1. On December 24, 1959, M/s. Short Brothers (Private) Ltd. sold its coffeeestates and other assets, and by resolution dated February 6, 1960, it wasresolved that it be voluntarily wound up and liquidators be appointed to administerits affairs. Out of the proceeds realized by sale of its assets, theliquidators of the Company distributed on March 30, 1960 Rs. 8,50,000 to theshareholders. By letter, dated December 19, 1960, the Income-tax Officer,Salem, informed the liquidators that he proposed to treat that amountdistributed as dividends in the hands of the shareholders, and to call upon theliquidators to pay the amount of tax deductible under s. 18(3D) of theIncome-tax Act. The liquidators submitted that the amount distributed to theshareholders was capital appreciation realised by sale of agricultural landsand buildings of the Company, and was not liable to tax, and that in any eventthe amounts distributed represented 'current profits' of the year inwhich it was resolved that the Company be would up and were on that account notdividend within the meaning of s. 2(6A)(c) of the Income-tax Act. After somecorrespondence the Income-tax Officer, Salem, by his order dated October 18,1962, finally called upon the liquidators to pay Rs. 4,11,700 which wasretained by the liquidators from the distribution made to the shareholders.
2. The liquidators then moved the High Court of Judicature at Madras, for awrit of prohibition restraining the First Income-tax Officer from taking furtheraction to enforce collection of the amount referred to by him in hiscommunication, dated October 18, 1962. Holding that the demand made by theIncome-tax Officer was 'not in conformity with the law' in that theamount of Rs. 8,50,000 which had been distributed could not be deemed to bedistributed as dividend without determining whether any portion of the amountrepresented capital gains, which arose out of the sale of capital assetsconsisting of lands from which agricultural income was derived, the High Courtissued a writ restraining the Income-tax Officer from enforcing the demand fortax. The High Court reserved liberty to the Income-tax Officer to examine thequestion afresh, and to determine 'the correct amount of dividend withinthe meaning of s. 2(6A)(c)'. With special leave, the First Income-taxOfficer has appealed to this Court.
3. It was submitted on behalf of the Income-tax Officer that the High Courtin entertaining the petition in its extra-ordinary jurisdiction under Art. 226of the Constitution, bypassed the machinery of assessment and rectification oforders of assessment prescribed by the Indian Income-tax Act which is bothadequate and efficacious. But the High Court has, under Art. 226 of theConstitution jurisdiction to issue to any person or authority within theterritories in relation to which it exercises jurisdiction, directions, orders,or writs in the nature, amongst others, of mandamus, prohibition and certiorarifor the enforcement of any of the rights conferred by Part III and for anyother purpose. It is true that normally the High Court will not entertain apetition in exercise of its jurisdiction under Art. 226 of the Constitutionwhen the party claiming relief has an alternative remedy which is adequate andefficacious. The question however is one of discretion of the High Court andnot of its jurisdiction, and if the High Court in exercise of their discretionthought that the case was one in which its jurisdiction may be permitted to beinvoked, this Court would normally not interfere with the exercise of thatdiscretion.
4. The High Court was of the view that all profits accumulated in theprevious years and the profits till the date on which it was resolved that theCompany be voluntarily wound up would be included in the expression'accumulated profits' under s. 2(6A)(c) of the Indian Income-tax Actread with the Explanation. They held that even capital gains taxable under s.12B except for the period mentioned in the Explanation were when distributed, 'dividend'within the definition, but profits realised by transfer of property used foragricultural purposes and which yielded agricultural income not being capitalgains taxable under the law are not 'dividend', and on that accountthe order of the Income-tax Officer bringing to tax the entire amountdistributed without determining whether any portion of that amount representedcapital gains arising from the sale of capital assets consisting of lands fromwhich agricultural income was derived was not within his authority.
5. Counsel for the liquidators contended in the first instance that allprofits whatever may be their character arising in the year in which theCompany is voluntarily wound up are not liable to be taxed as they did not fallwithin the definition of 'dividend' in s. 2(6A)(c). Counsel for theDepartment, while supporting the view of the High Court relating to thechargeability to tax of 'current profits', contended that the entireamount of Rs. 8,50,000 distributed to the shareholders, whatever may be thesource from which the profits were earned, was liable to be brought to taxunder s. 12 of the Income-tax Act as dividend distributed.
6. By s. 12 of the Income-tax Act, tax is payable by an assessee under thehead 'Income from other sources' in respect of income, profits andgains of every kind which may be included in his total income if not includedunder any of the preceding heads in Sections 7 to 10 of the Act. By sub-s. (1A)'income from other sources' includes dividends. Section 2(6A) defines'dividend', and at the relevant time clause(c) and the Explanation tothe clause stood as follows :
''dividend' includes -
(c) any distribution made tothe shareholders of a company on its liquidation, to the extent to which thedistribution is attributable to the accumulated profits of the companyimmediately before its liquidation, whether capitalised or not;
. . . .
Explanation. - The expression'accumulated profits' wherever it occurs in this clause, shall notinclude capital gains arising before the 1st day of April, 1946, or after the31st day of March, 1948, and before the 1st day of April, 1956.'
7. By the Explanation to s. 2(6A) accumulated profits include capital gainsnot arising within the excepted period. The Explanation is undoubtedly couchedin negative form, but there is no ground for accepting the argument of counselthat in the substantive clauses of the definition, accumulated profits do notinclude capital gains. The Explanation plainly implies that with in theexpression 'accumulated profits' are included capital gains outsidethe excepted periods. On the interpretation contended for by counsel, for thethe Explanation which seeks to exclude 'capital gains' from thecontent of accumulated profits would have no meaning. By sub-s. (1) of s. 12Btax is payable by an assessee under the head 'capital gains' inrespect of any profits or gains arising from the sale, exchange, relinquishmentor transfer of a capital asset effected after the 31st day of March, 1956, andsuch profits or gains shall be deemed to be income of the previous year inwhich the sale, exchange, relinquishment or transfer took place. Under theIndian Income-tax Act, 1922, 'capital gains' arising after March 31,1946 were made chargeable by the Income-tax and Excess Profits Tax (Amendment)Act, 1947, which inserted s. 12B in the Act. The levy was, however, abolishedby the Finance Act, 1949, and the operation of s. 12B as enacted by theAmendment Act of 1947 was restricted to capital gains arising before April 1,1948. By the Finance Act 3 of 1956 which introduced a new s. 12B, capital gainswere again made chargeable to tax with effect from April 1, 1957 on the profitsor gains arising from the transfer of capital assets, which expression isdefined in s. 2(4A) as meaning 'property of any kind held by an assessee,whether or not connected with his business, profession or vocation, but doesnot include -
(i) . . . . .
(ii) . . . . .
(iii) any land from which theincome derived is agricultural income.'
8. The contention raised by counsel for the Company that the profits earnedin the 'current year', i.e., the year in which it was resolved thatthe Company be would up, were not 'dividend' within the meaning of s.2(6A)(c) of the Act cannot be accepted. Sub-clause (c) of s. 2(6A) declaresthat accumulated profits, immediately before the liquidation of the company,are dividend : it does not say that accumulated profits up to the end of theprevious year immediately preceding the year in which liquidation of thecompany commences are divided. It is true that in giving effect to thedefinition, the taxing authorities have to compute profits of the company for apart of the year, but that is not a ground for reading the plain words of thestatute in an artificial sense. Under s. 3 of the Act read with s. 4, thecharge to income-tax is on the total income of the previous year, and inaccordance with and subject to the provisions of the Indian Income-tax Act. Butthere is noting in the Act which prohibits assessment of profits for a partonly of the previous year in certain special circumstances. For instance, unders. 26(2) it is provided that in the case of succession to a person carrying onany business, profession or vocation, in such capacity by another person, suchperson and such other person shall each be assessed in respect of his actualshare of the profits of the previous year.
9. In amending the definition in s. 2(6A)(c) by the Finance Acts of 1955 and1956, Parliament has sought to clarify its meaning and to avoid the argumentwhich was successfully raised in certain cases on the interpretation of thestatute before it was amended. By the terms of the definition, distributionwhich is attributable to the accumulated profits of the Company immediatelybefore its liquidation is to be deemed dividend. Thereby all profits earnedtill immediately before liquidation, if they are distributed, will be broughtto tax wholly if they consist of accumulated profits, or partially to theextent they are attributable to accumulated profits.
10. Amendments which have been made from time to time in the Act clearlydisclose the intention of Parliament that it was not intended to allow theprofits of the current year distributed by a liquidator of a company to escapeliability to tax. In Inland Revenue Commissioners v. George Burrell. (1924) 2 K. B. 52 it was held that on the undivided profits of past years and of theyear in which the winding up of a company occurred which were distributed amongthe shareholders, super-tax was not payable, because in the winding up they hadceased to be profits and were assets only. It was observed in Burrell's case(1924) 2 K.B. 52 that the only thing the liquidator of a company inliquidation may do is to turn the assets into money, and divide the money amongthe shareholders in proportion to their shares. Surplus of trading profit madein a particular year are distributable rateably among all the shareholders as capital,and it is not right to split up the sums received by the shareholders intocapital and income, by examining the accounts of the company when it carried onbusiness, and disintegrating the sum received by the shareholders subsequentlyinto component parts based on an estimate of what might possibly have beendone, but was not done. As the Indian Companies Act, 1913, closelyfollowed the scheme of the English Companies Act, and the view expressed inBurrell's case(1924) 2 K.B. 52 applied to the Indian Income-tax Act, aspecial definition of 'dividend' was devised by Parliament by theenactment of the Income-tax (Amendment) Act 7 of 1939, with a view to supersedethe view in Burrell's case (1924) 2 K. B. 52 Clause (c) of sub-s. (6A) asoriginally enacted stood as follows :
''dividend' includes -
(c) any distribution made tothe shareholders of a company out of accumulated profits of the company on theliquidation of the company :
Provided that only theaccumulated profits so distributed which arose during the six previous years ofthe company preceding the date of liquidation shall be so included.'
11. By the Finance Act, 1955 the proviso to sub-clause(c) of clause(6A) wasomitted. There was a further amendment made by the Finance Act, 1956 andclause(c) to the amended section read as follows :
''dividend' includes -
(c) any distribution made tothe shareholders of a company on its liquidation, to the extent to which thedistribution is attributable to the accumulated profits of the companyimmediately before its liquidation, whether capitalised or not;'
12. Under Act 7 of 1939 profits which arose within six previous yearspreceding the date of liquidation when distributed were to be deemed dividends.But the effect of the definition was that distribution of profits accumulatedafter the last day of the previous year whatever their nature could not beregarded as distribution of dividend : Sheth Haridas Achratlal v. TheCommissioner of Income-tax. : 27ITR684(Bom) It was held in that case by theBombay High Court that for the purpose of s. 2(6A)(c) as it stood in 1949, abroken period between the last day of the previous year of a company, and thecommencement of winding up could not be considered 'a previous year'.The Parliament with a view to supersede the view in Sheth Haridas Achratlal'scase : 27ITR684(Bom) deleted by the Finance Act, 1955, the proviso tosub-clause (c). To make its meaning more clear Parliament by the Finance Act,1956, recast the substantive clause (c). Viewed in the context of thislegislative history, there is not doubt that 'current profits', i.e.,profits of a company in liquidation arising after the end of the last previousyear and before liquidation commenced, were brought within the net of taxationas dividend. The contention raised by counsel for the Company on this part ofthe case must fail.
13. The question which remains to be considered is whether capitalappreciation in respect of the lands from which the income derived isagricultural income and which was not taxable in the hands of the company ascapital gains would still on distribution be liable to be taxed as dividendunder s. 12 of the Income-tax Act. As we have already pointed out capital gainsunder s. 12B are chargeable in respect of any profits arising from transfer of'capital assets', and 'capital assets' do not include landsfrom which the income derived is agricultural income. Profits derived bytransfer of lands from which the income derived is agricultural income wouldnot therefore be chargeable on a combined reading of s. 12B with s. 2(4A) ofthe Income-tax Act under the head 'capital gains'. The expression'accumulated profits' does not include capital gains arising withinthe excepted periods : vide Explanation to s. 2(6A). 'Accumulatedprofits' are therefore profits which are so regarded in commercialpractice, and capital gains as defined in the Income-tax Act. Realization ofappreciated value of assets in commercial practice is regarded as realizationof 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 liquidators of the rise in the capital value will not bedeemed dividend for the purpose of the Income-tax Act.
14. Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar,Bombay v. Commissioner of Income-tax, Bombay : 27ITR1(Mad) that since dividendreceived by a shareholder of a company out of the profits earned fromagricultural income is not exempt from liability to pay tax under s.4(3)(viii), dividend distributed from profits earned out of sale of capitalassets inclusive of lands from which the income derived is agricultural incomeis also not exempt from Income-tax. But the Company does not claim exemptionfrom liability to tax under s. 4(3)(viii) : it claims exemption because thereceipt is not income which is chargeable to tax under s. 12 under the head'dividend'. The case of Mrs. Bacha F. Guzdar : 27ITR1(Mad) hastherefore no application to this case.
15. The appeal therefore fails and is dismissed with costs.
16. Appeal dismissed.