1966 (10) TMI 29 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the sum of ₹ 75,000 or any part thereof could be treated as dividend under section 2(6A)(c) of the Indian Income-tax Act, 1922 ? Held that - We discharge the answer recorded by the High Court, and record the answer that that part of ₹ 75,000 which bears the same ratio to ₹ 75,000 which the accumulated profits at the date of liquidation bore to the total assets of the company immediately before liquidation is dividend . In the present case the Tribunal has not determined what part of ₹ 75,000 represents accumulated profits. But on the view we have taken of the true meaning of section 2(6A)(c) of the Act, the Tribunal was bound to do so. Appeal allowed in part

Summary

Issues Involved:
1. Taxability of distributions made by a liquidator as "dividend" under section 2(6A)(c) of the Income-tax Act, 1922.
2. Interpretation of section 2(6A)(c) regarding the proportionate distribution of accumulated profits and capital.
3. Determination of accumulated profits in the hands of the liquidator for tax purposes.

Issue-wise Detailed Analysis:

1. Taxability of Distributions Made by a Liquidator as "Dividend":
The primary issue centered on whether the sum of Rs. 75,000 distributed by the liquidator could be treated as "dividend" under section 2(6A)(c) of the Income-tax Act, 1922. The Income-tax Officer had brought the entire amount to tax as "dividend," which was confirmed by the Appellate Assistant Commissioner. However, the Tribunal and the High Court differed on this interpretation. The Supreme Court clarified that the amounts distributed by a liquidator are to be treated as capital of the company, but for tax purposes, the distribution must be disintegrated into capital and accumulated profits as they existed immediately before liquidation.

2. Interpretation of Section 2(6A)(c):
The Court examined the legislative amendments to section 2(6A)(c) of the Income-tax Act, 1922, noting that the clause was designed to include distributions made out of accumulated profits by a liquidator as "dividend." The clause was initially inserted to prevent the escapement of tax on such distributions. The Finance Act, 1955, and the Finance Act, 1956, further clarified that any distribution attributable to accumulated profits immediately before liquidation should be treated as dividend, regardless of whether those profits were capitalized. The Supreme Court emphasized that the language of section 2(6A)(c) is clear in its intent to disintegrate the distribution into its components for tax purposes.

3. Determination of Accumulated Profits:
The Court held that the Income-tax Officer must first determine the accumulated profits and capital immediately before liquidation. The ratio between these two components should then be applied to any amount distributed by the liquidator to ascertain the portion attributable to accumulated profits, which would be taxable as dividend. The Tribunal had failed to determine what part of the Rs. 75,000 represented accumulated profits. The Supreme Court directed that this determination must be made to comply with the true meaning of section 2(6A)(c).

Conclusion:
The Supreme Court discharged the High Court's answer and provided a new one, stating that "that part of Rs. 75,000 which bears the same ratio to Rs. 75,000 which the accumulated profits at the date of liquidation bore to the total assets of the company immediately before liquidation is dividend." The appeal was partially allowed, and the Tribunal was instructed to determine the portion of Rs. 75,000 that represents accumulated profits. There was no order as to costs.