1979 (1) TMI 95 - HC - Income Tax

Court upholds Tribunal's decision on Super Profits Tax Act assessment for company in liquidation

The Tribunal's decision that no assessment under the Super Profits Tax Act, 1963, could be made on the assessee-company in liquidation was upheld by the ... Company In Liquidation, Standard Deduction, Super Profits Tax, Tax Liability Issues Involved:1. Justification of the Tribunal's decision that no assessment under the Super Profits Tax Act, 1963, can be made on the assessee-company (in liquidation).Issue-wise Detailed Analysis:1. Justification of the Tribunal's Decision:The primary question was whether the Tribunal was justified in holding that no assessment under the Super Profits Tax Act, 1963, could be made on the assessee-company, which was in liquidation. The assessment year in question was 1963-64, and the assessee was a banking company that went into liquidation on August 8, 1960. The official liquidator took charge of the assets and liabilities of the company, and a balance-sheet was prepared on that date. For the relevant assessment year, the Income Tax Officer (ITO) determined the taxable income at Rs. 5,79,678 and believed this amount attracted liability for super profits tax. The assessee had not submitted any return under the Super Profits Tax Act, prompting a notice under Section 9(a) of the Act. The assessee's return showed chargeable profits as 'nil,' arguing that there was no chargeable profit after considering the 'standard deduction' allowable, resulting in no liability to super-tax.The ITO overruled the assessee's contention, granting an alternative minimum standard deduction of Rs. 50,000 and calculating the chargeable profit at Rs. 2,04,740. The Appellate Assistant Commissioner (AAC) confirmed the ITO's order. However, on appeal, the Tribunal found that liquidation had not changed the company's status and that the surplus was chargeable to super profits tax only under Section 4 of the Act. The Tribunal opined that Section 27 of the Act exempted a company from the provisions of the Act if it had no share capital, covering cases of companies in liquidation with no identifiable share capital. The Tribunal cited the Supreme Court's decision in Girdhardas case [1967] 63 ITR 300, which stated that in the hands of the liquidator, there is only one fund that cannot be disintegrated into share capital, thus attracting the exemption under Section 27.Additionally, the Tribunal reasoned that even if the exemption under Section 27 was not applicable, the charging section, Section 4, would not apply as the standard deduction was incapable of ascertainment. The Tribunal referred to the Supreme Court's decision, stating that in the hands of the liquidator, it was not possible to view the fund as entirely composed of profits or capital. The Tribunal rejected the argument that the fund could be assumed to be either capital or profits.Legal Provisions and Analysis:- Section 2(5) and Section 2(9) of the Act: Define 'chargeable profits' and 'standard deduction,' respectively.- Section 4: The charging section imposes super-tax on the chargeable profits exceeding the standard deduction.- Section 27: Exempts companies with no share capital from the Act's provisions.The Tribunal's view was that the standard deduction, which must be computed based on the share capital and reserves, could not be ascertained for a company in liquidation. The Tribunal based its conclusions on the English decision in IRC v. George Burrell [1924] 9 TC 27; [1924] 2 KB 52 (CA), which stated that after liquidation, the distinction between surplus profits and capital ceases, and the liquidator's distributions are considered as capital. The Supreme Court's decision in Girdhardas case supported this reasoning, noting that the fund in the hands of the liquidator is a consolidated amount representing both capital and accumulated profits.The court observed that the Indian Companies Act closely followed the English Companies Act, and the principle in Burrell's case applied to distributions made by liquidators. The Finance Act, 1956, amended the Indian I.T. Act, 1922, to supersede this principle, but no such amendment existed for the Super Profits Tax Act.Conclusion:The court concluded that the Tribunal's view was correct, as the standard deduction was incapable of ascertainment for a company in liquidation. Consequently, the charge to tax could not be levied. The court answered the question in the affirmative, in favor of the assessee, and against the revenue, with no order as to costs.