1984 (10) TMI 41 - SC - Income Tax

Whether a company in liquidation is chargeable to super profits tax under the Super Profits Tax Act, 1963? Held that - When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. Exactly similar being the scheme of the Super Profits Tax Act, 1963, the above observations fully apply to the case before us. Hence, it has to be held that inasmuch as the provisions contained in the Act for computing the capital of the company and its reserves cannot have any application in respect of a company in liquidation and, consequently, the standard deduction is incapable of ascertainment, the charge of super profits tax under s. 4 of the Act is not attracted to such a case. The judgment of the High Court does not, therefore, call for any interference. Appeal dismissed.

Issues:
- Whether a company in liquidation is chargeable to super profits tax under the Super Profits Tax Act, 1963.

Detailed Analysis:
The case involved the determination of whether a company in liquidation is liable to pay super profits tax under the Super Profits Tax Act, 1963. The central question was whether funds in the hands of the official liquidator could be classified as representing paid-up share capital or reserves as required by the Act. The company in question, a banking company, went into liquidation in 1960, and the assessment year in consideration was 1963-64. The Income Tax Officer (ITO) determined the taxable income of the company and imposed super profits tax. The company contended that as a company in liquidation, the formula for calculating standard deduction based on paid-up share capital was inapplicable. The Tribunal, High Court, and ultimately the Supreme Court agreed with the assessee's position.

The relevant provision was Section 4 of the Act, which outlined the charge of tax on companies for each assessment year. The term "chargeable profits" was defined in the Act as the total income of the assessee adjusted according to the provisions of the Act. The definition of "standard deduction" was crucial for the case, as it was calculated based on the capital of the company as per the Second Schedule of the Act. The Second Schedule specified the rules for computing a company's capital, including paid-up share capital, reserves, and other relevant amounts. The court emphasized that for the standard deduction calculation, the company must have paid-up share capital on the first day of the relevant previous year, which was not applicable in the case of a company in liquidation.

The court referenced previous case law, including IRC v. George Burrell and CIT v. Girdhardas and Co. Private Ltd., to support the argument that in the case of a company in liquidation, the distinction between capital, reserves, and profits disappears, and there is only one consolidated fund in the hands of the liquidator. The court also cited CIT v. B. C. Srinivasa Setty to highlight that the computation provisions must align with the nature of the charge, and in this case, the provisions for computing capital and reserves did not apply to a company in liquidation. Therefore, the court concluded that the super profits tax was not applicable to a company in liquidation as the standard deduction could not be ascertained. The appeal was dismissed, affirming the decisions of the lower courts in favor of the assessee.

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