First Income-Tax Officer, Salem v. M/S. Short Brothers (P) Ltd

FIRST INCOME-TAX OFFICER, SALEM MJS. SHORT BROIBERS (P) Ltd. December 15, 1965 {K. SUBBA RAO, J. C. SHAH ANll S. M. S!KRI, JJ.] Income-tax Act (11 of 1922), ss. 2(6-A)and 12-B-"Accumu/ated Profits", meaning of-If inc/ud<s capital gains from sale of lands yielding agricultural income. 2(6-A)and 12-B-"Accumu/ated After the respondenl-company sold it• asoets, which included agricul-tural lands and buildings, it wa. re3olved that it should be voluntarily wound up. On 30rh March, the liquidator distributed R•. 850,000 to share-holder.. The appellant (Income-tax Officer) proposed to treat the amounts distributed as dividends and to call upon the liquidators to pay the lax under s. 18(3D) of the Income-tax Act, 1922. The liquida-rors contended that the amount was capital appreciation realised by the sale of agricultural lands and buildings and therefore not liable to tax; and that in any event the amounts represented "current profits" of tho year in which it was resolved that the company be wound up and so were not dividends within the meaning of s. 2(6-A)(c). As the appellant did not agree, the liquidators moved the High Court for a writ of prohibi-tion to rmtrain him from raking further action. The High Court i'3ued the writ holding that the demand by the appellant was not in conformity with law in that the amount of Rs. 850,000 amid not be deemed to be distributed as dividend without determining whether any portion of it represented capital gains. which arose out of the sale of capital assets con•isting o! land• from which agricultural income was derived. Jn appeal to thi• Court. HELD : (i) Normally the High Court should not entertain a petition under Art. 226, when the parly claiming relief h., an adequate alternative remedy, but as the matter is one of discretion and not jurisdiction of the High Court, if the High Court thought that the case was one in which it< jurisdiction could be invoke<.\, this Court would ordinarily not inrerferc with the exercise of the di.<cretion. [86 Fl (ii) The decision in Bacha Gutdur v. Commissioner of Income-lax, (27 l.T.R. I), wherein it w .. held that dividend received by a abare-holder out of profits earned from agricultural income wu not exempt from liability under s. 4(3)(viii), h., no application to the present cue, be· cause, the claim of the respondent to exemption from liability to tax was not under s. 4(3 )(viii), but on the b.,is tharthe receipt by the share· holder was not income chargeable to tax under s. 12 as dividend. [92 BJ (iii) By s. 12 tax is payable by an asse3See under tho head "income from other sources" which includes dividends. "Dividend" is defined in s. 2( 6-A) and cl. ( c) 6-A) and cl. ( c) c) declares that accumulated profits immediatt/y be/or• the liquidation of the company are dividends. Since it does not say that (iii) By s. 12 tax is payable by an asse3See under tho head "income from other sources" which includes dividends. "Dividend" is defined in s. 2( 6-A) and cl. ( c) 6-A) and cl. ( c) c) declares that accumulated profits immediatt/y be/or• the liquidation of the company are dividends. Since it does not say that only accumulated profits upto end of the previous year immediately pr,._ ceding the year in which liquidation of tho company commences are divi-dend, all profits earned till immediately before liquidation, if they are di•tributed, will be brought to tax wholly if they consist of accumulated profits, or partly to the extent they are attributable to accumulated profits. In giving effect to tho definition, the taxing authority may have to com-