SHETH HARIDAS ACHRATLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee was a shareholder of the Gujarat Corporation Ltd. This company had a share capital of Rs. 1,00,000 divided into 1,000 share of Rs. 100 each. With regard to 960 shares only Rs. 35 were paid up on each share. The remaining 40 shares were fully paid up. The company passed a resolution on the 5th December, 1946, which it converted the partly paid up 960 shares into fully paid up shares by transferring a sum of Rs. 62,400 out of the undistributed profits of the company. The company went into liquidation on the 1st May, 1949. The liquidator realised the total assets of Rs. 1,61,000. The assessee who held 251 shares received a dividend of Rs. 22,590 from the liquidator in the year of account, and the Taxing Department held that the dividend was covered by the definition of 'dividend' in section 2 (6A) (c) of the Income -tax Act and therefore liable to tax, and it is in respect of this distribution of the assets of the company in liquidation that three questions have been submitted to us by the Tribunal.

(2.) NOW , before we look at the question perhaps it will be better to consider generally the scheme of section 2 (6A) which defines 'dividend'. It is clear that the definition given by the Legislature is an artificial definition. It is an inclusive definition and it deals with four classes of cases in which a certain payment becomes dividend in the eye of the income -tax law, and the one we are concerned with is the class referred to in sub -clause (c) and that is in the following terms : '(c) 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.'

(3.) NOW , bearing this scheme of section 2 (6A) in mind, the first question that arises on this reference is : Which are the six previous years of the company preceding the date of the liquidation for the purpose of the proviso to section 2 (6A). In this case, as we have already pointed out, the date of liquidation is the 1st May, 1949, and what we have to consider is what are the six previous years preceding this date of liquidation. The accounting year of the company is the calendar year. Therefore the previous year to the date of liquidation would be the calendar year 1948 and the remaining five years must be the years preceding that calendar year 1948. Therefore, on a plain construction of the language used by the Legislature it is clear that the six previous years contemplated by the proviso are the years 1943 to 1948. Mr. Palkhivala's contention is that inasmuch as the company carried on business till the 30th April, 1949, the first previous year which must be taken into consideration is the year 1949 and not the year 1948. Now, 'previous year' is defined in the Income -tax Act itself and it is a period of 12 months according to the method of accounting of the assessee. A previous year is never a broken period of a few months. Undoubtedly, the company is liable to pay tax on the profits made by it during this broken period, but the Income -tax Act provides a special machinery for taxing an assessee whose business is discontinued during particular period. Therefore, for the purpose of the Income -tax Act the period 1st January, 1949, to the 30th April, 1949, would be part of the previous year for the assessment year 1950 -51. It may be that during the whole of that previous year the company did not to business and its business was discontinued, but as we said before, although the Income -tax Act might lay down the machinery and provide the procedure for assessing the income of the company during this broken period, it does not follow that for the purpose of the Income -tax Act this broken period becomes the previous year for the purpose of the proviso to section 2 (6A) (c). Therefore, in our opinion, it is clear that the six previous years in this case are the years 1943 to 1948.