1963 (10) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of section 2(6A)(c) of the Indian Income-tax Act, 1922.
2. Definition and scope of "accumulated profits."
3. Inclusion of current profits and capital gains in "accumulated profits."
4. Validity of the Income-tax Officer's demand for tax on the distribution made by the liquidator.

Issue-wise Detailed Analysis:

1. Interpretation of section 2(6A)(c) of the Indian Income-tax Act, 1922:
The primary issue in the writ petition revolves around the interpretation of section 2(6A)(c) of the Indian Income-tax Act, 1922. The petitioner, representing Messrs. Short Brothers (Private) Ltd., contested the Income-tax Officer's classification of the distributed sum of Rs. 8? lakhs as "dividend" under this section. The court examined the definition of "dividend," which includes any distribution made to shareholders on liquidation attributable to the company's accumulated profits immediately before its liquidation, whether capitalized or not.

2. Definition and scope of "accumulated profits":
The court analyzed the term "accumulated profits" in the context of section 2(6A)(c). Before the amendment in 1955, the definition included only profits accumulated during the six previous years before liquidation. Post-amendment, the definition was broadened to encompass all accumulated profits as recorded in the company's books. The court highlighted the significance of the phrase "immediately before its liquidation," emphasizing that it includes all profits, including those accrued during the year of liquidation, as part of accumulated profits.

3. Inclusion of current profits and capital gains in "accumulated profits":
The petitioner argued that current profits and capital gains should be excluded from "accumulated profits." However, the court disagreed, stating that the term "immediately before its liquidation" indicates that current profits up to the date of liquidation are included in accumulated profits. Regarding capital gains, the court referred to the Explanation in section 2(6A), which excludes capital gains arising before April 1, 1946, or after March 31, 1948, and before April 1, 1956. Consequently, capital gains outside these periods are included in accumulated profits. The court clarified that capital gains from the sale of agricultural land are not included, as such land is not considered a capital asset under the Act.

4. Validity of the Income-tax Officer's demand for tax on the distribution made by the liquidator:
The court found that the Income-tax Officer's demand for tax on the distribution of Rs. 8? lakhs was made without determining whether any portion of this amount represented capital gains from the sale of agricultural land. The officer failed to apportion the profits between capital assets like buildings, plant, and machinery, and agricultural land. The court concluded that the demand was not in conformity with the law and issued a writ of prohibition restraining the Income-tax Officer from enforcing the demand. The officer was directed to re-examine the matter and determine the correct amount of dividend within the meaning of section 2(6A)(c) based on the court's observations.

Conclusion:
The court's judgment emphasized the need for a proper interpretation of section 2(6A)(c) and a thorough assessment of accumulated profits, including current profits and capital gains. The Income-tax Officer's demand was deemed invalid due to the lack of proper apportionment, and the officer was instructed to reassess the distribution in accordance with the court's guidelines.