Skip to content


Girdardas and Co. Private Ltd. (In Liquidation) Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Judge
Reported in[1965]55ITR171(Guj)
ActsIncome Tax Act, 1922 - Sections 2(6A)
AppellantGirdardas and Co. Private Ltd. (In Liquidation)
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate S.P. Mehta, Adv.
Respondent Advocate J.M. Thakore, Adv. General
Cases ReferredResch v. Federal Commissioner of Taxation
Excerpt:
direct taxation - dividend - section 2 (6a) of income tax act, 1922 - assessee went into voluntary liquidation - liquidator distributed amount - section 2 (6a) amended providing for treating distribution out of accumulated profits as dividend on and after assessment year 1955-56 - assessee distributed rs. 75000 in assessment year 1958-59 - distribution treated as dividend - objections raised - tribunal concluded that if distribution made but not considered as dividend then subsequent distribution to be considered as dividend if can be considered as dividend - rs 75000 treated as dividend - held, conclusion of tribunal upheld as sufficient evidence to prove that distribution made out of accumulated profits. - - the scope and content of the section can be better appreciated if the.....j.m. shelat, c.j.1. this is a reference under section 66(1) of the income-tax act at the instance of the assessee-company. 2. the relevant assessment year is 1958-59 of which the previous year is the year ending 30th september, 1957. 3. the assessee-company, a private limited company, went in to voluntary liquidation on the 23rd of august, 1952. at the time of liquidation, the assessee-company had at its disposal rupees twenty-five lakhs, being its paid up capital, and rs. 5,34,041, being the accumulated profits. prior to the assessment year 1958-59, the liquidator had made the following distributions : assessment year amount distributedrs.1953-54 17,25,0001954-55 3,00,0001955-56 2,00,000----------------total 22,25,000----------------4. however, it was only rs. 50,500 out of the.....
Judgment:

J.M. Shelat, C.J.

1. This is a reference under section 66(1) of the Income-tax Act at the instance of the assessee-company.

2. The relevant assessment year is 1958-59 of which the previous year is the year ending 30th September, 1957.

3. The assessee-company, a private limited company, went in to voluntary liquidation on the 23rd of August, 1952. At the time of liquidation, the assessee-company had at its disposal rupees twenty-five lakhs, being its paid up capital, and Rs. 5,34,041, being the accumulated profits. Prior to the assessment year 1958-59, the liquidator had made the following distributions :

Assessment year Amount distributedRs.1953-54 17,25,0001954-55 3,00,0001955-56 2,00,000----------------Total 22,25,000----------------

4. However, it was only Rs. 50,500 out of the distribution made during the accounting year ending 30th of September, 1952, relevant to the assessment year 1953-54 that the income-tax department treated as dividend under section 2(6A) (c) of the Act, as it then stood, and brought that amount to tax. On the 20th of July, 1957, the liquidator made a further distribution, the distribution being during the assessment year 1958-59. The dispute in this reference is regarding the amount of this last distribution, viz., Rs. 75,000, which the Income-tax Officer, while making the assessment for the tax year 1958-59, treated as dividend within the meaning of section 2(6A) (c) of the Act, rejecting the contention of the assessee-company that the said amount could not be regarded as dividend.

5. The definition of 'dividend', prior to its amendment on 1st of July 1955, so far as it is relevant in this reference, stood as follows :

'2. (6A) 'Dividend' includes........

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company : Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included.'

6. The definition of 'dividend' was amended by the Finance, Act, 1955, by deleting, inter alia, the aforesaid proviso, and the amended definition came into force as from 1st of April, 1955. As amended, section 2(6A) (c) ran as follows

'2. (6A) 'Dividend' includes........ (c) any distribution made to the shareholder 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.'

7. The reasoning adopted by the Income-tax Officer was that when the sum of Rs. 17,25,000 was first distributed in the accounting period ending 30th September, 1952, the then Income-tax Officer considered as to what amount could then be considered as dividend within the meaning of section 2(6A) (c) out of the above sum, and at that time the Income-tax Officer could only take accumulated profits of six previous years immediately preceeding the year in which the company went into liquidation as dividend out of the total distribution made by the liquidator. On that basis, Rs. 50,500 only was considered to be the dividend. At that time, the profits of the period from the 1st October, 1951, to the 23rd of August, 1952, could not be considered as dividend because those profits could not then be held as accumulated profits, but were current profits of that year. In the subsequent year, however, they could be treated as accumulated profits and a further sum of Rs. 49,468 (Rs. 98,000 less tax due on that amount, namely, Rs. 48,532) was treated as dividend out of the distribution made in November, 1952. In reply to the company's contention that whatever profits could be treated as dividend had already been considered in the earlier years and that all accumulated profits had already been exhausted and there were none which could be attributed to the distribution made during the assessment year 1958-59, the Income-tax Officer was of the view that contention was not valid. His reasons were that whereas prior to the 1st of April, 1955, only those accumulated profits which could be considered as dividend were taken into account, the amended definition having been brought into force as from the 1st April, 1955, the department was entitled to treat those profits, which could not until then be treated as dividend.

8. But on account of the aforesaid amendment all that was now necessary was to see whether the amount distributed by the liquidator could be attributed to the accumulated profits or not. He also held that the accumulated profits which had not been considered as dividend came to Rs. 4,32,073 and that the extent to which the company had got accumulated profits, the amount distributed by the liquidator could be treated as dividend, and therefore the amount of Rs. 75,000 distributed during the assessment year 1958-59 by the liquidator was dividend within the meaning of section 2(6A) (c) as amended. Aggrieved by this order, the assessee company took the matter in appeal before the Appellate Assistant Commissioner, contending that the distribution in question could be considered from three different profits of view : (1) to presume that the accumulated profits were distributed first before anything out of the paid up capital was returned; (2) to hold that each distribution was made up of both the funds, in the same proportion which the funds bore to each other; and (3) to hold that the paid up capital was first returned in full, and only thereafter the accumulated profits were distributed. It was contended on behalf of the assessee-company that the entire accumulated profits must be deemed to have been distributed during the assessment year 1953-54, and, therefore, nothing therefrom remained to be distributed henceforth. It was also argued that the words 'any distribution' in the section indicated the very first distribution that the liquidator made and that distribution should be presumed to be out of the accumulated profits and that it was only when the accumulated profits were exhausted that the question of the return of capital could arise. It was also argued that the first possibility should be accepted, as the normal presumption was that the liquidator would distribute first the profits and thereafter the paid-up capital, and that, therefore, when the distribution totaling to Rs. 17,25,000 was made during the assessment year 1953-1954, that amount included the entire fund of accumulated profits. It was also argued that the expression 'any distribution' in the section meant that the very first distribution should be treated as one accumulated profits and should be brought to tax accordingly and that the legislature could not have intended that taxation on accumulated profits should be postponed to some future date, that is, until the entire paid up capital was distributed. In the alternative, it was argued that even if it were held that the accumulated profits had not been distributed and only the paid up capital was returned so far, even then the amount distributed being so far Rs. 23,00,000 only, rupees two lakhs still remained to be distributed from the paid-up capital of the company which was Rs. 25,00,000 and, therefore, in either view of the matter, the distribution of Rs. 75,000 could not be treated as dividend. The Appellate Assistant Commissioner was, however, of the view that applying the test laid down in section 2(6A) (c), nothing could be deemed to have been a distribution of accumulated profits, presumably because as the definition stood then, the only amount which could be attributed to accumulated profits and, therefore, chargeable as dividend, was the amount Rs. 50,500 and, therefore, chargeable as dividend, was the amount of Rs. 50,500 and therefore, each of the rest of the distribution would have to be treated as out of the paid-up capital. As regards the seventh distribution, that is, the amount of Rs. 75,000 in question, it would be necessary to apply the test laid down in the definition section and on applying that test, it would be seen that the assessee-company still possessed accumulated profits which had not been taxed as dividend, and by virtue of section 2(6A) (c), the portion which was equivalent to the unexhausted accumulated profits would have to be treated as distribution of dividend and brought to tax accordingly. The view of the Appellate Assistant Commissioner thus was that in respect of the distributions made before the last distribution of Rs. 75,000 in question, the only amount which could be treated as attributable to accumulated profits by reason of the proviso which limited the concept of dividend, was Rs. 50,500, the balance of Rs. 4,34,073 referable to accumulated profits not being amenable to tax on account of the restrictive definition of 'dividend.' It was only when the restriction as to the period of six years was removed by the Finance Act of 1955, by deleting the proviso that it became possible to regard the balance as being attributable to past accumulated profits.

9. When the matter came up before the Tribunal the assessee-company contended (1) that the entire accumulated profits must be deemed to have been distributed when the amount Rs. 17,25,000 was paid during the assessment year 1953-1954, (2) that the amount of accumulated profits therefore must be deemed to have exhausted their chargeability when the first distribution of Rs. 17,25,000 was made, and (3) that the limit of six years prescribed in the definition of 'dividend' was only intended as a ceiling or a maximum and, therefore, did not affect the principle that the distribution would first be out of profits and then out of capital. It was also contended that the prorata principle should be adopted while applying the section to distribution and that, in any event, when the distribution of rupees two lakhs was made during the year of account ending on the 30th of September, 1954, the funds attributable to accumulated profits must be deemed to have been exhausted and, therefore, the amount of Rs. 75,000 in question should not be regarded as dividend. The Tribunal was of the view that in the case of a company other then the one in liquidation, the distribution must either be of accumulated profits of to the extent to which the company possessed accumulated profits. However, in the case of a company in liquidation, under section 2(6A) (c) the distribution can be considered as dividend only to the extent to which it is attributable to accumulated profits. 'The distinction in phraseology appears to have been observed for the reason that there cannot be any question of a company in liquidation distributing any profits for the purpose of being considered as dividend, because of the liquidation of a company, all distinction between profits and capital disappears and the liquidator is only possessed of surplus funds in his hands which are all capital.' Therefore, whereas in every other case a distribution is to be considered as dividend whether of accumulated profits or to the extent to which the company possesses accumulated profits, in the case of a company in liquidation it is sufficient if a distribution is made and there are accumulated profits to which such distribution can be attributed. In other words, the fiction introduced is that any distribution should be considered as first coming out of accumulated profits so long as the amount representing the accumulated profits is available for distribution, though, in law, profits have ceased to exist and it is all capital surplus in the hands of the liquidator. As against the contention urged on behalf of the assessee-company that according to the fiction created by section 2(6A) (c) of the Act, the entire amount of accumulated profits included in the sum of Rs. 17,25,000 could be considered as dividend, but for the proviso to clause (c) and therefore, any further distribution could not once again be considered as dividend even though the fiction created by the section prior to its amendment had restricted the chargeability to the amount attributable to accumulated profits of the six previous years, the Tribunal was of the view that the expression 'any distribution' in the section meant each and every distribution that a company in liquidation might make. Therefore, if earlier any distribution has been made but such distribution or part of such distribution has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend, must be held to be so.

10. Mr. Mehta has challenged the Tribunal's conclusion as incorrect and as one not borne out by the language of section 2(6A) (c). He argued that the definition of 'dividend' creates a fiction for it renders a fund as dividend which, in ordinary law, would not be dividend. The definition includes in the expression 'dividend' even the profits which may have been capitalised and even if a company has treated in the past a fund of accumulated profits as capital, it makes no difference, for, what the definition of 'dividend' does in effect is to carve out from the fund in the hands of the liquidator the amount found attributable to accumulated profits and treats that distribution to shareholders by him as dividend which is referable to what were prior to the data of liquidation accumulated profits. He argued that under the definition as it stood prior to the amendment, out of that fund referable to accumulated profits, only that part of it could be treated as dividend which was attributable to accumulated profits of six years prior to the date of liquidation and no more. Mr. Mehta argued that though the definition limited within its compass that part of the fund referable to accumulated profits of six years, there was nothing in that definition to indicate that the rest of the fund distributed would not include accumulated profits. Therefore, argued Mr. Mehta, the distribution of Rs. 17,25,000 must be deemed to include the entire accumulated profits and, in that view, the whole of such profits must be held to have been distributed and none was left out to be available as dividend in the assessment year in question. He contended that the department had no right or discretion to treat only Rs. 50,500 taxed as dividend to be the only sum attributable to accumulated profits and the rest left out to be distributed in any sub-sequent year. He also contended that the presumption would be that the liquidator would first distribute profits and then distribute the paid up capital, and therefore, accumulated profits in their entirety must be held to have been distributed in the very first distribution made during the assessment year 1953-1954. The past distributions exceeded the entire fund of accumulated profits and, therefore, nothing was left so as to make the present distribution fall within the chargeability of the amended section 2(6) (c) and the source of Rs. 75,000 in question could not be said to be in the accumulated profits. In support of his contention, Mr. Mehta would have read the definition clause of 'dividend' in section 2(6A) (c) as it then was, and then read separately the proviso which limited the accumulated profits of the last six years as dividend. On the other hand, the contention of the learned Advocate-General was that the section and the proviso must be read together, for, they together provided the definition of 'dividend' and that it was only when they read together that it was possible to get the fictional concept of dividend given by the legislature as also the object with which the legislature was at pains to create that fiction. The fiction so created enabled that portion of the fund attributable to accumulated profits of six years only to be treated as dividend and, therefore, until the proviso subsisted, it would be that fund only which, by virtue of the fiction created by the legislature, was referable to accumulated profits of the prescribed period which would be taxable as dividend and no more. The learned Advocate-General, therefore, contended that during any assessment for the period prior to the amendment, the department would not be concerned with any other fund except that limited fund and there would, therefore, be no power to inquire and, therefore, no enquiry as to whether the balance was from accumulated profits or whether it was referable to such accumulated profits. So long as the proviso subsisted, there was no question of treating the fund lying with the liquidator as being two separate funds, capital and accumulated profits, except that, so far as the Income-tax Act was concerned, that part of it as fell within the ambit of the sub-section would, by the fictional concept created by the legislature therein, be regarded and taxed as dividend.

11. In order to appreciate these rival contentions, it would be necessary first to turn to the section itself and ascertain what is it that it does, both when the proviso was there and when it was deleted by the Finance Act, 1955. But before we proceed to do that, it would be expedient to remember the object with which the legislature first introduced this section. The scope and content of the section can be better appreciated if the historical background of this section is kept in mind.

12. This sub-section was introduced in the Act by the Income-tax (Amendment) Act, 1939, and it was introduced as a result of the decision in the case of Inland Commissioners v. George Burrell. The question debated in that case was whether a portion of the assets of the company in liquidation, which represented undistributed profits, formed part of the income of the recipient for super-tax purposes when distributed to the shareholders by the liquidator on the liquidation of the company. On behalf of the Crown it was contended that the undistributed profits retained their character as profits in liquidation of the company and meant profits unless validly capitalised before the liquidation of the company, that the special reserves in question were formed by transfer of profits from the profit and loss account to the special reserve fund as appearing from the balance-sheets of the company and that such special reserves fell to be distributed as profits in liquidation. Rowlatt J. rejected the contention on behalf of the Crown and held that super-tax was not payable on the undivided profits as income, on the ground that in the winding up they had ceased to be profits and were assets. In appeal, Pollock M. R. observed :

'The voluntary liquidation has deprived the directors of the power of declaring a dividend. These facts must be faced and due weight given to the considerations which arise from them. The rights of the Crown and the subject must be governed by what is, and not what might have been. Further it is a misapprehension, after the liquidator has assumed his duties, to continue the distinction between surplus profits and capital.'

13. The learned Master of the Rolls further observed :

'It is not right to split up the sums received by the shareholders into capital and income, by examining the accounts of the company when it carried on business, and disintegrating the sum received by the shareholders subsequently into component parts, based on an estimate of what might possibly have been done, but was not done.'

14. Similarly, Scrutton L. J. in Inland Revenue Commissioners v. Blott has observed :

'A company is liquidated during the year of assessment, and the liquidator returns to the shareholders : (1) their original capital, (2) accretions to capital due to increase in value of the assets of the company; (3) the reserve fund of undivided profits in the company; (4) the undivided profits of the last year of assessment. Heads (3) and (4) will have paid income-tax through the assessment of the company; but it appears to me that none of the heads will be returnable to super-tax as assessment; they are not income from property, but the property itself in course of division.'

15. Though this opinion was expressed obiter by Scrutton L. J. in the course of his judgment, Pollock M. R. in Burrell's accepted these observations as laying down the correct principle of law. The principles laid down in these decisions, therefore, clearly are : (1) that upon the liquidation of a company, the liquidator holds all funds which come into his hands as property of the company which at the date of the winding up are surplus assets of the company; (2) that when distributions are made amongst the shareholders, such distributions are not distributions of profits but of capital or property of the company in the winding up of the company, for, in the winding up of the company, the company has no right to declare or pay dividends even of profits of that year; and (3) that it is not right to split up the sums distributed to the shareholders into capital and income by examining the books of account of the company when it carried on business and disintegrating the sums distributed to the shareholders subsequently into component parts as sums which might or could have been distributed as profits and were not done so. The position as it prevailed prior to 1939, therefore, was that any distribution by a liquidator, whether out of undistributed profits or otherwise, was distribution of capital only and did not attract tax. It was to get over this difficulty and to bring to tax the distributions from out of accumulated profits which, in the hands of the liquidator, were property, that the legislature inserted in the Act the definition of 'dividend' by the Amendment Act of 1939.

16. Let us, therefore, see how the legislature proceeded to achieve this result. The sub-section laid down an inclusive and not an exhaustive definition. In the first place, it provided that dividend would include any distribution to the shareholders of a company out of accumulated profits of the company, provided that only the accumulated profits so distributed arose during the six years preceding the date of liquidation. The definition gives a fictional meaning to the word 'dividend' because a company in liquidations cannot pay any dividends to its shareholders. The accumulated or undistributed profits on and after the date of liquidation cease to have the character of profits and are property or capital assets in the hands of the liquidator and when distributed, they are distributed to the shareholders as part the company's property. Under the ordinary law, there cannot be any division between funds which can be treated as dividends and but funds which can be called capital. Both are assets, the property of the company. Therefore, when the definition provides that a distribution attributable to accumulated profits of six years previous to the date of liquidation is dividend, the legislature was imparting to that expression a connotation which the ordinary law would not attach to the word 'dividend.' Secondly, the definition permits the income-tax department to notionally disintegrate a portion of the fund in the hands of the liquidator, namely, accumulated profits, only for six years prior to the date of liquidation, which the liquidator himself is not permitted to do. The position, therefore, is that accumulated profits of six years only are dividends, but not the rest of the accumulated profits which remain in the hands of the liquidator as the company's property. There is no warrant in the sub-section to treat the rest as accumulated profits, for the sub-section applies only to that part which can be regarded as accumulated profits of six years which, but for the fiction, would be property and which is and still remains property in the hands of the liquidator. It is thus that a limited portion of the fund attributable to accumulated profits for six years which is dividend, but the rest cannot be given the fictional notion of dividend and retains the character of property, not only in relation to the company and its liquidator, but even the income-tax department.

17. This reading of the sub-section and the scope of the fiction created thereby is to a certain extent borne out by the decision in Vidyutrai Y. Desai v. Commissioner of Income-tax. In that case, the assessee was a registered shareholder of a private limited company which was incorporated in 1943, and which carried on the business of managing agency of the Barsi Spinning and Weaving Mills Ltd. The capital of this company was Rs. 5,00,000 divided into 500 shares of Rs. 1,000 each. The assessee was a shareholder of 375 shares of this company in his own name and as beneficial owner of five shares held in the name of one Oza. The company went into liquidation on January 18, 1947. The balance-sheet of the company on this data showed the paid-up capital, liabilities, unpaid dividends, sundry creditors and accumulated profits. The accounts filed by the liquidator showed that the total cash realised by him, apart from the shares held by the company in the Barsi Spinning and Weaving Mills Ltd., was Rs. 4,49,339. Out of this amount, the liquidator distributed a sum of Rs. 3,72,907 amongst the shareholders and out of this distribution the assessee received Rs. 2,83,409. The question canvassed in that reference was whether a sum of Rs. 1,08,720 out of the aforesaid sum was received as dividend within the meaning of section 2(6A) (c) of the Act. The contention urged by the assessee was converse to the one urged in the present case, namely, that so long as the shareholders was not paid the full amount of his shares first in distribution, the portion of the distribution determined as having been paid out of accumulated profits would not attract tax. This contention was negatived and it was held that where a distribution in the winding up of a company is found to be out of accumulated profits, it is subject to tax even though the amount so distributed does not exceed the capital subscribed by the assessee, and it would not be correct to say in such a case that what exceeds the capital alone attracts tax. The principle deducible from this decision is that thought all the funds lying with the liquidator are property and any distribution made by him therefrom is part of that property, the fiction created by the sub-section permits the Income-tax Officer to go behind the normal rule of law and find out if the distribution or any part thereof is referable to accumulated profits of six years prior to the data of liquidation, and the definition then attaches chargeability to that distribution or part of it, as the case may be, which, but for the fiction created by the legislature, would not be amenable to income-tax. The definition thus produces at one and the same time a fiction as to attributability and chargeability which would not be available to the Income-tax officer except for the fictional definition of 'dividend'. This notional concept of dividend has also been brought out in a recent decision of this court in Gautam Sarabhai v. Commissioner of Income-tax. The assessment year with which the case concerned itself was 1955-56, the accounting year being the calendar year 1954. The assessees were shareholders in a company incorporated in accordance with the law prevailing in East Africa, called Kawampe Cotton Co. Ltd., Kampala. Having regard to the provisions contained in the Indian Income-tax Act, this company was regarded as a company for the purposes of the Indian Income-tax Act. The company went into voluntary liquidation on 22nd July, 1954. In the month of August, 1954, the liquidator made payment to the assessee, who were shareholders in that company. These amounts were received by the assessees on the 27th of August, 1954. The Income-tax Officer held that the amounts distributed as aforesaid were referable to the accumulated profits of the previous years of the company and fell within the category of dividend under section 2(6A) (c), as it stood prior to the amendment, and were liable to be taxed as dividends. The learned Chief Justice, delivering the judgment, observed that though the expression 'accumulated profits' was in inapt expression, the object for which the legislature inserted the definition of 'dividend' was clear, namely, that what the legislature intended to hit was a distribution made to the shareholders of a company which was referable to accumulated profits which arose during the six previous years preceding the date of liquidation of the company. He observed :

'When we read the provisions contained in sub-section (c) and the words used in the proviso, the intention of the legislature is clear that what was sought to be drawn into the net cast by the use of the world 'dividend' was the distribution made to the shareholders of a company referable to accumulated profits of the company which arose during six previous years of the company preceding the date of liquidation. What the legislature in-tended to convey by the words 'out of accumulated profits of the company' was to indicate the source from which the money distributed came. If the distribution is referable to the accumulated profits of the company, then such distribution would be a distribution covered by the expression 'dividend'. Even though it would not be proper to describe such distribution as a distribution made out of the accumulated profits of the company and it would not be possible on the winding up of a company to say that any distribution has been made by the liquidator out of the accumulated profits of the company, the legislative intent is clear and leaves no room for doubt that what was intended to be covered was a distribution referable to the accumulated profits of the company of the previous six years of the company preceding the date of liquidation.'

18. This decision to a certain extent supports the conclusion that it is by reason of the fiction created by the legislature that a portion of the funds, namely, that which can be traced to accumulated profits, which, though property otherwise under the law of the land, is made amenable to income-tax, and that the scope of that fiction is limited to that portion of it which is traceable to accumulated profits of six years preceding the date of liquidation and not the rest. Even the profits of the year during which the company goes into liquidation are not profits, once the liquidation commences. Similarly, the profits of the years prior to those six years are not taxable and are for all purposes the property of the company distributable by the liquidator to the shareholders as property, for, on the commencement of the liquidation, they lose the character of profits though before the liquidation they could have held the distinctive character of profits. Therefore, though before date of liquidation, the funds of the company would have the distinctive characters, namely, of capital and accumulated or undistributed profits, that distinction gets lost on liquidation. The only thing that the fiction does is to project, so far as the Income-tax Act is concerned, that distinction in future, i.e., even after liquidation when a distribution is made. In other words, what section 2(6A) (c) does is to impart attributability of accumulated profits to a distribution or part of it, as the case may be, which in law such a fund distributed by the liquidator would not have, and having done that, makes it chargeable as dividend. But it is that which is attributable to accumulated profits of six years prior to liquidation which can be regarded as chargeable dividend; so far as the rest is concerned, including the profits which arose or remained undistributed during the period earlier than six years and also during the year when the liquidation commenced, it retains the character of surplus assets property of the company.

19. Normally, dividend can be paid from current profits only. It is only the fiction of attributability created by section 2(6A) (c) that distinguishes accumulated profits from the rest of the funds available to the liquidator for distribution. But the right to so distinguish is available to the income-tax department and not to the liquidator or the company, and so far as the liquidator is concerned, all funds recovered by him are surplus assets which he must distribute amongst the shareholders in accordance with the provisions of the Companies Act. That being the position, there is no scope for the presumption urged by Mr. Mehta that when the liquidator started distributing the property of the company in liquidation, he did so first out of accumulated profits and it was only when such profits were exhausted that he would begin the distribution of capital and, therefore, the first distribution of Rs. 17,25,000 must be regarded as having exhausted all the accumulated profits. His contention that just as there is a presumption when remittances are made by company from abroad to its branch in India that they are from profits and not from capital, the same presumption must hold good in the case of distribution by a liquidator, is fallacious, for he forgets the distinction between a company which is still functioning and a company in liquidation as also the principle that when a company is in liquidation, all the funds with the liquidator are surplus assets or property of that company and the distribution made by the liquidator is of and from the properties of the company as the liquidation obliterates all distinctions between profits and capital. As stated in Burrell's case, the funds possess only one character, that is, as the property of the company. The law does not permit its disintegration into two funds, one of capital and the other of profits. It is only by virtue of the artificial definition of 'dividend' in the Income-tax Act, as distinguished from that under the Companies Act, that the Income-tax Officer is permitted to go behind the liquidation proceedings and ascertain, presumably from the records of the company, whether from the funds lying with the liquidator there are funds which have their source in accumulated profits, but that disintegration is only permissible to him and that too, in respect of that fund which can be attributable or referable to accumulated profits for six years prior to the date of liquidation, because it is only that fund which alone is dividend chargeable as such when distributed and it is the fund which is so chargeable to which the process of disintegration is permissible.

20. It must be remembered that section 2(6A) (c) is not a charging section but a sub-section which lays down a definition making a departure from the ordinary law and by a legal fiction makes that, which is by no means dividend. When the legislature creates a legal fiction, it attributes to something characteristics which in ordinary law it does not possess, and it does so for a specific purpose. The purpose with which the legislature enacted the legal fiction by means of the definition of 'dividend' as stated in Gautam Sarabhai v. Commissioner of Income-tax was to bring into the net of chargeability a specific fund which the legislature could not have otherwise done. The chargeability thus created was limited to that specific fund only and that chargeability was brought about by applying it to the fund traceable to accumulated profits of six years prior to the commencement of the liquidation of the company. As observed in Gautam Sarabhai's case there can, in law, be no such thing as accumulated profits once the company is in liquidation and the legislature has in fact used an inapt expression while seeking to create the artificial fiction of 'dividend'. But the legislative intent is clear as held in that decision, the intent being to bring into the net of taxability a limited fund from out of the surplus assets in the hands of the liquidator, namely, the fund which the liquidator distributes of which, as the learned judges have there observed, the source can be found in accumulated profits of the six years prior to the date of liquidation. Once this process is kept in mind, it becomes easy to realise the fallacy in the contention put forward by Mr. Mehta that we should first read the substantive part of the definition clause and then read separately the proviso as restricting the fiction to accumulated profits on six years only as taxable. The fallacy in this contention lies in the fact that Mr. Mehta forgets that section 2(6A) (c) is a definition clause and, therefore, the sub-section must be read as a whole in order to ascertain what it is that is made chargeable thereunder as dividend. In that view, there is hardly any warrant to split asunder the definition and contend that the substantive part renders the entire fund with the liquidator traceable to accumulated profits as dividend and the proviso then carves out or limits that fund, which is attributable to profits of six years only, as chargeable dividend. There is no warrant for such a construction, for, when a definition is enacted, it must be read in its entirety. It is not as if section 2(6A) (c) is a charging section which levies tax on a particular fund from out of which a limited fund is carved out by the proviso. The legislative intent is clear, namely, to treat that portion of the amount distributed by the liquidator as chargeable as dividend which the income-tax department can trace to accumulated profits of the last six years and that portion only. The power and the function of the department end there, for it is in respect of that limited fund only that the department is permitted to go behind the liquidation proceedings and to disintegrate the assets lying with the liquidation Mr. Mehta's contention that when Rs. 50,000 were taxed as dividend from out of the distribution of Rs. 17,25,000 during the accounting year ending 30th September, 1952, as accumulated profits for six years prior to the date of liquidation, the remainder also must be held to be accumulated profits, though not then taxable by reason of the proviso limiting the taxability to profits of six years, cannot be accepted, for the contention is dependent upon the construction of section 2(6A) (c) as suggested by him. The contention is based upon an assumption that the Income-tax Officer first disintegrates the fund lying with the liquidator into capital assets and accumulated profits and then brings to tax out of the latter, profits of the six years prior to the date of liquidation. That construction is, however, fallacious and is not warranted by section 2(6A) (c) which, I may repeat, is not a charging but a definition sub-section and restricts the permissible disintegration in respect of a specific limited fund, the remainder retaining the character of surplus assets distributable by the liquidator amongst the shareholders.

21. If the view of section 2(6A) (c) taken above is correct, then it follows that when the sum of Rs. 50,500 was brought to tax in respect of the assessment year 1953-54, the effect of it was that only the accumulated profits of six years prior to the date of liquidation were exhausted and not the entire fund traceable to accumulated fund for the entire period, for it was in respect of the former only that the Income-tax Officer, as the definition of 'dividend' then stood, could go behind the liquidation proceedings. The remainder remained and must be held to be properties of the company which the liquidator was bound to distribute to the shareholders as their share in the properties of the company. This was the position until the 1st of April, 1955, when the section was amended as aforesaid. Until the proviso remained, the chargeability of the entire fund attributable to accumulated profits of six years prior to the date of liquidation was exhausted and nothing more remained to be done or could be done by the income-tax department.

22. But when the proviso was deleted, the restriction of the power of the income-tax authorities to lend chargeability to accumulated profits and the chargeability of such profits was removed. The process of disintegrating the funds of the company, so far restricted, was made unrestricted and therefore the department could again go behind the liquidation proceedings and if it could trace any distribution to accumulated profits, it could treat such distribution or part or it, as the case may be, as liable to tax as dividend. In other words, what the department could not do until the proviso remained, as part of the fiction created by the definition clause, it could now do, as the fiction by the deletion of the proviso became unrestricted by any period prescribed. The department, by the deletion of the proviso, got the power to go behind the liquidation proceedings and all the implications in law thereof, to disintegrate each and every distribution to ascertain if such distribution could be traceable to accumulated profits, except those which were already taxed, and treat such distribution or part of it, as distribution of dividend. When the liquidator distributed Rs. 2,00,000 during the assessment year 1954-1955, it was possible for the department to bring that amount or part of it to tax. The department omitted to do so. What its effect is we are not concerned in this reference, but the learned Advocate-General was right when he contended that the fund of Rs. 5,00,000 and odd, admittedly traceable to accumulated profits, at the date when the company went into liquidation, would remain still unexhausted even if the amount of Rs. 2,00,000 distributed in the assessment year 1955-1956 were treated as the amount attributable to past profits. Therefore, when the further sum of Rs. 75,000 was distributed on the 24th of July, 1957, if that amount found its source in the accumulated profits, except the accumulated profits of the six years immediately preceding the date of liquidation which were already brought to tax, the department would be entitled to bring it to tax. That is because the power of the department to go behind the liquidation proceedings became unlimited, no longer restricted by any period, as was the case prior to the amendment in 1955. Consequently, the power to divide the funds lying with the liquidator into funds attributable to accumulated profits and those which are not so, became unrestricted. The amount of Rs. 5,00,000 and odd having been exhausted only to the extent of Rs. 50,500 and perhaps Rs. 2,00,000 there were funds still with the liquidator which could be treated as having their source in accumulated profits, or, in other words, as referable to such profits, and, therefore, it cannot be said, as Mr. Mehta contended, that the entire accumulated profits were already exhausted when the previous distributions were made.

23. In this view, I would answer the question referred to us in the affirmative. The assessee-company will pay to the Commissioner the costs of this reference.

P.N. Bhagwati, J.

24. The complexity of income-tax legislation is such that it is not remarkable that different minds should arrive at different conclusions on a problem of income-tax law which may at first blush appear to be a relatively simple problem. Lord Buckmaster once observed that it is not easy to penetrate the tangled confusion of the Income-tax Acts and expressed his regret at having to differ from his colleagues in the House on a point of income-tax law by saying that though they had entered the labyrinth together, they had unfortunately found exit by different paths. I preface this judgment by making the same observation for it is not without a sense of regret that I differ from My Lord the chief Justice in the answer to be given to the question submitted to us for out opinion on this reference.

25. The question which arises on this reference is a question relating to the applicability of section 2(6A) (c) of the Income-tax Act. The assessee is a private limited company. It went into voluntary liquidation on 23rd August, 1952. At the date of liquidation the paid-up capital of the assessee was Rs. 25,00,000 and its accumulated profits amounted to Rs. 5,34,041 out of which the accumulated profits for the six previous years preceding the date of liquidation were Rs. 50,500. Soon after liquidation commenced, the liquidator distributed two sums of Rs. 15,00,000 and Rs. 2,25,000 on 9th September, 1952, and 25th September, 1952, respectively, the aggregate amount distributed up to 30th September, 1952, being Rs. 17,25,000. While making the assessment for the assessment year for which the previous year was the year ending 30th September, 1952, the question arose whether any part of the distribution of Rs. 17,25,000 was liable to be treated as dividend under section 2(6A) (c) as it then stood. Now during the assessment year 1953-54, section 2(6A) (c) was in the following terms :

'2. In this Act, unless there is anything in the subject or context, ......

(6A) 'dividend' includes - .......

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company : Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included;'

and the revenue authorities, therefore, considered how far the distribution made by the liquidator was referable to the accumulated profits of the assessee for the six previous years preceding the date of liquidation and since the accumulated profits of the assessee for the six previous years preceding the date of liquidation were only Rs. 50,500 the revenue authorities treated a sum of Rs. 50,500 out of the distribution of Rs. 17,25,000 as dividend under section 2(6A) (c). The liquidator thereafter made three further distributions of Rs. 1,50,000 Rs. 75,000 during the year ending 30th September, 1953, which was the previous year for the assessment year 1954-55. No part of this distribution was treated as dividend under section 2(6A) (c), since the accumulated profits of the assessee for the six previous years preceding the date of liquidation were only Rs. 50,500 and the distribution referable to these accumulated profits had already been brought to tax as dividend. From the commencement of the assessment year 1955-56, however, a change took place in the law. Section 2(6A) (c) was amended by the Finance Act, 1955 and the proviso was deleted with the result that from and after the assessment year 1955-56, any distribution made by a liquidator was liable to be treated as dividend under section 2(6A) (c) if it was 'out of accumulated profits' without any limitation of time. During the year ending 30th September, 1954, which was the previous year for the assessment year 1955-56, the liquidator distributed a further sum of Rs. 2,00,000 but the revenue authorities did not treat any part of the distribution as dividend under the section 2(6A) (c) even though the time-limit of six years was removed and the accumulated profits of the assessees over the years excluding the accumulated profits during the six previous years preceding the date of liquidation amounted to Rs. 5,34,041 less Rs. 50,500, i.e., Rs. 4,83,541. The next distribution was made by the liquidator on 24th July, 1957, and that is the distribution out of which the present controversy has arisen between the assessee and the revenue. The liquidator on this occassion distributed a sum of Rs. 75,000. The Income-tax Officer in the course of the assessment of the assessee for the assessment year 1958-59, for which the corresponding previous year was the year ending 30th September, 1957, treated the distribution of Rs. 75,000 as divided under section 2(6A) (c). We may point out here that before the assessment year 1958-59, a further amendment was made in section 2(6A) (c) by the Finance Act, 1956, with effect from 1st April, 1956, and section 2(6A) (c) as it applied in the assessment year 1958-59 was in the following terms :

'2. In this Act, unless there is anything repugnant in the subject or context - .....

(6A) '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 or not.'

26. The Income-tax Officer took the view that the distribution of Rs. 75,000 made in the year of account was attributable to the accumulated profits of the assessee and was, therefore, 'dividend' within the meaning of section 2(6A) (c). It was contended on behalf of the assessee that the accumulated profits of the assessee at the date of liquidation were only Rs. 5,34,041 and the distribution of Rs. 17,25,000 made in the year ending 30th September, 1952, therefore, exhausted the whole of the accumulated profits and the further distribution thereafter made including the distribution of Rs. 75,000 in the year of account could not be said to be attributable to the accumulated profits of the assessee. The assessee agreed that only a sum of Rs. 50,500 was treated as dividend in the assessment year 1953-54 but that was, he said, due to the proviso which limited the distribution liable to be regarded as dividend to that part which was referable to the accumulated profits of the six previous years preceding the date of liquidation and it did not mean that the rest of the distribution was not referable to the accumulated profits of the earlier years. This contention of the assessee was negatived by the Income-tax Officer who held that the distribution of Rs. 75,000 was attributable to the accumulated profits of the assessee and he accordingly treated it as dividend under section 2(6A) (c) and taxed the assessee on that basis. The assessee preferred an appeal but the appeal was unsuccessful and the matter was carried to the Tribunal. The same contention was advanced before the Tribunal, namely, that having regard to the distribution of Rs. 17,25,000 made in the year ending 30th September, 1952, which comprised Rs. 5,34,041 referable to the accumulated profits of the assessee, the distribution of Rs. 75,000 made in the year of account could not be attributable to the accumulated profits of the assessee and the contention met with the same fate. The Tribunal did not accept the contention and held that :

'.... The definition of dividend as is in force in the assessment year under consideration once again speaks of any distribution and any distribution means each and every distribution that a company in liquidation may take. Therefore, if earlier, any distribution has been made, but such distribution or part of such distribution has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend, must be held to be so. In our opinion that is the correct interpretation of the section. It is not that in the assessment year 1953-54, when the matter was considered by the Income-tax Officer, for the first time, the distribution made by the company fell to be considered in its entirety to the extent of the accumulated profits in spite of the fact that such distribution could be considered as dividend only to the limited extent, and that any subsequent distribution was taken out of the pail of taxation as dividend even if the restriction no more applied. In the present case, there can be no dispute that the definition of dividend as was in force in the assessment year under consideration equally speaks of any distribution and if any distribution is each and every distribution, as we think must be considered as stated above, then, there is no reason to think that the distribution presently under the consideration which fulfills all the conditions of the section for the purpose of treating it as dividend is to be taken as not falling in that category.'

27. The Tribunal on this view confirmed the decision of the Income-tax Officer that the distribution of Rs. 75,000 was liable to be treated as dividend under section 2(6A) (c). The assessee in the present reference made by the Tribunal at his instance challenges this view of the Tribunal and contends that the distribution of Rs. 75,000 could not on the facts and circumstances of the case be regarded as dividend within the meaning of section 2(6A) (c).

28. In order to arrive at the true meaning and effect of section 2(6A) (c), it is necessary to consider, having regard to what Lord Coke said in Heydon's case, how the matter stood before the enactment of section 2(6A) (c), what the mischief was for which the law as it existed prior to the introduction of section 2(6A) (c) did not provide and what remedy has been provided by section 2(6A) (c) to cure that mischief. The genesis of section 2(6A) (c) is to be found in the case of Inland Revenue Commissioners v. George Burrell. In that case there were several single-ship companies. On the sale or loss of its ship each company went into liquidation. After the liabilities had been discharged, the assets of the company, including the profits earned from the commencement of the company's year up to the date of the cessation of business, and also any undistributed profits of past years that had been accumulated and invested and held as reserve funds, were distributed among the shareholders, and each shareholder accordingly received in the liquidation a certain fraction of the profits of the year in which business ceased but which the company had not resolved to divide, and of the accumulated profits of past years invested and then held in reserve. The revenue claimed that the portion of the distribution which represented the profits made during the broken year and the accumulated profits of the past years was income in the hands of shareholders for super-tax purposes. The Court of Appeal negatived the claim of the revenue holding that when a distribution is made by a liquidator among the shareholders, such distribution, even if it is made out of the profits made by the company before liquidation or in the course of liquidation, would not be part of the annual profits or gains of the shareholders chargeable to super-tax but would be capital in their hands, since whatever may have been the nature of the assets of the company when it was functioning, on liquidation all assets become the property of the company distribution among the shareholders after payment of liabilities and in liquidation 'Profits are not distributed or received as such' but are distributed and received as part of the property of the company which the shareholders are entitled to have distributed on liquidation. The result was that a rather anomalous position was brought about. When a company makes profit and instead of distribution them as dividend accumulates them from year to year and at a later date distributes them to the shareholders, whether after capitalisation or without capitalisation, the amount so distributed would be dividend under section 2(6A) (a), but when a company which has so accumulated the profits goes into liquidation before declaring a dividend and the liquidator distributes those profits to the shareholders, such distribution, according to the decision in Burrell's case would not be dividend. But if the accumulated profits, whether capitalised or not, when received by the shareholders on distribution by the company as a going concern are dividend and consequently attract tax in the hands of the shareholders, there is no reason why, merely because liquidation intervenes, they should not be taxed when received by the shareholders in liquidation. It is no doubt true that, as a result of the legal effect of winding up, the distinction between profit and capital disappears and what is distributed by the liquidator and received by the shareholders is merely the property of the company, but such property of the company may include what were accumulated profits prior to liquidation and when those profits are received by the shareholders, they must suffer taxation as they would if received from the company as a going concern. The Indian legislature, therefore, following similar legislation by British Parliament in 1927, enacted section 2(6A) (c) in 1939. The effect of this provision was, to quote the words of Venkatarama Aiyar J. in Dhandania Kedia and Company v. Commissioner of Income-tax, 'to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company which working; bust subject to this limitation that while in the latter the profits distributed would be dividend whenever they might have been accumulated, in the former such profits would be dividend only in so far as they came out of profits accumulated within six years prior to liquidation.' This limitation was introduced by the proviso which formed part of section 2(6A) (c) at the time when the section was first enacted. So long as the proviso stood, the distribution could be regarded as dividend only to the extent to which it was a distribution of accumulated profits of six years prior to liquidation. What the legislature then aimed at catching were only the accumulated profits of six years prior to liquidation when they reach the hands of the shareholders and even if the accumulated profits of earlier years were distributed to the shareholders, they were not touched by the legislature and they escaped taxation in the hands of the shareholders by reason of the decision in Burrell's case. The legislature, therefore, with a view to securing that even though any accumulated profits of earlier years distributed by a liquidator to the shareholders until than may have escaped taxation by reason of the decision in Burrell's case, the balance of such accumulated profits shall not thenceforth escape taxation if and when they reach the hands of the shareholders on distribution by a liquidator and shall be taxed in the same manner as they would when distributed by the common as a going concern, deleted the proviso by the Finance Act, 1955. The result was that from and after the assessment year 1955-56, the distribution of accumulated profits by a liquidator was equated wholly and in all respects with a similar distribution by a company which is working, irrespective of as to when the profits were accumulated. If any accumulated profits were released to the shareholders as part of a distribution made by a liquidator in respect of the assessment year 1955-56 or any succeeding assessment year, such accumulated profits were liable to be fictionally regarded as dividend and taxed as such in the hands of the shareholders as if no liquidation had intervened and they had been distributed by the company as a going concern.

29. I find that this interpretation which I am inclined to put on section 2(6A) (c) is completely supported by the observations of Dixon J. in Resch v. Federal Commissioner of Taxation. In that case section 16B of the Income Tax Assessment Act 1922-1930 which was then the provision in the Australian income-tax law corresponding to our section 2(6A) (c) came up for consideration before the High Court of Australia. The material part of that section was in the following terms :

'Where in the course of the winding up of a company a distribution is made by the liquidator to the members or shareholders, the amount distributed shall, to the extent to which it represents income derived by the company (whether prior to or during liquidation) which would have been assessable in the hands of the members or shareholders, if distributed to them by a company not in liquidation, be deemed to be assessable income of the members or shareholders derived in the year in which the distribution is made.'

30. Explaining the object and meaning of that section, Dixon J. stated at page 219-220 of the Report :

'It will be seen that the purpose of the section was to require the inclusion in the assessable income of a member of a company being wound up of so much of every distribution in the liquidation as upon a proper dissection or apportionment is found attributed to the existence among the assets of profits, whether reserved, accumulated, floating or even earned since liquidation, if those profits would, under the provisions of section 16(b) (i), have formed part of the member's assessable income, had they been distributed by the company as a going concern.

The section thus impliedly concedes what was decided by this court in Stevenson's case, namely, that section 16(b) (i) was confined to distributions of part by a company as a going concern and did not apply to a distribution in a liquidation : so that under the provisions of that paragraph no part of a distribution in a winding up was taxable in the hands of the members, notwithstanding that it represented or reflected taxable income of the company.

But section 16B destroys this distinction and, if the profits are of a kind which could not be distributed among members or shareholders while the company was a going concern without exposing the member or shareholder to liability to include them in his assessable income, then in the event of a winding up he must also include them when they are distributed as part of the surplus dividend among shareholders or members or, as they ought technically to be called, contributories.

The mode of distribution will be different. In a winding up the liquidator distributes the surplus as a fund without distinguishing according to the source of the components. Profits are, therefore, not distributed as such; while a going concern must maintain a distinction between profits and share capital and distribute profits under a description or in a guise which so identifies them, e.g., as dividend or bonus. Section 16B, therefore, does not, and logically could not, say that the distribution in a winding up must, to be taxable, be of the same character as a distribution that would be taxable in the case of a going concern. It is the liability to tax under section 16(b) (i), not of the distribution, but of the thing distributed, the profit, that section 16B takes as the discrimen for the purpose of ascertaining what part of the surplus in a winding up a contributory must include in his assessable income.'

31. These observations though made in relation to the Australian section apply equally to our section 2(6A) (c) since, apart from some minor inconsequential difference in language, there is no real difference in content and substance between the two sections and they clearly support the thesis that as in the case of the Australian section, so also in the case of our section 2(6A) (c), what are sought to be brought within the ambit of taxation are the accumulated profits when they reach the hands of the shareholders on distribution in liquidation and when they so reach the hands of the shareholders, they are fictionally treated as dividend and taxed as such, despite the fact that they are distributed and received as part of the property of the company in liquidation. To quote the same learned judge once again from another part of his judgment in the same case 'the subject taxed is profits, the occassion is the liberation of the profits to the shareholder in the course of liquidation'. Prior to the enactment of section 2(6A) (c) the accumulated profits, when they reached the hands of the shareholders on distribution by a liquidator, were not taxable by a reason of the decision in Burrell's case : after the enactment of section 2(6A) (c) the accumulated profits of six years prior to liquidation became taxable when they were released to the shareholders in liquidation, but by reason of the proviso the accumulated profits of earlier years remained untaxable even though received by the shareholders as part of distribution in liquidation; but after the deletion of the proviso whatever accumulated profits are released to the shareholders in the course of liquidation are made taxable by fictionally treating them as dividend. Whenever a distribution made by a liquidator after the deletion of the proviso is sought to be brought within section 2(6A) (c) the question which must therefore be asked is : Is the distribution a distribution of accumulated profits on the hypothesis that there is no intervening liquidation and the company is a going concern And this question must necessarily involve the further inquiry again on the same hypothesis whether any accumulated profits have already been distributed as part of the previous distribution, though by reason of the decision in Burrell's case they could not be regarded as dividend except in so far as they were accumulated profits of six years prior to liquidation

32. If these considerations are borne in mind, it is really not difficult to arrive at a concern solution of the problem before us. The first distribution made by the liquidator was of the aggregate sum of Rs. 17,25,000 and that was made in the year ending 30th September, 1952, which was the previous year for the assessment year 1953-54. During this assessment year the proviso existed in section 2(6A) (c) and the only relevant inquiry could, therefore, be whether the distribution of Rs. 17,25,000 represented or reflected the accumulated profits of the assessee of the six previous years preceding the date of liquidation and if so to what extent. The accumulated profits of six years prior to liquidation amounted to Rs. 50,500 and the revenue found that these accumulated profits amounting to Rs. 50,500 which were with the assessee at the date of liquidation were distributed among the shareholders as part of the distribution of Rs. 17,25,000 and the distribution of Rs. 50,500 out of Rs. 17,25,000 was, therefore, treated by the revenue as dividend under section 2(6A) (c) as it then stood. Having regard to the proviso it was not necessary at that stage to inquire further whether the remaining part of the distribution of Rs. 17,25,000 represented or reflected accumulated profits of earlier years, for even if the accumulated profits of earlier years were included in the distribution of Rs. 17,25,000, such accumulated profits were still by reason of Burrell's case capital in the hands of the shareholders and shared the same character and quality as the other surplus assets of the assessee. Of course the revenue could, as a purely theoretical proposition, dissect the distribution of Rs. 17,25,000 and ascertain whether any part of it represented or reflected the accumulated profits of earlier years and if so to what extent or if dissection was not possible, then arrive at the result by apportionment but that would have been a totally futile intellectual exercise. The accumulated profits of six years prior to liquidation having been brought to tax as dividend in the hands of the shareholders as part of the distribution of Rs. 17,25,000 in the assessment year 1953-54, no part of the subsequent distribution made during the year ending 30th September, 1953, being the previous year for the assessment year 1954-55, could be regarded by the revenue as dividend under section 2(6A) (c) since the proviso continued to exist during the assessment year 1954-55. The poviso was, however, deleted with effect from 1st April, 1955, and the revenue was, thereafter, entitled to consider the relation to any distribution made from and after assessment year 1955-56, whether it represented or reflected accumulated profits of earlier years, the accumulated profits of six years prior to liquidation having already been distributed and brought to tax as dividend in the hands of the shareholders in the assessment year 1953-54. If any part of the accumulated profits of earlier year was found to have been distributed among the shareholders from and after assessment year 1955-56, the revenue could bring it to tax as dividend in the hands of the shareholders under section 2(6A) (c) as if no liquidation had intervened. The revenue was, therefore, entitled to examine whether the distribution of Rs. 2,00,000 made during the year ending 30th September, 1954, corresponding to the assessment year 1955-56, represented or reflected any accumulated profits of earlier years and if it did, then to tax it as dividend under section 2(6A) (c). The revenue, however, did not treat any part of this distribution as dividend under section 2(6A) (c) with the result that if any accumulated profits of earlier years were distributed to the shareholders as part of this distribution, they escaped assessment in the assessment year 1955-56 notwithstanding the deletion of the proviso. Then came the distribution of Rs. 75,000 which has given rise to the present reference. Now in regard to this distribution also the revenue was entitled to inquire whether any part of it represented or reflected accumulated profits of earlier years. The revenue was entitled to ask the question : When this distribution was made, were any accumulated profits of earlier years released to the shareholders as part of such distribution or, in other words, if there were no liquidation, would this distribution be a distribution of accumulated profits of earlier years liable to be regarded as dividend Of course in order to answer this question it was necessary for the revenue to inquire whether any accumulated profits of earlier years had already been distributed to the shareholders as part of the previous distributions, irrespective of their chargeability, for what was already distributed to the shareholders could not be distributed once again and even if any accumulated profits of earlier reached the hands of the shareholders as part of this distribution, they could only be out of the balance of accumulated profits of earlier years remaining undistributed at the date of this distribution. But if, after making this inquiry, the answer to the question was in the affirmative, the distribution to the extent to which it was a distribution to the extent to which it was a distribution of accumulated profits of earlier years was liable to be regarded as dividend under section 2(6A) (c).

33. Now instead of making this inquiry, what the revenue did was to regard the entire distribution of Rs. 75,000 as dividend on the basis that so long as the accumulated profits were not exhausted by being regarded as dividend, any distribution made after the deletion of the proviso could be regarded as distribution referable to accumulated profits. The revenue took the view, and that was the view advocated before us, that so long as the proviso existed, the chargeability was limited to the accumulated profits of six years prior to liquidation with the result that when the sum of Rs. 50,000 out of the distribution of Rs. 17,25,000 was brought to tax as dividend, the accumulated profits of six years prior to liquidation were exhausted but so far as the balance of the fund traceable to accumulated profits was concerned, it continued to remain the property of the company divisible among the shareholders indistinguishable from the rest of the surplus assets and it was only after the deletion of the proviso that the revenue became entitled to disintegrate the distribution for the purpose of ascertaining it was attributable to the balance of the fund taxable to accumulated profits which remained unexhausted until the deletion of the proviso. The argument of the revenue was that the balance of the fund traceable to accumulated profits amounted to Rs. 5,34,041 less Rs. 50,500, i.e., Rs. 4,83,541, and that even if the distribution of Rs. 2,00,000 made in the assessment year 1955-56 after the deletion of the proviso could be attributable to such balance, such balance was not exhausted and was sufficient to cover the distribution of Rs. 75,000 and the distribution of Rs. 75,000 was, therefore, liable to be regarded as dividend under section 2(6A) (c). This argument has found favour with my Lord the Chief Justice, but with the greater deference to him, I find my self unable to accept it. I conceive the argument to be fallacious and my reason for saying so is as follows :

34. The argument proceeds on the assumption that accumulated profits can exist in the distribution only when they are chargeable and it is chargeability which makes the distribution attributable to accumulated profits. This assumption is, I think, unjustified. When liquidation takes place the assets of the company may consist of various component funds such as accumulated profits, capital gains and other capital of the company. It is no doubt true that on liquidation all these funds become part of the property of the company divisible among the shareholders in liquidation and in the hands of the liquidator there is no distinction between one fund and another, yet it is these funds which constitute the property of the company and, therefore, when a distribution is made out of the property of the company, such distribution would consist of one or more of these funds. It may be that in a given case if may be difficult to disintegrate the distribution for the purpose of ascertaining the component funds of which it may be made, since the property of the company is distributed among the shareholders is property remaining after discharge of obligations, but the difficulty of disintegration cannot negative the physical fact that the distribution must necessarily consist of one or more of these funds. The distribution may therefore, comprise the fund attributable to accumulated profits and the accumulated profits may thus exist in the distribution quite irrespective of their chargeability. They would not be chargeable because they would be distribution and received as part of the property of the company (vide Burrell's case) but that does not mean that as an identifiable fund they do not from a constituent part of the distribution. It is because they reach the hands of the shareholders though as part of the distribution of the property of the company that they are made chargeable as dividend under section 2(6A) (c). Whether a distribution is out of accumulated profits or not is a matter of fact and not a matter of fiction. Even in Burrell's case, which was decided at a time when there was no section corresponding to section 2(6A) (c), it was admitted that the distribution represented accumulated profits and it was because of this circumstance that the contention was raised by the revenue that, to use the words of Pollock M. R., 'that portion of the assets... Which represents undistributed profits, whether accumulated during past years or made during the broken year, forms part of the income of the recipient shareholder....' Section 2(6A) (c) postulates that a distribution may in a given case be out of accumulated profits - and when I use the expression 'accumulated profits' I mean what were accumulated profits at the date of the liquidation - or in other words may be attributable to accumulated profits and when such is the case, it imparts the character of chargeability to the distribution by creating the fiction of dividend. The section does not enact a fiction deeming a distribution to have come out of accumulated profits or making a distribution attributable to accumulated profits. The concept of attributability exists independently of the section and it is only when a distribution is attributable to accumulated profits, or to put it differently, owes its origin to the fund consisting of accumulated profits that the section comes into operation and attaches the fiction of dividend to the distribution. If the distribution has not come out of accumulated profits or is not attributable to accumulated profits, the section cannot apply and no part of the distribution can be fictionally regarded as dividend. The argument of the revenue proceeds on the hypothesis that the section not only creates the fiction of chargeability but also creates the fiction of attributability and that so long as the accumulated profits are not exhausted by being charge as dividend, any distribution made by the liquidator must be deemed to be attributable to them. The argument is clearly wrong for it makes the existence of accumulated profits - and I may once again make it clear that by accumulated profits I mean what were accumulated profits at the date of liquidation - in the distribution dependent on chargeability instead of making chargeability dependent on the existence of accumulated profits in the distribution.

35. The view advocated on behalf of the revenue also ignores the object and purpose of the enactment of section 2(6A) (c). On that view even if the identifiable fund consisting of what were accumulated profits at the date of liquidation ceases to exist either by reason of having been disbursed or destroyed, the distribution would be chargeable to the extent of such fund as dividend under section 2(6A) (c). The result would be that if such distribution had been made while the company was a going concern, it would not have been chargeable as dividend since it would not have been out of accumulated profits. But if it is made in liquidation, it would be chargeable as dividend. What is not taxable in the case of a working company would be taxable in the case of a company in liquidation. That was certainly not the object and purpose of the legislature in enacting section 2(6A) (c). The object and purpose was to equate the two positions - to assimilate the distribution of accumulated profits in winding up to a similar distribution by a company which is working - and not to tax the fund representing accumulated profits irrespective of the question whether it reaches the hands of the shareholders in liquidation or not. This fund is not to be taxed if it does not reach the hands of the shareholders and it is to be taxed only to the extent to which it reaches the hands of the shareholders. The construction suggested by the revenue sins against this basic principle underlying the enactment of section 2(6A) (c) inasmuch as it makes the entire fund representing accumulated profits taxable without regard to the question whether in fact it has reached the hands of the shareholders or not after the deletion of the proviso and even though it might have ceased to exist or might have already been distributed, either wholly or in part, as part of previous distributions made during the existence of the proviso.

36. Just as the view contended for on behalf of the revenue represented one extreme, the view for which Mr. S. P. Mehta on behalf of the assessee contended represented another extreme. His contention was that whenever a distribution is made it must be presumed to have been made first out of accumulated profits and the distribution of Rs. 17,25,000 made in the year ending 30th September, 1952, must, therefore, be regarded as having exhausted the accumulated profits of earlier year so that no distribution made thereafter can be said to be referable to the accumulated profits of earlier years. In support of this contention he invoked the analogy of remittance from abroad and urged that just as there is a presumption in case of such remittance that it is first from profits and then from capital, a similar presumption must apply in the case of distribution by a liquidator. I do not think the contention is well-founded. There is no analogy between remittance from abroad and distribution by a liquidator. No intention can be presumed in a liquidator to make a distinction between one portion of the property of the company and another and to distribute one portion in preference to the other. There is neither principle nor authority which supports any such presumption in case of distribution by a liquidator. Moreover, the reasons which I have given above for negativing the construction of the revenue apply equally to negative the applicability of the presumption contended for on behalf of the assessee. The view put forward by Mr. S. P. Mehta that the distribution of Rs. 17,25,000 must of itself without anything more be regarded as having exhausted the accumulated profits of earlier years by reason of the suggested presumption must, therefore, be rejected.

37. The argument urged against the view which I am inclined to take was that in most cases it would not be possible to dissect the distribution for the purpose of ascertaining the component funds of which it is made, since the property of the company which would be distributed among the shareholders would be property remaining after discharge of the obligations. Now it is true that in a given case, in the absence of anything to show that any particular identifiable fund or funds have been utilised for making a distribution, it may not be possible to dissect the distribution for the purpose of ascertaining the component fund or of which it is made, but in such a case the revenue can always resort to the method well-known in case where apportionment is required to be made, namely, the method of rateable apportionment. The distribution can be rateably apportioned among the various funds constituting the property of the company. This is the method which has received judicial approval in Australia as is evident from Gunn's Commonwealth Income Tax Las and Practice, seventh edition, Page 567, article 1329. If, therefore, physical dissection of the distribution into its component funds is not possible, this method can followed by the revenue and it can be determined to what extent the fund attributable to what were accumulated profits at the date of liquidation is comprised in the distribution and to the extent to which it is so comprised in the distribution, if can be brought to tax as dividend under section 2(6A) (c).

38. I must now turn to examine the facts of the present case in the light of the aforesaid discussion, but before I do so, I must refer to two decisions which were cited before us by the learned Advocate-General on behalf of the revenue. The first decision was that reported in Gautam Sarabhai v. Commissioner of Income-tax. That case related to the construction of section 2(6A) (c) as it stood prior to its amendment by the Finance Act, 1956, when the words were 'any distribution made to the shareholders of a company out of accumulated profits of the company.' An ingenious argument was advanced by Mr. Palkhivala appearing on behalf of the assessee that inasmuch as section 2(6A) (c) charged only that part of the distributed of a company in liquidation which was made out of accumulated profits, the legislature had misfired because on liquidation of a company profits shed their character as profits and the entire net assets of the company become a surplus fund in which the element of profits as distinguished from capital does not exist and there can, therefore, be no distribution out of accumulated profits. Mr. Palkhivala relied strongly on the decision in Burrell's case. A Division Bench of this court consisting of K. T. Desai C.J. (as he then was) and myself rejected the contention of Mr. Palkhivala and pointed out that though it is true that on liquidation of the company the accumulated profits do not remain in the hands of the liquidator as accumulated profits and acquire the character of property of the company and the language used by the legislature in section 2(6A) (c) as it then stood was, therefore, not apt, the legislative intent was clear and reading the section as a whole it was apparent that 'what the legislature intended to hit was distribution made to the shareholders of a company which was referable to accumulated profits.' What the legislature intended to convey by the words 'out of accumulated profits of the company' was to indicate the source from which the money distributed came and if the distribution was referable to the accumulated profits of the company, such distribution would be a distribution covered by the expression 'dividend'. Of course the section with which I am concerned in the present reference is section 2(6A) (c) as it stood after its amendment by the Finance Act, 1956, but all that the amendment did was to do away with the inaptness of language without effecting any change in the meaning and content of the section. This decision can, therefore, be usefully referred to for the interpretation of section 2(6A) (c) after its amendment by the Finance Act, 1956. This decision clearly show that what the legislature intended to achieve by enacting section 2(6A) (c) was to within the ambit of taxation the fund constituted of what were accumulated profits at the date of liquidation when it reaches the hands of the shareholders in liquidation. If a distribution in liquidation comes out of source of accumulated profits and whether it comes out of that source or not, is not a question dependent on section 2(6A) (c) - section 2(6A) (c) declares that, though, under the law, apart from the section, it would be capital and, therefore, not chargeable, it shall be regarded as dividend and taxed as such in the hands of the shareholders. This decision, therefore, far from contradicting the view I am taking, actually goes to support it.

39. The other decision to which reference was made in the course of the arguments by the learned Advocate-General was the decision of the Bombay High Court in Vidyutrai Y. Desai v. Commissioner of Income-tax. I do not see how this decision can help the revenue. All that was laid down by the Division Bench of the Bombay High Court in this case was that though an assessee may have incurred actual loss by subscribing to the capital of the company and may have, in the distribution of assets in winding up, received much less than the capital subscribed, yet the distribution to the extent to which it is out of accumulated profits must be regarded as dividend and attract tax. The question which has arisen before us was not before the Bombay High Court and this decision does not, therefore, throw any light on that question.

40. It is clear from the aforesaid discussion that the question to which the Tribunal should have addressed itself was whether the distribution of Rs. 75,000 represented or reflected accumulated profits of earlier years. Whether if there were no liquidation, could this distribution be said to be a distribution of accumulated profits of earlier years In order to answer this question it was necessary for the Tribunal to inquire whether any part of the accumulated profits of earlier years was distributed to the shareholders when the previous distributions were made. The Tribunal should have ascertained whether the fund constituted of what accumulated profits at the date of liquidation was exhausted by the previous distributions made by the liquidator and, if not, whether the distribution of Rs. 75,000 represented or reflected any part of such fund. The revenue instead of asking the Tribunal to determine this point, invited the Tribunal to proceed on an entirely erroneous basis which I have already set out above and the Tribunal proceeding on that basis did not disintegrate the distribution of Rs. 75,000 either by actual dissection or by rateably apportionment for the purpose of ascertaining whether any part of it came out of accumulated profits of earlier years. The result is that there is no finding of the Tribunal that when the distribution of Rs. 75,000 was made, accumulated profits of earlier years had not been exhausted by the previous distribution and that they reached the hands of the shareholders as part of this distribution, so that this distribution could be said to be referable to such accumulated profits. There being no such finding, it is clear that the distribution of Rs. 75,000 cannot be regarded as dividend under section 2(6A) (c).

41. I would therefore, answer the question referred to us in the negative and direct that the assessee must get the costs of the reference from the Commissioner.

Bhakshi, J.

42. The question for consideration in this reference under section 66(1) of the Indian Income-tax Act, 1922, is whether the sum of Rs. 75,000 or any part thereof could be treated as dividend under section 2(6A) (c) of that Act. This amount represents the seventh distribution made by the liquidator of the assessee-company on 24th July, 1957, for the assessment year 1958-59 at the rate of Rs. 30 per share. The assessee company had gone into voluntary liquidation on 23rd August, 1952. On the date of going into liquidation, the company had accumulated profits amounting to Rs. 5,34,041. Two distributions were made by the liquidator in the accounting year ending 30th September, 1952, relevant to the assessment year 1953-54 amounting to Rs. 17,25,000. There more distributions were made in the accounting year ending 30th September, 1953, relevant to the assessment year 1954-55 amounting to Rs. 3 lakhs. A sixth distribution was made in the accounting year ending 30th September, 1954, relevant to the assessment year 1955-56 amounting to Rs. 2 lakhs. The seventh distribution with which we are now concerned, was made during the accounting year ending 30th September, 1957, relevant to the assessment year 1958-59 amounting to Rs. 75,000. It is this last distribution that was treated by the Income-tax Officer as dividend within the meaning of section 2(6A) (c) of the Income-tax Act. Earlier, when the distribution was made in the accounting year ending 30th September, 1952, an amount of Rs. 50,500 was treated as dividend within the meaning of section 2(6A) (c) of the Income-tax Act for the purpose of the assessment in the case of the shareholders of the assessee-company. Thus as against the accumulated profits of Rs. 5,34,041 and the paid up capital of the company of Rs. 25 lakhs as at the date of the liquidation, the total amount distributed up to the accounting year 30th September, 1957, was Rs. 23 lakhs and earlier only as amount of Rs. 50,500 was held to be dividend. When in the year of assessment now under consideration a further amount of Rs. 75,000 was distributed, the present controversy has arisen.

43. On behalf of the assessee-company, it was contended that the entire accumulated profits should be considered to have exhausted their chargeability at the time of the first distribution considered by the Income-tax Officer in the amount of Rs. 17,25,000 for the assessment year 1253-54. It was contended on behalf of the assessee that the accumulated profits of the assessee at the date of liquidation were only Rs. 5,34,041 and the distribution of Rs. 17,25,000 made in the year ending 30th September, 1952, therefore exhausted the whole of the accumulated profits and the further distributions thereafter made, including the distribution of Rs. 75,000 in the year of account, could not be said to be attributable to the accumulated profits of the assessee. The assessee further contended that only a sum of Rs. 50,500 was treated as dividend in the assessment year 1953-54, but that was due to the proviso to the relevant clause of the section, which limited the distribution liable to be regarded as dividend to that part which was referable to the accumulated profits of the six previous year preceding the date of liquidation and it did not mean that the rest of the distribution was not referable to the accumulated profits of the earlier years. It was also urged by the assessee that the distribution in the accounting year ending 30th September, 1954, relevant to the assessment year 1955-56, amounting to Rs. 2 lakhs should, in any case, be held to have exhausted the accumulated profits to that extent. On the other band, it was contended on behalf of the revenue that considering the language of section 2(6A) defining the word 'dividend' as applicable for the assessment year 1958-59 and on a proper construction of the section in its entirety, the distribution which relates to the present matter would be caught as dividend as it fell within the purview of section 2(6A) (c) of the Income-tax Act. It was contended on behalf of the revenue that during any assessment for the period prior to the amendment of section 2(6A) (c), the department would not be concerned with any other fund except that limited fund in respect of a period of six years as prescribed by the proviso to the section and that they would therefore have no power to inquire and there was therefore no inquiry as to whether the balance was from accumulated profits, or whether it was referable to such accumulated profits. So long as the proviso subsisted, there was no question of treating the funds lying with the liquidator as being two separate funds, i.e, capital and accumulated profits, except that so far as the Income-tax Act, was concerned, that part of it which fell within the ambit of the sub-section would, by the fictional concept created by the legislature, be regarded and taxed as dividend.

44. Before we discuss the question relating to the applicability of section 2(6A) (c), it would be necessary to refer to the relevant provisions of that section which obtained before 1955 and thereafter. Clause 6(A) of section 2 prior to its amendment by the Finance Act, 1955, stood as under :

''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 shareholders of all or any part of the assets of the company :

(b) any distribution by a company of debentures or debentures stock, to the extent to which the company possesses accumulated profits, whether capitalised or not;

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company :

Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceeding the date of liquidation shall be so included; and (d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;

Provided that 'dividend' does not include a distribution in respect of any share issued for full cash consideration which is not entitled in the event of liquidation to participate in the surplus assets, when such distribution is made in accordance with sub-clause (c) or (d) : Provided further that the expression 'accumulated profits' wherever it occurs in this lause, shall not include capital gains arising before the 1st day of April, 1964, or after the 31st day of March, 1948.'

45. That clause, as amended by the Finance Act, 1955, reads thus :

''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 shareholders of all or any part of the assets of the company;

(b) any distribution by a company of debentures, debenture-stock or deposit certificates in any form, whether will or without interest, to the extent to which the company possesses accumulated profits whether capitalised or not;

(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company;

(d) any distribution made to company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;

(e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits;

but 'dividend' does not include -

(1) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off.

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.'

46. The clause was again amended by the Finance Act of 1956, which defined 'dividend' as under :

'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 shareholders of all or any part of the assets of the company;

(b) any distribution by a company of debentures, debenture stock or deposit certificates in any form, whether with or without interest, to the extent to which the company possesses accumulated profits, whether capitalised or not;

(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 profit of the company immediately before its liquidation, whether capitalised or not;

(d) any distribution by a company on the reduction of its capital to the extent of which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;

(e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf of for the individual benefit of a shareholder to the extent to which the company in either case possesses accumulated profits;

but 'dividend' does not include -

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend which the meaning of sub-clause (e), to the extent to which it is so set off.

47. Explanation. - The expression 'accumulated profits', wherever it occurs in this clause, shall not included capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948.'

48. It would, at this stage, be convenient to note the effect of the decision in Inland Revenue Commissioner v. George Burrell. In that case, the court of Appeal held that accumulated and current profits distributed by the liquidator amongst the shareholders on the liquidation of a company were not dividend in the hands of the shareholders. The reasoning adopted for this decision was that a liquidator could not declare or distribute a dividend and that on the liquidator of a company undistributed profits could no longer be distinguished from capital and that the accumulated as well as the current profits became surplus assets in the hands of the liquidator and that, therefore, what the liquidator would distribute amongst the shareholders would be capital which would merely be their share in the assets of the company. It is obvious that sub-clause (c) of clause (6A) of section 2 supersedes the effect of the decision in Burrel's case as it expressly provides that any distribution made to any shareholder on the liquidation of a company out of the company's accumulated profits would fall within the definition of 'dividend' and would therefore to taxable in the hands of the shareholders. If we look to the clause before its amendment, it would appear that its operation was limited only to the accumulated profits which arose during the six previous years of the company preceding the date of liquidation and after the amendment of the clause, the accumulated profits of any year were brought within the purview of chargeability. The Indian legislature thus by enacting section 2(6A) (c) achieved the effect of assimilating the distribution of accumulated profits by a liquidator to a similar distribution by a company which was working, subject to the limitation that the profits would be dividend only in so far as they came out of profits accumulated within six years prior to liquidation. This limitation was introduced by the proviso which formed part of section 2(6A) (c) at the time when the section was first enacted and so long as the proviso stood the distribution could be regarded as dividend only to the extent to which it was a distribution of accumulated profits of six years prior to liquidation. This limitation was lifted by deleting the proviso by the Finance Act of 1955, with the result that from and after the assessment year 1955-56, the distribution of accumulated profits by a liquidator could be equated with a similar distribution by a company which was in actual working, irrespective of as to when the profits were accumulated. In other words, the fiction that was created was that if any accumulated profits were distributed to the shareholders as part of a distribution by a liquidator in respect of the assessment year 1955-56 of any subsequent assessment year, such accumulated profits were liable to be treated as dividend and taxed in the hands of the shareholders. If section 2(6A) (c) was not enacted, the accumulated profits when they reached the hands of the shareholders on distribution by a liquidator, would not have been taxable, but after the enactment of section 2(6A) (c) this position could not obviously obtain. After the enactment of section 2(6A) (c), the accumulated profits of six years prior to liquidation became taxable when they were distributed to the shareholders in liquidation, but by reason of the proviso, the accumulated profits of earlier years would remain untaxable, although they would be received by the shareholders as part of distribution in liquidation. This proviso, as stated earlier, was deleted and after this was done, whatever accumulated profits were released to the shareholders in liquidation, would be taxable by virtue of the fiction and would be liable to be treated as dividend.

49. On the liquidation of a company, the assets of the company may consist of different funds such as accumulated profits, capital, capital gains, etc., and all these funds would become part of the assets of the company held by the liquidator and liable to be distributed amongst the shareholders. In the hands of the liquidator, there would be no distinction between one fund and the other as the assets would be held by the liquidator as the property of the company and, therefore, when a distribution is made out of this property, such distribution may consist of one or more of these funds. Sometimes it may be difficult to earmark the particular fund out of all the component funds of which the assets were constituted, from which the distribution was made. Whether a distribution is made out of accumulated profits or out of any other fund, is a physical fact and hence to be ascertained on the facts of each particular case. The fiction created by section 2(6A) (c) makes the fund of accumulated profits liable to tax in spite of the fact that such accumulated profits have merged into the property and assets of the company on liquidation. By virtue of such a fiction, an item forming one of the assets of the company, which could otherwise not be subjected to tax, was brought within the net and was made liable to tax. But that fiction is restricted by the section to the creation of the liability at any distribution to the extent to which the distribution could be made attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. The section does not prescribe on enact as to how the attributability to the accumulated profits of the company is to be ascertained, nor does it provide for raising any presumption as regards such attributability. The extent to which the fiction has been created by the section under consideration is thus restricted and must be restricted to the terms of, and the phraseology used in, the section because the section attempts to saddle liability in respect of an item of the funds of a company in liquidation, which otherwise could not have been brought into tax. The fiction, therefore, cannot be extended beyond what the section provides for. The section thus does not enact a fiction deeming a distribution to have come out of accumulated profits or making a distribution attributable to accumulated profits. The argument therefore made on behalf of the revenue assumes that the section not only creates a fiction of chargeability but also a fiction of attributability which, on a plain reading of the section, cannot be sustained. Similarly, the view contended for on behalf of the assessee that whenever a distribution is made, it must be presumed to have been made first out of accumulated profits and that the distribution made in the year ending 30th September, 1952, must be regarded as having exhausted the accumulated profits of earlier years, and that therefore, no distribution made thereafter can be said to be referable to the accumulated profits of earlier years, cannot be accepted. Such a presumption, in the case of a distribution by a liquidator, does not appear to be permissible on a proper construction of the section.

50. The section as it stands and fully warrants the construction of the section referred to above. There is no direct authority on this question which has been cited by the learned advocates appearing on behalf of the parties. Reference however may be made, with some advantage, to the following observations of Dixon J. in Resch v. Federal Commissioner of Taxation :

'Among those provisions is section 16B, the material part of which is as follows : 'Where in the course of the winding up of a company a distribution is made by the liquidator to the members or shareholders, the amount distributed shall, to the extent to which it represents income derived by the company (whether prior to or during liquidation) which would have been assessable in the hands of the members of shareholders if distributed to them by a company not in liquidation, be deemed to be assessable income of the members or shareholders derived in the year in which the distribution is made ?'

51. It will be seen that the purpose of the section was to require the inclusion in the assessable income of a member of a company being wound up of so much of every distribution in the liquidation as upon a proper dissection or apportionment is found attributable to the existence among the assets of profits, whether reserved, accumulated, floating or even earned since liquidation, if those profits would, under the provisions of section 16(b) (i), have formed part of the members' assessable income, had they been distributed by the company as a going concern.

52. The section thus impliedly concedes what was decided by this court in Stevenson's case, namely, that section 16(b) (i) was confined to distributions of profit by company as a going concern and did not apply to a distribution in a liquidation; so that under the provisions of that paragraph no part of a distribution in a winding up was taxable in the hands of the members, notwithstanding that it represented or reflected taxable income of the company.

53. But section 16B destroys this dissection and, if the profits are of a kind which could not be distributed among members or shareholders while the company was a going concern without exposing the members or shareholders to a liability to include them in his assessable income, then in the event of a winding up he must also include them when they are distributed as part of the surplus dividend among shareholders or members or, as they ought technically to be called, contributories.

54. The mode of distribution will be different. In a winding up the liquidator distributes the surplus as a fund without distinguishing according to the source of the components. Profits are therefore not distributed as such; while a going concern must maintain a distinction between profits and share capital and distribute profits under a description or in a guise which so identifies them, e.g., as dividend or bonus. Section 16B therefore, does not, and logically could not, say that the distribution in a winding up must, to be taxable, be of the same character as a distribution that would be taxable in the case of a going concern. It is the liability to tax under section 16(b) (i) not of the distribution, but of the thing distributed, the profit, that section 16B takes as the discriment for the purpose of ascertaining what part of the surplus in a winding up a contributory most include in his assessable income.'

55. It was urged by the learned Advocate-General that the above authority relates to a provision in the Australian income tax law in which the relevant section was not a defining section, but a charging section; Whereas, according to the learned Advocate-General, in the case before us, section 2(6A) (c) is a defining section and not a charging section. That is true and although these observations were made in relation to the Australian section, the observations quoted above offer some help in the construction and applicability of the Indian section. What are sought to be brought within the ambit of taxation by the Australian section are the accumulated profits when they reach the hands of the shareholders on distribution in liquidation and when they so reach the hands of the shareholders, they are fictionally treated as dividend and taxed as such.

56. It is true that in the absence of anything to show that any particular fund has been utilised for making a distribution, it may be difficult to dissect the distribution for the purpose of ascertaining the fund out of which the distribution was made. But, in such a case, the revenue can possibly adopt the method of rateable apportionment which has been referred to in Gunn's Commonwealth Income Tax Law and Practice, 7th edition, page 567, article 1329. The notes under article 1329 indicate how apportionment of capital profits for the purpose of distribution could be made. But, in any event, it appears to be certain that the section does not enact a fiction deeming a distribution to have come out of accumulated profits or making a distribution attributable to accumulated profits and therefore whether the distribution is out of accumulated profits or not would always remain a matter of fact and not a matter of fiction.

57. If we turn to the facts of the present case, the first distribution made by the liquidator was of the sum of Rs. 17,25,000 which made in the year ending 30th September, 1952. At the time of this distribution the proviso existed in section 2(6A) (c) and the only inquiry therefore that was relevant at the time, was whether the distribution of Rs. 17,25,000 reflected the accumulated profits of the assessee of the six years preceding the date of liquidation and, if so, to what extent. As the accumulated profits of the six years previous to the liquidation were Rs. 50,500, this amount of Rs. 50,500 out of the total amount of Rs. 17,25,000 was treated by the revenue as dividend under section 2(6A) (c). It was obvious that it was not necessary at that time to institute any further inquiry as to whether the remaining part of Rs. 17,25,000 reflected accumulated profits or not. The provision continued to exist during the assessment year 1954-55, but when it was deleted, the revenue could legitimately say that it was entitled to consider in relation to any distribution made from that date, whether such a distribution reflected accumulated profits of earlier years. If any part of the accumulated profits or earlier years was found to have been distributed among the shareholders from the aforesaid date, the revenue could make it liable to tax as dividend under section 2(6A) (c). Equally so, in regard to the present distribution in controversy, the revenue was entitled to inquire whether any part of the distribution reflected accumulated profits of earlier years. This the revenue did not do in the present case, but what it did was that it considered the entire distribution of Rs. 75,000 as dividend on the basis that so long as the accumulated profits were not exhausted by being regarded as dividend, any distribution made after the deletion of the proviso could legitimately be regarded as distribution referable to accumulated profits. The revenue thus proceeded on the basis, which has been adopted as an argument by it at the hearing that so long as the proviso existed, the chargeability was restricted to the accumulated profits of six years prior to liquidation and that, therefore, when the sum of Rs. 50,500 was brought to tax as dividend, the accumulated profits of six years prior to liquidation were only exhausted and utilised, but the balance of the fund of accumulated profits could always be made available to be utilised in considering the attributability to accumulated profits. The revenue, in support of this argument, depended upon the assumption that accumulated profits existed in the distribution only when they were chargeable. The effect of such an argument, if accepted, would be to extend the fiction created by the section not only to chargeability but to attributability also. Such an argument, as we have already discussed, is not well-founded. The Tribunal, in the present case, did not ascertain whether the fund constituted what were accumulated profits at the date of liquidation was exhausted by the previous distributions and whether the distribution of Rs. 75,000 reflected any part of such fund. The Tribunal did not disintegrate the distribution of Rs. 75,000 for the purpose of finding out whether any part of it came out of accumulated profits of earlier years and thus there is no finding of the Tribunal that when the distribution of Rs. 75,000 was made, accumulated profits of earlier years had not been exhausted by the previous distributions and that they reached the hands of the shareholders as part of this distribution, so that the present distribution could be said to be referable to accumulated profits. In the absence of such a finding, the distribution of Rs. 75,000 could not have been regarded as dividend under section 2(6A) (c).

58. I would therefore, answer the question in the negative. The assessee must get the costs of the reference from the Commissioner.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //