COMMISSIONER OF INCOME TAX MADRAS Vs. URMILA RAMESH

JUDGEMENT

(1.) These appeals arise by virtue of a certificate having been granted by the Madras High Court under S. 261 of Income-tax Act, 1961 and the common questions of law referred relate to the interpretation of S. 2(22) of Income-tax Act, 1961 (hereinafter referred to as "the Act").

(2.) Briefly stated, the facts are that the respondents-assessee were shareholders of Tinnevely Motor Service Company Private Limited. The road transport business of the respondents was taken over by the then State of Madras as a result of which the said company went into voluntary liquidation on 28-3-1970. After the sale of its assets the liquidator distributed the first dividend on 31-3-1970 at the rate of Rs. 100/- per share, the second dividend on 17-4-1970 at the rate of Rs. 40/- per share and the third dividend on 20-10-1971 at the rate of Rs. 25/- per share. In the assessment of several shareholders the Income-tax Officer held, inter alia, that the accumulated profits of the company on the date of liquidation amounted to Rs. 6,61,065/-. Based on this figure, the Income-tax Officer treated 17.5% per share as dividend for the year 1970-71, 57.75% of the dividend of Rs. 40/- per share for the year 1971-72 and 57.5% of the dividend of Rs. 25/- per share for the year 1972-73 as the income of the respective shareholder under section 2(22)(c) of the Act.

(3.) The respondents filed appeals against the order of assessment and contended before the Appellate Assistant Commissioner that the sum of Rs. 7,28,760/-, which was the profit assessed under Section 41(2) of the Act in the preceding years, and had been taken into consideration by the Income-tax Officer in determining the accumulated profit at the aforesaid figure of Rs. 6,61,065/-, could not be treated as accumulated profits under Section 2 (22) (c) of the Act. The submission was that there were, in fact, no accumulated profits in the commercial sense on the date of liquidation. The Appellate Assistant Commissioner accepted the contention of the respondents and allowed their appeals. The Income-tax Tribunal upheld the said decision and thereupon, at the instance of Revenue, it referred the following questions of law to the High Court of Madras.