FALSHAW C.J. - At the instance of the Commissioner of the Income-Tax, the following question has been referred by the Appellate Tribunal under section 66 (1) of the Income-tax Act :
'Whether on the facts and in the circumstances of the case, the payment of Rs. 21,488 received by the assessee in the winding up of the Rupar Electric Supply Co. Ltd. (in liquidation) is includible in his assessable income as dividend under section 2 (6A) (c) of the Indian Income-tax Act ?'
The facts are that the assessee, D. D. Puri, held 395 shares in the Rupar Electric Supply Co. Ltd. The licence of this company expired on the 10th of November, 1952, and from that date the electrical undertaking was taken over the Punjab Government, the price fixed being Rs. 7,30,340. The company went into liquidation on the 28th of February, 1953. For the assessment year 1953-54, which covered the last year when the company was in business, the Income-tax Officer assessed the companys income at Rs. 2,67,357 after taking into account the profit of Rs. 2,61,256 under section 10 (2) (vii) of the Act on the sale price of the undertaking, and the net income was computed at Rs. 1,78,183 after allowing a brought-forward loss.
It seems that the sale price was paid by the Government in installments and the assessee-shareholders received three payments from the liquidator, one of Rs. 39,500 on the 4th of April, 1953 the second of Rs. 59,250 on the 11th of January, 1957, and the third of Rs. 35,550 on the 19th of June, 1958. We are only concerned with the second of these payments, which was made in the accounting year 1956-57 and assessment year 1957-58. The Income-tax Officer treated the whole sum of Rs. 59,250 as dividend under section 2 (6a) (c), overruling the assessees claim that this was a capital payment and not taxable income. In the assessees appeal, the Appellate Assistant Commissioner came to the conclusion that out of Rs. 59,250, only Rs. 21,488 were to be treated as dividend under section 2 (6a) (c).
On the assessees appeal, the Appellate Tribunal held that the payment was not on account of accumulated profits mentioned in section 2 (6a) (c) and that it was merely a case of notional profits under section 10 (2) (vii) ascertained in the year of account. The assessees appeal was accordingly accepted and the amount was held not to be taxable.
It does not seem to me that even authority relied on by the learned counsel for the department, First Income-tax Officer, Salem v. Short Brothers (P.) Ltd. advances his case. The facts there were that a private company had sold its coffee estates and other assets in December, 1959, and gone into voluntary liquidation in February, 1960. The assets of the company were sold for Rs. 8,40,000 which the liquidator proposed to distribute among the shareholders, but the Income-tax Officer wanted to treat the amount as dividend and finally called on the liquidator to pay Rs. 4,11,700 which still remained in his hands to the department, and at that stage the liquidator had recourse to the Madras High Court with a petition under article 226 of the Constitution. The High Court issued a writ restraining the Income-tax Officer from enforcing the demand for tax, through the Income-tax Officer was given liberty to examine the question a fresh and determine the correct amount of dividend within the meaning of section 2 (6a) (c). The appeal of the Income-tax Officer against this order was dismissed by the Supreme Court, which did not attempt to give any decision on what portion of the amount to be distributed by the liquidator among the shareholders was dividend within the meaning of section 2 (6a) (c). However, the following observations appear at page 90 :
'Realisation of appreciated value of assets in commercial practice is regarded as realisation 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.'
Section 2 (6a) (c) of the Income-tax Act reads :
'Dividend, includes - .....
(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 of not.'
The question whether, when a liquidator is making a distribution of the proceeds of the sale of the companys assets to the shareholders, a notional profit assessed under section 10 (2) (vii) falls within the meaning of accumulated profits in section 2 (6a) (c) appears to be settled by the decision of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. from which I quote the following passage in the head-note :
'In computing the profits and gains of a company under section 10 of the Act for the purpose of assessing the taxable income, the difference between the written down value it was sold (the price not being in excess of the original cost) is to be deemed to be profit in the year of account, and being such profit, it is liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction introduced for the purposes of the Act as income. Because this difference between the price realised and the written down value is made chargeable to income-tax, its character, and it is not converted into assessees business profits. It does not reach the assessee as his profits; it reaches him as part of the capital invested by him, the fiction created by section 10 (2) (vii), second proviso, not withstanding.
The difference between the written down value of an asset and the price realised by the sale thereof is not really income, but is made taxable income, for the purpose of computation of the assessable income, by the fiction in the second proviso to section 10 (2) (vii) of the Income-tax Act, read with section 2 (6c). On that account, it does not become commercial profit and is not liable to be taken into account in assessing whether in view of the smallness of the profits a larger dividend would be unreasonable.'
Admittedly, the point being decided in that case was not quite the same as that which arises in the present case, but the decision in Commissioner of Income-tax v. Bai Vina appears to be quite in point. In that case the assessee, a shareholder in a company in liquidation, had received a sum of Rs. 3,000 from the liquidator in respect of each share held by him in the liquidated company made up of the items :
repayment of capital
repayment of capital gains
distribution of accumulated profits.
The dispute arose principally about the sum of Rs. 1,570 specifically paid to the shareholder as repayment of capital gains, and in the reference made to the Gujarat High Court at the instance of the Commissioner, J. M. Shelat C.J. and P. N. Bhagwati J. held, largely on the strength of the decision in Bipinchandra Maganlal & Co.s case, that the receipt of excess over written down value on sale of capital asset could not be held to be profit independently and apart from the legal fiction enacted in the second proviso to section 10 (2) (vii) and could not be regarded as 'dividend' within the meaning of section 2 (6A) (c), and that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. With this view I am in respectful agreement and I would accordingly answer the question referred to us in the negative and direct the Commissioner to pay the costs. to the assessee. Counsels fee Rs. 250.
H. R. KHANNA J. - I agree.
Question answered in the negative.