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Commissioner of Income-tax Vs. Official Liquidator, Palai Central Bank Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKerala High Court
Decided On
Case NumberIncome-tax Referred Case No. 76 of 1977
Judge
Reported in[1979]49CompCas268(Ker); [1979]117ITR676(Ker)
ActsSuper Profits Tax Act, 1963 - Sections 2(5), 2(9), 4, 12, 25 and 27 - Schedule - Rule 1; Companies Act, 1956 - Sections 210 and 211; Companies (Court) Rules, 1959 - Rules 298 and 299
AppellantCommissioner of Income-tax
RespondentOfficial Liquidator, Palai Central Bank Ltd.
Appellant Advocate P.K.R. Menon, Adv.
Respondent Advocate C.M. Devan, Adv.
Cases ReferredSeth Haridas Achratlal v. Commissioner of Income
Excerpt:
.....whether tribunal justified in holding that no assessment under act of 1963 can be made on assessee-company (in liquidation) - in view of precedent even though on winding up of company distinction between assets and accumulated profits disappear taxing authority may disintegrate amount distributed into its component parts and determine share attributable to accumulated profits - amount distributed would deemed to be received by shareholders partly as accumulated profits and rest as capital - under section 2 (6a) (c) no warrant for view that in course of liquidation accumulated profits exist as separate fund even in notional sense - each distribution is of consolidated amount representing both capital and accumulated profits - no such corresponding amendment in act of 1963 - held, holding..........means the total income of an assessee computed under the income-tax act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the first schedule.' 4. and section 2(9) defines ' standard deduction ' thus :' (9) ' standard deduction' means an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the second schedule, or an amount of fifty thousand rupees, whichever is greater:provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of six per cent, or, as the case may be, of fifty thousand rupees shall be increased or decreased proportionately :provided further that where a company has different previous years in respect of.....
Judgment:

Gopalan Nambiyar, C.J.

1. The Income-tax Appellate Tribunal, Cochin Bench, has along with its statement of the case, forwarded the following question of law for our opinion, viz.:

' Whether, on the facts and in the circumstances of the case, was the Tribunal justified in holding that no assessment under the Super Profits Tax Act, 1963, can be made on the assessee-company (in liquidation) ?'

2. The assessment year with which we are concerned is 1963-64, that is, the year ended March 31, 1963. The assessee is a banking company, namely, the Palai Central Bank Ltd., which went into liquidation on August 8, 1960. On that date, the official liquidator took charge of the assets and liabilities of the company. A balance-sheet had been prepared on that date. Thereafter, for every year, the liquidator used to prepare an income and expenditure statement for submission to the Reserve Bank of India. For the year in question, namely, the assessment year 1963-64, the taxable income of the assessee was determined by the ITO at Rs. 5,79,678. The officer was of the view that this amount would attract liability for super profits tax. As the assessee had not submitted any return under the Super Profits Tax Act, a notice under Section 9(a) of the Act calling for the return was issued. The assessee submitted the return showing the chargeable profits as ' nil '. The return was sought to be supported by the contention that there was no chargeable profit after considering the 'standard deduction' allowable to the assessee and hence no liability to super-tax. It was the assessee's contention that if the standard deduction be calculated on the share capital and reserve as on the date of liquidation, there would be a deficiency of Rs. 23,411. The ITO overruled this contention pointing out that the official liquidator was making disbursements to creditors in instalments from the commencement of liquidation proceedings, and it is unreasonable to believe that the general reserves and other reserves stood at the same figures as they were prior to the winding up of the company. He, therefore, granted the alternative minimum standard deduction of Rs. 50,000, arid worked out the chargeable profit at Rs. 2,04,740. The AAC confirmed the said order of the ITO. On appeal, the Tribunal found that liquidation had not changed or affected the status of the company and that the surplus was chargeable to super profits tax only under Section 4 of the Act. It was of the view that Section 27 of the Act exempted a company from the provisions of the Act if it had no share capital; and that the exemption could not be confined to the companies under Section 12(b) or Section 25 alone, but would cover cases of a company going into liquidation which has no identifiable share capital. The Tribunal referred to the Supreme Court's decision in Girdhardas case : [1967]63ITR300(SC) , that in the hands of the liquidator there is only one fund which cannot be disintegrated into share capital in the liquidator's hands, and, therefore, the exemption under Section 27 of the Act was attracted. There was again another reason given by the Tribunal, namely, that even if the exemption under Section 27 is not attracted, the charging section, Section 4, would not apply to the company as the standard deduction was incapable of ascertainment. The Tribunal referred to the decision of the Supreme Court and held that as there was only one consolidated fund in the hands of the liquidator, it would not be possible to view the fund as entirely composed of profits or of capital. To the argument that on these two alternative assumptions, that the fund was composed of either the one or the other, the liability could be worked out, the Tribunal answered that the submission was unacceptable and that it cannot be assumed that the company had no capital at all. At the instance of the revenue, it submitted the question of law for our opinion.

3. Section 2(5) of the Act defines chargeable profits as follows:

' 2. Definitions.

In this Act, unless the context otherwise requires,--......

(5) ' chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.'

4. And Section 2(9) defines ' standard deduction ' thus :

' (9) ' Standard deduction' means an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater:

Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of six per cent, or, as the case may be, of fifty thousand rupees shall be increased or decreased proportionately :

Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration. '

5. Section 4 is the charging section, which reads :

' 4. Charge of tax.--Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1963, a tax (in this Act referred to as the super profits tax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction, at the rate or rates specified in the Third Schedule.'

6. And Section 27 is the exemption section which provides that the Act shall not apply to any company which has no share capital. Turning to the Second Schedule, the mode of computation of the capital of a company for the purposes of super-tax is provided thus :

'1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922, or under Sub-section (3) of Section 34 of the Income-tax Act, 1961, and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of--

(i) any money borrowed by it which remains outstanding ; and (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule.

Explanation 1.--A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.

Explanation 2,--Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid up share capital.

Explanation 3.--Where a company has different previous years in respect of its income, profits and gains, the computation of capital under Rule 1 and Rule 2 of this Schedule shall be made with reference to the previous year which commenced first......'

(Rules 2 and 3 omitted as unnecessary)

7. It will be seen from the charging section, Section 4, that super-tax was imposable only on so much of the chargeable profits of the company as exceed the standard deduction at the rates specified in the Third Schedule. It follows, therefore, that where the standard deduction itself is incapable of ascertainment, the charge to tax cannot be levied. The standard deduction has to be computed in accordance with the Second Schedule, with respect to the share capital and the reserve of the company in the modes sanctioned by Rule 1 of the Schedule. In the case of a company in liquidation, it is clear on an analysis of the provisions of Sections 210 and 211 of the Companies Act and Rules 298 and 299 of the Companies (Court) Rules that the concept of share capital is unknown to a company in liquidation and that after liquidation, the liquidator is to file accounts, merely showing receipts and payments and that the accounts do not show the capital or reserve with respect to which the capital of the company is to be worked out as provided in the Schedule. It appears to us, therefore, that the view taken by the Tribunal is correct having regard to the provisions of the Act.

8. The Tribunal based its conclusions on the English decision in IRC v. George Burrell [1924] 9 TC 27 : [1924] 2 KB 52 (CA). We do not propose to examine the case in full or in detail. We think the decision supports the reasoning and the conclusion of the Tribunal. It is enough for us to refer to the decision of the Supreme Court in Girdhardas case : [1967]63ITR300(SC) , where this English decision is referred to, with respect to the provisions of the Indian I.T. Act, 1922, for distribution of dividend income. The court observed (pp. 303, 305):

' In Commissioners of Inland Revenue v. George Burrell [1924] 2 KB 52 ; 9 TC 27 (CA), Pollock M.R. observed :'......it is a misapprehension, after the liquidator has assumed his duties, to continue the distinction between surplus profits and capital. Lord Macnaghten in Birch v. Cropper [1889] 14 A. C. 525, 546 (HL), the ease which finally determined the rights inter se of the preference and ordinary shareholders in the Bridgewater Canal, said : ' I think it rather leads to confusion to speak of the assets which are the subject of this application as ' surplus assets ' as if they were an accretion or addition to the capital of the company capable of being distinguished from it and open to different considerations. They are part and parcel of the property of the company --part and parcel of the joint stock or common fund--which at the date of the winding up represented the capital of the company.'

9. The amounts distributed to the shareholders by a liquidator are therefore distributed as capital of the company, since the liquidator has no power to distribute dividend, and the sums received by the shareholders cannot be disintegrated into capital and profits, by examining the accounts of the company when it was a going concern.

10. The scheme of the Indian Companies Act closely followed the English. Companies Act and the view expressed in George Burrell's case [1924] 2 KB 52, applied to distributions made by liquidators, and those distributions were not liable to be taxed as dividend. Parliament, with a view to avoid escapement of tax, devised a special definition of the word 'dividend' and incorporated it by Act 7 of 1939 as Section 2(6A). The effect of the provision was to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company as a going concern, but subject to the limitation that while in the latter the profits distributed will be dividend whatever the length of the period for which they were accumulated, in the former such profits may be dividend only in so far as they come out of profits accumulated within six years prior to liquidation. It also appeared from the language used that profits of the current year during which the company was ordered or resolved to be wound up could not be included in the expression ' dividend ' : [see Seth Haridas Achratlal v. Commissioner of Income-fax : [1955]27ITR684(Bom) ]. By the Finance Act, 1955, the proviso to Clause (c) was deleted and in consequence thereof the limitation relating to the period during which the profits were accumulated ceased to apply in the determination whether the amount distributed by the liquidator was dividend. Even after the amendment by the Finance Act, 1955, the language of the clause was found to be somewhat inapt and the legislature, by the Finance Act, 1956, recast clause (c)...

11. The language used by the legislature in Section 2(6A)(c), as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components--capital and accumulated profits--as they existed immediately before the commencement of liquidation. In any distribution made to the shareholders of a company by the liquidator, that part which is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and liable to tax under the Act. The provision was intended to supersede the application of the principle of George Burrell's case [1924] 2 KB 52 (CA), that is, to enact that even though on a winding up of a company the distinction between the assets and the accumulated profits disappears, the taxing authority may disintegrate the amount distributed into its component parts and determine the share attributable to accumulated profits. The amount distributed would, therefore, be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, the proportion being the same which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding up, and that part of the receipt which is attributable to the accumulated profits would be taxable. The Income-tax Officer has, therefore, in the first instance to determine the accumulated profits in the hands of the company, whether capitalised or not, and the rest of the capital immediately before the liquidation : he has then to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the component attributable to accumulated profits. There is in Section 2(6A)(c) no warrant for the view that in the course of liquidation the accumulated profits exist as a separate fund even in a notional sense. Each distribution is of a consolidated amount which represents both capital and accumulated profits. There is also nothing in the clause which supports the view that whatever is brought to tax by the taxing authorities in a given year is dividend, and the rest represents the assets of the company. The fund in the hands of the liquidator is one : when the fund or a part of it is distributed, the 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.'

12. The above reasoning makes it clear that the principle of the decision in Burrell's case [4924] 9 TC 27 ; [1924] 2 KB 52 (CA) was got over under the Indian I.T. Act, 1922, by the amendment effected by the Finance Act, 1956, to the provisions of the Indian I.T. Act, 1922. There is no such corresponding amendment to the provisions of the Super Profits Tax Act. In this view again, the reasoning of the Tribunal, following the principle in Burrell's case [1924] 9 TC 27 (CA), appears to be correct.

13. We answer the question referred in the affirmative, that is, in favour of the assessee and against the revenue. There will be no order as to costs.


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