SRINIVASAN J. - The question that arises in this writ petition calls for an interpretation of section 2 (6A) (c) of the Indian Income-tax Act, 1922. It arises in the following manner. Messrs. Short Brothers (Private) Ltd. own certain coffee estates in Salem District. The company sold all of its assets on December 24, 1959. The assets sold included the lands, buildings and machinery. By a resolution passed on February 6, 1960, the company went into voluntary liquidation. The sale proceeds realised was in excess of Rs. 11 lakhs. The liquidator made a distribution to the shareholders of a sum of Rs. 8.5 lakhs which represented the excess of the sale proceeds over the book-value of the assets. In the view that the excess so distributed did not represent the profits or accumulated profits, the liquidator did not deduct tax on such distribution. The Income-tax Officer by his letter dated 19th December, 1960, proposed to treat the sum of Rs. 8.5 lakhs so distributed as dividend falling within the meaning of section 2 (6A) (c) in the hands of the shareholders. He called upon the liquidator to pay the amount of tax deductible under section 18 (3) (d) of the Act. That this letter provision casts a liability on the payer to deduct tax on any distribution to the shareholders as dividend is not denied. The contention of the liquidator was and is that this distribution is not a dividend within the meaning of section 2 (6A) (c). The objection raised by the liquidator was, however, overruled by the Income-tax Officer and he called upon the liquidator to pay over a sum of Rs. 4,11,700 as the tax due. The short contention of the petitioner, the liquidator representing the company, is that this distribution cannot be regarded as a dividend, that the liquidator is not bound to deduct and pay any tax, and that the view taken by the Income-tax Officer and the demand made by him are ex facie illegal and it is in these circumstances that a writ of prohibition is sought to restrain the Income-tax Officer from enforcing the demand.
On behalf of the Income-tax Officer, Salem, it is claimed that as at the commencement of the year on April 1, 1959, the company had reserves and surplus, including capital reserves, standing at Rs. 1,82,501 which also included a sum of Rs. 23,667 transferred from the profit and loss account of the previous year. On the eve of the liquidation, the reserve and surplus, including the surplus on the sale of the estates, stood at Rs. 10,33,809. This sum included a profit of Rs. 39,059 made during the period April 1, 1959, to February 6, 1960. It is contended on behalf of the department that the petitioner company has in fact withheld a certain amount towards a possible demand in respect of tax. It is claimed that the petitioner was rightly called upon to pay over this sum to the department, leaving it to the individual shareholders to contest the claim. It is pointed out that the shareholders are not citizens of India and most of them are non-residents. It is also urged that since the question depends upon a proper construction of the relevant provision of the Act, it should be left for determination in the appropriate proceedings relevant to the assessment and demand, and that the petitioner has personally no grievance which would entitle him to seek the writ jurisdiction of this court.
The matter has been argued at length with reference to the interpretation to be placed on section 2 (6A) (c). We, therefore, proceed to deal with that question, ignoring the contention of the department that the petitioner, if aggrieved, has adequate remedies in the proceedings of assessment and in subsequent appeal.
The definition of 'dividend' is an inclusive one. Sub-clause (c) of section 2 (6A) was submitted by section 3 of the Finance Act of 1956 with effect from the 1st April, 1956. It reads thus :
'Dividend includes - ... 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.'
We shall presently refer to the changes that were effected in this sub-section from time to time. But this section is also governed by an Explanation which is of importance in the present context. This Explanation reads :
'The expression accumulated profits wherever it occurs in this clause, shall not include capital gains arising before the first day of April, 1946, or after the 31st day of March, 1948, and before the first day of April, 1956.'
Mr. Ramaswami, learned counsel for the petitioner, contends that the expression 'accumulated profits' had a clearly understood connotation. Firstly, he argues that capital gains of any description must also be left out. It is these contentions that require to be examined in some detail.
Before doing so, we may refer to the various changes that were made this sub-clause of section 2 (6A). Before the amendment in 1955, this clause read :
'Any distribution made to the shareholders of the company out of the 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.'
It is immediately clear that this definition took into account only accumulated profits and even then only such accumulated profits as arose during the six previous years. The reference to the previous years obviously took out of the category of accumulated profits any portion of the profits which arose during the year in which the liquidation took place. There is thus intrinsic evidence to show that accumulated profits could not include the current profits during the year under assessment.
After the amendment by the Finance Act of 1955, the above definition was replaced by the following :
'(c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company.'
The only change that was effected was that the proviso was cut out and that resulted in the position that the quantum of accumulated profits to be taken into account as dividend for distribution was not restricted to the six previous years but took account of the entirety of the accumulated profits as it appeared in the books of the company. The amendment by the Finance Act, 1956, which is the one which we are called upon to interpret, is in these terms :
'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.'
The significance of the expression 'immediately before its liquidation', which did not occur in the earlier definitions, calls for examination. As has been pointed out, apart from the accumulated profits, whatever the quantum might be, as it stood in the books of the company at the commencement of the year April 1, 1959, the company had made profits during the previous year relevant to the assessment year and had a certain amount of what may be designated 'current profits' on the eve of liquidation. Does this sum form part of the expression 'accumulated profits' This is the first question that we have to deal with. In this regard, Mr. Ramamani refers to Dhandhania Kedia and Company v. Commissioner of Income-tax. This was a case which dealt with the definition of 'dividend' as it stood before the amendment in 1955. In that case, the company went into liquidation in January, 1950. In all, the shareholders received Rs. 26,000 and this was assessed in their hands as dividend as defined in section 2 (6A) (c). It was not in dispute that the sum represented undistributed profits of the company which had accrued during the six accounting years preceding the liquidation. When the matter came before the High Court of Rajasthan, the reference was answered against the assessee, holding that the said sum was liable to be taxed as dividend within the meaning of that expression in section 2 (6A) (c). Their Lordships of the Supreme Court had to consider the meaning of the expression 'previous years' and the contention of the appellant that the profits had not been accumulated within the six previous years of the liquidation of the company. The appellant was a resident of Udaipur where there was not any law imposing a tax on income. It was under the Indian Finance Act, 1950, that the residents of the State of Udaipur became liable for the first time to pay tax on their income. The contention of the assessee before their Lordships of the Supreme Court was that as there was no year of assessment in relation to him, there could be no previous year and that, therefore, the years 1943-44 to 1948-49 cannot be held to be previous years, because the Income-tax Act came into force in the State only on the 1st April, 1950. Their Lordships accepted the contention on behalf of the department that the expression 'six previous years of the company' occurring in the proviso was used in a sense different from the 'previous year' as defined in relation to an assessment under the Income-tax Act. Their Lordships also pointed out the necessity for the enlarged definition of 'dividend' which arose by reason of the view that when once a company had gone into liquidation, there could be no question of distribution of dividend, and that all the assets of the company remaining after the discharge of its obligations were surplus, divisible among the shareholders as capital. It was to remove the anomaly that the definition of 'dividend' was enlarged. Their Lordships observe :
'The effect of this provision is to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company which is working; but subject to this limitation that while in the latter the profits distributed will 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.'
Finally, they held that accumulated profits sought to be caught by section 2 (6A) (c) would be profits accumulated in the financial years preceding the year in which the liquidation took place.
It is this observation of the Supreme Court that is relied upon by Mr. Ramamani to support his contention that the accumulated profits referred to in the provisions even after its amendment by the Finance Act of 1956 must be limited to such profits as appear in the books of the company at the commencement of the assessment year and that, in any event, it cannot take in the profits which arose during the accounting year in which the liquidation took place. One would normally be disposed to accept the contention but for certain changes which appear to us to be significant, that have been effected in the definition. What the section as it stands now refers is to the 'the accumulated profits of the company immediately before its liquidation'. If the intention was to leave out what may be called the current profits in the year of account up to the date of liquidation, the word 'immediately' would be wholly redundant. The interpretation which Mr. Ramamani contends for would be acceptable if the definition read 'to the accumulated profits of the company before its liquidation, whether capitalised or not'. The use of the word 'immediately' in this context cannot possibly be ignored. We believe that the reason why this word 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.
The next part of the contention of the petitioner hinges upon the Explanation to section 2 (6A). This Explanation states that the expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the first day of April, 1946, or after the 31st day of March, 1948, and before the first day of April, 1956. On the argument that the expression 'accumulated profits' cannot include capital gains at all, we do not see eye to eye with the learned counsel. The Explanation is couched in the negative and it only excludes the capital gains arising before a particular date and during a certain period specified in the section. It should, therefore, follow that except where the capital gains arose before that date or during that period, such capital gain shall stand included in the expression 'accumulated profits'. Here again, learned counsel reiterates the argument that accumulated profits cannot include current profits and since any part of the capital gains by the sale of the assets of the company arose during the account year, it must be regarded as current capital gains which must be left out. Such interpretation cannot to our mind fit in with the plain terms of the Explanation.
Section 12B of the Act deals with capital gains and it states that tax under the head 'Capital Gains' shall be payable in respect of any profit or gains arising from the sale of a capital asset effected after the 31st of March, 1956. Turning now to the definition of the expression 'capital asset' it is common ground that it means property of any kind held by an assessee, but does not include 'any land from which the income derived is agricultural income'. It is not in dispute that part of the sale consideration of Rs. 11 lakhs and odd realised by the sale of the assets of the company related to the coffee plantation apart from buildings and machinery. It would, therefore, follow that the profits arising from the sale of the land upon which the coffee was grown would not be profit arising from the sale of a capital asset. For the purpose of the inclusion of capital gains in the expression 'dividend', note can only be taken of the profits which arose by the sale of capital assets other than lands from which agricultural income was derived. This position is not controverted by the department.
It would follow what we have stated that the demand for tax based on the distribution of a sum of Rs. 8.5 lakhs has been made without determining whether any portion of this amount represents capital gains which arose from the sale of capital asset consisting of lands from which agricultural income was derived. It was necessary for the Income-tax Officer to apportion the profit as between capital assets consisting of buildings, plant and machinery, and the assets being land upon which coffee was grown, for the profit arising from the sale of the latter will not be capital gains and will not, therefore, stand included within the expression 'accumulated profits' according to the Explanation. We are not entering into the question as to the quantum of the accumulated profits; that lies within the province of the assessing authority who should compute it in the light of what we have stated above. It is, however, clear that the demand as made is not in conformity with law.
A writ of prohibition will accordingly issue restraining the Income-tax officer from enforcing the demand. It will be open to the Income-tax officer to examine the question afresh and determine what should be regarded as the correct amount of dividend within the meaning of section 2 (6A) (c) in the light of the above observations. There will be no order as to costs.