COMMISSIONER OF INCOME TAX Vs. M V MURUGAPPAN

JUDGEMENT

(1.) THESE are two references before us involving the same question, both made at the instance of the Commissioner of Income-tax, Madras, under section 66(1) of the Income-tax Act, 1922. They relate to the assessment year 1955-56, corresponding to the accounting year ended April 12, 1955. There was a public limited company called Ajax Products Limited which was incorporated in 1939 with a paid up capital of Rs. 4.16 lakhs and authorised and issued capital of Rs. 6 lakhs. This company was engaged in the business of manufacturing abrasive paper and steel products. In September, 1944, the company purchased a spun silk mill by name Jaya Spun Silk Mill for Rs. 4, 51, 164, but, after working the mill for some time, sold it in February, 1946, to Mysore Spun Silk Mills Limited for Rs. 7, 92, 750. The company thus made a profit of Rs. 3, 41, 586 out of the transaction. For the assessment year 1947-48, this sum was brought to tax treating the same as business profits and a tax of Rs. 1, 49, 444 was charged which was paid at the end of 1953. Eventually, this court in Ajax Products Ltd. v. Commissioner of Income-tax held on March 7, 1960, that the sum of Rs. 3, 41, 586 was not assessable to tax because it could not be regarded as pertaining to business profits. In 1960, the company accordingly received refund of the sum paid as tax. On October 31, 1954, the company went into liquidation. The accounting year of the company was the calendar year and for the period from January 1, 1954, to October 31, 1954, it made a profit of Rs. 1, 79, 704 which, after payment of the tax assessed thereon, was reduced to the net sum of Rs. 81, 611.

(2.) THE assessees were some of the shareholders of the company. On March 10, 1955, the liquidators of the company made a distribution to the shareholders of Rs. 100 per share by allotment of a share in Carborundum Universal Limited to the extent of the same face value. THEre were subsequent distributions made by the liquidators with which we are not concerned in these references THE Income-tax Officer considered that both the sums of Rs. 81, 611 and Rs. 1, 49, 444 should be regarded as included in the accumulated profits of the company and that, in the light of section 2(6A)(c), Rs. 34.37 per share should be regarded as dividend. On appeal, the view wa s taken that the sum of Rs. 81, 611, referable to the broken period of 1955, that is, from January 1, 1954, to October 31, 1954, represented current profits and could not, therefore, be regarded as accumulated profits under that statutory provision. This amount was directed to be excluded from the accumulated profits. THE Tribunal, on appeal by the department, confirmed that view. As regards the other amount of Rs. 1, 49, 444, the assessees' appeals failed before the Appellate Assistant Commissioner but the Tribunal held in favour of the assessees in their appeals. In the circumstances, the following question has been referred to us "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 81, 611 and Rs. 1, 49, 444 were not part of the accumulated profits of the company as on October 31, 1954, as contemplated under section 2(6A)(c) of the Income-tax Act, 1922 ?" *THE Tribunal purported to follow T. Appzvu Chettiar v. Commissioner of Income-tax and Girdhardas and Co. Ltd. v. Commissioner of Income-tax in support of its view that the sum of Rs. 81, 611 represented current profits which could not be legitimately included in the expression "accumulated profits" in section 2(6A)(c) of the Act. THE Tribunal thought that any distribution out of current profits would not constitute dividend. Accumulated profits, in its opinion, should be understood in contra-distinction to current profits. In respect of the other sum, the Tribunal noted that as the refund was received by the company only in 1960, it could not be held to be part of the accumulated profits of the company before the date of its liquidation.

(3.) THE first of these cases decided by the High Court of Australia pertained to war-time profits tax. THE court was construing "accumulated trading profits" which occurred in section 17(1) of the Australian War-time Profits Tax Assessment Act, 1917-18, in a context which is of course different from what we are dealing with. But Issacs and Rich JJ. made these observations"THE expression 'accumulated profits' is familiar in judicial decisions and well known in the mercantile world for over 150 years. But for present purposes it will be sufficient to refer to very few cases, namely, Hollins v. Allen, decided by Kindersley V.C. in 1866, and Sproule v. Bouch in 1887. Later cases exemplify and support this, the most important of which is Commissioners of Inland Revenue v. Blott. In Hollins v. Allen, the Vice Chancellor drew a distinction between 'current profits' and other profits. That is to say, he drew a distinction between, on the one hand, 'current profits' of a given year, in which be included a surplus balance of profits of a previous year not appropriated to any fund, and, on the other, profits in a fund accumulated in previous years for any purpose. And, in our view, the true import of the term 'accumulated profits' is that they are profits which the company has appropriated to some reserve account, whether that account be of a capital nature or not. 'Accumulation' in that connection does not mean the mere existence of profits, even over a lengthened period, however they are employed but it connotes the affirmative gathering of these profits, or such as may be selected, into a measured or measurable heap and allocated to a named reserve fund, whatever its nature may be." *Though these are observations made in a different context, we think that they are expressive of the general import of "accumulated profits" and we do not see why we should not give similar import to accumulated profits in clause (c) of sub-section (6A) of section 2. This view of the Australian High Court was reiterated in Federal Commissioner of Taxation v. Miller and Anderson Limited and Lathan C.J. observed"But ' accumulation' plainly refers to the past and not to a current period." *We are aware that the learned Chief Justice made that observation while construing section 24 of the War-time (Company) Tax Assessment Act, 1940-41, and deciding whether accumulated profits in that section included accumulated profits of a continuous account. But it is of significance that as opined by Latham C.J. "accumulation" by itself in the nature of things must refer to the past and not what is current.