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TMI Blog1966 (10) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... t-company and to appoint a liquidator for that purpose. The paid-up capital of the assessee was Rs. 25 lakhs, and on the date of commencement of winding up it had an accumulated profit of Rs. 5,34,041. From time to time the liquidator distributed the assets in his hands among the shareholders. The following table sets out the distributions made by the liquidator: ------------------------------------------------------------------------------------------------------------------------------------------------- Assessment year Distribution Date of distribution Amount distributed per share ------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. 1953-54 600 9- 9-1952 15,00,000 ,, 90 25- 9-1952 2,25,000 1954-55 60 10-11-1952 1,50,000 ,, 30 6- 5-1953 75,000 ,, 30 23- 2-1953 75,000 1955-56 80 10-11-1953 2,00,000 ------------------------------------------------------------------------------------------------------------------------------------------------- Out of the distribution made on September 9, 1952, the Income-tax Officer brought, in the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as it is material for the purpose of this appeal: " '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 accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included...." By section 3 of the Finance Act, 1955, the proviso to clause (c) was deleted and by section 3 of the Finance Act, 1956, with effect from April 1, 1956, the following clause (c) was substituted: "(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. " By section 17(2) of the Indian Companies Act, 1913, regulation 97 of Table A was one of the obligatory regulations which had to be adopted in terms identical with or to the same effect in the articles of association of every company. Regulation 97 provided that " no dividend shall be paid otherwise than out of profits of the year or any other undist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a special definition of the word " dividend " and incorporated it by Act 7 of 1939 as section 2(6A). The effect of the provision was to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company as a going concern, but subject to the limitation that while in the latter the profits distributed will be dividend whatever the length of the period for which they were accumulated, in the former such profits may be dividend only in so far as they come out of profits accumulated within six years prior to liquidation. It also appeared from the language used that profits of the current year during which the company was ordered or resolved to be wound up could not be included in the expression " dividend ": see Sheth Haridas Achratlal v. Commissioner of Income-tax. By the Finance Act, 1955, the proviso to clause (c) was deleted and in consequence thereof the limitation relating to the period during which the profits were accumulated ceased to apply in the determination whether the amount distributed by the liquidator was dividend. Even after the amendment by the Finance Act, 1955, the language of the clause was found to be somewhat inapt and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... components, and that process will go on till the accumulated profit account in a notional sense is exhausted. On this view the amount distributed is disintegrated, as if it came out of two funds notionally distinct and to the extent to which any part bears tax, it is to be regarded as coming out of the accumulated profits, and the rest out of the capital. Shelat C. J. expressed substantially the same view. Bhagwati and Bakshi JJ. were of the view that, since the enactment of section 2(6A)(c), in the hands of the liquidator, accumulated profits and capital may be deemed separate funds, and in the case of each distribution the source from which the amount is withdrawn should be determined. If the source from which the amount is distributed is capital, the distribution is not taxable ; if it is accumulated profits, it is taxable. The language used by the legislature in section 2(6A)(c), as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components---capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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