1. Distribution of assets by a liquidator during company winding up — Taxability of such distributions as dividends under Section 2(6A)(c) of the Income-tax Act, 1922. (Para 1 )
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1966 Supreme(SC) 264
SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA JJ.
Commissioner of Income-tax Gujarat, Appellant
Versus
Girdhardas and Co. Private Ltd. Respondent.
Civil Appeal No. 690 of 1965, D/- 7-1 1966.
Advocates appeared
Mr. B. Sen, Senior Advocate, (M/s. T. A. Ramachandran and R. N. Sachthey, Advocates with him), for Appellant; Mr. S. T. Desai, Senior Advocate, (Mr. I. N. Shroff, Advocate, with him), for Respondent.
Advocates:
B.SEN, I.M.SHROFF, R.N.SACH, S.T.DESAI, T.A.Ramachandran
B.SEN, I.M.SHROFF, R.N.SACH, S.T.DESAI, T.A.Ramachandran
Important Points
Distributions made by a liquidator from a consolidated fund are treated as dividends to the extent of the ratio of accumulated profits to total assets existing immediately before the company's liquidation.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Income-tax Act, 1922 - Section 2(6A)(c) - Indian Companies Act, 1913 - Section 17(2) - Distribution by liquidator during winding up - Treatment of accumulated profits as dividend - The provision allows the taxing authority to disintegrate the amount distributed into its component parts and determine the share attributable to accumulated profits (Para 10).
(B) Nature of fund in liquidation - In the hands of the liquidator, there is only one consolidated fund representing both capital and accumulated profits - For the purpose of determining tax liability, the amount distributed is disintegrated into capital and accumulated profits as they existed immediately before the commencement of liquidation (Para 10).
(C) Calculation of dividend - The amount distributed is deemed to be received partly as accumulated profits and partly as capital, in the same proportion which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding up (Para 10).
Facts of the case:
A company was wound up with a specific amount of paid-up capital and accumulated profits. The liquidator made several distributions to shareholders over time. The tax authorities sought to treat a specific distribution as a dividend under the relevant income-tax legislation. The assessee contended that accumulated profits had been exhausted by previous distributions.
Findings of Court:
The court found that the liquidator does not hold separate funds for capital and profits. Instead, any distribution made from the consolidated fund must be apportioned between capital and accumulated profits based on the ratio existing immediately before the liquidation.
Issues: Whether a specific distribution made by a liquidator during the winding up of a company could be treated as a dividend under Section 2(6A)(c) of the Income-tax Act, 1922.
Ratio Decidendi: The court ruled that since the fund in the hands of the liquidator is one, any distribution is deemed to take place in the same proportion in which the capital and accumulated profits stood in the accounts of the company immediately before the winding up. The taxing authority must determine the ratio between capital and undistributed profits and apply this ratio to the amount distributed to determine the taxable component.
Result: Appeal partially allowed.
(B) Nature of fund in liquidation - In the hands of the liquidator, there is only one consolidated fund representing both capital and accumulated profits - For the purpose of determining tax liability, the amount distributed is disintegrated into capital and accumulated profits as they existed immediately before the commencement of liquidation (Para 10).
(C) Calculation of dividend - The amount distributed is deemed to be received partly as accumulated profits and partly as capital, in the same proportion which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding up (Para 10).
Facts of the case:
A company was wound up with a specific amount of paid-up capital and accumulated profits. The liquidator made several distributions to shareholders over time. The tax authorities sought to treat a specific distribution as a dividend under the relevant income-tax legislation. The assessee contended that accumulated profits had been exhausted by previous distributions.
Findings of Court:
The court found that the liquidator does not hold separate funds for capital and profits. Instead, any distribution made from the consolidated fund must be apportioned between capital and accumulated profits based on the ratio existing immediately before the liquidation.
Issues: Whether a specific distribution made by a liquidator during the winding up of a company could be treated as a dividend under Section 2(6A)(c) of the Income-tax Act, 1922.
Ratio Decidendi: The court ruled that since the fund in the hands of the liquidator is one, any distribution is deemed to take place in the same proportion in which the capital and accumulated profits stood in the accounts of the company immediately before the winding up. The taxing authority must determine the ratio between capital and undistributed profits and apply this ratio to the amount distributed to determine the taxable component.
Result: Appeal partially allowed.
Legal Category Hierarchy
Table of Contents
2. Whether distributions by a liquidator are taxable as dividends only after accumulated profits are exhausted or based on a proportional disintegration of capital and profits. (Para 1 , 9 )
3. The liquidator holds a single consolidated fund; for tax purposes, distributions must be disintegrated into capital and accumulated profits based on their ratio before liquidation. (Para 10 )
4. Distributions by a liquidator are taxable as dividends to the extent they are attributable to accumulated profits based on the ratio existing immediately before liquidation. (Para 10 )
5. Appeal partially allowed — Distribution taxable as dividend based on the ratio of accumulated profits to total assets immediately before liquidation. (Para 11 , 12 )
6. How are distributions made by a liquidator treated for tax purposes under Section 2(6A)(c) of the Income-tax Act, 1922?
Distributions are disintegrated into components of capital and accumulated profits as they existed immediately before liquidation. The portion attributable to accumulated profits is treated as a dividend and is taxable. (Para 10 )
7. Does a liquidator maintain separate funds for capital and accumulated profits during winding up?
No, there is only one consolidated fund in the hands of the liquidator. The distinction between capital and accumulated profits is made only for the purpose of determining tax liability. (Para 10 )
8. What is the method for determining the taxable portion of a distribution made during liquidation?
The taxing authority must determine the ratio between accumulated profits and total capital immediately before liquidation and apply this ratio to the amount distributed to find the taxable component. (Para 10 )
Judgment
SHAH, J. : By a resolution dated August 23, 1952 it was resolved to wind up the respondent company and to appoint a liquidator for that purpose. The paid-up capital of the assessee was Rs. 25 lakhs, and on the date of commencement of winding up it had an accumulated profit of Rs. .5,34,041. From time to time the liquidator distributed the assets in his hands among the shareholders. The following table sets out the distributions made by the liquidator:
Assesment Year Distribution per share Date of distribution Amount distributed
1953-54 Rs. 600 9-9-1952 15,00,000
" Rs. 90 25-9-1952 2,25,000
1954-55 Rs. 60 10-11-1952 1,50,000
" Rs. 30 6-5-1953 75,000
" Rs. 30 23-2-1953 75,000
1955-56 Rs. 80 10-11-1953 2,00,000
Out of the distribution made on September 9, 1952, the Income-tax Officer brought, in the assessment year 1953-54, to tax Rupees 52,400 as "dividend" within the meaning of S. 2 (6A) (c) of the Income-tax Act, 1922, as it then stood. On July 24, 1957, the liquidator distributed Rs. 30 per share among the shareholders. The income-tax Officer in the course of assessment for the year 1958-59 sought to bring the entire amount of Rs. 75,000 distributed to tax as dividend" within the meaning of S. 2 (6A) (c) of the Income-tax Act as amended by the Finance Act, 1956. The objections raised by the liquidator were rejected and the amount was brought to tax. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In appeal to the Tribunal on behalf of the assessee, it was urged that the entire accumulated profit was exhausted when Rs. 17,25 000 were distributed in the year 1952 and thereafter there were no accumulated profits in the hands of the liquidator which could be distributed, and that in any event whenever distribution is made of the assets in the hands of the liquidator, accumulated profits and the capital must be deemed to be distributed in the same proportion in which the accumulated profit and the capital stood at the date of liquidation. The Tribunal rejected the first contention and did not consider the second.
(2) The Tribunal referred the following question to the High Court of Judicature at Bombay under S. (1) of the Income-tax Act, 1922:
"Whether on the facts and in the circumstances of the case the sum of Rupee 75,000 or any part thereof could be treated as dividend under S. 2(6A)(c) of the Indian Income-tax Act, 1922?"
The reference was transferred after reorganisation of the State under the Bombay State Reorganisation Act, 1960, to the High Court of Gujarat for hearing and disposal. The reference was heard before a Bench consisting of Shelat, C. J. and Bhagwati J, The two learned Judges differed, and the case was referred to Bakshi J. Bakshi, J., agreed with Bhagwati, J., and answered the question referred to in the negative.
3. To appreciate the arguments advanced at the Bar, it is necessary to notice the changes which were made from time to time in S. 2(6A)(c) of the Indian Income-tax Act, 1922, and the reasons for enacting and amending that clause. Clause (6A) which defines dividend was inserted in the Indian Income-tax Act by Act 7 of 19 39. As originally enacted, it provided, insofar as it is material for the purpose of this appeal:
" dividend includes
(a) * * *
(b) * * *
"(c) any distribution made to the shareholders of a company on its 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; By, S. 3 of the Finance Act, 1955, the proviso to cl. (c) was deleted and by S. 3 of the Finance Act, 1956, with effect from April 1, 1956, the following clause (c) was substituted:
"(c) 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. whether capitalised
