1965 (2) TMI 31 - HC - Companies Law

Summary

Issues Involved:
1. Deduction of income-tax from dividends distributed by the official liquidator.
2. Classification of profits earned during liquidation as dividends.
3. Applicability of Section 2(22)(c) of the Income-tax Act, 1961.
4. Interpretation of "accumulated profits" and "date of liquidation."

Detailed Analysis:

1. Deduction of Income-Tax from Dividends Distributed by the Official Liquidator
The petitioners, contributories of a company in liquidation, challenged the deduction of income-tax from the third dividend proposed by the official liquidator and sought a refund of the 30% deduction made from the second dividend. The official liquidator had deducted income-tax from the second dividend and credited it to the income-tax department. The court ruled that the official liquidator was in error in making this deduction.

2. Classification of Profits Earned During Liquidation as Dividends
The court examined whether the profits earned by the company during liquidation could be classified as dividends and thus be subject to income-tax deduction at source. It was noted that the company had no accumulated profits at the commencement of liquidation in 1934, and the profits in question were earned during liquidation. The court referred to previous judgments, including the Supreme Court's decision in Dhandhania Kedia & Co. v. Commissioner of Income-tax, which held that profits earned during liquidation are not considered dividends.

3. Applicability of Section 2(22)(c) of the Income-tax Act, 1961
Section 2(22)(c) defines "dividend" to include any distribution made to shareholders out of the accumulated profits of the company on its liquidation. However, the court clarified that this provision applies to profits accumulated immediately before liquidation, not to profits earned during liquidation. The court emphasized that the legislative history and amendments to this section did not alter this interpretation.

4. Interpretation of "Accumulated Profits" and "Date of Liquidation"
The court analyzed the terms "accumulated profits" and "date of liquidation" in the context of the Income-tax Act. It concluded that "accumulated profits" refer to profits accumulated up to the date of liquidation, excluding profits earned during liquidation. The "date of liquidation" was interpreted to mean the commencement of winding up, not the final dissolution of the company. The court referred to Explanation 2 of Section 2(22), which clarified that accumulated profits for sub-clause (c) include profits up to the date of liquidation, not beyond.

Conclusion:
The court directed the official liquidator not to deduct income-tax or super-tax from future dividends to be declared and distributed in respect of the company. The petitioners were advised to seek a refund for the previously deducted amount through appropriate proceedings before the Income-tax Officer. Each party was ordered to bear its own costs.