THE COMMISSIONER OF INCOME-TAX, MADRAS vs. M. V. MURUGAPPAN & ORS.

CIVIL APPEAL No. 566/1967Supreme Court[1971] 1 S.C.R. 37724 April 1970Bench: 3 JudgesAuthor: J.C. SHAH, K.S. HEGDE, A.N. GROVER5 pages
AI SummaryDismissed

What were the facts?

The respondents were shareholders of Ajax Products Ltd., a public limited company that maintained its accounts on a calendar year basis. The company went into liquidation on October 31, 1954. On March 10, 1955, the liquidators distributed shares of Carborundum Universal Ltd. to the shareholders, valued at Rs. 100 per share. This distribution was made out of profits earned by Ajax Products Ltd. between January 1, 1954, and October 31, 1954. The total profit earned in this period was Rs. 1,79,704, and after tax assessment of Rs. 98,093, a balance of Rs. 81,611 remained. The Income-tax Officer treated this amount as taxable "accumulated profits" under Section 2(6A)(c) of the Income-tax Act, 1922. The Appellate Assistant Commissioner, the Tribunal, and the High Court held that this amount was not accumulated profits and represented capital in the hands of the shareholders.

What did the Supreme Court hold?

The Supreme Court held that the distribution of Rs. 81,611 by the liquidator on March 10, 1955, represented current profits earned by the company between January 1, 1954, and October 31, 1954. The Court referred to the definition of "dividend" under Section 2(6A)(c) of the Income-tax Act, 1922, as amended by the Finance Act of 1955. It noted that prior to the 1955 amendment, the proviso to clause (c) limited "accumulated profits" to those arising during the six previous years. The deletion of this proviso by the Finance Act of 1955 removed this limitation. However, the Court emphasized that profits of the year in the course of which the company was ordered to be wound up, not being accumulated profits, were not considered dividend. The Court also cited English case law (Birch v. Cropper, Commissioner of Inland Revenue v. George Burrel, Staffordshire Coal and Iron Co. Ltd. v. Brogan) which established that surplus assets distributed in winding up are capital in nature and cannot be apportioned into capital and accumulated profits. Therefore, the amount distributed as dividend out of current profits could not, in the state of the law in force for the assessment year 1955-56, be deemed a dividend in the hands of the shareholders. The appeal was dismissed.

What were the issues?

1. Whether the distribution of Rs. 81,611 by the liquidator on March 10, 1955, which represented profits earned between January 1, 1954, and October 31, 1954, constituted "accumulated profits" as contemplated by Section 2(6A)(c) of the Income-tax Act, 1922, making it liable to be taxed as dividend in the hands of the shareholders. Assessee's contentions (implied from the High Court and Tribunal's decision): The profits earned in the year of liquidation, prior to the actual winding up, were current profits and not "accumulated profits" as defined under Section 2(6A)(c) of the Income-tax Act, 1922, as it stood at the relevant time. Therefore, their distribution in liquidation did not amount to a taxable dividend. Revenue's contentions (implied from the Income-tax Officer's action and the appeal): The amount of Rs. 81,611, being the balance of profits earned in the year of liquidation after tax, constituted "accumulated profits" under Section 2(6A)(c) of the Income-tax Act, 1922, and was therefore taxable as dividend upon distribution to shareholders.

Which sections of the Income-tax Act were involved?

Section 2(6-A)(c),Section 66(1)

AI-generated summary — verify with the full judgment below

\ ) J D E F G THE COMMISSIONER OF INCOME-TAX, MADRAS v. M. V. MURUGAPPAN & ORS.

April 24, 1970 [J.C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.] Income Tax Act. 1922, s. 2(6-A)(c)--Company i11 liquidation-Distri- bution of profits earned in year of liquidation to shareholders if liable to tax q.s dividend.

The respondents were shareholders of a public limited company. The Company ll'aintained ito accounts according to the Calendar Y car.

The company wont into liquidation on October 31, 1954. The Liquidators of the company distributed on March IO, 1955 among the sharcnoldero for each share of the cornpany a share of another company " share of equal face value.

The d·istribution was made out of profits earned by the company between January 1, 1954 and October 31, 1954. The lncorr,e- tax Officer brought the value of the shares received by the shareho[dors to ta,~ on the footing that it repr~.sented "accumulated profits" as conterr1- plated by s. 2f6A) (c) of the Income-tax Act. !9122. In appeal the Appellate Assistant Commissioner held that the profits earned between January 1. 1954 and October 31, 1954 were not accumulated profits and when d;stributed the

The order continues below.

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