgment and order dated

October 3, 1963 of the Madras High Court in Writ Petition

No. 1242 of 1962.

S. T. Desai, N. D. Karkhanis and R. N. Sachthey, for the

appellant.

A. V. Viswanatha Sastri, B. R. Agarwal and H. K. Puri, for

the respondent.

The Judgment of the Court was delivered by

Shah, J. On December 24, 1959, M/s. Short Brothers

(Private) Ltd. sold its coffee estates and other assets, and

by resolution, dated February 6, 1960, it was resolved that

it be voluntarily wound up and liquidators be appointed to

administer its affairs. Out of the proceeds realized by

sale of its assets, the liquidators of the Company

distributed on March 30, 1960 Rs. 8,50,000 to the

shareholders. By letter, dated December 19, 1960, the

Income-tax Officer, Salem, informed the liquidators that he

proposed to treat that amount distributed as dividends in

the hands of the shareholders, and to call upon the

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liquidators to pay the amount of tax deductible under S.

18(3D) of the Income-tax Act. The liquidators submitted

that the amount distributed to the shareholders was capital

appreciation realised by sale of agricultural lands and

buildings of the Company, and was not liable to tax, and

that in any event the amounts distributed represented

"current profits" of the year in which it was resolved that

the Company be wound up and were on that account not

dividend within the meaning of S. 2(6A)(c) of the

Income..tax Act. After some correspondence the Income-tax

Officer, Salem by his

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order, dated October 18, 1962, finally called upon the

liquidators to pay Rs. 4,11,700 which was retained by the

liquidators from the distribution made to the shareholders.

The liquidators then moved the High Court of Judicature at

Madras, for a writ of prohibition restraining the First

Income-tax Officer from taking further action to enforce

collection of the amount referred to by him in his

communication, dated October 18, 1962. Holding that the

demand made by the Income-tax Officer was "not in conformity

with the law" in that the amount of Rs.. 8,50,000 which had

been distributed could not be deemed to be distributed as

dividend without determining whether any portion of the

amount represented capital gains, which arose out of the

sale of capital assets consisting of lands from which agri-

cultural income was derived, the High Court issued a writ

restraining the Income-tax, Officer from enforcing the

demand for tax. The High Court reserved liberty to the

Income-tax Officer to examine the question afresh, and to

determine "the correct amount of dividend within the meaning

of S. 2(6A)(c)". With special leave, the First Income-tax

Officer has appealed to this Court.

It was submitted on behalf of the Income-tax Officer that

the High Court in entertaining the petition in its extra-

ordinary jurisdiction under Art. 226 of the Constitution,

bypassed the machinery of assessment and rectification of

orders of assessment prescribed by the Indian Income-tax Act

which is both adequate and efficacious. But the High Court

has under Art. 226 of the Constitution jurisdiction to issue

to any person or authority within the territories in

relation to which it exercises jurisdiction, directions,

orders, or writs in the nature, amongst others of mandamus,

prohibition and certiorari for the enforcement of any of the

rights conferred by Part III and for any other purpose. It

is true that normally the High Court will not entertain a

petition in exercise of its jurisdiction under Art. 226 of

the Constitution when the party claiming relief has an

alternative remedy which is adequate and 'efficacious. The

question however is one of discretion of the High Court and

not of its jurisdiction, and if the High Court in exercise

of its discretion thought that the case was one in which its

jurisdiction may be permitted to be invoked, this Court

would normally not interfere with the exercise of that

discretion.

The High Court was of the view that all profits accumulated

in the previous years and the profits till the date on which

it was resolved that the Company be voluntarily wound up

would be

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included in the expression "accumulated profits" under s.

2(6A) (c) of the Indian Income-tax Act read with the

Explanation. They held that even capital gains taxable

under S. 12B except for the period mentioned in the

Explanation were when distributed, "dividend" within the

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definition, but profits realised by transfer of property

used for agricultural purposes and which yielded

agricultural income not being capital gains taxable under

the law are not "dividend", and on that account the order of

the Income-tax Officer bringing to tax the entire amount

distributed without determining whether any portion of that

amount represented capital gains arising from the sale of

capital assets Consisting of lands from which agricultural

income was derived was not within his authority.

Counsel for the liquidators contended in the first instance

that all profits whatever may be their character arising in

the year in which the Company is voluntarily wound up are

not liable to be taxed as they did not fall within the

definition of "dividend" in S. 2(6A)(c). Counsel for the

Department while supporting the view of the High Court

relating to the chargeability to tax of "current profits",

contended that the entire amount of Rs. 8,50,000 distributed

to the shareholders, whatever may be the source from which

the profits were earned, was liable to be brought to tax

under S. 12 of the Income-tax Act as dividend distributed.

By S. 12 of the Income-tax Act, tax is payable by an

assessee under the head "Income from other sources" in

respect of income, profits and gains of every kind which may

be included in his total income if not included under any of

the preceding heads in ss. 7 to 10 of the Act. By sub-s.

(1A) "income from other sources" includes dividends.

Section 2(6A) defined "dividend"and at the relevant time

cl. (c) and the Explanation to the clause stood as follows :

" 'dividend' includes-

(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 capitalized or not;

Explanation.-The expression "accumulated

profits" wherever it occurs in this clause,

shall not include

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capital gains arising before the 1st day of

April, 1946, or after the 31st day of March,

1948, and before the 1st day of April, 1956."

By the Explanation to S. 2(6A) accumulated profits include

capital gains not arising within the excepted period. The

Explanation is undoubtedly couched in negative form, but

there is no ground for accepting the argument of counsel

that in the substantive clauses of the definition,

accumulated profits do not include capital gains. The

Explanation plainly implies that within the expression

"accumulated profits" are included capital gains outside

the excepted periods. On the interpretation contended for

by counsel, the Explanation which seeks to exclude capital

gains" from the content of accumulated profits would have no

meaning. By sub-s. (1) of s. 12B tax is payable by an

assessee under the head "capital gains" in respect of any

profits or gains arising from the sale, exchange,

relinquishment or transfer of a capital asset effected

after the 31st day of March, 1956, and such profits and

gains shall be deemed to be income of the previous year in

which the sale, exchange, relinquishment or 'transfer took

place. Under the Indian Income-tax Act, 1922, " capital

gains" arising after March 31, 1946 were made charge:able by

the Income-tax and Excess Profits Tax (Amendment) Act, 1947,

which inserted S. 12B in the Act. The levy was, however,

abolished by the Finance Act, 1949, and the operation of S.

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12B as enacted by the Amendment Act of 1947 was restricted

to capital gains arising before April 1, 1948. By the

Finance Act 3 of 1956 which introduced a new s. 12B, capital

gains were again made chargeable to tax with effect from

April 1, 1957 on the profits or gains arising from the

transfer of capital assets, which expression is defined in

s. 2(4A) as meaning "property of any kind held by an

assessee, whether or not connected with 'his business,

profession or vocation, but does not include-

(i)

(ii)

(iii) any land from which the income derived

is agricultural income;"

The contention raised by counsel for the Company that the

profits earned in the "current year" i.e., the year in which

it was resolved that the Company be wound up,were not

"dividend" within the meaning of S. 2(6A) (c) of the Act

cannot be accepted. Sub-clause (c) of s. 2(6A) declares

that accumulated profits immediately before the liquidation

of the company, are

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dividend : it does not say that accumulated profits up to

the end of the previous year immediately preceding the year

in which liquidation of the company commences are dividend.

It is true that in giving effect to the definition, the

taxing authorities have to compute profits of the company

for a part of the year, but that is not a ground for reading

the plain words of the statute in an artificial sense.

Under s. 3 of the Act read with S. 4, the charge to income-

tax is on the total income of the previous year, and in

accordance with and subject to the provisions of the Indian

Income-tax Act. But there is nothing in the Act which

prohibits assessment of profits for a part only of the

previous year in certain special circumstances. For

instance, under s. 26(2) it is provided that in the case of

succession to a person carrying on any business, profession

or vocation, in such capacity by another person, such person

and such other person shall each be assessed in respect of

his actual share of the profits of the previous year.

In amending the definition in s. 2 (6A) (c) by the Finance

Acts of 1955 and 1956, the Parliament has sought to clarify

its meaning and to avoid the argument which was successfully

raised in certain cases on the interpretation of the statute

before if was amended. By the terms of the definition,

distribution which is attributable to the accumulated

profits of the Company immediately before its liquidation is

to be deemed dividend. Thereby all profits earned till

immediately before liquidation, if they are distributed,

will be brought to tax wholly if they consist of accumulated

profits, or partially to the extent they are attributable to

accumulated profits.

Amendments which have been made from time to time in the Act

clearly disclose the intention of the Parliament that it was

not intended to allow the profits of the current year

distributed by a liquidator of a company to escape liability

to tax. In Inland Revenue Commissioners v. George

Burrell,(1) it was held that on the undivided profits of

past years and of the year in which the winding up of a

company occurred which were distributed among the

shareholders, super-tax was not payable, because in the

winding up they had ceased to be profits and were assets

only. It was observed in Burrell's case(1) that the only

thing the liquidator of a company in liquidation may do is

to turn the assets into money, and divide the money among

the shareholders in proportion to their shares. Surplus of

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trading profit made in a particular year are distributable

ratably among all the

(1) [1934] 2 K.R 52.

L9Sup. Cl/66-7

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shareholders as capital, and it is not right to split up the

sum.-, received by the shareholders into capital and income,

by examining the accounts of the company when it carried on

business, and disintegrating the sum received by the

shareholders subsequently into component parts based on an

estimate of what might possibly have been done, but was not

done. As the Indian Companies Act, 1913, closely followed

the scheme of the English Companies Act, and the view

expressed in Burrell's case(1) applied to the Indian Income-

tax Act, a special definition of "dividend' was devised by

Parliament by the enactment of Income-tax (Amendment) Act 7

of 1939, with a view to supersede the view in Burrell's

case(1). Clause (c) of sub-s. (6A) as originally enacted

stood as follows

'dividend' includes-

(c) any distribution made to the

shareholders of a company 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

By the Finance Act, 1955 the proviso to sub-

cl. (c) of cl. (6A) was omitted. There was a

further amendment made by the Finance Act,.

1956 and cl. (c) to the amended section read

as follows :

" 'dividend' includes-

(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;"

Under Act 7 of 1939 profits which arose within six previous

years preceding the date of liquidation when distributed

were to be deemed dividends. But the effect of the

definition was that distribution of profits accumulated

after the last day of the previous year whatever their

nature could not be regarded as distribution of dividend :

Sheth Haridas Achratlal v. The Commissioner of Income taX.(

2) It was held in that case by the Bombay High Court

that for the purpose of s. 2 (6A) (c) as it

(1) (1924] 2 K.B. 52.

(2) 27. I.T.R. 684.

91

stood in 1949, a broken period between the last day of the

previous year of a company, and the commencement of winding

up could not be considered "a previous year". The

Parliament with a view to supersede the view in Sheth

Haridas Achratlal's case(1) deleted by the Finance Act,

1955, the-proviso to sub-clause (c). To make its meaning

more clear Parliament by the Finance Act. 1956, recast the

substantive clause (c). Viewed in the context of this

legislative history, there is no doubt that " current

profits" i.e., profits of a company in liquidation arising

after the end of the last previous year and before

liquidation commenced, Were brought within the net of

taxation as dividend. The contention raised by counsel for

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the Company on this part. of the case must fail.

The question which remains to be considered is whether

capital appreciation in respect of the lands from which the

income derived is agricultural income and which was not

taxable in the hands of the company as capital gains would

still on distribution be liable to be taxed as dividend

under s. 12 of the Income-tax Act. As we have already

pointed out capital gains under s. 12B are chargeable in

respect of any profits arising from transfer of "capital

assets", and "capital assets" do not include. lands from

which the income derived is agricultural _ income, Profits

derived by transfer of lands from which the income, derived

is agricultural income would not therefore be chargeable on

a combined reading of s. 12B with s. 2 (4A) of the Income-

tax Act under the head "capital gains".. The expression

"accumulated profits" does not include capital gains arising

within the excepted periods : vide Explanation to s. 2 (6A).

"Accumulated profits" are therefore profits which are so

regarded in commercial practice, and capital gains as

defined in the Income-tax Act. Realization of appreciated

value of assets in commercial practice is regarded as

realization of capital rise,. and not of profits of the

business. Unless, therefore, appreciation in the value of

capital assets is included in the capital gains,

distribution by the liquidator of the rise in the capital

value will not be deemed dividend for the purpose of the

Income-tax Act.

Counsel for the Department contended, relying upon MrsBacha

F. Guzdar, Bombay v. Commissioner of Income-tax Bombay(2)

that since dividend received by a shareholder of a company

out of the profits earned from agricultural income is not

exempt from liability to pay tax under s. 4(3) (viii),

dividend

(1) 27 I.T.R. 684.

(2) 27 I.T.R. 1.

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distributed from profits earned out of sale of capital

assets inclusive of lands from which the income derived is

agricultural income is also not exempt from income-tax. But

the Company does not claim exemption from liability to tax

under S. 4(3) (viii): it claims exemption because the

receipt is not income which is chargeable to tax under s. 12

under the bead "dividence. The case of Mrs. Bacha F.

Guzdar(1) has therefore no application to this case.

The appeal therefore fails and is dismissed with costs.

Appeal dismissed.

(1) 27 I.T.R. 1.

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