VIDYUTRAI Y DESAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference raised a question regarding the taxation of 'dividend' as defined in section 2, sub -section (6A), clause (c), of the Income -tax Act. The assessee was a shareholder of a private limited company known as Desai Arvade Ltd. The said company were the managing agents of the Barsi Spinning and Weaving Mills Ltd. The capital of the company was Rs. 5,00,000 divided into 500 shares of Rs. 1,000 each and the assessee was a shareholder of 375 in his own name and as beneficial owner of 5 shares in the name of K.M. Oza. The company went into liquidation on the 18th of January, 1947. The liquidator realised the assets of the company excluding 1,000 shares of the Barsi Spinning and Weaving Mills Ltd. of which the company was the owner, paid thereout the costs of liquidation and the liability of the company in full, and had a balance in his hands of Rs. 3,72,907 which was distributed amongst the shareholders. The assessee's share of this distribution was Rs. 2,83,409. The shares of the Barsi Spinning and Weaving Mills Ltd. were distributed amongst the shareholders in specie. It was found by the Appellate Assistant Commissioner that out of the distribution of Rs. 2,83,409 a sum of Rs. 1,08,720 was paid out of the accumulated profits of the company. The total accumulated profits according to the balance -sheet of the company at the date of liquidation were Rs. 1,68,867. This sum of Rs. 1,08,720 was taxed in the hands of the assessee as 'dividend' within the definition of the section 2(6A)(c). It was contended before the Tribunal by the assessee that since this distribution fell short of the paid up capital of the company and the assessee did not even receive in full the amount that he had paid for his 375 shares, the portion of the distribution which was determined as having been paid out of accumulated profits does not attract tax. This submission was negatived by the Tribunal and the question that has been referred to us by the Tribunal is : 'Whether on the facts and in the circumstances of this case, the sum of Rs. 1,08,720 out of the sum of Rs. 2,72,080 was a receipt of dividend within the meaning of section 2(6A)(c) of the Indian Income -tax Act ?'

(2.) NOW , in the first instance, one must start with the definition of 'dividend' for this purpose which is to be found in section 2(6A)(c) and it is : ''dividend' includes - (c) any distribution made to the shareholders of a company out of accumulated profits of the company on the liquidation of the company.'

(3.) IT is to get over the law as laid down in this case that the Indian Income -tax Act was amended by subjecting to tax any distribution made to the shareholders of a company out of accumulated profits on the liquidation of the company.