1972 (8) TMI 134 - SC - Income Tax

Interpretation of Tax Law on Liquidation Distribution: Legislative Intent & Scope Considered

C.I.T. GUJARAT Versus VADILAL LALLUBHAI

C.I.T. GUJARAT Versus VADILAL LALLUBHAI - 1973 AIR 1016, 1973 (1) SCR 1058, 1973 (3) SCC 17, (1972)86 ITR 2 Issues Involved:1. Applicability of Section 44-F read with Section 2(6A)(c) of the Indian Income-tax Act, 1922.2. Interpretation of 'dividend' under Section 2(6A)(c).3. Definition and scope of 'income' under Section 2(6C).4. Legislative intent and mischief rule in tax avoidance.Detailed Analysis:1. Applicability of Section 44-F read with Section 2(6A)(c) of the Indian Income-tax Act, 1922:The principal question of law was whether the Department was right in applying Section 44-F read with Section 2(6A)(c) of the Indian Income-tax Act, 1922. The Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal had answered this in favor of the Department, but the High Court ruled in favor of the assessee. The Supreme Court agreed with the High Court's conclusion, finding Section 44-F read with Section 2(6A)(c) inapplicable to the facts and circumstances of the case.2. Interpretation of 'dividend' under Section 2(6A)(c):The Revenue contended that the distribution of assets on liquidation was 'dividend' under Section 2(6A)(c) and thus 'income' as defined in Section 2(6C). The assessee argued that the definition of 'dividend' in Section 2(6A)(c) was repugnant to the subject dealt with under Section 44-F. The Supreme Court noted that Section 2(6A) provides an inclusive definition of 'dividend,' which includes any distribution made to shareholders on liquidation attributable to accumulated profits. However, the Court held that this artificial definition of 'dividend' could not be extended to Section 44-F, which concerns itself with income arising from securities or shares over a period of time.3. Definition and scope of 'income' under Section 2(6C):Section 2(6C) gives an inclusive definition of 'income,' which includes 'dividend.' The Court observed that for Section 44-F to apply, the income must arise from shares or securities and be capable of being apportioned on a day-to-day basis. The Court found that upon liquidation, shares cease to be income-yielding assets and become mere pieces of paper. The distribution of assets on liquidation cannot be considered as income accruing from day to day, unlike interest on securities or dividends on shares.4. Legislative intent and mischief rule in tax avoidance:The Court examined the legislative intent behind Section 44-F, which was included to prevent tax avoidance through 'bond-washing' transactions. The Select Committee had recommended this section to address the manipulation of securities to avoid tax. The Court noted that Section 44-F was analogous to Section 33 of the English Finance Act, 1927, designed to counteract tax avoidance by converting revenue receipts into capital receipts. The Court concluded that the scheme of Section 2(6A)(c) was incompatible with Section 44-F, as they were intended to address different situations. The deemed dividend under Section 2(6A)(c) could not be considered 'income' under Section 44-F.Conclusion:The Supreme Court agreed with the High Court that Section 44-F was inapplicable to the facts of the assessee's case. The appeals were dismissed with costs, and the Court did not find it necessary to examine other subsidiary questions. The judgment emphasized the importance of legislative intent and the specific mischief the legislature aimed to remedy, reaffirming that taxing provisions should not be interpreted to extend beyond their legitimate field.