THE COMMISSIONER OF INCOME-TAX, MADRAS vs. URMILA RAMESH

CIVIL APPEAL No. 2141/1982Supreme Court[1998] 1 S.C.R. 32323 January 1998Bench: 3 JudgesAuthor: S.C. AGRAWAL, B.N. KIRPAL, S. RAJENDRA BABU COMMISSIONER OF INCOME19 pages
AI SummaryDismissed

What were the facts?

The respondents, shareholders of a private limited company that underwent voluntary liquidation, received dividends after the sale of the company's assets. The Income Tax Officer treated the sale amount, determined as 'accumulated profit' under Section 41(2) of the Income Tax Act, 1961, as 'deemed dividend' under Section 2(22)(c) in the hands of the shareholders. The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal allowed the appeals against these assessment orders. The High Court, on reference, held that profits assessed under Section 41(2) could not form part of accumulated profits for Section 2(22)(c). The Revenue appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the amount received by the company, taxed under Section 41(2) of the Income Tax Act, 1961, did not represent 'accumulated profits' within the meaning of Section 2(22) of the Act. Section 41(2) creates a legal fiction to withdraw excess depreciation allowed in earlier years when an asset is sold for more than its written-down value but less than its original cost. This amount, in fact, is neither income nor profit nor capital gain. For shareholders, the company sold assets at a price less than the actual cost, and the amount taxable under Section 41(2) cannot be considered profit distributable as dividend. The Court affirmed that the distribution of such an amount is not a 'deemed dividend' under Section 2(22)(c). The High Court was correct in its decision. The appeals were dismissed.

What were the issues?

1. Whether the amount received by the company on the sale of assets, which was taxed under Section 41(2) of the Income Tax Act, 1961, constitutes 'accumulated profit' within the meaning of Section 2(22)(c) of the Act, thereby being taxable as a 'deemed dividend' upon distribution to shareholders? (Question of law) Assessee's contentions: The amount realized on the sale of assets was less than the purchase price, representing only a return of capital. The excess of realization over the written-down value, taxed under Section 41(2) by legal fiction, cannot be regarded as profit or capital gain. Reliance was placed on Commissioner of Income-Tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. (41 ITR 290), Commissioner of Income-Tax, West Bengal v. Gangadhar Banerjee and Co. (Private) Ltd. (57 ITR 176), and P.K. Badiani v. Commissioner of Income-Tax, Bombay (105 ITR 642). Revenue's contentions: If the sale amount exceeds the written-down value, it represents accumulated profits under Section 41(2) and should be assessed as dividend upon distribution. Reliance was placed on Cambay Electric Supply Industrial Co. ltd. v. Commissioner of Income-Tax, Gujarat-II (113 ITR 84).

Which sections of the Income-tax Act were involved?

Section 2(22)(c),Section 32(1)(iii),Section 41(2),Section 10(2)(vii),Section 50

AI-generated summary — verify with the full judgment below

THE COMMISSIONER OF INCOME-TAX, MADRAS A v. URMILA RAMESH JANUARY 23, 1998 [S.C. AGRA WAL, B.N. KIRPAL ANDS. RAJENDRA BABU, JJ.] B Income Tax Act, 1961 : Ss. 2(22)(c), 32(/)(iii) and 41 (2)-Assessees-shareholders of company- Liquidation-Amount realized on sale of assets in excess of written down C value but less than purchase price-Distribution of dividends to shareholders-Assessment order treating the sale amount as "accumulated profit" and its distribution to shareholders as "deemed dividend"-Validity of-Held, amount received by the company on sale of assets does not constitute" accumulated profit"-Return of capital on sale of assets is not D capable of being capitalised and hence is not "deemed dividend"-Jncome Tax Act, 1922-Section I 0(2)(vii).

Section 2(22)(c)- "accumulated profit"-Nature and scope of S.41(2)-Whether contains any legal fiction as regards income of an E assessee-Held, yes.

Respondents-assesses were share-holders of a private Limited Company which went into voluntary Liquidation. After sale of its assets, the liquidator distributed the dividends to the share-holders. The Income Tax Officer by determining the accumulated profits of the compa

The order continues below.

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