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TMI Blog1955 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... tributed profits of the company. The company went into liquidation on the 1st May, 1949. The liquidator realised the total assets of ₹ 1,61,000. The assessee who held 251 shares received a dividend of ₹ 22,590 from the liquidator in the year of account, and the Taxing Department held that the dividend was covered by the definition of dividend in section 2(6A)(c) of the Income-tax Act and therefore liable to tax, and it is in respect of this distribution of the assets of the company in liquidation that three questions have been submitted to us by the Tribunal. Now, before we look at the questions perhaps it will be better to consider generally the scheme of section 2(6A) which defines dividend . It is clear that the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not so qualified. In ordinary law it is clear that if a company makes profits and instead of distributing them appropriates them to capital, then they cease to be accumulated profits which could be distributed by means of declaring a dividend. As the Legislature wanted to extend the meaning of the expression dividend in the case of sub-clauses (a), (b) and (d ) they treated accumulated profits, even though they were appropriated to capital, as dividends, but in the case of sub-clause (c) by omitting to qualify the expression accumulated profits the clear intention of the Legislature was that only those accumulated profits should come within the ambit of sub-clause (c) which had not been capitalised, because if the accumulated pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths according to the method of accounting of the assessee. A previous year is never a broken period of a few months. Undoubtedly, the company is liable to pay tax on the profits made by it during this broken period, but the Income-tax Act provides a special machinery for taxing an assessee whose business is discontinued during a particular period. Therefore, for the purpose of the Income-tax Act the period 1st January, 1949, to the 30th April, 1949, would be part of the previous year for the assessment year 1950-51. It may be that during the whole of that previous year the company did not do business and its business was discontinued, but as we said before, although the Income-tax Act might lay down the machinery and provide the procedure f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quidation that fall in the category of dividend and are liable to tax. The Advocate-General relied on an old English decision reported in Commissioners of Inland Revenue v. Burrell [1924] 9 Tax Cas. 27. In that case what was held was that when the liquidation of a company begins all distinction disappears and there are only surplus assets and the shareholder only gets this money in that character and that money no longer bears the character of profits which are liable to tax. It is in view of this that the English Court held that the surplus assets on liquidation distributed to a shareholder were not liable to income-tax. Now, it was after this decision that the Legislature incorporated sub-clause (c) in section 2(6A) of the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as the expression stands it can only mean the accumulated profits which have not been capitalised because, as we have already pointed out, once accumulated profits are capitalised in ordinary law they would cease to be profits which are capable of being distributed as dividend. Therefore, if the Legislature wanted to extend the meaning of accumulated profits as it has done in sub-clauses (a), (b) and (d ), it would have used the same qualifying expression in sub-clause (c) as it has done in the other sub-clauses. Therefore, in the absence of any such expression we can only come to the conclusion that the accumulated profits which are capitalised do not come within the ambit of sub-clause (c). In view of this it is clear that the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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