T. Appavu Chettiar vs Commissioner of Income Tax, Madras

Rajagopalan, J.—The question referred to this Court u/s 66(1) of the Income Tax Act was :

Whether the sum of Rs. 31,250 was rightly taxed.

assessee held ten shares of the face value of Rs. 8,750 in Sri Kannan Rice Mills Ltd., hereinafter referred to as the company. The subscribed

capital of the company was Rs. 43,750 most of which was apparently spent on the acquisition of a rice mill. The company went into liquidation on

March 31, 1947; the liquidator sold the assets of the company th same day and realised Rs. 2,10,000. The realisations were distributed between

the shareholders on April 1, 1947. The assessee received for his share Rs. 40,000. Rupees 31,250 the difference between the capital he had

subscribed and the share of the assets he received on liquidation was assessed to Income Tax in the assessment year 1947-48. The accounting

year of the assessee ended on April 12, 1947. The accounting year of the company was April 1, 1946, to March 31, 1947.

The Tribunal held that the amount in question, Rs. 31,250, was ""dividend"", which came within the scope of section 2(6A)(c) of the Income Tax

Act. The alternative basis for sustaining the assessment was that it amounted to capital gains, taxable u/s 12B of the Income Tax Act, which in the

opinion of the Tribunal was more favorable to the assessee.

It should be noted that the company itself was assessed to capital gains u/s 12B, and that was sustained by this Court in R.C. No. 8 of 1951.

Obviously section 12B will not apply to the amount received by the assessee. It was not profits or gains arising from the sale of any capital asset of

his. It was the sale of the capital assets of the company, in which he was no doubt a shareholder, that resulted in profits.

Section 2(6A)(c) runs : ""Dividend includes any distribution made to the shareholders of a company out of 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 liquidation shall be so included.

To grant the relief the assessee seeks in these proceedings it may not be necessary to decide whether Rs. 31,250 that the assessee received on

the liquidation of the company constituted ""dividend"" within the meaning of section 2(6A)(c) and we refrain from expressing any opinion on that

question. Assuming without deciding it, that the amount was dividend which accrued to the assessee in his accounting year, the proviso to section

2(6A)(c) should suffice to exclude the amount in the assessment year in question. Assuming that the distribution by the liquidator was out of

accumulated profits of the company"", the proviso to sub-clause (c) of section 2(6A) would exclude the profits of the company which accrued to it

in its year of account ending with March 31, 1947. The realisation of the company was only on March 31, 1947. It is only any distribution out of

the accumulated profits of the company in any of the six previous years, the six accounting years of the company previous to the year ending

March 31, 1947, that would fall within the scope of sub-clause (c). That the dividend accrued to the assessee in his previous year, the accounting

year ending with April 12, 1947, is irrelevant.

The view we have taken of the scope of the proviso to sub-clause (c) of section 2(6A) is in accord with the principle laid down by Chagla, C.J.,

and Tendolkar, J., in Sheth Haridas Achratlal v. Commissioner of Income Tax. See the observations at pages 688 and 689. We respectfully agree

with the view taken by8 the learned Judges of the Bombay High Court : if we may say so with respect, the significance of the expression ""six

previous years of the company preceding the date of liquidation"" in the proviso to sub-clause (c) of section 2(6A) has been correctly defined.

The question is answered in the negative and in favour of the assessee. The assessee will be entitled to his costs of this reference. Counsels fee

Rs. 250. Reference answered in the negative.