1. This is a reference by the Income-tax Appellate Tribunal under Section 66(1), income-tax Act, and has been made at the instance of M/s. Dhandhania Kedia & Co., Udaipur (hereinafter called the assessee).
2. This reference came up for hearing on 17-4-1956. On that date counsel for the assessee were present, but counsel for the Commissioner, Income-tax, was not present. Arguments were heard ex parte, and judgment was reserved. Before, however, the judgment could be delivered, an application was made that counsel for the Commissioner of Income-tax could not appear as he had no knowledge of the date fixed. Notice was issued on this application, and 31-7-1956 was fixed for hearing.
The assessee did not seriously contest the application for rehearing, and only prayer that if the case was to be reheard, it should be heard on the merits on the date fixed, namely 31-7-1956. As the judgment had not been delivered, we thought at best to hear both parties on the merits, and did so on 31-7-1956.
3. The facts, which have led to this reference, are these: The assessee was being assessed to income-tax for the assessment year 1951-52, the relevant account period being the financial year 1950-51. The assessee was a resident of former Udaipur State to which territory the Income-tax Act was made applicable from 1-4-1950. The assessee held certain shares in a Company called Mewar Industries Ltd., operating in the former Udaipur State. That Company went into liquidation on 28-1-1950.
On 22-4-1950, during the year of account under assessment, the assessee received a sum of Rs. 26,000/- from the liquidator of the Company. This sum was treated by the Income-tax Officer as dividend within the meaning of that term in Section 2(6-A)(c). There was no dispute that this sum represented the accumulated profits which arose during the six years preceding the date of liquidation.
It was, however, contended that the words 'previous years' appearing in the proviso to Section 2(6-A)(c) should be read along with the definition of the term 'previous year' in Section 2 (11) (a) of the Act. It was submitted that as Section 2(11)(a) contained the words 'the year for which the assessment is to be made', and as there was no income-tax in the former Udaipur State before 28-1-1950 when the Company went into liquidation, the accumulated profits received from the liquidator could not be considered to be dividend within the meaning of Section 2(6-A)(c), and could not, therefore, be taxed.
4. The Income-tax Officer, however, treated the amount as dividend, and taxed it. The appeal by the assessee to the Appellate Assistant Commissioner was dismissed. His appeal to the Appellate Tribunal was also dismissed. Thereupon, he made an application for reference in the matter to this Court, and the Appellate Tribunal has referred the following question to us for reply:
'Whether on the facts and in the circumstances of this case, the afore-mentioned sum of Rs. 26000/- was liable to be taxed in the assessee's hands as 'dividend' within the meaning of that term in Section 2(6-A)(c), Income-tax Act.'
4. Section 2(6-A)(c) reads as follows:
'Dividend includes 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 BO distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included.'
5. Section 2(11)(a), which will also have to be referred to in answering this reference, is as follows:
' 'Previous year' means-
in respect of any separate source of income profits and gains- (a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up.'
There is a proviso also, but we are not concerned with that.
6. The contention of the assessee is that g. 2(6-A)(c) uses the words 'six previous years of the Company'. These words must be given the meaning which they bear keeping in view the definition of the words 'previous year' in Section 2 (11) (a). It is further submitted that 'the previous year' contemplated by Section 2(11)(a) is the year preceding the year for which the assessment is to be made. Therefore, if there was no year for which the assessment was to be made in the case of this Company previous to the application of the Income-tax Act to Udaipur on 1-4-1950, there could be no previous year of this Company.
In other words, what is contended is that there could only be a 'previous year' within the meaning of that term in Section 2(6-A)(c) if there is an assessment year following the previous year. If there is no assessment year, there can be no 'previous year', and as in this case there can be admittedly no assessment year before 1-4-1950, in that territory, there can be no 'previous year' also.
7. The argument so put appears plausible. But a close consideration of Section 2 (6-A) (c) will show that the intention of the Legislature was not, in this section, to relate each of the six 'previous years' necessarily to an immediately following 'assessment year'.
The words 'previous years' appear to have been used in the proviso with the idea of indicating the accounting years of the Company and not merely six calendar years before the date of liquidation of the Company. That seems to be the reason why the Legislature did not use the words 'during the six years preceding the date of liquidation', hut used instead the words 'during the six previous years of the Company preceding the date of liquidation'. The intention seems to be to cover the Bis: accounting years previous to the date of liquidation, and not merely six calendar years previous to the date of liquidation.
8. Section 2(6-A)(c) appears in the definition section. It begins with the following words:
'In this Act, unless there is anything repugnant in the subject or context,'
We have, therefore, to see whether the Legislature, when it used the words 'previous years' in the proviso to Section 2(6-A)(c), necessarily Intended to meanthat, in order that there might be previous years, there must be an assessment year immediately fol-lowing each previous year.
We are of opinion that this could not be the intention behind the use of the words 'six previous years' in Section 2(6-A)(c). The subject of the context shows that any distribution made to the shareholders of the Company out of accumulated profits on liquidation was to be taxed as dividend.
The proviso, however, has limited the sum, which can be taxed, only to those amounts which had been accumulated within six accounting years before the date of liquidation so that earlier accumulations may not be taxed. In so doing, we are of opinion that the Legislature could not have intended that there must be an assessment year Immediately following the accounting year for each of the six years.
What, after all, in substance is the meaning of the words 'previous year' in Section 2(11)(i)(a)? These words really mean the financial year or the accounting year, and for purposes of chargeability to income-tax they are related to an immediately following year called the assessment year. When, therefore, the proviso to Section 2(6-A)(c) has used the words 'previous years', they can only mean the six financial or accounting years immediately preceding the date of liquidation.
What the assessee wants us to hold is that six previous years mean not only the six accounting years immediately preceding the date of liquidation, but that there must be an assessment year immediately following each of these six years. This, in our opinion, cannot be read into the words 'six previous years' in the context in which they nave been used in the proviso to Section 2(6-A)(c).
All that is necessary in order to determine the six previous years of the Company is to take the six accounting years before the date of liquidation, disregarding any broken period between the end of the accounting year and the date of liquidation.
9. There is another reason why the Legislature could not have intended that in order to find six previous years there must be an assessment year following each previous year. As we have said before, these words appear in the proviso which limits the period which can be taken into account for treating accumulated profits as dividend.
If the Legislature had not put in this proviso, all accumulated profits whenever earned by the Company would be liable as dividends on liquidation if distributed. In such a case, no question would arise of looking for an assessment year relating to each year during which the Company worked. That this must have been the intention is also clear from the fact that in 1955 the proviso has been deleted, and now any distribution made to the share-holders out of accumulated profits irrespective of when the profits were earned is liable to income-tax.
We are, therefore, of opinion that the contention of the learned counsel that there must be an assessment year following each of the six previous years before it can be said that there were six previous years of the Company must fail.
10. It was urged that we must not treat any word in the statute as surplusage and must give meaning to all the words to be found in the proviso. From what we have said above, it will be obvious that we are not treating the words 'previous years' as surplusage. We are giving a meaning to them; but in the context in which these words have been used, it is obvious that they do not mean that there must be an assessment year Immediately following each previous year out of six.
11. We may in this connection refer to Commissioner of Income-tax, Madras v. K. Srinivasan,AIR 1953 SC 113 (A). In that case, the interpretation of the words 'end of the previous year' In Sub-sections (3) & (4) of Section 25, Income-tax Act came up for consideration. It has been held that the expression 'end of the previous year' in Sub-sections (3) and (4) of Section 25 in the context of those sub-sections means the end of an accounting year (a period of-full 12 months) expiring immediately preceding the date of discontinuance or succession. At page 118, the following observations occur:
'The expression 'previous year' substantially means an accounting year comprised of a full period of twelve months and usually corresponding to a financial year preceding the financial year of assessment. It also means an accounting year comprised of a full period of twelve months adopted by the assessee for maintaining his accounts but different from the financial year and preceding a financial year. For purposes of the charging sections of the Act unless otherwise provided for It is co-related to a year of assessment immediately following it, but it is not necessarily wedded to an assessment year in all cases and it cannot be said that the expression 'previous year' has no meaning unless it is used in relation to a financial year in a certain context.'
12. We are of opinion, that on the analogy of this decision of the Supreme Court, the context in which the words 'six previous years' appear In the proviso to Section 2(6-A)(c) shows that these words only mean the six accounting years of a Company preceding the date of liquidation. These words have nothing to do with the Company being chargeable to income-tax in each of the years following the six accounting years.
13. Our answer, therefore, is that on thefacts and in the circumstances of this case, thesum of Rs. 26000/- received by the assessee on 22-4-1950, is liable to be taxed in the assessee's handsas dividend within the meaning of that term inSection 2 (6-AXc), Income-tax Act.