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TMI Blog1965 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... s and buildings of the company, and was not liable to tax, and that in any event the amounts distributed represented "current profits " of the year in which it was resolved that the company be wound up and were on that account not dividend within the meaning of section 2(6A)(c) of the Income-tax Act. After some correspondence the Income-tax Officer, Salem, by his order dated October 18, 1962, finally called upon the liquidators to pay Rs. 4,11,700 which was retained by the liquidators from the distribution made to the shareholders. The liquidators then moved the High Court of Judicature at Madras, for a writ of prohibition restraining the First Income-tax Officer from taking further action to enforce collection of the amount referred to by him in his communication dated October 18, 1962. Holding that the demand made by the Income-tax Officer was " not in conformity with the law " in that the amount of Rs. 8,50,000 which had been distributed could not be deemed to be distributed as dividend without determining whether any portion of the amount represented capital gains, which arose out of the sale of capital assets consisting of lands from which agricultural income was derived, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing whether any portion of that amount, represented capital gains arising from the sale of capital assets consisting of lands from which agricultural income was derived was not within his authority. Counsel for the liquidators contended in the first instance that all profits whatever may be their character arising in the year in which the company is voluntarily wound up are not liable to be taxed as they did not fall within the definition of " dividend " in section 2(6A)(c). Counsel for the department, while supporting the view of the High Court relating to the chargeability to tax of " current profits ", contended that the entire amount of Rs. 8,50,000 distributed to the shareholders, whatever may be the source from which the profits were earned, was liable to be brought to tax under section 12 of the Income-tax Act as dividend distributed. By section 12 of the Income-tax Act, tax is payable by an assessee under the head " Income from other sources " in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the preceding heads in sections 7 to 10 of the Act. By sub-section (1A) " Income from other sources " inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(4A) as meaning " property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include ---.... (iii) any land from which the income derived is agricultural income." The contention raised by counsel for the company that the profits earned in the " current year ", i.e., the year in which it was resolved that the company be wound up, were not " dividend " within the meaning of section 2(6A)(c) of the Act cannot be accepted. Sub-clause (c) of section 2(6A) declares that accumulated profits, immediately before the liquidation of the company, are dividend : it does not say that accumulated profits up to the end of the previous year immediately preceding the year in which liquidation of the company commences are dividend. It is true that in giving effect to the definition, the taxing authorities have to compute profits of the company for a part of the year, but that is not a ground for reading the plain words of the statute in an artificial sense. Under section 3 of the Act read with section 4, the charge to income-tax is on the total income of the previous year, and in accordance with and subject to the provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closely followed the scheme of the English Companies Act, and the view expressed in Burrell's case applied to the Indian Income-tax Act, a special definition of " dividend " was devised by Parliament by the enactment of the Income-tax (Amendment) Act 7 of 1939, with a view to supersede the view in Burrell's case Clause (c) of sub-section (6A), as originally enacted, stood as follows : " '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 the Finance Act, 1955, the proviso to sub-clause (c) of clause (6A) was omitted. There was a further amendment made by the Finance Act, 1956, and clause (c) to the amended section read as follows : " 'Dividend' includes --- . . . (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted value of assets in commercial practice is regarded as realization of capital rise, and not of profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act.
Counsel for the department contended, relying upon Mrs. Bacha F. Guzdar v. Commissioner of Income-tax, that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to pay tax under section 4(3)(viii), dividend distributed from profits earned out of sale of capital assets inclusive of lands from which the income derived is agricultural income is also not exempt from income-tax. But the company does not claim exemption from liability to tax under section 4(3)(viii) : it claims exemption because the receipt is not income which is chargeable to tax under section 12 under the head " dividend ". The case of Mrs. Bacha F. Guzdar has, therefore, no application to this case.
The appeal, therefore, fails and is dismissed with costs.
Appeal dismissed
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