9911796707
TMI Blog1964 (6) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... 22,25,000 However, it was only ₹ 50,500 out of the distribution made during the accounting year ending 30th of September, 1952, relevant to the assessment year 1953-54, that the income-tax department treated as dividend under section 2(6A)(c) of the Act, as it then stood, and brought that amount to tax. On the 20th of July, 1957, the liquidator made a further distribution, the distribution being during the assessment year 1958-59. The dispute in this reference is regarding the amount of this last distribution, viz., ₹ 75,000, which the Income-tax Officer, while making the assessment for the tax year 1958-59, treated as dividend within the meaning of section 2(6A)(c) of the Act, rejecting the contention of the assessee-company that the said amount could not be regarded as dividend. The definition of dividend , prior to its amendment on 1st of July, 1955, so far as it is relevant in this reference, stood as follows : 2. (6A) 'Dividend' includes (c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company: Provided that only the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the 1st April, 1955, the department was entitled to treat those profits, which could not until then ,be treated as dividend. But on account of the aforesaid amendment all that was now necessary was to see whether the amount distributed by the liquidator could be attributed to the accumulated profits or not. He also held that the accumulated profits which had not been considered as dividend came to ₹ 4,32,073 and that the extent to which the company had got accumulated profits, the amount distributed by the liquidator could be treated as dividend, and therefore the amount of ₹ 75,000 distributed during the assessment year 1958-59 by the liquidator was dividend within the meaning of section 2(6A)(c) as amended. Aggrieved by this order, the assessee company took the matter in appeal before the Appellate Assistant Commissioner, contending that the distribution in question could be considered from three different points of view : (1) to presume that the accumulated profits were distributed first before anything out of the paid up capital was returned; (2) to hold that each distribution was made up of both the funds, in the same proportion which the funds bore to eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paid-up capital. As regards the seventh distribution, that is, the amount of ₹ 75,000 in question, it would be necessary to apply the test laid down in the definition section and on applying that test, it would be seen that the assessee-company still possessed accumulated profits which had not been taxed as dividend, and by virtue of section 2(6A)(c), the portion which was equivalent to the unexhausted accumulated profits would have to be treated as distribution of dividend and brought to tax accordingly. The view of the Appellate Assistant Commissioner thus was that in respect of the distributions made before the last distribution of ₹ 75,000 in question, the only amount which could be treated as attributable to accumulated profits by reason of the proviso which limited the concept of dividend, was ₹ 50,500, the balance of ₹ 4,34,073 referable to accumulated profits not being amenable to tax on account of the restrictive definition of dividend It was only when the restriction as to the period of six years was removed by the Finance Act of 1955, by deleting the proviso that it became possible to regard the balance as being attributable to past accum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount representing the accumulated profits is available for distribution, though, in law, profits have ceased to exist and it is all capital surplus in the hands of the liquidator. As against the contention urged on behalf of the assessee-company that according to the fiction created by section 2(6A)(c) of the Act, the entire amount of accumulated profits included in the sum of ₹ 17,25,000 could be considered as dividend, but for the proviso to clause (c) and therefore, any further distribution could not once again be considered as dividend even though the fiction created by the section prior to its amendment had restricted the charge-ability to the amount attributable to accumulated profits of the six previous years, the Tribunal was of the view that the expression any distribution in the section meant each and every distribution that a company in liquidation might make. Therefore, if earlier any distribution has been made but such distribution or part of such distribution has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend, must be held to be so. Mr. Mehta has challenged the Tribunal's conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accumulated profits. In support of his contention, Mr. Mehta would have read the definition clause of dividend in section 2(6A)(c) as it then was, and then read separately the proviso which limited the accumulated profits of the last six years as dividend. On the other hand, the contention of the learned Advocate-General was that the section and the proviso must be read together, for, they together provided the definition of dividend and that it was only when they were read together that it was possible to get the fictional concept of dividend given by the legislature as also the object with which the legislature was at pains to create that fiction. The fiction so created enabled that portion of the fund attributable to accumulated profits of six years only to be treated as dividend and, therefore, until the proviso subsisted, it would be that fund only which, by virtue of the fiction created by the legislature, was referable to accumulated profits of the prescribed period which would be taxable as dividend and no more. The learned Advocate-General, therefore, contended that during any assessment for the period prior to the amendment, the department would not be concerned with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,39,40 ; The voluntary liquidation has deprived the directors of the power of declaring a dividend. These facts must be faced and due weight given to the considerations which arise from them. The rights of the Crown and the subject must be governed by what is, and not what might have been. Further it is a misapprehension, after the liquidator has assumed his duties, to continue the distinction between surplus profits and capital. The learned Master of the Rolls further observed : It is not right to split up the sums received by the shareholders into capital and income, by examining the accounts of the company when it carried on business, and disintegrating the sum received by the shareholders subsequently into component parts, based on an estimate of what might possibly have been done, but was not done. Similarly, Scrutton L.J. in Inland Revenue Commissioners y. Blott [1920] 2 KB 657,675;8 Tax Cas 101 has observed: A company is liquidated during the year of assessment, and the liquidator returns to the shareholders : (1) their original capital, (2) accretions to capital due to increase in value of the assets of the company; (3) the (1) reserve fund of undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inition gives a fictional meaning to the word dividend because a company in liquidation cannot pay any dividends to its shareholders. The accumulated or undistributed profits on and after the date of liquidation cease to have the character of profits and are property or capital assets in the hands of the liquidator and when distributed, they are distributed to the shareholders as part of the company's property. Under the ordinary law, there cannot be any division between funds which can be treated as dividends and funds which can be called capital. Both are assets, the property of the company. Therefore, when the definition provides that a distribution attributable to accumulated profits of six years previous to the date of liquidation is dividend, the legislature was imparting to that expression a connotation which the ordinary law would not attach to the word dividend. Secondly, the definition permits the income-tax department to notionally disintegrate a portion of the fund in the hands of the liquidator, namely, accumulated profits, only for six years prior to the date of liquidation, which the liquidator himself is not permitted to do. The position, therefore, is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on determined as having been paid out of accumulated profits would not attract tax. This contention was negatived and it was held that where a distribution in the winding up of a company is found to be out of accumulated profits, it is subject to. tax even though the amount so distributed does not exceed the capital subscribed by the assessee, and it would not be correct to say in such a case that what exceeds the capital alone attracts tax. The principle deducible from this decision is that though all the funds lying with the liquidator are property and any distribution made by him therefrom is part of that property, the fiction created by the sub-section permits the Income-tax Officer to go behind the normal rule of law and find out if the distribution or any part thereof is referable to accumulated profits of six years prior to the date of liquidation, and the definition then attaches chargeability to that distribution or part of it, as the case may be, which, but for the fiction created by the legislature, would not be amenable to income-tax. The definition thus produces at one and the same time a fiction as to attributability and chargeability which would not be available to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en such distribution would be a distribution covered by the expression ' dividend'. Even though it would not be proper to describe such distribution as a distribution made out of the accumulated profits of the company and it would not be possible on the winding up of a company to say that any distribution has been made by the liquidator out of the accumulated profits of the company, the legislative intent is clear and leaves no room for doubt that what was intended to be covered was a distribution referable to the accumulated profits of the company of the previous six years of the company preceding the date of liquidation This decision to a certain extent supports the conclusion that it is by reason of the fiction created by the legislature that a portion of the funds, namely, that which can be traced to accumulated profits, which, though property otherwise under the law of the land, is made amenable to income-tax, and that the scope of that fiction is limited to that portion of it which is traceable to accumulated profits of six years preceding the date of liquidation and not the rest. Even the profits of the year during which the company goes into liquidation are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,25,000 must be regarded as having exhausted all the accumulated profits. His contention that just as there is a presumption when remittances are made by a company from abroad to its branch in India that they are from profits and not from capital, the same presumption must hold good in the case of distribution by a liquidator, is fallacious, for he forgets the distinction between a company which is still functioning and a company in liquidation as also the principle that when a company is in liquidation, all the funds with the liquidator are surplus assets or property of that company and the distribution made by the liquidator is of and from the properties of the company as the liquidation obliterates all distinctions between profits and capital. As stated in Burr ell's case (Supra), the funds possess only one character, that is, as the property of the company. The law does not permit its disintegration into two funds, one of capital and the other of profits. It is only by virtue of the artificial definition of dividend in the Income-tax Act, as distinguished from that under the Companies Act, that the Income-tax Officer is permitted to go behind the liquidation proceedings a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fiction to accumulated profits of six years only as taxable. The fallacy in this contention lies in the fact that Mr. Mehta forgets that section 2(6A)(c) is a definition clause and, therefore, the sub-section must be read as a whole in order to ascertain what it is that is made chargeable thereunder as dividend. In that view, there is hardly any warrant to split asunder the definition and contend that the substantive part renders the entire fund with the liquidator traceable to accumulated profits as dividend and the proviso then carves out or limits that fund, which is attributable to profits of six years only, as chargeable dividend. There is no warrant for such a construction, for, when a definition is enacted, it must be read in its entirety. It is not as if section 2(6A)(c) is a charging section which levies tax on a particular fund from out of which a limited fund is carved out by the proviso. The legislative intent is clear, namely, to treat that portion of the amount distributed by the liquidator as chargeable as dividend which the income-tax department can trace to accumulated profits of the last six years and that portion only. The power and the function of the depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But when the proviso was deleted, the restriction of the power of the income-tax authorities to lend chargeability to accumulated profits and the chargeability of such profits was removed. The process of disintegrating the funds of the company, so far restricted, was made unrestricted and therefore the department could again go behind the liquidation proceedings and if it could trace any distribution to accumulated profits, it could treat such distribution or part of it, as the case may be, as liable to tax as dividend. In other words, what the department could not do until the proviso remained, as part of the fiction created by the definition clause, it could now do, as the fiction by the deletion of the proviso became unrestricted by any period prescribed. The department, by the deletion of the proviso, got the power to go behind the liquidation proceedings and all the implications in law thereof, to disintegrate each and every distribution to ascertain if such distribution could be traceable to accumulated profits, except those which were already taxed, and treat such distribution or part of it, as distribution of dividend. When the liquidator distributed ₹ 2,00,000 during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, they had unfortunately found exit by different paths. I preface this judgment by making the same observation for it is not without a sense of regret that I differ from My Lord the Chief Justice in the answer to be given to the question submitted to us for our opinion on this reference. The question which arises on this reference is a question relating to the applicability of section 2(6A)(c) of the Income-tax Act. The assessee is a private limited company. It went into voluntary liquidation on 23rd August, 1952. At the date of liquidation the paid-up capital of the assessee was ₹ 25,00,000 and its accumulated profits amounted to ₹ 5,34,041 out of which the accumulated profits for the six previous years preceding the date of liquidation were ₹ 50,500. Soon after liquidation commenced, the liquidator distributed two sums of ₹ 15,00,000 and ₹ 2,25,000 on 9th September, 1952, and 25th September, 1952, respectively, the aggregate amount distributed up to 30th September, 1952, being ₹ 17,25,000. While making the assessment for the assessment year for which the previous year was the year ending 30th September, 1952, the question arose whether an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as removed and the accumulated profits of the assessee over the years excluding the accumulated profits during the six previous years preceding the date of liquidation amounted to ₹ 5,34,041 less ₹ 50,500, i.e., ₹ 4,83,541. The next distribution was made by the liquidator on 24th July, 1957, and that is the distribution out of which the present controversy has arisen between the assessee and the revenue. The liquidator on this occasion distributed a sum of ₹ 75,000. The Income-tax Officer in the course of the assessment of the assessee for the assessment year 1958-59, for which the corresponding previous year was the year ending 30th September, 1957, treated the distribution of ₹ 75,000 as dividend under section 2(6A)(c). We may point out here that before the assessment year 1958-59, a further amendment was made in section 2(6A)(c) by the Finance Act, 1956, with effect from 1st April, 1956, and section 2(6A)(c) as it applied in the assessment year 1958-59 was in the following terms: 2. In this Act, unless there is anything repugnant in the subject or context- (6A) ' dividend ' includes- . (c) any distribution made to the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y distribution means each and every distribution that a company in liquidation may take. Therefore, if earlier, any distribution has been made, but such distribution or part of such distribution has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend, must be held to be so. In our opinion that is the correct interpretation of the section. It is not that in the assessment year 1953-54, when the matter was considered by the Income-tax Officer, for the first time, the distribution made by the company fell to be considered in its entirety to the extent of the accumulated profits in spite of the fact that such distribution could be considered as dividend only to the limited extent, and that any subsequent distribution was taken out of the pail of taxation as dividend even if the restriction no more applied. In the present case, there can be no dispute that the definition of dividend as was in force in the assessment year under consideration equally speaks of any distribution and if any distribution is each and every distribution, as we think must be considered as stated above, then, there is no reason to think that the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the annual profits or gains of the shareholders chargeable to super tax but would be capital in their hands, since whatever may have been the nature of the assets of the company when it was functioning, on liquidation all assets become the property of the company distributable among the shareholders after payment of liabilities and in liquidation profits are not distributed or received as such but are distributed and received as part of the property of the company which the shareholders are entitled to have distributed on liquidation. The result was that a rather anomalous position was brought about. When a company makes profits and instead of distributing them as dividend accumulates them from year to year and at a later date distributes them to the shareholders, whether after capitalisation or without capitalisation, the amount so distributed would be dividend under section 2(6A)(a), but when a company which has so accumulated the profits goes into liquidation before declaring a dividend and the liquidator distributes those profits to the shareholders, such distribution, according to the decision in Burrell's case (Supra) would not be dividend. But if the accumulated p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the shareholders until then may have escaped taxation by reason of the decision in Burrell's case (Supra), the balance of such accumulated profits shall not thenceforth escape taxation if and when they reach the hands of the shareholders on distribution by a liquidator and shall be taxed in the same manner as they would when distributed by the company as a going concern, deleted the proviso by the Finance Act, 1955. The result was that from and after the assessment year 1955-56, the distribution of accumulated profits by a liquidator was equated wholly and in all respects with a similar distribution by a company which is working, irrespective of as to when the profits were accumulated. If any accumulated profits were released to the shareholders as part of a distribution made by a liquidator in respect of the assessment year 1955-56 or any succeeding assessment year, such accumulated profits were liable to be fictionally regarded as dividend and taxed as such in the hands of the shareholders as if no liquidation had intervened and they had been distributed by the company as a going concern. I find that this interpretation which I am inclined to put on section 2(6A)( c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must also include them when they are distributed as part of the surplus dividend among shareholders or members or, as they ought technically to be called, contributories. The mode of distribution will be different. In a winding up the liquidator distributes the surplus as a fund without distinguishing according to the source of the components. Profits are, therefore, not distributed as such ; while a going concern must maintain a distinction between profits and share capital and distribute profits under a description or in a guise which so identifies them, e.g., as dividend or bonus. Section 16B, therefore, does not, and logically could not, say that the distribution in a winding up must, to be taxable, be of the same character as a distribution that would be taxable in the case of a going concern. It is the liability to tax under section 16(b)(i ), not of the distribution, but of the thing distributed, the profit, that section 16B takes as the discrimen for the purpose of ascertaining what part of the surplus in a winding up a contributory must include in his assessable income. These observations though made in relation to the Australian section apply equally to our sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind, it is really not difficult to arrive at a correct solution of the problem before us. The first distribution made by the liquidator was of the aggregate sum of ₹ 17,25,000 and that was made in the year ending 30th September, 1952, which was the previous year for the assessment year 1953-54. During this assessment year the proviso existed in section 2(6A)(c) and the only relevant inquiry could, therefore, be whether the distribution of ₹ 17,25,000 represented or reflected the accumulated profits of the assessee of the six previous years preceding the date of liquidation and if so to what extent. The accumulated profits of six years prior to liquidation amounted to ₹ 50,500 and the revenue found that these accumulated profits amounting to ₹ 50,500 which were with the assessee at the date of liquidation were distributed among the shareholders as part of the distribution of ₹ 17,25,000 and the distribution of ₹ 50,500 out of ₹ 17,25,000 was, therefore, treated by the revenue as dividend under section 2(6A)(c) as it then stood. Having regard to the proviso it was not necessary at that stage to inquire further whether the remaining part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treat any part of this distribution as dividend under section 2(6A)(c) with the result that if any accumulated profits of earlier years were distributed to the shareholders as part of this distribution, they escaped assessment in the assessment year 1955-56 notwithstanding the deletion of the proviso. Then came the distribution of ₹ 75,000 which has given rise to the present reference. Now in regard to this distribution also the revenue was entitled to inquire whether any part of it represented or reflected accumulated profits of earlier years. The revenue was entitled to ask the question: When this distribution was made, were any accumulated profits of earlier years released to the shareholders as part of such distribution or, in other words, if there were no liquidation, would this distribution be a distribution of accumulated profits of earlier years liable to be regarded as dividend? Of course in order to answer this question it was necessary for the revenue to inquire whether any accumulated profits of earlier years had already been distributed to the shareholders as part of the previous distributions, irrespective of their chargeability, for what was already distributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und favour with my Lord the Chief Justice, but with the greatest deference to him, I find myself unable to accept it. I conceive the argument to be fallacious and my reason for saying so is as follows : The argument proceeds on the assumption that accumulated profits can exist in the distribution only when they are chargeable and it is chargeability which makes the distribution attributable to accumulated profits. This assumption is, I think, unjustified. When liquidation takes place the assets of the company may consist of various component funds such as accumulated profits, capital gains and other capital of the company. It is no doubt true that on liquidation all these funds become part of the property of the company divisible among the shareholders in liquidation and in the hands of the liquidator there is no distinction between one fund and another, yet it is these funds which constitute the property of the company and, therefore, when a distribution is made out of the property of the company, such distribution would consist of one or more of these funds. It may be that in a given case it may be difficult to disintegrate the distribution for the purpose of ascertaining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section comes into operation and attaches the fiction of dividend to the distribution. If the distribution has not come out of accumulated profits or is not attributable to accumulated profits, the section cannot apply and no part of the distribution can be fictionally regarded as dividend. The argument of the revenue proceeds on the hypothesis that the section not only creates the fiction of chargeability but also creates the fiction of attributability and that so long as the accumulated profits are not exhausted by being charged as dividend, any distribution made by the liquidator must be deemed to be attributable to them. The argument is clearly wrong for it makes the existence of accumulated profits-and I may once again make it clear that by accumulated profits I mean what were accumulated profits at the date of liquidation-in the distribution dependent on chargeability instead of making chargeability dependent on the existence of accumulated profits in the distribution. The view advocated on behalf of the revenue also ignores the object and purpose of the enactment of section 2(6A)(c). On that view even if the identifiable fund consisting of what were accumulated profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat just as there is a presumption in case of such remittance that it is first from profits and then from capital, a similar presumption must apply in the case of distribution by a liquidator. I do not think the contention is well-founded. There is no analogy between remittance from abroad and distribution by a liquidator. No intention can be presumed in a liquidator to make a distinction between one portion of the property of the company and another and to distribute one portion in preference to the other. There is neither principle nor authority which supports any such presumption in case of distribution by a liquidator. Moreover, the reasons which I have given above for negativing the construction of the revenue apply equally to negative the applicability of the presumption contended for on behalf of the assessee. The view put forward by Mr. S.P. Mehta that the distribution of ₹ 17,25,000 must of itself without anything more be regarded as having exhausted the accumulated profits of earlier years by reason of the suggested presumption must, therefore, be rejected. The argument urged against the view which I am inclined to take was that in most cases it would not be poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets of the company become a surplus fund in which the element of profit as distinguished from capital does not exist and there can, therefore, be no distribution out of accumulated profits. Mr. Palkhivala relied strongly on the decision in Barrett's case (Supra). A Division Bench of this court consisting of K.T. Desai C.J. (as he then was) and myself rejected the contention of Mr. Palkhivala and pointed out that though it is true that on liquidation of the company the accumulated profits do not remain in the hands of the liquidator as accumulated profits and acquire the character of property of the company and the language used by the legislature in section 2(6A)(c) as it then stood was, therefore, not apt, the legislative intent was clear and reading the section as. a whole it was apparent that what the legislature intended to hit was distribution made to the shareholders of a company which was referable to accumulated profits. What the legislature intended to convey by the words out of accumulated profits of the company was to indicate the source from which the money distributed came and if the distribution was referable to the accumulated profits of the company, such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said to be a distribution of accumulated profits of earlier years ? In order to answer this question it was necessary for the Tribunal to inquire whether any part of the accumulated profits of earlier years was distributed to the shareholders when the previous distributions were made. The Tribunal should have ascertained whether the fund constituted of what were accumulated profits at the date of liquidation was exhausted by the previous distributions made by the liquidator and, if not, whether the distribution of ₹ 75,000 represented or reflected any part of such fund. The revenue instead of asking the Tribunal to determine this point, invited the Tribunal to proceed on an entirely erroneous basis which I have already set out above and the Tribunal proceeding on that basis did not disintegrate the distribution of ₹ 75,000 either by actual dissection or by rateable apportionment for the purpose of ascertaining whether any part of it came out of accumulated profits of earlier years. The result is that there is no finding of the Tribunal that when the distribution of ₹ 75,000 was made, accumulated profits of earlier years had not been exhausted by the previous dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g year 30th September, 1957, was ₹ 23 lakhs and earlier only an amount of ₹ 50,500 was held to be dividend. When in the year of assessment now under consideration a further amount of ₹ 75,000 was distributed, the present controversy has arisen. On behalf of the assessee-company, it was contended that the entire accumulated profits should be considered to have exhausted their charge-ability at the time of the first distribution considered by the Income-tax Officer in the amount of ₹ 17,25,000 for the assessment year 1953-54. It was contended on behalf of the assessee that the accumulated profits of the assessee at the date of liquidation were only ₹ 5,34,041 and the distribution of ₹ 17,25,000 made in the year ending 30th September, 1952, therefore exhausted the whole of the accumulated profits and the further distributions thereafter made, including the distribution of ₹ 75,000 in the year of account, could not be said to be attributable to the accumulated profits of the assessee. The assessee further contended that only a sum of ₹ 50,500 was treated as dividend in the assessment year 1953-54, but that was due to the proviso to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets of the company; (b)any distribution by a company of debentures or debenture stock, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c)any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company : Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquid-tion shall be so included ; and (d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not; Provided that' dividend ' does not include a distribution in respect of any share issued for full cash consideration which is not entitled in the event of liquidation to participate in the surplus assets, when such distribution is made in accordance with sub-clause (c) or (d): Provided further that the expression accumulated profits wherever it occurs in this clause, sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng before the Ist day of April, 1946, or after the 31st day of March, 1948 The clause was again amended by the Finance Act of 1956, which defined dividend as under : ' Dividend ' includes- (a) any distribution by a company of accumulated profits whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b)any distribution by a company of debentures, debenture stock or deposit certificates in any form, whether with or without interest, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c)any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d)any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the Ist day of April, 1933, whether such accumulated profits have been capitalised or not; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company out of the company's accumulated profits would fall within the definition of dividend and would therefore be taxable in the hands of the shareholders. If we look to the clause before its amendment, it would appear that its operation was limited only to the accumulated profits which arose during the six previous years of the company preceding the date of liquidation and after the amendment of the clause, the accumulated profits of any past year were brought within the purview of chargeability. The Indian legislature thus by enacting section 2(6A)(c) achieved the effect of assimilating the distribution of accumulated profits by a liquidator to a similar distribution by a company which was working, subject to the limitation that the profits would be dividend only in so far as they came out of profits accumulated within six years prior to liquidation. This limitation was introduced by the proviso which formed part of section 2(6A)(c) at the time when the section was first enacted and so long as the proviso stood the distribution could be regarded as dividend only to the extent to which it was a distribution of accumulated profits of six years prior to liquidation. This li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact and hence to be ascertained on the facts of each particular case. The fiction created by section 2(6A)(c) makes the fund of accumulated profits liable to tax in spite of the fact that such accumulated profits have merged into the property and assets of the company on liquidation. By virtue of such a fiction, an item forming one of the assets of the company, which could otherwise not be subjected to tax, was brought within the net and was made liable to tax. But that fiction is restricted by the section to the creation of the liability at any distribution to the extent to which the distribution could be made attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. The section does not prescribe or enact as to how the attributability to the accumulated profits of the company is to be ascertained, nor does it provide for raising any presumption as regards such attributability. The extent to which the fiction has been created by the section under consideration is thus restricted and must be restricted to the terms of, and the phraseology used in, the section because the section attempts to saddle liability in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper dissection or apportionment is found attributable to the existence among the assets of profits, whether reserved, accumulated, floating or even earned since liquidation, if those profits would, under the provisions of section 16(b)( i), have formed part of the members' assessable income, had they been distributed by the company as a going concern, The section thus impliedly concedes what was decided by this court in Stevenson's case (Supra ) , namely, that section 16(b)( i) was confined to distributions of profit by a company as a going concern and did not apply to a distribution in a liquidation ; so that under the provisions of that paragraph no part of a distribution in a winding up was taxable in the hands of the members, notwithstanding that it represented or reflected taxable income of the company. But section 16B destroys this dissection and, if the profits are of a kind which could not be distributed among members or shareholders while the company was a going concern without exposing the members or shareholders to a liability to include them in his assessable income, then in the event of a winding up he must also include them when they are distributed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te how apportionment of capital profits for the purpose of distribution could be made. But, in any event, it appears to be certain that the section does not enact a fiction deeming a distribution to have come out of accumulated profits or making a distribution attributable to accumulated profits and therefore whether the distribution is out of accumulated profits or not would always remain a matter of fact and not a matter of fiction. If we turn to the facts of the present case, the first distribution made by the liquidator was of the sum of ₹ 17,25,000 which was made in the year ending 30th September, 1952. At the time of this distribution the proviso existed in section 2(6A)(c) and the only inquiry therefore that was relevant at the time, was whether the distribution of ₹ 17,25,000 reflected the accumulated profits of the assessee of the six years preceding the date of liquidation and, if so, to what extent. As the accumulated profits of the six years previous to the liquidation were ₹ 50,500, this amount of ₹ 50,500 out of the total amount of ₹ 17,25,000 was treated by the revenue as dividend under section 2(6A)(c). It is obvious that it was n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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