VEERASWAMI, J. - These are two references before us involving the same question, both made at the instance of the Commissioner of Income-tax, Madras, under section 66(1) of the Income-tax Act, 1922. They relate to the assessment year 1955-56, corresponding to the accounting year ended April 12, 1955. There was a public limited company called Ajax Products Limited which was incorporated in 1939 with a paid up capital of Rs. 4.16 lakhs and authorised an issued capital of Rs. 6 lakhs. This company was engaged in the business of manufacturing abrasive paper and steel products. In September, 1944, the company purchased a spun silk mill by name Jaya Spun Silk Mill for Rs. 4,51,164, but, after working the mill for some time, sold it in February, 1946, to Mysore Spun Silk Mills Limited for Rs. 7,92,750. The company thus made a profit of Rs. 3,41,586 out of the transaction. For the assessment year 1947-48, this sum was brought to tax treating the same as business profits and a tax of Rs. 1,49,444 was charged which was paid at the end of 1953. Eventually, this court in Ajax Products Ltd. v. Commissioner of Income-tax held on March 7, 1960, that the sum of Rs. 3,41,586 was not assessable to tax because it could not be regarded as pertaining to business profits. In 1960, the company accordingly received refund of the sum paid as tax. On October 31, 1954, the company went into liquidation. The accounting year of the company was the calendar year and for the period from January 1, 1954, to October 31, 1954, it made a profit of Rs. 1,79,704 which, after payment of the tax assessed thereon, was reduced to the net sum of Rs. 81,611. The assessees were some of the shareholders of the company. On March 10, 1955, the liquidators of the company made a distribution to the shareholders of Rs. 100 per share by allotment of a share in Carborundum Universal Limited to the extent of the same face value. There were subsequent distributions made by the liquidators with which we are not concerned in these references.
The Income-tax Officer considered that both the sums of Rs. 81,611 and Rs. 1,49,444 should be regarded as included in the accumulated profits of the company and that, in the light of section 2(6A) (c), Rs. 34.37 per share should be regarded as dividend. On appeal, the view was taken that the sum of Rs. 81,611, referable to the broken period of 1955, that is, from January 1, 1954, to October 31, 1954, represented current profits and could not, therefore, be regarded as accumulated profits under that statutory provision. This amount was directed to be excluded from the accumulated profits. The Tribunal, on appeal by the department, confirmed that view. As regards the other amount of Rs. 1,49,444, the assessees appeals failed before the Appellate Assistant Commissioner but the Tribunal held in favour of the assessees in their appeals. In the circumstances, the following question has been referred to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 81,611 and Rs. 1,49,444 were not part of the accumulated profits of the company as on October 31, 1954, as contemplated under section 2(6A) (c) of the Income-tax Act, 192 ?'
The Tribunal purported to follow T. Appavu Chettiar v. Commissioner of Income-tax and Girdhardas and Co. Ltd. v. Commissioner of Income-tax in support of its view that the sum of Rs. 81,611 represented current profits which could not be legitimately included in the expression 'accumulated profits' in section 2(6A) (c) of the Act. The Tribunal thought that any distribution out of current profits would not constitute dividend. Accumulated profits, in its opinion, should be understood in contra-distinction to current profits. In respect of the other sum, the Tribunal noted that as the refund was received by the company only in 1960, it could not be held to be part of the accumulated profits of the company before the date of its liquidation. The Tribunal further pointed out that the word 'accumulated' would appear to indicate a process of decision by the company whereby certain amounts out of the profits were set apart for reserve or allowed to be carried forward, and in this case there was no such decision, and that the section did not say undistributed profits of the company but accumulated profits.
Before we refer to the relevant statutory provision, we may advert to what is of historical interest in connection with it. In Commissioners of Inland Revenue v. Burrell, which turned on super-tax, Rowlatt J., in the context of winding up of a company, observed that in liquidation there was neither capital nor profits and that all that happened was that the net assets of the company in the course of administration in liquidation were distributed to the shareholders. This view was accepted and reiterated in Commissioner of Income-tax v. P. R. A. L. Muthu Karuppan Chettiar. There Lord Atkin referred to Commissioner of Inland Revenue v. Burrell and pointed out that, according to that decision, a company was a separate entity to the shareholders, that during the continuance of the company, its shareholders had no right to the profits except so far as they were distributed on a regular declaration of dividend and that on winding up their sole right was to share in the assets available after winding up and that for the purpose of ascertaining such assets, it was quite immaterial whether the company originally possessed them by way of capital or profits; the liquidator might apply sums earned as profits in paying capital liabilities and capital assets in paying revenue liabilities and what he distributed was a lump sum, and no reconstruction into a division of capital and profits was necessary or in many cases possible. The position in respect of a partnership, according to Lord Atkin, was different, for there the profits were the profits of the partners, joint in the first instance, and, if the appropriate statute so provided, assessable as joint : but in fact representing an interest of each partner. The effect of this position in law in the field of taxation was obvious. A company could accumulate profits for any length of time and, on its winding up, it would go entirely scot-free from tax and not only so, its shareholders, who were in receipt of their share of the assets of the company, could also not be taxed because in their hands such share would be capital in nature. Just as the British Parliament did in 1927, the Indian Legislature too neutralized that position and sought to bring to tax distribution out of such accumulated profits of a company, whether working or in liquidation, viewing such distribution as a dividend in so far as it came out of such profits. This was done in 1939 by introducing sub-section (6A) to section 2 which is a definition section. This sub-section gave an expanded meaning to the word 'dividend' and included within its ambit cases of distribution out of accumulated profits of a company which otherwise could not under the general law be regarded as dividend. Clauses (a) and (b) related to distribution out of accumulated profits of a company which is still working. Clause (c), which is relevant to these references before us, as it originally stood in 1939, read :
'(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.'
This clause was retained until 1955. But in that year by the Finance Act, 1955, the proviso to clause (c) was dropped. For the sake of completeness, we may refer to the further development in relation to this clause. In 1956, by the Finance Act of that year, clause (c) was somewhat recast so as to read :
'(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.'
Clause (c) of sub-section (22) of section 2 of the Income-tax Act, 1961, is in identical terms. But sub-section (22) has a second Explanation which is to the effect that the expression 'accumulated profits' in sub-clause (c) shall include all profits of the company up to the date of liquidation. The question is whether 'accumulated profits' in clause (c) by itself as it stood in 1955 after the amendment in that year carried the same meaning as the said second Explanation.
Clause (c) by itself was without any limitation as to the time during which the profits were accumulated, and so evidently the legislature considered that there should be a limit fixed. That was why the proviso was put in, in the first instance, in 1939. Dhandhania Kedia & Co. v. Commissioner of Income-tax, on a construction of the proviso, held that the expression 'previous years' did not have the same denotation as the expression in section 2(11) because it would be a contradiction in terms to speak of six years in relation to any specified assessment year. Six previous years in the proviso meant, as held in that case, the six financial years preceding the year in which the liquidation took place, the words 'previous year' having, therefore, the connotation of the financial year of the company. In the course of its judgment, the Supreme Court, referring to the effect of section 2(6A) (c), as it stood in 1939, stated that it was to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company which was working but subject to the 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 and went on to observe at page 405 :
'Now, it should be mentioned that when a company in liquidation distributes its current profits, that would also be not dividend as held in Burrells case, and the law to that extent has been left untouched by section 2(6A) (c). And it has accordingly been held by the High Courts that the current profits of a company in liquidation which are distributed to the shareholders are not dividend within section 2(6A) (c), vide Appavu Chettiar v. Commissioner of Income-tax and Girdhardas & Co. Ltd. v. Commissioner of Income-tax.'
Thus, in the view of the Supreme Court, the current profit arising in the broken period in the year of liquidation will not, in view of the proviso, fall within the ambit of clause (c). It is only the distribution of profits accumulated during the six financial years preceding the year in which the liquidation took place that were brought within the net of that clause. But the question is still left whether, without the proviso, clause (c) by itself would take in current profits during such broken period. Short Brothers (P.) Ltd. v. First Income-tax Officer, Salem decided by a Division Bench of this court, was concerned with clause (c) as amended in 1956 and held that in view of the word 'immediately' used before the words 'its liquidation' in the clause, current profits would also be included in the accumulated profits. But the learned judges also observed at page 320 :
'We believe that the reason why this word (immediately) has been put in is to emphasise the position that all distribution made by the company on liquidation, except to the extent to which it might be otherwise dealt with, must be taken to be of accumulated profits, and if that is so, current profits which arose to the company during the accounting year up to the date of liquidation must necessarily form part of the accumulated profits referred to in the section.'
Mr. Balasubrahmanyan for the revenue relies on this observation and contends that it meant that, in the view of the Division Bench, the ambit of clause (c), even before its amendment in 1956 and without its proviso, was to bring in the entire profits undistributed on the date of liquidation. We are unable to accept the argument of Mr. Balasubrahmanyan. Learned counsel apparently reads more into that observation than it could bear in the context in which it was made. As we said, the division Bench was concerned with the construction of clause (c), as it stood amended in 1956, and the observation extracted above should be understood in that light. Reference was then made for the revenue to Kanhaiya Lal Bhargava v. Official Liquidator, a decision of a learned single judge of the Allahabad High Court sitting on the company side, in which he was concerned not with clause (c) as it stood in 1955, but with section 2(22) (c) of the Income-tax Act, 1961. The learned judge stated that the accumulated profits in clause (c) included profits up to the date of the distribution. This was obviously so because of the second Explanation to sub-section (22) of section 2 which we have referred to earlier. The learned judge, referring to the significance of the amendment to clause (c) made by the Finance Act, 1956, stated at page 397 :
'The significance of this amendment is that it clarifies and qualifies the accumulated profits, which are dividends, to mean only such profits as have accumulated immediately before the liquidation of the company. The effect of the law declared by Burrells case was partially abrogated by the introduction of clause (c) originally. The profits which had accrued during the six years prior to liquidation alone were sought to be taxed by artificially treating them as dividend.
This six years limitation was taken away by the 1955 amendment. After that amendment, clause (c) did not specifically say whether it would include current profits of the company in liquidation. The 1956 amendment solved this ambiguity.'
Mr. Balasubrahmanyan, with reference to this observation, says that, in the view of the learned judge of the Allahabad High Court, the amendment of 1956 only clarified the earlier position and, therefore, it would follow that clause (c) in 1955 would take in all profits of all times. But that is not what the learned judge meant to lay down and this is clear from the observations made by him later in the passage we have extracted. No direct decision has been brought to our notice in which the ambit of the expression 'accumulated profits' in clause (c) as it stood in 1955 was determined. We have, therefore, to construe clause (c) by ourselves and see what its ambit was, whether it took in current profits referable to a broken period in the year of liquidation.
No doubt, the object of clause (c) is to bring to tax any distribution to the shareholders of a company in liquidation out of its accumulated profits. Clause (c), be it noted, used not the expression 'profits' but 'accumulated profits'. 'Accumulated' normally means 'heaped up, stored up, or put by'. It also, to our minds, indicates an effort on the part of a person in that direction. It seems to us to be inappropriate to call a current profit as a profit 'heaped up, stored up or put by.' Current profit is what accrues in praesenti : accumulated profit means to relate to the past. Mr. Balasubrahmanyan for the revenue suggested that the word 'accumulated' in clause (c) only means 'undistributed' or 'what is not appropriated'. If that were the meaning, nothing would have been easier for the legislature to stop short of using the expression 'accumulated', and the word 'profits' by itself would have conveyed that sense. We think that the word 'accumulated' in clause (c) cannot be given that meaning and that something more than mere profits was meant. The legislature confined the clause to a particular kind of profits and did not extend it to all kinds of profits.
Though, as we said, there is no direct decision in support of the construction we are inclined to place on the word 'accumulated', we think that some assistance is derived from Hooper & Harrison Limited (In Liquidation) v. Federal Commissioner of Taxation. The first of these cases decided by the High Court of Australia pertained to war-time profits tax. The court was construing 'accumulated trading profits' which occurred in section 17(1) of the Australian War-time Profits Tax Assessment Act, 1917-18, in a context which is of course different from what we are dealing with. But Issacs and Rich JJ. made these observations :
'The expression accumulated profits is familiar in judicial decisions and well known in the mercantile world for over 150 years. But for present purposes it will be sufficient to refer to very few cases, namely, Hollins v. Allen, decided by Kindersley V. C. in 1866, and Sproule v. Bouch in 1887. Later cases exemplify and support this, the most important of which is Commissioners of Inland Revenue v. Blott. In Hollins v. Allen, the Vice-Chancellor drew a distinction between current profits and other profits. That is to say, he drew a distinction between, on the one hand, current profits of a given year, in which he included a surplus balance of profits of a previous year not appropriated to any fund, and, on the other, profits in a fund accumulated in previous years for any purpose. And, in our view, the true import of the term accumulated profits is that they are profits which the company has appropriated to some reserve account, whether that account be of a capital nature or not. Accumulations in that connection does not mean the mere existence of profits, even over a lengthened period, however they are employed; but it connotes the affirmative gathering of these profits, or such as may be selected, into a measured or measurable heap and allocated to a named reserve fund, whatever its nature may be.'
Though these are observations made in a different context, we think that they are expressive of the general import of 'accumulated profits' and we do not see why we should not give similar import to accumulated profits in clause (c) of sub-section (6A) of section 2. This view of the Australian High Court was reiterated in Federal Commissioner of Taxation v. Miller and Anderson Limited and Lathan C.J. observed :
'But accumulation plainly refers to the past and not to a current period.'
We are aware that the learned Chief Justice made that observation while construing section 24 of the War-time (Company) Tax Assessment Act, 1940-41, and deciding whether accumulated profits in that section included accumulated profits of a continuous account. But it is of significance that as opined by Latham C.J. 'accumulation' by itself in the nature of things accumulated and current profits must have been borne in mind in Girdhardas & Co. Ltd. v. Commissioner of Income-tax, for Chagla C.J., though the learned Chief Justice was dealing with the proviso to clause (c), stated :
'Further, it refers to a distribution of accumulated profits and what we are dealing with here is not accumulated profits but current profits.'
Learned counsel for the assessee invited our attention to Sheth Haridas Achratlal v. Commissioner of Income-tax which was decided on February 15, 1955, just before the amendment of 1955 was made, dropping the proviso, and contended that though in that case the court had held that the profits during the broken period in the year of liquidation were not included within the ambit of the proviso, nevertheless the legislature, while dropping the proviso, did not think fit to make in explicit that such profits should also be taken to have been included in the main provision of clause (c). But we are not impressed that this approach to a construction of clause (c) is of assistance, for it assumes that Sheth Haridas Achratlal v. Commissioner of Income-tax also determined the scope of clause (c) itself which in fact it did not. Reference was next made for the assessees to Commissioner of Income-tax v. Century Spinning and . where it was held that the word 'reserve' did not take in current profits. But the decision was rendered in a totally different context and we do not think that it is of much help in construing clause (c).
In the light of our discussion so far, we are of opinion that accumulated profits in clause (c), as it stood in 1955, did not include current profits of the company made during the broken period between January 1, 1954, and October 31, 1954, in the year of its liquidation. That means, The Tribunal rightly excluded from the accumulated profits of the company the sum of Rs. 81,611.
That takes us to a consideration of the other sum of Rs. 1,49,444. We are of the view that the Tribunal was right in holding that this sum too could not be included within the accumulated profits. In point of fact, this amount was not available when the distribution was made on March 10, 1955. The refund was received by the company, as already mentioned, only in 1960. Further, as appears from the order of the Appellate Assistant Commissioner, the accumulated profits up to December 31, 1953, amounted only to Rs. 78,310. Obviously, therefore, the amount paid by way of tax at the end of 1953 must have been debited to the profit and loss account. It is on this ground that the Tribunal excluded this sum from the accumulated profits and, as we said, it did so rightly. Its decision can also be supported on the other reasoning of the Tribunal, namely, that accumulation is a conscious act and the result of a decision, especially when a company is concerned. This sum was never treated by the company as accumulated profits. Mr. Balasubrahmanyan for the revenue addressed an ingenious argument that there is nothing to show that the tax was paid only out of accumulated profits and not from other sources. But the factual position as disclosed by the record which we referred to a little earlier is a sufficient answer against the contention. His further argument is that when this court in Ajax Products Ltd. v. Commissioner of Income-tax held that the tax was not legally levied, and the refund of it was, therefore, made, it must be taken as if there was never any tax levied and the same paid, and, if that be the position, there should be no difficulty in holding that this sum was part of the accumulated profits. The argument involves a fiction which can only be justified by an appropriate legislative provision. We cannot import into clause (c) such a fiction or a distribution out of a notional amount which in point of fact did not exist on the date of distribution. Mr. Balasubrahmanyan, however, relies on Neptune Assurance Co. v. Life Insurance Corporation and says that the right to a refund of the tax existed even on the date when the tax was paid and could not be said to have arisen only on the date when it was refunded. Learned counsel is right here and has the support of Neptune Assurance Co. v. Life Insurance Corporation. But there can be no distribution to the shareholders out of a mere right which had not fructified into an actual refund. For the assessees our attention is drawn to Girdhardas and Co. Ltd. v. Commissioner of Income-tax, and it is stated that a notional or deemed dividend for the purpose of section 23A cannot be regarded as dividend paid out of accumulated profits within the meaning of section 2(6A) (c). Though the analogy of this decision is not precisely in point, learned counsel for the assessee, in our opinion, is right when he contends that, on the fictional basis relied on by learned counsel for the revenue, it cannot be held that the sum of Rs. 1,49,444 represented accumulated profits on the date of distribution, to wit, March 10, 1955.
We answer the question under reference in relation to both the sums against the revenue with costs; counsels fees Rs. 250 (one set).