1964 (6) TMI 58 - HC - Income Tax

Summary

Issues Involved:
1. Definition and interpretation of "dividend" under Section 2(6A)(c) of the Income-tax Act.
2. Taxability of distributions made by a liquidator to shareholders.
3. Applicability of amendments to Section 2(6A)(c) by the Finance Act, 1955, and 1956.
4. Determination of whether distributions are attributable to accumulated profits.

Issue-wise Detailed Analysis:

1. Definition and Interpretation of "Dividend" under Section 2(6A)(c):
The core issue revolves around the interpretation of the term "dividend" under Section 2(6A)(c) of the Income-tax Act, particularly in the context of a company in liquidation. The pre-amendment definition included any distribution made to shareholders out of accumulated profits on liquidation, with a proviso limiting it to profits accumulated during the six previous years before liquidation. The post-amendment definition (effective from April 1, 1955) removed this proviso, thus expanding the scope to include all accumulated profits immediately before liquidation, whether capitalized or not.

2. Taxability of Distributions Made by a Liquidator:
The judgment delves into the taxability of distributions made by a liquidator. The Income-tax Officer initially treated Rs. 50,500 out of the Rs. 17,25,000 distributed in the year ending September 30, 1952, as dividend, based on the accumulated profits of six previous years. The subsequent distribution of Rs. 75,000 during the assessment year 1958-59 was also treated as dividend by the Income-tax Officer, asserting that it was attributable to accumulated profits.

3. Applicability of Amendments to Section 2(6A)(c) by the Finance Act, 1955, and 1956:
The amendments to Section 2(6A)(c) by the Finance Act, 1955, and 1956 play a crucial role in this case. The deletion of the proviso by the Finance Act, 1955, allowed the tax authorities to consider accumulated profits beyond the six years preceding liquidation. This change meant that any distribution attributable to accumulated profits, regardless of when they were accumulated, could be treated as dividend.

4. Determination of Whether Distributions are Attributable to Accumulated Profits:
The judgment extensively discusses whether the distributions made by the liquidator were attributable to accumulated profits. The assessee contended that the entire accumulated profits should be deemed exhausted with the initial distribution of Rs. 17,25,000. However, the Income-tax Officer and the Tribunal held that the accumulated profits were not fully exhausted and that the subsequent distribution of Rs. 75,000 could still be considered as dividend under the amended Section 2(6A)(c).

Comprehensive Analysis:

Definition and Interpretation of "Dividend":
The judgment clarifies that the definition of "dividend" under Section 2(6A)(c) includes any distribution made to shareholders out of accumulated profits on liquidation. The pre-amendment proviso limited this to profits accumulated during the six previous years before liquidation. Post-amendment, the scope was broadened to include all accumulated profits immediately before liquidation, whether capitalized or not. This change was significant as it allowed the tax authorities to consider a broader range of accumulated profits for tax purposes.

Taxability of Distributions:
The taxability of distributions made by a liquidator was a contentious issue. The Income-tax Officer initially taxed Rs. 50,500 out of the Rs. 17,25,000 distributed in the year ending September 30, 1952, as dividend. This was based on the accumulated profits of the six previous years. The subsequent distribution of Rs. 75,000 during the assessment year 1958-59 was also treated as dividend, with the Income-tax Officer arguing that it was attributable to accumulated profits. The Tribunal upheld this view, stating that any distribution made after the deletion of the proviso could be regarded as distribution referable to accumulated profits.

Applicability of Amendments:
The amendments to Section 2(6A)(c) by the Finance Act, 1955, and 1956 were pivotal. The deletion of the proviso by the Finance Act, 1955, allowed the tax authorities to consider accumulated profits beyond the six years preceding liquidation. This meant that any distribution attributable to accumulated profits, regardless of when they were accumulated, could be treated as dividend. The Tribunal held that the deletion of the proviso expanded the scope of what could be considered as dividend, allowing the tax authorities to go beyond the six-year limitation.

Determination of Attributability:
The determination of whether distributions were attributable to accumulated profits was a key issue. The assessee argued that the entire accumulated profits should be deemed exhausted with the initial distribution of Rs. 17,25,000. However, the Income-tax Officer and the Tribunal held that the accumulated profits were not fully exhausted and that the subsequent distribution of Rs. 75,000 could still be considered as dividend. The Tribunal emphasized that the definition of "dividend" meant each and every distribution that a company in liquidation might make, and if earlier distributions were not fully considered as dividend, subsequent distributions could still be taxed as such.

Conclusion:
The judgment ultimately upheld the view that the distribution of Rs. 75,000 made during the assessment year 1958-59 was taxable as dividend under the amended Section 2(6A)(c). The amendments to the section allowed the tax authorities to consider accumulated profits beyond the six-year limitation, and the distributions made by the liquidator were deemed attributable to these accumulated profits. The assessee's contention that the accumulated profits were exhausted with the initial distribution was rejected, and the Tribunal's decision to treat the subsequent distribution as dividend was affirmed.