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Commissioner of Income-tax, Bombay City-i Vs. ScIndia Steam Navigation Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 52 of 1967
Judge
Reported in[1980]125ITR118(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2) and 12B(1)
AppellantCommissioner of Income-tax, Bombay City-i; ScIndia Steam Navigation Co. Ltd.
RespondentScIndia Steam Navigation Co. Ltd.; Commissioner of Income-tax, Bombay City-i
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateD. Vyas, Adv.
Excerpt:
(i) direct taxation - deduction - sections 10 (2) and 128 (1) of income tax act, 1922 - whether contribution made by company to election fund of indian national congress was an admissible deduction in determining business profits under section 10 for assessment year 1958-59 - assessee failed to establish definite connection and satisfy revenue authorities that expenditure was laid out for purpose business - held, contribution made by company to election fund of indian national congress was not an admissible deduction in determining business profits under section 10. (ii) business profits - whether amount out of sale proceeds of ship was includible in business profits of company in assessment year 1958-59 under second proviso to section 10 (2) (vii) or section 10 (2 a) - ship was not used.....desai, j. 1. in this reference under section 66(1) of the indian i.t. act, 1922, five questions in all have been referred to us, three at the instance of the assessee and two at the instance of the commissioner. these five questions are as follows: '(1) whether, on the facts and in the circumstances of the case, the contribution of rs. 3,25,000 made by the company to the election fund of the indian national congress was an admissible deduction in determining the business profits under section 10 of the indian income-tax act/ 1922, for the assessment year 1958-59 (2) whether, on the facts and in the circumstances of the case, the amount of rs. 20,03,448 out of the sale proceeds of the ship s. s. jalakirti was includible in the business profits of the company in the assessment year.....
Judgment:

Desai, J.

1. In this reference under section 66(1) of the Indian I.T. Act, 1922, five questions in all have been referred to us, three at the instance of the assessee and two at the instance of the Commissioner. These five questions are as follows:

'(1) Whether, on the facts and in the circumstances of the case, the contribution of Rs. 3,25,000 made by the company to the election fund of the Indian National Congress was an admissible deduction in determining the business profits under section 10 of the Indian Income-tax Act/ 1922, for the assessment year 1958-59

(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 20,03,448 out of the sale proceeds of the ship S. S. Jalakirti was includible in the business profits of the company in the assessment year 1958-59, under the second proviso to section 10(2)(vii) or section 10(2A) of the Indian Income-tax Act, 1922

(3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 14,196 realised by the company on sale of the accounting machine and the amount of Rs. 21,39,566 realised by the company on the sale of its ship, S. S. Jalakanya could be included in its business profits for the assessment years 1958-59 and 1959-60, respectively, under the second proviso to section 10(2)(vii) read with the second proviso to section 12B (1) of the Act

(4) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 44,048 and Rs. 46,511 credited to the company's reserve accounts as a result of the cancellation of debentures of the company were includible in the company's business profits for the assessment years 1958-59 and 1959-60, respectively

(5) Whether, on the facts and in the circumstances of the case, the amount of Rs. 50,937 could be treated as a part of the accumulated profits of the Burma company for the purpose of ascertaining dividends under section 2(6A)(c) in the hands of the assessee-company for the assessment year 1959-60

2. It appears to us to be advisable to deal with the facts and contentions pertaining to each question separately.

3. The first question relates to the contribution of Rs. 3,25,000 made by the assessee-company to the election fund of the Indian National Congress. The assessee claimed this amount as a deduction in determining its business profits for the accounting year relevant to the assessment year 1958-59. This claim was disallowed by the ITO on the ground that it could not be regarded as expenditure incurred or laid out wholly or exclusively for the purpose of the shipping business carried on by the assessee-company. This disallowance was confirmed by the AAC who observed that there was no evidence to establish that the sole purpose of the payment was for advancing the trade of the assessee or for enabling it to protect its assets and earn profits. Before the Tribunal it was contended, on behalf of the assessee, that the assessee-company was a shipping company which required planning on a long-term basis and it was, therefore, essential from the point of view of the assessee-company that the Congress party which was committed to the declared policy of the Government with regard to shipping should continue in office for a long period to implement that policy. The Tribunal, however, concurred with the view taken by the ITO and the AAC, observing that 'in order to be deductible, the expenditure must have direct connection with some specific purpose and that purpose must have direct connection with the trade'. It was held that the contribution made by the assessee-company lacked such direct relationship and, therefore, the claim of the assessee-company was disallowed.

4. The arguments made before the Tribunal have been repeated before us. But it appears to us that as far as this court is concerned, the matter is concluded by the decision of the Division Bench in CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd. : [1975]100ITR139(Bom) . It was held in the said decision that a contribution to a political party is not an expenditure incurred solely and exclusively for earning profits within the meaning of s. 10 (2)(xv) and would not be an allowable deduction. It was further observed that the donation was not deductible unless there was some connection between the expenditure and earning of profits. In coming to this conclusion the Division Bench observed that in several decisions of the different High Courts in India a uniform view has been taken by all the High Courts which had occasion to decide the question. It is unnecessary to set out these decisions once again. We observe that before such a claim can be upheld it would be for the assessee to establish a definite connection and satisfy the revenue authorities that the expenditure was laid out for the purposes of the business, and what has been suggested to us does not indicate such nexus or connection as is requisite for the allowance under s. 10(2)(xv).

5. Question No. 2 pertains to an amount of Rs. 20,03,488 sought to be charged by the income-tax authorities as includible in the business profits of the assessee-company for the assessment year 1958-59, either under the second proviso to s. 10(2) (vii) or s. 10(2A) of the Indian I.T. Act, 1922. The assessee-company had in its fleet a ship called, S. S. Jalakirti. This ship was sold to be one company of Panama City for a sum of Rs. 52,54,094. This was done in pursuance of a memorandum of agreement dated May 1, 1956. The assessee-company had acquired the ship for Rs. 25,02,936 and its written down value on July 1, 1956, i. e., the beginning of the accounting year, was Rs. 4,99,488. According to this agreement, the ship was to be delivered at a U.K. or a continental port. The delivery was to be given after completing its voyage which had commenced at Calcutta on March 28, 1956, and such delivery had to be effected between July 1, 31, 1956. The buyers indicated their desire to take delivery of the ship at Hamburg. In the order of the ITO the itinerary of the ship just prior to its delivery to the buyers is fully indicated as under:

28-3-1956 -- Left Calcutta with 260 tons cargo.29-3-1956 -- Reached Chittagong, discharged cargo.22-4-1956 -- Left Chittagong with 2,734 tons cargo.26-4-1956 -- Reached Madras.13-5-1956 -- Left Madras lifting 6,887 tons cargo.31-5-1956 -- Reached Suez Canal, Discharged 186 tons cargo.01-6-1956 -- Loaded 435 tons and left Suez Canal.09-6-1956 -- Reached Oran, took fuel and water and left Oran.17-6-1956 -- Reached Hamburg, discharged 2,983 tons.20-6-1956 -- Left Hamburg.23-6-1956 -- Reached Gydnia, 6,887 tons cargo discharged.28-6-1956 -- Left Gydnia.01-7-1956 -- Reached Hamburg.02-7-1956 -- Ship delivered to new owners. It may be mentioned that the certificate of sale as well as the certificate of the registry of shipping had been handed over to the Registrar of Shipping, London, with the appropriate documents and the necessary documents were subsequently forwarded to the Registrar of Shipping, Bombay, for cancellation of the Indian registry of the vessel. The ITO held that the difference between the written down value and the cost of the ship was chargeable under s. 10(2)(vii) as profits because in his view the ship was in passive user of the assessee-company in the year of account. According to him, the actual voyage of the ship for the purpose of the assessee's business could be said to have terminated only when the ship reached Hamburg on July 1, 1956. In the alternative, he held that the amount was taxable even under s. 10(2A). When the question came up before the AAC in appeal, he took the view that the ship was in legal use of the assessee till its Indian registration was cancelled, which was much later in the year. He, however, did not uphold the alternative ground given by the ITO, viz., that the amount was chargeable even under s. 10 (2A). The Tribunal upheld the inclusion of profits under s. 10 (2A)(vii) but did not find any merit in the alternative contention of the departmental representative that the amount was chargeable under s. 10(2A). In the view of the Tribunal, 'the asset must be taken to be used for the business if the asset was in a condition in which it could be effectively used in the operation of the business and the business concerned was a continuing business it was not necessary that the asset should have been actively worked'. According to the Tribunal, 'the ship was in active service and in the use of the company's business immediately before delivery was given to the purchasers at Hamburg'.

6. Vyas, on behalf of the assessee, drew our attention to a decision of this High Court in Bharat Line Ltd. v. CIT : [1973]90ITR363(Bom) , and submitted that, in view of this decision, the question was required to be answered in favour of the assessee and that the views expressed by the Tribunal run counter to the observations in the above decision. In Bharath Line's case : [1973]90ITR363(Bom) , the assessee was the owner of a steamer, S. S. Bharatsena, which had been purchased in 1947 for about rupees fourteen lakhs, and after certain additions were made the total cost of the steamer came to slightly over rupees twenty lakhs. In 1955 certain negotiations took place for the sale of the steamer. These resulted in the acceptance of the offer o2 December, 1955, and the sale contract was reduced to writing on8 December 2, 1955. The clauses of this contract provided that before delivery was effected to the buyers, certain repairs were to be carried put by the sellers. Whilst these negotiations were being cattier on, the ship was actually being used by the assessee for the purpose of its business and was on its way to Rangoon with cargo. However, on and12 on December13, 1955, the assessee-company sent express instructions (by letter and telegram) to its Rangoon agents to the effect that no cargo should be loaded at Rangoon for Madras and the agents were further instructed that when the ship arrived at Rangoon they should arrange to discharge the cargo as quickly as possible and sail it for Calcutta without loading any cargo. It was observed by the court that after the oral contract to sell the ship was arrived at, all subsequent communications go to show that prior to December31, 1955, the assessee-company had decided not to use the ship,' Bharatsena', for purposes of its business. Even as regards repairs it was observed that such repairs were not required to make the ship useful for the purpose of the business of the assessee-company but had to be carried out because it was one of the terms and conditions under the ship-sale contract. Under the circumstances the question which was being considered by the Division Bench, viz., whether on the facts and in the circumstances of the case, the ship, 'Bharatsena', could be said to have been used by the assessee for the purpose of its business at any time during the previous year 1956, was answered in the negative and in favour of the assessee.

7. It was submitted to us that if the itinerary of the ship, S. S. Jalakirti, which is earlier set out, is studied in the context of the clause in the memorandum of agreement and letters dated June 8 and June13, 1956, exchanged between the London agents of the assessee and the assessee, it would be clear that the voyage of the ship came to an end when the balance of the cargo was discharged by it at Gydnia (a port of Poland) and the portion of the voyage thereafter was for the purpose of effecting delivery to the buyers at Hamburg. In this connection it may be stated that copies of the memorandum of agreement and the letters have by consent been marked as annexure 'G'. In clause 4 of the memorandum it is made clear that the steamer is to be delivered in any port in U. K. or on the continent at the vendors' option between and1 July31, 1956. By their letter dated June 8, 1956, the Scindia Steamships (London) Ltd. gave intimation to the assessee that the buyers had requested them to arrange delivery of the vessel at Hamburg on the completion of her present voyage after her return from Gydnia. In their letter dated June13, it was made clear by the assessee that it was important from their point of view that the current voyage of the vessel should terminate on or before June 30, 1956, and the vessel should thereafter be delivered to the buyers as early after June30, 1956, as possible, say, 1st or 2nd July.

8. It is in this context that the itinerary as set out earlier has to be understood. It is further to be noted that in the course of its voyage out from India the ship in question had earlier reached Hamburg on June 17, 1956, and discharged substantial cargo. It left Hamburg on June 20, went to Gydnia in Poland and discharged the remaining cargo. From Gydnia it returned to Hamburg, in ballast, without taking any cargo and after reaching Hamburg it was handed over to the purchasers. This would clearly suggest that up to Gydnia the ship was being used in the shipping business of the assessee-company and from and after the date on which it left Gydnia it was proceeding to Hamburg merely for the purpose of effecting delivery to the buyers as provided in the memorandum of agreement. Once the facts are appreciated in this manner, it will become clear that they are comparable to the facts which were before this court in Bharat Line's case : [1973]90ITR363(Bom) , referred to above. If that is so, at least as far as this court is concerned, it will have to be held that the ship, S. S. Jalakirti, could not be said to have been used by the assessee for the purpose of its business at any time after July, 1956, so that the inclusion of the amount of Rs. 20,03,448 under s. 10(2)(vii) would not be justified.

9. As far as the claim of the revenue that the amount could be added and charged under s. 10(2A) is concerned, we are in agreement with the view expressed by the Tribunal. This view is in accordance with the decision given by the Division Bench of this High Court in Income-tax Reference No. 69 of 1965 CIT v. Gagalbhai Jute Mills Ltd., decided on August 1 1974; : [1979]116ITR602(Bom) which we have ourselves applied and followed in Income-tax Reference No. 131 of 1963 CIT v. Mafatlal Fine Spg. & Mfg. Co. Ltd. : [1979]116ITR599(Bom) decided in this very session. In this view of the matter, we do not think it would be justified to discuss the question of include ability or chargeability under s. 10(2A) further. As far as this court is concerned, therefore, question No. 2 will have to be answered in favour of the assessee.

10. Two items are involved in question No. 3 and although they refer to two separate assessment years, they both raise a common question of principle. In the assessment year 1958-59, the assessee-company sold an accounting machine to Scindia Workshop Ltd., which was a 100% subsidiary of the assessee-company. The cost of this machine to the assessee was Rs. 21,747; its written down value as on July 1, 1956, was Rs. 1,990. The amount realised from the subsidiary company was Rs. 16,186. The question that arose, therefore, was whether the difference between the sale price and written down value, which came to Rs. 14,196, was chargeable as profits under the proviso to s. 10(2)(vii).

11 In the assessment year 1959-60 the assessee-company sold one ship, viz., S.S.Jalakanya, to M/s. Kamal Shipping Co. Ltd., which was also a 100% subsidiary of the assessee. The original cost of the ship was Rs. 25,59,495 and the depreciation allowed up to the beginning of the accounting year was Rs. 21,39,566. The ship was sold to the subsidiary company for a sum of Rs. 35,00,000 and the question that arose was whether the depreciation allowance, i.e.,Rs. 21,39,566, which was recovered in the course of sale, could be charged as profits under the proviso to s. 10(2)(vii). It is interesting to observe that the answer to the question will not be found from s. 10(2)(vii) but depends upon the proper interpretation of the second proviso to s. 12B(1), which relates to capital gains. The statutory provision (excluding the first proviso) may be fully set out:

'12B. Capital gains (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after th day 3 of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place : .... Provided further that the transfer of a capital asset by a company to a subsidiary company, the whole of the share capital of which is held by the parent company or by the nominees thereof, shall not be treated as a sale, exchange or transfer within the meaning of this section where the subsidiary company is resident in the taxable territories and is registered under the Indian Companies Act, 1956, so however that for the purposes of clause (vi) or clause (vii) of sub-section (2) of section 10, the cost or the written down value, as the case may be, of the transferred capital asset shall be taken to be the same as it would have been if the parent company had continued to hold the capital asset for the purposes of its business.'

12. The assessee had claimed before the ITO for both these years that, in view of the express language of the second proviso, no profit could be charged under s. 10(2)(vii) in the hands of the assessee-company, because both for the purposes of the parent company as well as for the subsidiary company the cost or the written down value of the transferred asset should be taken to be the same as it would have been if the parent company had continued to hold the capital asset for the purposes of its business. This contention was not accepted by the ITO. In appeal, however, the AAC took the contrary view that the proviso must be interpreted in general terms and that it would apply also to the parent company as notional profits under s. 10(2) (vii) were exempted by reason of the language employed in the later portion of the second proviso. The AAC proceeded on the footing that the statute which imposed a pecuniary burden was liable to be construed strictly. He further observed that although this was part of s. 12B(1), it was an accepted fact that in the Indian I.T.Act,19, all the provisions dealing with a particular item would not be found in one place or in their proper places, and, in his view, therefore, the language employed could be regarded, properly speaking, as an exemption from the proviso to s. 10(2)(vii) which provided for inclusion of the difference in the profits of the parent company. The AAC upholding the claim of the assessee also regarded the phraseology of this proviso, which expressly refers to cls. (vi) and (vii) of sub-s. (2) of s. 10, as very material. In his view such wording clearly went to show that the parent company was also exempted from the charge. According to his view, therefore, the addition of the two amounts was clearly unjustified. He accordingly ordered their deletion. In further appeal, the Tribunal upheld the departmental contention for both these items. It found several difficulties in accepting the contentions of the assessee which are summarized in para. 26 of the order of the Tribunal and in para. 17 of the statement of the case. Broadly speaking, we are in agreement with the views expressed by the Tribunal. According to us, fair reading of the second proviso to s. 12B(1) would seem to suggest that after providing for imposition of tax on capital gains an exemption has been made in respect of transfer of a capital asset by a company to its wholly-owned subsidiary. By the proviso in which it is made clear that such exemption is for the purpose of this section dealing with capital gains only, and in continuation of that scheme of exemption, a corresponding liability is imposed on the subsidiary company to the effect that for the purposes of allowance to be calculated under clause (vi) or clause (vii) of sub-s. (2) of s. 10 the cost or the written down value of the transferred asset shall be taken in the accounts of the subsidiary company as they would have been if the parent company had continued to hold the capital asset for the purpose of its business. A fair reading of the second proviso to s. 12B(1) would clearly indicate that it applies only to the subsidiary company and we find no warrant for extending the provision by the adoption of any principle of logic or strict construction to the parent company. In this view of the matter, we are inclined to agree with the conclusions of the Tribunal and the question will have to be answered against the assessee.

13. We now come to the questions referred to us at the instance of the department. The fourth question pertains to certain amounts which accrued to the company for the two years in question as a result of cancellation of the debentures of the company. The surplus arose in the following circumstances. The company had issued debentures of the face value of rupees five crores during the accounting year ended on June 3, 1949. The purpose of the issue was to purchase ships and shares in the proposed shipping corporation and to construct ships and to make other outlays at Visakhapatnam shipyard. There was an express stipulation in the debenture trust deed to appropriate a sum of rupees ten lakhs every year towards the sinking fund. The debenture-trustees under the authority conferred upon them by the trust deed invested the amount of sinking fund together with the interest accumulations in the company's own debentures. In the accounting year ended on June30, 1953, the debenture trust deed was amended so as to permit the existing sinking fund investments in the company's debentures being cancelled, simultaneously extinguishing the corresponding liability on account of debentures. It was further provided that the debenture liability could be reduced out of further purchase and cancellation of debentures from certain stipulated appropriations to the sinking fund. Accordingly the company cancelled the debentures against the sinking fund investments in the following amounts:

Accounting year Amount of debenturespurchased & cancelledRs.1952-53 49,65,0001953-54 11,65,0001954-55 12,13,0001955-56 12,14,0001956-57 12,85,0001957-58 12,85,000

14. The surpluses accrued to the company since the debentures were quoted at a discount in the open market. We are only concerned with the surpluses in the last two years, viz., Rs. 44,048 in the accounting year 1956-57 and Rs.46,511 in the accounting year 1957-58. The surpluses in the earlier years were not charged to tax. The ITO took the view that since the assessee-company was purchasing and cancelling debentures year after year, these two amounts for the two years in question could properly be regarded as business profits. According to him, profit making was the dominant motive and in view of the motive and the frequency and the nature of the transactions, the conclusion was inescapable that these were business profits and should be regarded properly as part of the business income of the assessee for these years. In appeal, the AAC agreed with the ITO, relying on the definition of 'gross income' in the United States' Inland Revenue Code. In further appeal, the Tribunal upheld the assessee's contention, observing that what had been done had nothing whatsoever to do with the regular business of shipping. According to the Tribunal, what had been done was to materially alter its permanent framework or its capital structure and in the process the assessee had taken advantage of the favourable capital market. Such operation, according to the Tribunal, was essentially relatable to its capital and the benefit reaped by the company was essentially a capital benefit. According to the Tribunal, 'the mere frequency of operations does not change the capital aspect. It had to be from year to year because investment, each year, had to be confined to a prescribed amount of sinking fund, except in the year 1952-53 when the accumulated sinking fund could be utilised'. It was further observed that it was not possible to trace any indicia of trade in these operations as alleged by the departmental representative. According to the Tribunal, in the context in which it was done, it was more proper to take the view that what had been done was with a view to reduce the capital commitments in the context of favourable capital market.

15. Mr. Joshi, on behalf of the Commissioner, drew our attention to the decision of the Supreme Court in India Cements Ltd. v. CIT : [1966]60ITR52(SC) , where a distinction was made between obtaining of capital by issue of shares and obtaining loan by debentures. It is important to remember in connection with the observations to be found in the above decision that they are in the context of considering the amount spent by the assessee towards stamp duty, registration fee, lawyer's fees, etc., in connection with the loan which the assessee in the case before the Supreme Court, had obtained from the Industrial Finance Corporation and which had been secured by a charge on its fixed assets. The transactions which we are considering are of a totally different nature and it appears to us to be improper to pick out stray observations from a decision and apply them in a totally different context to a different set of facts. The Tribunal has found that what was being done by the assessee-company could be regarded as operations in connection with its capital and that from the mere frequency of the transactions or the fact that it was repeated from year to year (as it had to be) it could not be held that it was part of the business profits of the assessee. We are in agreement with this conclusion. It is quite clear that the accrual of surplus cannot be regarded as equivalent to profits earned out of the business activity. Once that conclusion is reached, it is immaterial for us to consider whether the accrual of surplus by the assessee-company is of capital nature or asset. In this view of the matter we are in agreement with the conclusions of the Tribunal and the question would be required to be answered in favour of the assessee.

16. This brings us to the fifth and the final question. This pertains to the amount of Rs. 50,937, and we are concerned with the assessment year 1959-60. The assessee-company had a 100% subsidiary company called M/s. Scindia Steamships (Burma) Ltd., which will be hereinafter referred to as the 'Burma company'. The Burma company went into voluntary liquidation with effect from June 1, 1956. The assessee's share capital in the Burma company was rupees five lakhs. On the date of liquidation the Burma company's reserve was Rs. 4,50,000 while the depreciation fund was Rs. 79,630. As against this there was a debit balance in the profit and loss account of Rs. 3,52,652. The net reserves, therefore, would work out at Rs. 1,76,978. Before the Burma company went into liquidation, its assessment for the year 1942-43 was in dispute before the Income-tax Tribunal in India and by virtue of the Tribunal's order dated 26, the 54 Burma company became entitled to a refund of Rs. 50,937. The ITO, however, gave effect to the Tribunal's order on December 5, 1957, only, i. e., more than a year after the date of liquidation. Subsequently, the assessee-company received in the year of account relevant to the assessment year 1959-60, a sum of Rs. 6,50,000 from the liquidator of the Burma company, and the question that arose between the assessee and the department was how much of this amount could be attributed to the Burma company's accumulated profits and treated as dividend under s. 2 (6A) (c). The provisions of s. 2 (6A) (c) read as follows:

'2. (6A) 'Dividend' includes-... (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distributions is attributable to the accumulated profits of the company immediately before its liquidation whether capitalised or not.

17. The ITO took the view that not only the surplus of Rs. 1,76,978 but also the amount of refund, viz., Rs. 50,937, must be taken to be accumulated profits to the company and treated as dividend under s. 2 (6A) (c). The AAC agreed with the ITO and his conclusion. The Tribunal upheld the contentions of the assessee in further appeal and, in its view, having regard to the context in which the words 'accumulated profits' are used in the several sub-sections of s. 2 (6A), they can mean only profits which are in the possession of the company which are recorded in its accounts and which the company was capable of distributing before the crucial date. In the instant case it was clear that the amount of refund had not reached the coffers of the company on the date of liquidation and, therefore, according to the Tribunal, the amount could not be taken to be a part of the company's accumulated profits and it could not be included as notional dividend under s. 2 (6A) (c). In our view, the bare wording of the statutory provision, which has been extracted above does not warrant the conclusion of the Tribunal that by the use of the word 'accumulated' the Legislature only intended to cover the amount actually in the possession of the company on the date of liquidation or profits which the company had taken to its accounts. Both on the language or on principles of logic and reason there is no warrant for putting this further restriction on the statutory provision.

18. In this connection, Mr. Vyas, on behalf of the assessee, referred us to the observation in Navnitlal C. Jhaveri v. CIT : [1971]80ITR582(Bom) , where it is observed as under:

'Now, 'accumulated profits' signifies, firstly, that there must have been profits in earlier years and, secondly, that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in the possession of the company just before the commencement of the accounting year in this reference.'

19. In our view, bearing in mind what the court was considering in the above reference, this sentence must be regarded as a casual observation and cannot even be elevated to the status of obiter dicta; it cannot be clearly and legitimately used for the purpose of evolving any principle of interpretation of the statutory provision.

20. On the other hand, it may be pointed out that in connection with s. 2 (6A) (e) it has been observed that the phrase' accumulated profits' for the purposes of that provision does not mean profits as disclosed by the company's balance-sheet: [see CIT v. Jamnadas Khimji Kothari : [1973]92ITR105(Bom) ]. We are inclined to observe that the entire tenor of the discussion to be found in the Tribunal's order, that accumulated profits on the date of liquidation would only refer to such amount or profits which the company has taken to its accounts, appears to us to be beside the point.

21. In the statutory provision the material words for consideration are 'attributable to the accumulated profits of the company immediately before its liquidation'. These cannot be read as equivalent to 'accumulated before its liquidation' in the sense that the company had gathered the amount in its hands before the date of liquidation. The phraseology would only seem to indicate that the company had kept collected and not distributed, disbursed or made some other similar provision in respect of the amount. It is in this sense that we will read the word' accumulated'.

22. There is one further aspect of the matter which is required to be noted. It was contended by Mr. Vyas that the assessee became entitled to the refund only when the ITO gave effect to the Tribunal's order and that was on December 5, 1957. According to his contention, therefore, the amount could not be said to have come to the company on the date of liquidation nor could the company be regarded as having been entitled to any definite amount till such order was passed by the ITO. If one reads the statement of the case (para. 24) or even the order of the ITO or of the AAC pertaining to this amount and the orders under which the company became entitled to the same, it would appear that this submission of Mr. Vyas cannot be accepted. The ITO squarely considered the question when refund became due to the assessee on6 July 2, 1954, when the Tribunal, passed the order and not on the date when the ITO gave effect to the Tribunal's order. The AAC refers to the terms of the order of the Tribunal, and in para. 13 of his order observes that in terms of the order of the Income-tax Appellate Tribunal under which the assessee was entitled to a refund of Rs. 50,937, the refund became due to the assessee on the date of the order of the Tribunal and not when the ITO gave effect to that order. The assessee does not appear to have produced any material before the Tribunal to controvert that position and that factual position appears to have been reflected in the statement of the case. It appears to us that the facts as submitted to us proceed on the footing that the quantum of refund to which the assessee was entitled was indicated by the Tribunal and what the ITO subsequently did was merely to give ministerial effect to the order of the Tribunal. The revenue authorities and the Tribunal appear to have taken the view that the assessee became entitled to the amount, or, in other words, that the amount became due to the assessee immediately on the order of the Tribunal being made and this is a finding binding on us. Once that conclusion is reached, it must be held that this amount must properly form part of the accumulated profits of the company immediately before its liquidation and on distribution it will be deemed to be dividend under the statutory provision which is being considered. In this view of the matter, this last question will be required to be answered in favour of the department and against the assessee.

23. In the result, the question of law which are referred to us are answered as follows:

Question No. 1 - - In the negative and against the assessee.Question No. 2 - - In the negative both as regards the secondproviso to s. 10 (2) (vii) and s. 10 (2A) andin favour of the assessee.Question No. 3 - - In the affirmative as regards both the amountsand against the assessee.Question No. 4 - - In the negative as regards both the amountsand in favour of the assessee.Question No. 5 - - In the affirmative and against the assessee.

24. The Commissioner and the assessee have partly succeeded and partly failed and a fair order as to costs must be that both the parties will bear their own costs of this reference. Order accordingly.


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