The court determined that a gift made prior to company liquidation cannot be categorized as accumulated profits for tax purposes if it was not actually received by the liquidator.

1The reference at the instance of the assessee under S.256(1) of the Income Tax Act, 1961 (the Act) is of the following question for the opinion of this court:
"Whether, on the .facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of "gift of Rs. 75.000 could be treated as part of the accumulated profits available with the company at the time of winding up for the purpose of dividend within the meaning of S.2(22)(c) of the I.T. Act, 1961."

2 The assessee was the Managing Director of a private limited company by name Parkins (P) Limited which went into voluntary liquidation on December, 18, 1971. The general body of the company resolved on November 15, 1971 to make a gift of a sum of Rs. 75,000 to the daughter of the Managing Director. The amount was given and an amount of Rs. 7000 was also paid as gift tax. When the company went into voluntary liquidation subsequently, the assessee was appointed as the liquidator. He received an amount of Rs. 1677 as the balance of the accumulated profits left with the company. An amount of Rs. 1560 was also available with him as the balance in the development rebate reserve.

3 While completing the assessments for the years 1974-75 and 1975-76, the Income Tax Officer proposed to treat the amount of gift as well as the gift tax paid thereon, totalling Rs. 82,000 as accumulated profits available with the company at the time of winding up, for the purpose of computing "dividend" under S.2(22)(c) of the Act. His reasoning was as follows:
"Under the provisions of S.531A of the Companies Act, 1956, any transfer of property, whether movable or immovable, if made within a period of one year before the presentation of a petition for winding up of a company shall be void. Hence, the action of the company in making a cash gift to a close relative of the Managing Director (who later on was appointed as the liquidator also) and paying gift tax thereon was against the explicit provisions of the Companies Act referred to above."
The assessee objected to the proposal pointing out that the transfer of Rs. 75,000 was good, valid and enforceable against the whole world and that the revenue was not entitled to take advantage of the provisions of S.531A of the Companies Act, 1956. The Income Tax Officer did not accept the objections in the view that the gift was hit by the provisions of S.531A aforesaid and therefore the amount of the gift and the gift tax paid thereon should be treated as accumulated profits available with the company for distribution as dividend under S.2(22)(c) of the Act. He distributed the amount accordingly for the four years, 1972-73 to 1975-76 in proportion to the holdings of the assessee and accordingly assessed the amount as "deemed dividend" for the years 1974-75 and 1975-76 and reassessed him under S.147(b) for the years 1972-73 and 1973-74.

4 But the Appellate Assistant Commissioner felt otherwise. He held that even if the gift was void as against the liquidator under S.531A, since the amount had been expended in fact and irretrievably gone out of the company's hands, it could not be treated as "accumulated profits" available for distribution as dividend. He also held that S.531A did not drag within its net" transactions which had the unanimous approval of the general body of the company, as in this case. The appeals were ' therefore allowed.

5 On further appeal by the department, the Income Tax Appellate Tribunal reversed the Appellate Assistant Commissioner and upheld the order of the assessing authority treating the amount as accumulated profits for the purpose of computing dividend within the meaning of S.2(22)(c) of the Act. In doing so. the Tribunal held that the liquidator was entitled to treat the transfer of the amount to the Managing Director's daughter as non est. and void, and therefore the amount could be treated as accumulated profits of the company available at the time of the winding up. The departmental appeals were accordingly allo