1980 (10) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amounts represented by the tariffs and dividends control reserve, contingencies reserve, and development reserve formed part of the accumulated profits of M/s. Upper Ganges Valley Electricity Supply Co. Ltd. immediately before its liquidation for the purpose of working out the distribution made to the shareholders treated as dividend u/s 2(22)(c) of the Income-tax Act, 1961.

Summary:

Issue 1: Accumulated Profits and Distribution as Dividend u/s 2(22)(c)
The primary issue was whether the amounts in the tariffs and dividends control reserve, contingencies reserve, and development reserve should be considered part of the accumulated profits of M/s. Upper Ganges Valley Electricity Supply Co. Ltd. immediately before its liquidation for the purpose of treating the distribution to shareholders as "deemed dividend" u/s 2(22)(c) of the Income-tax Act, 1961.

The Income Tax Officer (ITO) did not accept the assessee's contention that these reserves should be excluded when calculating accumulated profits. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, leading to an appeal to the Appellate Tribunal.

The Tribunal noted that these reserves had been handed over to the U.P. State Electricity Board as per the Electricity Act provisions, and the compensation paid to the assessee was after deducting these reserves. Therefore, no part of the distributed amount could be attributed to the accumulated profits.

The court referred to s. 2(22)(c) of the I.T. Act, 1961, which states that any distribution made to shareholders on liquidation, to the extent attributable to accumulated profits immediately before liquidation, is considered a dividend. The court also examined relevant case law, including CIT v. Girdhardas and Co. P. Ltd. and T. M. Rangachari v. CIT, to understand the treatment of reserves and accumulated profits.

The court concluded that since the compensation money was paid after deducting the amounts in the reserves, the distributed amount did not relate to the accumulated profits. The court also noted that the amounts in the reserves were deducted when determining the compensation payable to the company, which was then distributed by the liquidator.

Reframed Question and Conclusion:
The court reframed the question to focus on whether the amounts received by the assessee could be treated as income u/s 2(22)(c) of the I.T. Act, 1961. The court answered the reframed question in the affirmative, in favor of the assessee, concluding that the amounts received could not be treated as income under the said section. There was no order as to costs.

Separate Judgment:
Sudhindra Mohan Guha J. agreed with the judgment.