1962 (12) TMI 85 - HC - Income Tax

Shareholders' liquidation proceeds taxed as dividends under Indian Income Tax Act

Gautam Sarabhai and Ors. Versus Commissioner of Income Tax, Gujarat

The court held that amounts received by shareholders from the liquidator of a company, attributable to accumulated profits, are taxable as 'dividend' ... - Issues Involved:1. Taxability of amounts received by shareholders from the liquidator as 'dividend' under section 2(6A)(c) of the Indian Income Tax Act, 1922.2. Applicability of the amended or unamended clause (c) of section 2(6A) for the assessment year 1955-56.Issue-wise Detailed Analysis:1. Taxability of amounts received by shareholders from the liquidator as 'dividend' under section 2(6A)(c) of the Indian Income Tax Act, 1922:The core issue was whether the amounts distributed to the shareholders of Kawampe Cotton Co. Ltd. by the liquidator, which were referable to accumulated profits, should be taxed as 'dividend' under section 2(6A)(c) of the Indian Income Tax Act, 1922, for the assessment year 1955-56. The Income Tax Officer, Appellate Assistant Commissioner, and the Income Tax Appellate Tribunal all held that these amounts were taxable as dividend. The matter was then referred to the High Court for determination.Section 2(6A)(c) before the amendment stated: '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.'The argument presented by the assessees' counsel, Mr. Palkhivala, was that once a company goes into liquidation, the profits lose their character as profits and become part of a surplus fund. He relied on the decision in Inland Revenue Commissioners v. George Burrell, which held that undivided profits distributed during liquidation ceased to be profits and were merely assets. However, the court noted that section 2(6A)(c) was enacted to address this very issue, following similar legislation in Britain.The court concluded that the legislative intent was clear: distributions referable to accumulated profits from the six years preceding liquidation were to be taxed as dividends. Despite the inapt wording, the proviso clarified that only these accumulated profits were to be included in the definition of 'dividend'. Thus, the amounts received by the shareholders were taxable as dividends under section 2(6A)(c).2. Applicability of the amended or unamended clause (c) of section 2(6A) for the assessment year 1955-56:The second issue was whether the amended clause (c) of section 2(6A), as it stood after the Finance Act, 1955, or the unamended version, was applicable for the assessment year 1955-56. The amendment by the Finance Act, 1955, deleted the proviso, meaning that all accumulated profits distributed upon liquidation would be treated as dividends, without the six-year limitation.The Finance Act, 1955, came into force on 1st April 1955 and applied to assessments for the assessment year 1955-56. Given that the assessment year 1955-56 related to income from the previous year (calendar year 1954), the court held that the amended section 2(6A)(c) applied. The precedent established in cases like Maharaja of Pithapuram v. Commissioner of Income Tax confirmed that the law as amended by the relevant Finance Act applied to assessments for that year.Conclusion:1. The amounts received by the shareholders from the liquidator of Kawampe Cotton Co. Ltd., referable to accumulated profits, are taxable as 'dividend' under section 2(6A)(c) of the Indian Income Tax Act, 1922.2. The amended clause (c) of section 2(6A), as it stood after the Finance Act, 1955, is applicable to the present case for the assessment year 1955-56.The assessees were ordered to pay the costs of the reference to the Commissioner.