1965 PLP 692 (PTD)

"2. (6-A) "dividend" includes-. . . (c) any distribution made to the shareholders of a company out of the accumulated profits of the company on the liquidation of the company: Provided that only the accumulated profit so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included." According to Venkatarama Aiyar, J., speaking for the Supreme Court in Dhandania Kedia & Co. v. Commissioner of Income-tax ((1959) 35 I T R 400, 405): "The effect of this provision is to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company which is working ; but subject to this limitation that while in the latter the profits distributed will be dividend whenever they might have been accumulated, in the former such profits would be dividend only in so far as they came out of profits accumulated within six years prior to liquidation." The question whether profits earned by a company in liquidation during the continuance of the liquidation would on distribution be dividend within the meaning of section 2 (6A) (c) or not has been answered in the negative by the Madras High Court in T. Appavu Chettiar v. Commissioner of Income-tax ((1956) 29 I T R 768) and the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax ((1957) 31 I T R 82). This point came up for consideration before the Supreme Court in Dhandhania's case. It was held that: "Now, it should be mentioned that when a company in liquidation distributes its current profits, that would also be not dividend as held in Buller's case and the law to that extent has been left untouched by section 2 (6-A) (c)." The Supreme Court approved of the decision of the High Court mentioned above. It further observed " . . accumulated profits which are sought to be caught in section 2 (6A) (c) would be the profits accumulated in the financial years preceding the year in which the liquidation takes place . . . . . In the present case, as the company went into liquidation on January 18, 1950, excluding the current year which commenced on April 1, 1949, the six previous years will be the years 1943-44 to 1948-49." Thus the phrase "six previous years preceding the date of liquidation" was interpreted not to include the year in which the winding up commenced. By the Finance Act, 1955, the proviso to clause (c) was deleted. The result was that, with effect from and subsequent to the assessment year 1955-56, the limitation time of six years disappeared. But the position of current profits became obscure. Clause (c) was further amended by the Finance Act of 1956, which took effect on 1st April 1956. After this amendment clause (c) was as follows: "Any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation . . ." The significance of this amendment is that it clarifies and qualifies the "accumulated profits", which are dividends, to mean only such profits as have accumulated "immediately before the liquidation" of the company. The effect of the law declared by Burrell's case was partially abrogated by the introduction of clause (c) originally. The profits which had accrued during six years prior to liquidation alone were sought to be taxed by artificially treating them as dividend. The six years' limitation was taken away by the 1955 amendment. After that amendment, clause (c) did not specifically say whether it would include current profits of the company in liquidation. The 1956 amendment solved this ambiguity. It used the phrase "immediately before its liquidation". Prior to the 1955 amendment the provision was "preceding the date of liquidation". To my mind, "preceding the date" and "immediately before" are interchangeable terms conveying the same idea. "Preceding the date" was held by the Supreme Court to mean prior to commencement of the liquidation. The same meaning will hold good for immediately before". The Supreme Court had in. Dhandhania Kedia's case also held that "six previous years" did not include the year in which liquidation commenced. While enacting the 1961 Act the Legislature did not accept this limitation: Section 2 (22) (c) of the Income-tax Act, 1961, reproduces verbatim section 2 (6A) (c) of the 1922 Act. But it also enacts a new provision in the shape of Explanation 2 to section 2 (22). This is as follows: "The expression accumulated profits' in sub-clauses (a), (b), (d) and (e) shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation." Profits earned and Accumulated up to the date of liquidation are thus covered by sub-clause (c). Obviously profits accruing after the date of liquidation are excluded. The learned counsel for the Income-tax Department as well as for the official liquidator have urged that the word "liquidation" as well as the phrase "the date of liquidation" in these provisions do not refer to the commencement of the winding up proceedings but to the point of time when the company is ultimately liquidated. This point of time is in company law jurisdiction technically called the "dissolution" of the company. The liquidation and dissolution of a company mark different stages of its existence. Liquidation commences with the winding up of a company. When the affairs of a company have been completely wound up and finished, the Court makes an order that the company be dissolved and the company stands dissolved from the date of that order (vide section 194, Indian Companies Act, 1913, and section 481, Companies Act, 1956). On the passing of the order of dissolution the company incurs a civil death and the very existence of the company comes to an end. The statutory duty of the liquidator to the creditors and contributories of the company finishes. No distribution of assets or profits is made thereafter. As such the date of liquidation under section 2 (22) (c) of the Income-tax Act cannot be interpreted to mean the date of dissolution. A scrutiny of Explanation 2 also leads to this conclusion. For purposes of sub-clauses (a), (b), (d) and (e), accumulated profits includes profits up to the date of distribution or payment, but not so for purposes of sub-clause (c) ; for sub-clause (c), profits made only up to the date of liquidation are included. In the scheme of this Explanation, this is a date prior to distribution or payment. The date of dissolution comes long after distribution or payments of profits to the shareholders. In Dhandhania Kedia's sase, the winding up commenced on January 18, 1950, and the company had not been dissolved. It was held that the phrase "six previous years of the company preceding the date of liquidation" will be the years 1943-44 to 1948-49. In this case the Supreme Court thus declared that the date of liquidation refers to the date of the commencement of the winding up. The result is that profits earned after the commencement of the winding up of a company are not dividends and cannot be the subject-matter of any deduction of income-tax or super-tax at source under section 194 of the Income-tax Act, 1961. In the instant case the liquidation commenced in 1934. The company had accumulated no profits till that time. The profits of rupees three lakhs and odd in question have all been earned by the liquidator during the liquidation of the company. All this profit is not dividend and nothing can be deducted at source by the liquidator under section 194 of the Act. The liquidator was in error making the deduction at the rate of 30% from the second dividend Sri Deoki Nandan, learned counsel for the petitioner, did not press the second part of the prayer. He stated that his client will take appropriate proceedings before the Income-tax Officer for refund as the deducted income-tax has already been paid by the liquidator to the Department. It is, therefore, not necessary to make any direction in respect of the deduction already made from the second dividend. The official liquidator is directed not to deduct anything by way of income-tax or super-tax from the dividends that are to be declared and distributed in respect of this company. The parties shall bear their own costs.