1. The question referred to this Court under Section 66(1) of the Income-Tax Act was: 'whether the sum of Rs. 31,250 was rightly taxed?'
2. The assessee held ten shares of the face value of Rs. 8,750 in the Sri Kannan Rice Mills, Ltd., hereinafter referred to as the company. The subscribed capital of the company was Rs. 43,750 most of which was apparently spent on the acquisition of a rice mill. The comdany went into liquidation on 31st July, 1947; the liquidator sold the assets of the company the same day and realised Rs. 2,10,000. The realisations were distributed between the shareholders on 1st April, 1947. The assessee received for his share Rs. 40,000. Rs. 31,250 the difference between the capital he had subscribed and the share of the assets he received on liquidation was assessed to income-tax in the assessment year, 1947-48. The accounting year of the assessee ended on 12th April, 1947. The accounting year of the company was 1st April, 1946, to 31st March, 1947.
3. The Tribunal held that the amount in question, Rs. 31,250 was dividend which came within the scope of Section 2(6A)(c) of the Income-tax Act. The alternative basis for sustaining the assessment was that it amounted to capital gains, taxable under Section 12B of the Income-tax Act, which in the opinion of the Tribunal was more favourable to the assessee.
4. It should be noted that the company itself was assessed to capital gains under Section 12B, and that was sustained by this Court in R.C. No. 8 of 1951. Obviously Section 12B will not apply to the amount received by the assessee. It was not profits or gains arising from the sale of any capital asset of his. It was the sale of the capital assests of the company, in which he was no doubt a shareholder, that resulted in profits.
5. Section (6A)(c) runs:
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 so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included.
6. To grant the relief the assessee seeks in these proceedings it may not be necessary to decide whether Rs. 31,250 that the assessee received on the liquidation of the company constituted dividend within the meaning of Section 2(6-A)(c) and we refrain from expressing any opinion on that question. Assuming without deciding it, that the amount was dividend which accrued to the assessee in his accounting year, the proviso to Section 2(6-A)(c) should suffice to exclude the amount in the assessment year in question. Assuming that the distribution by the liquidator was out of 'accumulated profits of the company', the proviso to Sub-clause (c) of Section 2(6-A) exclude the profits of the company which accured to it in its year of account ending with 31st March, 1947. The realisation of the company was only on 31st March, 1947. It is only any distribution out of the accumulated profits of the Company in any of the six previous years, the six accounting years of the company previous to the year ending 31st March, 1947, that would fall within the scope of Sub-clause (c). That the dividend accrued to the assessee in his previous year, the accounting year ending with 12th April, 1947, is irrelevant.The view we have taken of the scope of proviso to Sub-clause (c) of Section 2(6-A) is in accord with the principle laid down by Chagla, C.J., and Tendolkar, J., in Sheth Haridas Acharatlal v. Commissioner of Income-tax : 27ITR684(Bom) , see the observations at page 688 and 689. We respectfully agree with the view taken by the learned Judges of the Bombay High Court. If we may say so with respect, the significance of the expression 'six previous years of the company preceding the date of liquidation' in the proviso to Sub-clause (c) of Section 2(6-A) has been correctly defined.
7. The question is answered in the negative and in favour of the assessee. The assessee will be entitled to his costs of this reference. 'Counsel's fee Rs. 250.