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Smt. Chechamma Thomas Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax References Case Nos. 13 to 15 of 1980 and 169 to 171 of 1982
Judge
Reported in[1986]161ITR718(Ker)
ActsIncome Tax Act, 1961 - Sections 2(22); Income Tax Act, 1922 - Sections 2(6A)
AppellantSmt. Chechamma Thomas
RespondentCommissioner of Income-tax
Appellant Advocate M. Pathorose Mathai and; Joseph Vellappally, Advs.
Respondent Advocate P.K.R. Menon, Adv.
Cases ReferredWill of H.K. Brodie (deceased) v. Commissioners of Inland Revenue
Excerpt:
direct taxation - assessment - section 2 (22) of income tax act, 1961 - income received by company as part of compensation on account of acquisition of land by government - such income cannot be treated as income at hands of shareholder and liable to assessment as dividend. - - coming back to the question how exactly to draw the line between a capital receipt and a revenue receipt in cases of the type that are before us, one can do no better than refer to the observations of finlay j. 725 infra) to this judgment would clearly bring out the fallacy in this assumption......assets', and 'capital assets' do not include lands from which the income derived is agricultural income. profits derived by transfer of lands from which the income derived is agricultural income would not, therefore, be chargeable on a combined reading of section 12b with section 2(4a) of the income-tax act under the head 'capital gains'. the expression 'accumulated profits' does not include capital gains arising within the excepted periods: vide explanation to section 2(6a). ' accumulated profits' are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the income-tax act. realisation of appreciated value of assets in commercial practice is regarded as realisation of capital rise, and not profits of the business. unless, therefore,.....
Judgment:

Bhaskaran, C.J.

1. The assessee in I.T.R. Cases Nos. 13 to 15 of 1980 holds 5,200 equity shares of Rs. 10 each in a limited company, Periyar and Pareekanni Rubbers Ltd., and the assessees in I.T.R. Cases Nos. 169 to 171 of 1982 hold 14,900 shares in that company. For the assessment years 1971-72, 1972-73 and 1973-74, the company had declared certain interim dividends. According to the assessees, only a portion thereof was exigible to tax in the first year and that no portion was exigible to tax in the remaining two assessment years. The contention of the assessees is that dividends for the respective years, to the extent to which exemption was claimed, was not taxable inasmuch as such portion of the dividends represented the surplus obtained on the sale of agricultural lands or compensation received by the company on acquisition by the Government. The Income-tax Officer, however, held that the entire income was exigible to tax because, according to him, shareholders and the company were different entities. Annexures A1, A2 and A3, respectively, in I.T.R. Cases Nos. 13 to 15 of 1980 are the assessment orders for the assessment years 1971-72, 1972-73 and 1973-74. Annexures A1, A2 and A3 in I.T.R. Cases Nos. 169 to 171 of 1982, respectively, are the orders of assessment for the years 1972-73 and 1973-74 in respect of the two assessees therein. Annexure B in ITR Cases Nos. 13 to 15 of 1980 is the combined order of the Appellate Assistant Commissioner who allowed the appeal holding that the portion of the dividends which represented the surplus obtained on the sale of agricultural land/acquisition by the Government was not accumulated profits and, therefore, not liable to be taxed. In I.T.R. Cases Nos. 169 to 171 of 1982, the Appellate Assistant Commissioner confirmed the assessments. On further appeal by the Revenue in I.T.R. Cases Nos. 13 to 15 of 1980 and by the assessees in I.T.R. Cases Nos. 169 to 171 of 1982, the Tribunal confirmed the findings of the Income-tax Officer. Annexure C in I.T.R. Cases Nos. 13to 15 of 1980 is the order of the Tribunal in I.T.R. Cases Nos. 169 to 171 of 1982. Annexures C1 and C2 are the orders of the Tribunal in respect of the two assessees therein.

2. The question of law common to both the references referred to this court for decision is as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the distribution to the assessees of the amount attributable to compensation and sale price received by the Periyar and Pareekanni Rubbers Ltd., on the acquisition and sale, respectively, of agricultural lands, was, in the hands of the assessees, receipt of dividend assessable to income-tax under the Income-tax Act, 1961?'

3. In substance, what is in issue is the taxability of the amounts received by way of dividends by the assessees from the company out of the compensation/sale price of agricultural lands received by the company on acquisition/sale of its lands.

4. It is an admitted fact that the company itself is not liable to pay any tax by way of capital gains on the said receipts of compensation/sale price. In First ITO v. Short Brothers P. Ltd. : [1966]60ITR83(SC) , a Bench of the Supreme Court consisting of Subba Rao, Shah and Sikri JJ. had held that capital appreciation in respect of the lands from which the income was derived was agricultural income ; and that was not taxable in the hands of the company as capital gains would not, on distribution, be liable to be so taxed as dividend under Section 12 of the Indian Income-tax Act, 1922. In Tea Estate India P. Ltd. v. CIT [1976] 03 ITR 785, the Supreme Court had reiterated this position. Again, in CIT v. Nalin Behari Lall Singha : [1969]74ITR849(SC) , the Supreme Court held as follows (at p. 852) :

'There is no warrant for the view expressed by the Tribunal that the definition of 'dividend' only includes deemed dividend. To hold that the capital gains within the excepted period are not part of the accumulated profits for the purpose of the definition under Section 2(6A) and a distributive share thereof does not on that account fall within the definition of 'dividend' and, therefore, of income chargeable to tax and still to regard them as a part of accumulated profits for the purpose of dividend in the popular connotation and to bring the share to tax in the hands of the shareholders is to nullify an express provision of the statute. We do not see any reason why such a strained construction should be adopted.'

5. In CIT v. Kamal Behari Lal Singha : [1971]82ITR460(SC) , the Supreme Court after having referred to the dictum laid down by the Supreme Court in Nalin Behari Lall Singha's case : [1969]74ITR849(SC) , observed as follows (at p. 463 of 82 ITR) :

'In these appeals, we have to decide what was left undecided in that case.

Coming back to the question how exactly to draw the line between a capital receipt and a revenue receipt in cases of the type that are before us, one can do no better than refer to the observations of Finlay J. in Trustees of the Will of H.K. Brodie (deceased) v. Commissioners of Inland Revenue [1933] 17 TC 432 (KB) :

'But, I think, the governing consideration is this : the question being, was the sum received as income, one has to consider what was the source from which it was received and what were the circumstances in which it was received. If the capital belonged to the person receiving the sums--if he or she was beneficially entitled not only to the income but to the capital--then I should think that, when the payments were made, they ought to be regarded, and would be regarded as payments out of capital, but where there is a right to the income, but the capital belongs to somebody else, then, if payments out of capital are made and made in such a form that they come into the hands of the beneficiaries as income, it seems to me that they are income and not the less income, because the source from which they come was--in the hands, not of the person receiving them, but in the hands of somebody else--capital.' The above observations, in our opinion, correctly set out the law.'

6. The Appellate Assistant Commissioner in para 3 of annexure B (order) is seen to have reached the finding, which reads as follows I

'I have perused the balance-sheets of M/s. Periyar and Pareekanni Rubbers Limited for several earlier years and I find that the company received huge amounts towards compensation for acquisition by the Government of part of its estate and that such sale proceeds have been appropriated and distributed as dividend to the shareholders.'

7. This finding of fact is not disputed before us. We find the legal position in regard to taxability of the dividend by the assessee would not be any the different from that of the assessees in Kamal Behari Lal Singha's case : [1971]82ITR460(SC) .

8. No doubt, the definition of 'dividend' in Section 2(6A) of the Indian Income-tax Act, 1922, is not fully identical with the definition in the corresponding Section 2(22) in the Income-tax Act, 1961. All the same, we should not lose sight of the fact that none of the amendments to the definition--during the material time--did bring about any alteration so far as distribution out of capital receipts is concerned. In order to facilitate easy reference, we are adding to this judgment an annexure (p. 275 intra) showing the material portion of the definition of 'dividend' in Section 2(6A) in the Indian Income-tax Act, 1922, as it stood during the relevant time for decision in CIT v. Nalin Behari Lall Singha : [1969]74ITR849(SC) , CIT v. Kamal Behari Lal Singha : [1971]82ITR460(SC) , First ITO v. Short Brothers : [1966]60ITR83(SC) and of the definition of 'dividend' in Section 2(22) of the 1961 Act for the case on hand. We find it difficult to agree with the reasoning advanced by the Appellate Tribunal for reversing the order of the Appellate Assistant Commissioner, distinguishing the four decisions of the Supreme Court. First ITO v. Short Brothers : [1966]60ITR83(SC) and Tea Estate India P. Ltd. v. CIT : [1976]103ITR785(SC) are sought to be distinguished by the Tribunal on the ground that they were cases involving companies in liquidation and CIT v. Nalin Behari Lall Singha : [1969]74ITR849(SC) and CIT v. Kamal Behari Lal Singha : [1971]82ITR460(SC) on the ground that the provisions of Section 2(22) of the Act which corresponds to Section 2(6A) of the 1922 Act, had undergone substantial changes. We have gone through the decisions of the Supreme Court in depth. In our view, the decisions in CIT v. Nalin Behari Lall Singha : [1969]74ITR849(SC) and CIT v. Kamal Behari Lal Singha : [1971]82ITR460(SC) did not give importance to the fact that the companies were in liquidation. The counsel for the Revenue cited the decisions of the Supreme Court in Dhandhania Kedia & Co. v. CIT : [1959]35ITR400(SC) and Kantilal Manilal v. CIT : [1961]41ITR275(SC) and also the decision of the Bombay High Court in Girdhardas & Co. Ltd. v. CIT : [1957]31ITR82(Bom) , in support of the arguments that what a company in liquidation distributes is its assets, not dividend ; and, therefore, the decisions of the Supreme Court in Short Brothers' case : [1966]60ITR83(SC) and Tea Estate India's case : [1976]103ITR785(SC) could have no application to the case on hand. In our view, the fact that the companies referred to in some of the Supreme Court decisions cited by the counsel for the Revenue were companies in liquidation was rather accidental from the point of the issue discussed and had no bearing on the question as to whether a shareholder was liable to pay tax on the portion of the capital sold, namely, the value of the land owned by the company and purchased by the Government.

9. We do not also agree with the Tribunal's reasoning that the decisions in Short Brothers' case : [1966]60ITR83(SC) and in Tea Estate India P. Ltd.'s case : [1976]103ITR785(SC) , would not apply to the present case because there had been changes in the definition of Section 2(22) of the Act, which corresponds to Section 2(6A) of the 1922 Act. The Tribunal has not enlightened as to how the difference in the definition had rendered the decisions inapplicable. The principle enunciated in those cases, which is applicable to the present case, is contained in the last two paragraphs in the decision in Short Brothers' case [1966] 60 ITR 83, which reads as follows (at pp. 89 and 90) :

'The question which remains to be considered is whether capital appreciation in respect of the lands from which the income derived is agricultural income and which was not taxable in the hands of the company as capital gains would still on distribution be liable to be taxed as dividend under Section 12 of the Income-tax Act. As we have already pointed out, capital gains under Section 12B ate chargeable in respect of any profits arising from transfer of 'capital assets', and 'capital assets' do not include lands from which the income derived is agricultural income. Profits derived by transfer of lands from which the income derived is agricultural income would not, therefore, be chargeable on a combined reading of Section 12B with Section 2(4A) of the Income-tax Act under the head 'Capital gains'. The expression 'accumulated profits' does not include capital gains arising within the excepted periods: vide Explanation to Section 2(6A). ' Accumulated profits' are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act. Realisation of appreciated value of assets in commercial practice is regarded as realisation of capital rise, and not 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.

Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) , that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to tax under Section 4(3)(viii), dividend distributed from profits earned out of sale of capital assets inclusive of land from which the income derived is agricultural income, is also not exempt from income-tax. But the company does not claim exemption from liability to tax under Section 4(3)(viii) : it claims exemption because the receipt is not income which is chargeable to tax under Section 12 under the head 'Dividend'. The case of Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) has, therefore, no application to this case.'

10. Capital gain, in fact, is made taxable by Section 45 of the Income-tax Act, 1961, as such a special deeming provision was felt necessary because capital gains would not otherwise come within the ordinary commercial concept of profit. By virtue of the definition of 'Capital asset', in Section 2(14), agricultural land is excluded ; hence capital gain on agricultural land is neither part of normal commercial profit nor taxable capital gains.

11. If we carefully consider the facts of the case and the reasoning of the Supreme Court in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) , we would at once realise that that decision has no application to the present case. The facts of the case were as follows. The assessee was a shareholder in certain tea companies 60% of whose income was exempt from tax as agricultural income under Section 4(3)(viii) of the Indian Income-tax Act, 1922. The assessee claimed that 60% of the dividend income received by her on her shares in those companies was also exempt from tax as agricultural income. The Supreme Court held that the dividend income received by the assessee was not agricultural income but was income assessable under Section 12. What weighed with the Supreme Court was that in the light of the definition of 'agricultural income' in Section 2(1), which read :

'any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such......'

the dividend income was not agricultural income in order that dividend might be held to be agricultural income, it would be incumbent upon the applicant to show that within the terms of the definition, it was rent or revenue derived from the land which was used for agricultural purposes. In this case, what the assessee claimed is not exemption of agricultural income derived by the assessee, but the share of the capital of the company which it was deprived of by the acquisition of the land or sale of land belonging to the company, and to which extent the value of the assessee's share in the company had been depleted.

12. The counsel for the Revenue also contended before us that the change of definition of 'income' would have a bearing on the case. It is his contention that whereas dividend included in the term 'income' originally was dividend as defined in the Act, by subsequent amendment the concept of income had been so enlarged as to take in not only dividend as defined in the Act but also something more than that, which might be called 'deemed dividend'. The Annexure (p. 725 infra) to this judgment would clearly bring out the fallacy in this assumption. We have to bear in mind that the Income-tax Act did not contain any exhaustive or restrictive definition of dividend ; it contained only an inclusive definition. The change in the definition of 'income' from time to time to correct an anomaly or to do away with the redundancy would not affect the decision on the question whether what has been specifically excluded from the definition of 'accumulated profits' could be included in the 'total income' for the purpose of taxation. The question before us, in other words, is whether the receipt in the hands of the shareholders with respect to that portion of the compensation/sale price of the land acquired/sold, was to be treated as dividend in view of the express exclusion of 'agricultural land' from the definition of 'capital asset' in Section 2(14) of the Act. There is no question before us as to whether the receipt was income other than dividend, and, therefore, exigible to tax, arising from the order of the Tribunal.

13. The English decisions relied on by the Tribunal, in our opinion, are not relevant for our purpose. Those decisions interpreted the provisions of the English law on income-tax, which could not be treated as authorities for deciding cases governed by the Indian Income-tax Act, 1922, which are not identical to those of the English law.

14. The result, therefore, is that we answer the questions in both the cases in the negative, that is, in favour of the assessee and against the Revenue.

15. A copy of this judgment under the signature of the Registrar and seal of the High Court would be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

ANNEXURE

Income-tax Act, 1922Income-tax Act, 1961Income-tax Act, 1922

(for decision ia : [1969]74ITR849(SC) and : [1971]82ITR460(SC) )(for decision in the case on hand)(for decision in : [1966]60ITR83(SC) )' Section 2(6A) ' dividend' includes --' Section 2(22) ' dividend ' includes--'Section 2(6A) ' dividend ' includes --(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its share holders of all or any part of the assets of the company.....(a) any distribution by a company of accumulated profits, whether capitalised or not if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.......(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; ...Explanation. -- The words ' accumulated profits ', wherever they occur in the clause, shall not include ' capital profits ' :Explanation 1. -- The expression ' accumulated profits ', wherever it occurs in this clause, shall not include capital gains arising before 1st day of April, 1946. or after the 31st day of March, 1948, and before the 1st day of April, 1956.(c) any distribution made to the share-holders 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 or not ; ...Provided further that the expression ' accumulated profits ' wherever it occurs in this clause, shall not include capital gains arising before the first day of April, 1946, or after the 31st day of March, 1948. 'Explanation 2. -- The expression ' accumulated profits', in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.'Explanation. -- The expression ' accumulated profits ', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.'


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