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Hariprasad Jayantilal and Co. Ltd. Vs. Income-tax Officer, Ahmedabad - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application Nos. 233 and 234 of 1960
Judge
Reported in(1961)GLR487; [1962]45ITR294(Guj)
ActsIncome Tax Act, 1922 - Sections 2(6A) and 35(10)
AppellantHariprasad Jayantilal and Co. Ltd.
Respondentincome-tax Officer, Ahmedabad
Appellant Advocate D.H. Dwarkadas, Adv.
Respondent AdvocateAdv.-General
Cases ReferredIn Sheth Haridas Achratlal v. Commissioner of Income
Excerpt:
.....raises an interesting question of law relating to the construction of section 35(10) of the income-tax act, and arises out of certain orders under the provisions made by the first respondent, the income-tax officer, special investigation circle, b, ahmedabad. dwarkadas that burrell's case has been accepted as good law in england since it was decided and the principle there enunciated has been accepted by the bombay high court. it is not necessary to set out that provision, as we fail to see how it lends any support to the argument, which must necessarily relate to the interpretation of section 35(10). we are not concerned with the meaning and import of that provision and need not discuss that provision. at the same time, we must not overlook that a deeming provision has to be..........np. 'out of the reserves formed out of the profits as accumulated profits of the earlier years'. the years out of the profits of which this amount of rs. 5,17,171-20 np. was distributed were years ending december 31, 1943, december 31, 1945, december 31, 1947, december 31, 1948 and december 31, 1951. for the purpose of the present petition, we are concerned with the accumulated profits of the years ending december 31, 1947, december 31, 1948 and december 31, 1951, the profits in respect of which respectively were rs. 1,55,000, rs. 17,971-20 np. and rs. 1,15,200. 4. on february 21, 1958, and february 22, 1958, the liquidator made a first contribution on ordinary shares to the shareholders of the company aggregating rs. 1,55,520. he again issued an income-tax refund certificate,.....
Judgment:

Desai, C.J.

1. This petition raises an interesting question of law relating to the construction of section 35(10) of the Income-tax Act, and arises out of certain orders under the provisions made by the first respondent, the Income-tax Officer, Special Investigation Circle, B, Ahmedabad.

2. The facts may be briefly stated. The petitioner is a limited liability company, which was taken in voluntary liquidation in 1957. The assessment years with which we are concerned on this petition are 1948-49 to 1953-54, the corresponding previous years being calendar years 1947 to 1952. The petitioner company was assessed for the assessment years 1948-49 to 1953-54 and allowed a rebate of one anna per rupee under clause (1) of the proviso to paragraph B of Part I of the Schedules to the Finance Acts of 1948 to 1953 respectively on the undistributed profits of those years. It will be convenient to set out here the income finally determined by the Income-tax Officer in respect of those years, the undistributed profits determined by the Income-tax Officer and on which rebate was allowed and the rebate that was allowed on that basis.

---------------------------------------------------------------------'Assessment Income finally Undistributed Rebate.year determined by profits determinedby the I. T. O.---------------------------------------------------------------------Rs. Rs. Rs. A. P.1. 1948-49 3,11,166 1,55,447 9,715- 7-02. 1949-50 3,80,852 1,68,691 10,543- 3-03. 1950-51 3,64,893 45,392 2,837- 0-04. 1951-52 3,70,055 36,892 2,305- 12-05. 1952-53 5,32,114 2,24,050 14,003- 2-06. 1953-54 3,81,764 1,39,478 8,717- 6-0------------ ------------- ------------Total 23,40,844 7,69,950 48,121- 14-0'------------ -------------- ------------

3. For the year ending December 31, 1956, the company itself declared an aggregated sum of Rs. 2,15,232 as dividends at its ordinary general meeting. It issued income-tax refund certificate in pursuance of a resolution of August 26, 1957. It will suffice here to mention that the total amount of dividends declared at the aforesaid meeting was Rs. 2,15,232 which was made up inter alia of an item of Rs. 1,55,000 'out of the reserve formed out of the profits and accumulated profits of the earlier years'. We may mention that the material year with which we are concerned is the year ending 31st December, 1952, and the amount in respect of that year was Rs. 1,20,000. The company was taken into voluntary liquidation by a resolution dated October 19, 1957. The very next day, the liquidator distributed a sum of Rs. 5,17,171-20 nP. to the shareholders of the company. He issued an income-tax refund certificate, as in his opinion the distribution was to be treated as 'dividend' under section 2(6A) (c) of the Indian Income-tax Act. He certified that the total amount of dividends distributed was Rs. 5,17,171-20 nP. 'out of the reserves formed out of the profits as accumulated profits of the earlier years'. The years out of the profits of which this amount of Rs. 5,17,171-20 nP. was distributed were years ending December 31, 1943, December 31, 1945, December 31, 1947, December 31, 1948 and December 31, 1951. For the purpose of the present petition, we are concerned with the accumulated profits of the years ending December 31, 1947, December 31, 1948 and December 31, 1951, the profits in respect of which respectively were Rs. 1,55,000, Rs. 17,971-20 nP. and Rs. 1,15,200.

4. On February 21, 1958, and February 22, 1958, the liquidator made a first contribution on ordinary shares to the shareholders of the company aggregating Rs. 1,55,520. He again issued an income-tax refund certificate, as the distribution was to be treated as 'dividend' under section 2(6A) (c) of the Act. He certified that the total amount of dividends distributed was an aggregate amount of Rs. 1,55,520 'out of the reserves formed out of the profits or accumulated profits of the earlier years' ending December 31, 1951, December 31, 1952, December 31, 1954, and December 31, 1956. For the purpose of the present petition, we are concerned only with the first two of these years, the amounts in respect of which were Rs. 98,886 and Rs. 22,289.

5. On March 31, 1958, the liquidator distributed a further sum of Rs. 150 per each ordinary share and the total amount of distribution was Rs. 1,15,200. That distribution was also to be treated as 'dividend' under section 2(6A) (c) of the Act. The liquidator issued on income-tax refund certificate to the effect that the total amount of dividends distributed and aggregating to Rs. 1,15,200 was 'out of the reserves formed out of the profits or accumulated profits of the earlier years' ending December 31, 1948, December 31, 1949, December 31, 1950 and December 31, 1951. On this petition, we are concerned with the amounts of accumulated profits of all the four years, which amounts respectively were Rs. 1,574, Rs. 47,642, Rs. 40,354 and Rs. 25,630 aggregating to Rs. 1,15,200.

6. On 27th July, 1959, the liquidator distributed a further sum of Rs. 100 per each ordinary share and the total amount of distribution was Rs. 76,800. The certificate stated that the total amount of dividends distributed was Rs. 76,800 'out of the reserves formed out of the profits or accumulated profits of the earlier year ending December 31, 1948.'

7. To the petition, the petitioner company has annexed a statement which show the distribution of dividends by and in respect of the petitioner company, containing some details in respect of the assessment years 1948-49 to 1953-54, which we have given in the beginning of our judgment and which shows the amount of the rebate aggregating to Rs. 48,121-14-0, and it is this amount of Rs. 48,121-14-0 that the Revenue claimed from the liquidator under section 35(10) of the Act. That is the amount in dispute and the subject-matter of this petition.

8. There is on our list Special Application No. 234 of 1960 and the dispute in that petition is of an identical nature. The amount of rebate there claimed by the Revenue under section 35(10) of the Act from the liquidator is Rs. 36,645.62 nP. That is the amount in dispute and the subject-matter of that petition. We purpose to dispose of both the petitions by one common judgment.

9. Notices calling upon the petitioner company to show cause why action under section 35(1) of the Act should not be taken for the relevant assessment years were issued by the first respondent, the Income-tax Officer, Special Investigation Circle, B, Ahmedabad, as, according to him, the dividend declared by the petitioner company and the distributions made by the liquidator were out of the undistributed profits of the earlier years in respect of which a rebate of one anna per rupee had been allowed in the relevant assessment years.

10. The liquidator took up the contention that the proposed action under section 35(10) of the Act was unjustified as the section did not apply to the case of the petitioner company. The contention was that before section 35(10) could be applied there must be a distribution of dividends by the company and not any distribution by the liquidator of the company. There being no appeal provided for in the Act against an order under section 35(10) of the Act, the petitioner company has come to this court on this petition under article 226 of the Constitution.

11. It has been argued before us by Mr. D. H. Dwarkadas, learned counsel for the petitioner, that section 35(10) can only apply to the distribution of a dividend by the company itself and the distribution, whether of dividend or otherwise, by a liquidator after a company is taken into liquidation does not fall within the ambit of section 35(10) of the Act. Such a distribution, says Mr. Dwarkadas, cannot be regarded as declaration of dividend by the company. Another contention urged by Mr. Dwarkadas is that section 35(10) is not retrospective in its operation, because it was incorporated in the Act from April 1, 1956. Now, this latter contention cannot be availed of by the petitioner in this court. In New Shorrock Spinning and . v. Income-tax Officer, Special Circle, Ahmedabad a division bench of the Bombay High Court held that section 35(10) would apply in a case of undistributed profits of previous years. In my judgment in that case I pointed out that section 35(10) was very clear in its scope and application and showed that it dealt with rebate granted in respect of the assessment years beginning with April 1, 1948, to 1955 and that the rule of construction against retrospective operation did not apply. I also pointed out in my judgment that section 35 operated despite the doctrine of finality of assessments. That decision of the Bombay High Court is binding on this court, and as far as this court is concerned, the contention relating to retrospective operation of section 35(10) must be negatived.

12. To turn to the principal contention of Mr. Dwarkadas. But, before we examine the same, it will be convenient to set out section 35(10) :

'Where, in any of the assessment for the years beginning on the 1st day of April of the years 1948 to 1955 inclusive, a rebate of income-tax was allowed to a company on a part of its total income under clause (i) of the proviso to Paragraph B of Part I of the relevant Schedules to the Finance Acts specifying the rates of tax for the relevant year, and subsequently the amount on which the rebate of income-tax was allowed as aforesaid is availed of by the company, wholly or partly, for declaring dividends in any year, the amount or that part of the amount availed of as aforesaid, as the case may be, shall, by reason of the rebate of income-tax allowed to the company and to the extent to which it has not actually been subjected to an additional income-tax in accordance with the provisions of clause (ii) of the proviso to Paragraph B of Part I of the Schedule to the Finance Acts above referred to, be deemed to have been made the subject of incorrect relief under this Act, and the Income-tax Officer shall recompute the tax payable by the company by reducing the rebate originally allowed, as if the re-computation is a rectification of a mistake apparent from the record within the meaning of this section and the provisions of sub-section (1) shall apply accordingly, the period of four years specified therein being reckoned from the end of the financial year in which the amount on which rebate of income-tax was allowed as aforesaid was availed of by the company wholly or partly for declaring dividends.'

13. It will also be convenient at this stage to refer to certain changes and modifications which were made in respect of section 35(10) with which we are concerned. Sub-section (10) was substituted by the Finance Act of 1956 with effect from April 1, 1956. Incidentally, it may be mentioned that sub-section (10) was deleted by clause (2) of section 30 of the Finance Act of 1959. In the course of the argument at the bar, reference was made by the learned Advocate-General to sub-sections (8) and (9) of section 35 of the Act. We shall examine this arguments later on in this judgment, but it is not necessary to set out the provisions of sub-sections (8) and (9) in our judgment.

14. It will be seen that the whole argument on behalf of the petitioner turns on the interpretation that may be placed on the first part of sub-section (10) of section 35, and particularly on the meaning and effect of the words 'and subsequently the amount on which the rebate of income-tax was allowed as aforesaid is availed of by the company, wholly or partly, for declaring dividends in any year.'

15. The expression 'dividend' has been defined in section 2(6A) of the Act. The relevant and material part of that definition, and to which our attention has been drawn, is 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 debenture-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.'

16. Counsel for the petitioner company does not dispute before us that what has been distributed by the company and the liquidator is 'dividend'. In fact, all the certificates refer to the amounts distributed as 'dividend'. The argument, however, is that the definition in clause (c) of section 2(6A), which speaks of distribution made to the shareholders of a company or its liquidator cannot be incorporated in section 35(10), because that provision speaks only of dividend declared in any year. It is said that section 35(10) only touches the amounts on which rebate of income-tax was allowed under the relevant provisions and was availed of by the company, wholly or partly, for declaring dividends in any year. It is only a dividend declared by a company, which, according to the present contention, is hit by section 35(10). A dividend declared by a liquidator, so the argument has run, would be outside the purview and operation of section 35(10). It is urged that the definition of 'dividend' in section 2(6A) is an artificial definition and that definition cannot apply when we have to interpret the expression 'declaring dividends' used in section 35(10). It is also urged that if the definition in section 2(6A) (c) is applied to this expression in section 35(10), it will result in repugnancy.

17. The archstone of the argument of counsel for the petitioner company is that once a company goes into liquidation, the difference between capital and dividends disappears and what the liquidator distributes is not the income of the company but the assets of the company in liquidation. In support of this aspect of the matter, reliance is strongly placed on certain decisions of the Bombay High Court, which have proceeded proposition laid down by the Court of Appeal in England in the leading case of Commissioners of Inland Revenue v. Burrell. It was there held that on the liquidation of a company undistributed profits can no longer be distinguished from capital, and that such portion of the assets distributed by the liquidator as represents undistributed profits is not income in the hands of the shareholders which they are required to include in their returns of total income for super-tax purposes. In Girdhardas & Co. Ltd. v. Commissioner of Income-tax, it was held that current profits which are distributed on liquidation cannot be treated as dividends even under the general law, apart from section 2(6A) (c), because when a company goes into liquidation, the distinction between capital and profits disappears and everything that the liquidator distributes is the assets of the company in liquidation. In Sheth Haridas Achratlal v. Commissioner of Income-tax also decided by the High Court of Bombay, Chagla C.J. and Tendolkar J. pointed out that in the case of sub-clause (c) to section 2(6A) of the Income-tax Act, the clear intention of the legislature was that only those accumulated profits which had not been capitalised should come within its ambit.

18. There have been changes in the definition of 'dividend' in section 2(6A), to which we shall be referring a little later in our judgment. It will not be necessary for us to go into an inquiry about profits which are capitalised and profits which are not capitalised. It is sufficient for the purpose of appreciating the present argument of Mr. Dwarkadas that Burrell's case has been accepted as good law in England since it was decided and the principle there enunciated has been accepted by the Bombay High Court.

19. Now there would have been considerable force in the argument canvassed before us by counsel for the petitioner company, if certain amendment in section 2(6A) had not been made by the legislature. That amendment particularly resulted in incorporating into the definition of 'dividends' in the Act a special provision, which expressly refers to distribution made to shareholders of a company on its liquidation. Counsel also relied on the case of In re Foster & Son Ld. It is not necessary to examine that decision, because it does not advance the argument urged before us on behalf or the petitioner company. The decision was relied on by counsel only for the purpose of showing that once a company goes into liquidation, the shareholders' right to receive dividend comes to an end. Our attention has also been drawn by counsel to the Second Schedule to the Indian Finance Act, 1948, a provision in clause B(a) of Part I relating to rates of income-tax set out at page LXXXII in the Income-tax Manual, 1959 (fifteenth edition). That provision speaks of dividends declared and rebate. It is not necessary to set out that provision, as we fail to see how it lends any support to the argument, which must necessarily relate to the interpretation of section 35(10). We are not concerned with the meaning and import of that provision and need not discuss that provision.

20. It is lastly urged by learned counsel for the petitioner company that we are dealing with a deeming provision and it must therefore be strictly construed. Speaking broadly, we agree that a taxing provision must be strictly construed, and if the language leaves the matter in dubio, we must prefer that interpretation which goes against the Revenue and in favour of the taxpayer. At the same time, we must not overlook that a deeming provision has to be applied like any other provision in an enactment. While applying it, as so often has been said, the court must no allow its imagination to boggle, and must apply a deeming provision with all its necessary concepts.

21. It has been argued on the other hand by the learned Advocate-General, who appears for the Revenue, that there is nothing in section 35(10), which requires that the definition of 'dividend' in section 2(6A) and particularly that part of it enacted in clause (c) of the same, should be excluded when interpreting the expression 'dividend' in section 35(10). He has drawn our attention to certain changes which were brought about in section 35 and which have bearing on the examination of the contention raised on behalf of the petitioner. Prior to its amendment by the Finance Act, 1955, clause (6A) of section 2 was, in certain respect, differently worded. To sub-clause (c) relating to distribution made to shareholders of a company on the liquidation to the company was appended a proviso. That sub-clause was as under :

'(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 the liquidation shall be so included.'

22. The amendment made in clause (6A) by the Finance Act of 1955 and sub-clause (c) as amended by the Finance Act of 1955 have already been set out by us when stating the definition of dividend with which we are here concerned. Clauses (8), (9) and (10), as they stood at all relevant time for the purpose of the present petition, were introduced in section 35 by the Finance Act, 1956. It is of some importance and cogency to note that it was by the same Finance Act of 1956 that the definition of 'dividend' in section 2(6A) with which we are concerned was substituted. The proviso to sub-clause (c) disappeared. Between April 1, 1955 and April 1, 1956, sub-clause (c) had to be read with the proviso and in 1956, new sub-clause (c) was introduced. It would not be correct therefore to say that the definition of 'dividend' was amended for the first time in 1956.

23. To turn to the argument canvassed on behalf of the petitioner company when it stated that if we apply that part of the definition of 'dividend' which is incorporated in sub-clause (c) to clause (6A) of section 2, it would result in repugnancy which would result by applying that part of the definition of 'dividend' contained in sub-clause (c) of section 2(6A) to the relevant provision of sections 35(10) under consideration. The answer was that there will be repugnance between section 2(6A) and section 35(10). This argument is obviously untenable. The whole argument ultimately had to rest on the expression 'for declaring' used in section 35(10), where it speaks of the amount on which the rebate of income-tax was allowed is availed of by the company 'for declaring dividends'. The greatest stress was laid on the expression 'declaring' and it was said that even if the liquidator distributes dividends to shareholders of a company on its liquidation, it cannot be said that he thereby declares any dividend within the context of section 35(10). Now, there if no magic in the word 'declaring' used in the section, and we see no reason why the use of the expression 'declaring dividends' in section 35(10) should be visited with any result which would require us to give a complete go-by to the definition of dividend in section 2(6A). Of course, a definition clause should be used only when the result would not be repugnant to the subject or context. In the subject-matter of section 35 and particularly section 35(10), there is nothing which requires us to desist from applying sub-clause (c) of section 2(6A), when we have to read and interpret section 35(10) nor do we find anything in the context which can be said to result in any repugnancy.

24. Counsel for the petitioner company leans heavily on the decision of the Court of Appeal in England in Burrell's case and the decisions of the Bombay High Court where the principle laid down in the English case was applied by the court. It is to be noted that sub-clause (c) was incorporated in the definition of 'dividend' in section 2(6A) after Burrell's case was decided. The Court of Appeal in England was not considering any provision similar to that contained in sub-clause (c) of section 2(6A). That sub-clause is enacted in precise language and words. The legislature, it must be presumed, does nothing in vain and does not enact anything which could be regarded as mere surplusage. It is necessary for the court to apply the definition of 'dividend' contained in section 2(6A) in its entirety, when we have to put some meaning and effect on that expression as used in section 35(10), unless of course it would not be repugnant to the subject or context. We have already stated that the result of the meaning and effect which we are asked to give of section 35(10) by the Advocate-General cannot result in any repugnancy either to subject or context. The principle laid down in Burrell's case cannot, therefore, be introduced in section 35(10), when we have a clear definition of 'dividend' in section 2(6A) and in which section a provision was incorporated relating to distribution made to shareholders of a company on its liquidation. On this petition, we are primarily concerned with distribution made to shareholders of a company on its liquidation by the liquidator, and we see no reason why we should not apply the definition of 'dividend' in section 2(6A) in its entirety while interpreting section 35(10) of the Act.

25. In the result, the petition fails. Rule will be discharged with costs.

26. In our judgment, we have made mention of Special Civil Application No. 234 of 1960. The contentions there arising are the same, which we have already considered in deciding Special Civil Application No. 233 of 1960. For reasons given by us above, this petition also fails and must be dismissed. Rule will be discharged with costs.

27. Petitions dismissed.


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