1956 (8) TMI 47 - HC - Income Tax

High Court clarifies dividend rules, rejects notional profit distribution.

GIRDHARDAS & CO., LTD. Versus COMMISSIONER OF INCOME-TAX, AHMEDABAD

GIRDHARDAS & CO., LTD. Versus COMMISSIONER OF INCOME-TAX, AHMEDABAD - [1957] 31 ITR 82 (Bom) Issues Involved:1. Whether the distribution of Rs. 98,000 being the profits from 1st October, 1951, to 23rd August, 1952, to the shareholders is the distribution of dividend within the meaning of section 2(6A)Rs.2. Whether the sum of Rs. 21,142 assessed in the hands of the assessee under section 23A in the assessment year 1949-50 could be taken as accumulated profits for the liquidator in the year of accountRs.Detailed Analysis:1. Distribution of Rs. 98,000 as Dividend:The core issue was whether the Rs. 98,000 distributed by the liquidator, representing profits from 1st October, 1951, to 23rd August, 1952, constituted a dividend under section 2(6A) of the Income-tax Act. The Tribunal held that this amount was indeed a dividend, contrary to the assessee's contention that it was capital profits. The Tribunal's reasoning was based on the interpretation that the restriction of six years applies only to accumulated profits and not to profits of the year of account in which liquidation occurs. The High Court, however, disagreed with the Tribunal's conclusion, emphasizing that under section 2(6A)(c), only accumulated profits of the six years preceding the date of liquidation could be treated as dividend. The Court noted that the distinction between capital and profits disappears upon liquidation, and thus, any distribution by the liquidator would be of the company's assets, not specifically as profits or capital. Consequently, the Court concluded that the Rs. 98,000 did not fall within the ambit of 'dividend' as defined by section 2(6A)(c).2. Sum of Rs. 21,142 as Accumulated Profits:The second issue revolved around whether the notional profit of Rs. 21,142 assessed under section 23A in the assessment year 1949-50 could be considered as accumulated profits available for distribution by the liquidator. The Tribunal excluded this amount, agreeing with the assessee that since the company never actually received this sum, it could not be available for declaring dividends. The High Court upheld this view, stating that the notional profit could not be deemed as accumulated profits in the hands of the liquidator. The Court emphasized that the definition of 'dividend' under section 2(6A) did not extend to notional profits that were never actually received by the company.Judgment Summary:The High Court answered both questions in the negative. It held that the Rs. 98,000 distributed by the liquidator did not constitute a dividend under section 2(6A) as it was not part of the accumulated profits of the six years preceding the liquidation. Additionally, the notional profit of Rs. 21,142 assessed under section 23A could not be considered as accumulated profits available for distribution by the liquidator. The Court emphasized that the definition of 'dividend' under section 2(6A) should be strictly construed, and only the accumulated profits of the six previous years preceding the liquidation could be treated as dividend. The Court also clarified that the winning party could raise questions of law arising from the Tribunal's order even if it had not applied for a reference, thereby overruling the preliminary objection raised by the assessee's counsel. The Commissioner was ordered to pay the costs of the reference.