COMMISSIONER OF INCOME-TAX, GUJARAT vs. GIRDHARDAS & COMPANY PRIVATE LTD.

CIVIL APPEAL No. 690/1965Supreme Court[1967] 1 S.C.R. 77707 October 1966Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA7 pages
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What did the Supreme Court hold?

The Supreme Court held that the language of Section 2(6A)(c) of the Income-tax Act, 1922, as amended by the Finance Act, 1956, is clear. There is only one fund in the hands of the liquidator. For the purpose of determining tax liability, any distribution made from this fund is disintegrated into its components of capital and accumulated profits as they existed immediately before the commencement of liquidation. That part of the distribution attributable to accumulated profits, whether capitalized or not, is treated as dividend and is taxable. The proportion of accumulated profits to capital at the commencement of winding up should be applied to the distributed amount to determine the taxable dividend component. The Court disagreed with the High Court's view that no part of the Rs. 75,000 could be treated as dividend without disintegration. The Tribunal was bound to determine what part of the Rs. 75,000 represented accumulated profits based on the ratio of accumulated profits to total assets at liquidation. The appeal was allowed in part, and the matter was remitted for determination of the dividend component.

What were the facts?

The respondent company, Girdhardas & Company Private Ltd., was wound up by a resolution on August 23, 1952. The company had a paid-up capital of Rs. 25 lakhs and accumulated profits of Rs. 5,34,041 at the commencement of winding up. The liquidator made several distributions to shareholders. For the assessment year 1953-54, Rs. 52,400 of a Rs. 15 lakh distribution on September 9, 1952, was taxed as dividend under Section 2(6A)(c) of the Income-tax Act, 1922. Subsequently, on July 24, 1957, the liquidator distributed Rs. 75,000. The Income-tax Officer sought to tax this entire amount as dividend for the assessment year 1958-59. The Appellate Assistant Commissioner confirmed this order. The assessee appealed to the Tribunal, which rejected the contention that accumulated profits were exhausted by earlier distributions and did not consider the argument that distributions should be in proportion to capital and accumulated profits.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 75,000 or any part thereof could be treated as dividend under Section 2(6A)(c) of the Indian Income-tax Act, 1922, as amended by the Finance Act, 1956? Assessee's contentions: - The entire accumulated profit was exhausted by earlier distributions totaling Rs. 17,25,000 in 1952, leaving no accumulated profits for subsequent distributions. - In any distribution of assets by a liquidator, accumulated profits and capital must be deemed to be distributed in the same proportion as they stood at the date of liquidation. Revenue's contentions: - The revenue sought to tax the entire Rs. 75,000 distribution as dividend. - The High Court held that since the Tribunal had not disintegrated the Rs. 75,000 to ascertain the portion attributable to accumulated profits, no part could be regarded as dividend.

Which sections of the Income-tax Act were involved?

Section 2(6A)(c)

AI-generated summary — verify with the full judgment below

B c D E }I G H COMMISSIONER OF INCOME-TAX, GUJARAT v. GIRDHARDAS & COMPANY PRIVATE LTD.

October 7, 1966 (J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.] Indian Income-tax Act, 1922, s. 2(6A)(c)-Distribution of accumulared profits on liquidation of company to be treated as dividend--Extent I<> which distribution represents accumulated profit, how to be detennined.

By a resolu•ion dated August 23, 1952 it was resolved to wind up the respondent company and to appoint a liquidator for that purpose. The paid-up capital of the assessee was Rs. 25 lakhs; and on the: date of toro- mencement of winding up it had an accumulated profit of Rs. 5,34,041. From time to time the liquidator -distributed the assets in his hands an1ong the shareholders.

Out of Rs. 15 lakhs distributed on September 9, 1952 the Income-tax Officer brought, in the assessment year 1953-54, to tax Rs. 52,400 as 'dividend' within the meaning of s. 2(6A)(c) of the Income- tax Act 1922 as it then stood. By virtue of an amendment of the said clause as effected by the Finance Act 1956 dividend was to include any distribution made to the sharehnlders of a company on its liquidation, to tbe extent to which

The order continues below.

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