1972 (8) TMI 1 - SC - Income Tax

Whether on the facts and in the circumstances of each of these cases the department was right in applying section 44F read with section 2(6A)(c) - Held that the deemed dividend contemplated by section 2(6A)(c) cannot be considered as income under section 44F - we agree with the High Court that section 44F is inapplicable to the facts of the assessee s case

Summary

Issues Involved:
1. Applicability of Section 44F read with Section 2(6A)(c) of the Indian Income-tax Act, 1922.
2. Interpretation of "dividend" and "income" under the Act.
3. Legislative intent behind Section 44F.
4. High Court's decision on the applicability of Section 44F.

Issue-wise Detailed Analysis:

1. Applicability of Section 44F read with Section 2(6A)(c) of the Indian Income-tax Act, 1922:
The principal question was whether the department was right in applying Section 44F read with Section 2(6A)(c) of the Act. The Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal answered in favor of the department, but the High Court sided with the assessee. The Supreme Court agreed with the High Court's conclusion, making it unnecessary to examine other questions.

2. Interpretation of "dividend" and "income" under the Act:
The revenue argued that the distribution of the assets of the managing agency companies on liquidation is "dividend" under Section 2(6A)(c) and thus "income" as defined in Section 2(6C). Conversely, the assessee contended that the definition of "dividend" in Section 2(6A)(c) is repugnant to the context of Section 44F, which deals with periodical income from securities or shares, not the compensation received for the destruction of income-yielding assets.

3. Legislative intent behind Section 44F:
Section 44F concerns income arising from securities or shares during a period of time. When a company goes into liquidation, shares cease to be income-yielding assets. The court noted that Section 44F was designed to prevent tax avoidance through "bond-washing" transactions. It was intended to address the manipulation of securities to convert revenue receipts into capital receipts, not the distribution of assets upon liquidation.

4. High Court's decision on the applicability of Section 44F:
The High Court found Section 44F inapplicable to the facts of the case. The Supreme Court agreed, noting that the fictional dividend under Section 2(6A)(c) could not be considered "income" under Section 44F. The court emphasized that legal fictions should not be extended beyond their legitimate field and that the language of Section 44F was not plain enough to bring the receipts in question to tax.

Conclusion:
The Supreme Court dismissed the appeals, agreeing with the High Court that Section 44F did not apply to the facts of the case. The court emphasized that the legislative intent behind Section 44F was to prevent tax avoidance through specific transactions, not to tax the distribution of assets upon liquidation. The appeals were dismissed with costs, and one hearing fee was awarded.