MESSRS. DHANDHANIA KEDIA & CO. vs. THE COMMISSIONER OF INCOME-TAX

CIVIL APPEAL No. 433/1957Supreme Court1958 INSC 8717 October 1958Bench: 3 JudgesAuthor: T.L. VENKATARAMA AIYYAR, P.B. GAJENDRAGADKAR, A.K. SARKAR10 pages
AI SummaryDismissed

What were the facts?

The appellant, a shareholder in Mewar Industries Ltd., a company registered in the former State of Udaipur, received Rs. 26,000 on April 22, 1950, from the company's liquidator. This sum represented undistributed profits accrued during the six accounting years preceding the liquidation. At that time, there was no income tax law in Udaipur; residents of Rajasthan, where Udaipur merged, became liable to income tax only from April 1, 1950. The Income-tax Officer assessed this sum as dividend under Section 2(6A)(c) of the Indian Income-tax Act for the assessment year 1951-52. The Appellate Assistant Commissioner, the Appellate Tribunal, and the Rajasthan High Court upheld this assessment.

What did the Supreme Court hold?

The Supreme Court held that the sum of Rs. 26,000 was dividend within the meaning of Section 2(6A)(c) of the Act and was liable to tax. The Court reasoned that the definitions in Section 2 of the Act apply unless there is anything repugnant in the subject or context. It would be repugnant to the definition of 'dividend' in Section 2(6A)(c) to import the definition of 'previous year' from Section 2(11) into the expression 'six previous years'. The expression 'previous years' in Section 2(6A)(c) means the financial years preceding the year in which liquidation took place. The Court referred to its earlier decision in Commissioner of Income-tax, Madras v. K. Srinivasan and K. Gopalan, which held that 'previous year' can mean a completed accounting year immediately preceding the happening of a contingency, even if not directly linked to an assessment year. The contention that the company was not defined as a 'company' under the Act was not considered as it was not a question referred to the High Court.

What were the issues?

1. Whether the sum of Rs. 26,000 distributed by the liquidator is taxable as dividend under Section 2(6A)(c) of the Indian Income-tax Act, 1922, considering that the profits were accumulated during years when no income tax was levied in the State of Udaipur. Assessee's contention: The term 'previous years' in Section 2(6A)(c) should be interpreted in conjunction with the definition of 'previous year' in Section 2(11). Since there was no income tax law in Udaipur prior to April 1, 1950, the years 1943-44 to 1948-49 cannot be considered 'previous years' for the purpose of Section 2(6A)(c), and thus the distributed profits are not taxable as dividend. Revenue's contention: The term 'previous years' in Section 2(6A)(c) refers to the accounting years preceding the liquidation, irrespective of whether income tax was levied during those years. The definition in Section 2(11) is not applicable in this context.

Which sections of the Income-tax Act were involved?

Section 2(6A)(c),Section 2(11),Section 3,Section 66(1),Section 66A(2),Section 2(5A)

AI-generated summary — verify with the full judgment below

Oetober z7. 204 SUPREME COURT REPORTS [1959) Supp. MESSRS. DHANDHANIA KEDIA & CO. v. THE COMMISSIONER OF INCOME-TAX (YENKATARAMA AIYAR, P. B. G.A.JENDRAGADKAR and A .. K. SARKAR, JJ.)

Income-tax-Dividend, tax on-Distribution of accumulated profits of previous years-" Previous years", meaning of-Indian Income-tax Act, I922 (XI of I922), ss. 2(6A)(c) and z(II).

The appellant, a resident of the once independent State of Udaipur, held 266 shares in the Mewar Industries Ltd.. a company registered in that State. There was no law in the State of Udaipur imposing tax on income and it was on April Il 195.0, that for the first time the residents of Rajasthan, in which the State had merged, became liable to pay such a tax. On January 18, 1950, the Company went into liquidation and on April 22, 1950, the liquidator distributed a portion of the assets among the shareholders, the appellant receiving a sum of Rs. 26,000. This sum represented the undistributed profits of the company which had accrued during the six accounting years preceding the liquidation. The income-tax authorities included this sum in the taxable income of the appellant for the assessment year i951-52 h

The order continues below.

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