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SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND) S.M. SIKRI, JJ
First Income-tax Officer, Salem, Appellant
Versus
Short Brothers (P) Ltd. Respondent.
Civil Appeal No. 97 of 1965, dated 15-12-1965.
Advocates appeared
Mr. S. T. Desai, Senior Advocate, (M/s N. D. Karkhanis and R N Sachthey, Advocates, with him), for Appellant; Mr. A. V. Viswanatha Sastri, Senior Advocate, (Mr. B R. Agarwal, Advocate and Mr. H. K. Puri Advocate, for M/s. Gagrat and Co.), for Respondent.
INCOME TAX - Dividend - Distribution of accumulated profits on liquidation of company - Whether capital appreciation in respect of agricultural lands is dividend - Income-tax Act, 1961, Ss. 2(6A)(c), 12, 12B, 4(3)(viii).
Fact of the Case:
The assessee company, M/s. Short Brothers (Private) Ltd., sold its coffee estates and other assets and was voluntarily wound up. The liquidators distributed Rs. 8,50,000 to the shareholders, which the Income-tax Officer treated as dividends and demanded tax under S. 18 (3D) of the Income-tax Act. The liquidators contended that the amount distributed was capital appreciation realized by sale of agricultural lands and buildings and was not liable to tax.
Finding of the Court:
The High Court held that the demand made by the Income-tax Officer was not in conformity with the law as the amount distributed could not be deemed to be distributed as dividend without determining whether any portion of the amount represented capital gains arising out of the sale of capital assets consisting of lands from which agricultural income was derived.
Issues: Whether the distribution of accumulated profits on liquidation of a company includes capital appreciation in respect of agricultural lands.
Ratio Decidendi: The definition of "dividend" in S. 2(6A)(c) of the Income-tax Act includes 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. The Explanation to S. 2(6A) excludes capital gains arising before April 1, 1946, or after March 31, 1948, and before April 1, 1956, from the definition of "accumulated profits". Capital gains arising after March 31, 1956, are chargeable to tax under S. 12B of the Act. "Capital assets" under S. 2(4A) do not include lands from which the income derived is agricultural income. Therefore, profits derived by transfer of lands from which the income derived is agricultural income would not be chargeable under the head "capital gain". Realization of appreciated 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.
Final Decision: The appeal of the Income-tax Officer was dismissed, holding that the distribution of accumulated profits on liquidation of a company does not include capital appreciation in respect of agricultural lands.
Judgment
SHAH, J. : On December 24, 1959. M/s. Short Brothers (Private) Ltd. sold its coffee estates and other assets, and by resolution, dated February 6, 1960, it was resolved that it be voluntarily wound up and liquidators be appointed to administer its affairs. Out of the proceeds realized by sale of its assets, the liquidators of the Company distributed on March 30 1960, Rupees 8,50,000 to the shareholders. By letter, dated December 19, 1960 the Income-tax Officer Salem, informed the liquidators that he proposed to treat that amount distributed as dividends in the hands of the shareholders, and to call upon the liquidators to pay the amount of tax deductible under S. 18 (3D) of the Income-tax Act. The liquidators submitted that the amount distributed to the shareholders was capital appreciation realised by sale of agricultural lands 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.
2. 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. 8,50000 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, the High Court issued a writ restraining the Income-tax Officer from enforcing the demand for tax. The High Court reserved liberty to the Income-tax Officer to examine the question afresh, and to determine "the correct amount of dividend within the meaning of S. 2 (6A) (c)". With special leave, the First Income-tax Officer has appealed to this Court.
3. It was submitted on behalf of the Income-tax Officer that the High Court in entertaining the petition in its extra-ordinary jurisdiction under Art. 226 of the Constitution, by-passed the machinery of assessment and rectification of orders of assessment prescribed by the Indian Income-tax Act which is both adequate and efficacious. But the High Court has under Art. 226 of the Constitution jurisdiction to issue to any person or authority within the territories in relation to which it exercises jurisdiction directions, orders, or writs in the nature, amongst others, of mandamus, prohibition and certiorari for the enforcement of any of the rights conferred by Part III and for any other purpose. It is true that normally the High Court will not entertain a petition in exercise of its jurisdiction under Art. 226 of the Constitution when the party claiming relief has an alternative remedy which is adequate and efficacious. The question however, is one of discretion of the High Court and not of its jurisdiction and if the High Court in exercise of their discretion thought that the case was one in which their jurisdiction may be permitted to be invoked, this Court would normally not interfere with the exercise of that discretion.
4. The High Court was of the view all profits accumulated in the previous years and the profits till the date on which it was resolved that the Company be voluntarily wound up would be included in the expression "accumulated profits" under S. 2 (6A) (c) of the Indian Income-tax Act read with the Explanation. They held that even capital gains taxable under S 12
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