# COMMISSIONER OF INCOME-TAX, GUJARAT v. GIRDHARDAS & COMPANY PRIVATE LTD

- **Citation:** [1967] 1 S.C.R. 777
- **Court:** Supreme Court of India
- **Decided:** 1966-10-07
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-gujarat-v-girdhardas-company-private-ltd-3913
- **Pages:** 7

## Headnote

Indian Income-tax Act, 1922, s. 2(6A)(c)-Distribution of accumulared
profits on liquidation of company to be treated as
dividend--Extent I<>
which distribution represents accumulated profit, how to be detennined.
By a resolu•ion dated August 23, 1952 it was resolved to wind up the
respondent company and to appoint a liquidator for that purpose. The
paid-up capital of the assessee was Rs. 25 lakhs; and on the: date of toromencement of winding up it had an accumulated profit of Rs. 5,34,041.
From time to time the liquidator -distributed the assets in his hands an1ong
the shareholders.
Out of Rs. 15 lakhs distributed on September 9, 1952
the Income-tax Officer brought, in the assessment year 1953-54, to tax
Rs. 52,400 as 'dividend' within the meaning of s. 2(6A)(c) of the Incometax Act 1922 as it then stood. By virtue of an amendment of the said
clause as effected by the Finance Act 1956 dividend was to include any
distribution made to the sharehnlders of a company on its liquidation, to tbe
extent to which the distribution is attributable to the accumulated profits of
the company immediately before its iiqui<lation whether capitalised or not.
On July 24, 1957, the hquidator distributed Rs. 75,000 among the share-·
holders. The Income~tax Officer in the course of assessment for the year
1958-59 sought to bring the entire amount so distributed to tax as 'dividend'.
The Appellate Assistant Commissioner confirmed the order of tho
Income-tax Officer.
In appeal to the Tribunal it was urged on behalf of
the assessee that when Rs. 15 lakhs were distributed on September 3, 1952
and Rs. 2 lakhs 25 thousand on September, 25, ·19)2 the entire accumulated profit was exhausted and thereafter there were no accumulated profit-;
which could be distributed, and that in any even.t whenever distribution·
is made of the assets in the hands of the liquidator,
accumulated profits
and the capital mu~~ be deemed to be &stributed in the same propor· ion in
which the accumulated profits and the capital stood on the date of
tho
liquidation. The Tribunal rejected the first contention and did not considef'
the setond.
In reference the High Court held that since the Tribunal had
not disintegrated Rs. 75,000 distributed for ascertaining whether any part
of it came out of the accumulated profits, no part of R,. 75.J)OO could be
regarded as dividend.
The Revenue appealed.
HELD: The language used by the
Legislature in
s. 2(6A) (c)
a~
amended by the Finan.ce Act 1956, is fairly clear. There is in the hands'
of the liquidator only one fund.
When a distribution is made out of the·
fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components-capital
.and accumulated profits-as they existed immediately before the commence•
ment -0f liquidation.
In any distribution made to the shareholders of a.
company by the liquidator, that part which is attributable to •he accumu ..
lated profits of the, compa~y immediately before its liguidation, whether·
such profiti have been cap:.talised or not, would be treated as dividend
and liab]e to tax under the Act.
The amount distributed would therefore
be deemed to be received by the shareholders partly as accumulated proMl7Sup. C!/66--5
778
SUPlll!MB COURT llBPOllTS
[1967) l S.C.R.
flta and the r<SI u capital, the proportion being the same which the accumulated profits bore to the capital iu tlie
accouots of the company
al the commencement of winding up, and that part of the receipt which "
attributable to the accumulated profits would be taxable.
The lncomotax Officer has therefore in the first instance to determine the accumulated
profits in the h•nds of the company whether capitalised or not, and tho
remainiog capito: 'rnimdiately before the liquidation : he has to determine
the ratio between SUCD C. ;'••l anu the un.Jistributed profits, and then to
apply the ratio to the amount a"" :~'.·•ed to determine the component attributable to accumulated profits.

## Text

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COMMISSIONER OF INCOME-TAX, GUJARAT
v.
GIRDHARDAS & COMPANY PRIVATE LTD.
October 7, 1966
(J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.]
Indian Income-tax Act, 1922, s. 2(6A)(c)-Distribution of accumulared
profits on liquidation of company to be treated as
dividend--Extent I<>
which distribution represents accumulated profit, how to be detennined.
By a resolu•ion dated August 23, 1952 it was resolved to wind up the
respondent company and to appoint a liquidator for that purpose. The
paid-up capital of the assessee was Rs. 25 lakhs; and on the: date of toromencement of winding up it had an accumulated profit of Rs. 5,34,041.
From time to time the liquidator -distributed the assets in his hands an1ong
the shareholders.
Out of Rs. 15 lakhs distributed on September 9, 1952
the Income-tax Officer brought, in the assessment year 1953-54, to tax
Rs. 52,400 as 'dividend' within the meaning of s. 2(6A)(c) of the Incometax Act 1922 as it then stood. By virtue of an amendment of the said
clause as effected by the Finance Act 1956 dividend was to include any
distribution made to the sharehnlders of a company on its liquidation, to tbe
extent to which the distribution is attributable to the accumulated profits of
the company immediately before its iiqui<lation whether capitalised or not.
On July 24, 1957, the hquidator distributed Rs. 75,000 among the share-·
holders. The Income~tax Officer in the course of assessment for the year
1958-59 sought to bring the entire amount so distributed to tax as 'dividend'.
The Appellate Assistant Commissioner confirmed the order of tho
Income-tax Officer.
In appeal to the Tribunal it was urged on behalf of
the assessee that when Rs. 15 lakhs were distributed on September 3, 1952
and Rs. 2 lakhs 25 thousand on September, 25, ·19)2 the entire accumulated profit was exhausted and thereafter there were no accumulated profit-;
which could be distributed, and that in any even.t whenever distribution·
is made of the assets in the hands of the liquidator,
accumulated profits
and the capital mu~~ be deemed to be &stributed in the same propor· ion in
which the accumulated profits and the capital stood on the date of
tho
liquidation. The Tribunal rejected the first contention and did not considef'
the setond.
In reference the High Court held that since the Tribunal had
not disintegrated Rs. 75,000 distributed for ascertaining whether any part
of it came out of the accumulated profits, no part of R,. 75.J)OO could be
regarded as dividend.
The Revenue appealed.
HELD: The language used by the
Legislature in
s. 2(6A) (c)
a~
amended by the Finan.ce Act 1956, is fairly clear. There is in the hands'
of the liquidator only one fund.
When a distribution is made out of the·
fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components-capital
.and accumulated profits-as they existed immediately before the commence•
ment -0f liquidation.
In any distribution made to the shareholders of a.
company by the liquidator, that part which is attributable to •he accumu ..
lated profits of the, compa~y immediately before its liguidation, whether·
such profiti have been cap:.talised or not, would be treated as dividend
and liab]e to tax under the Act.
The amount distributed would therefore
be deemed to be received by the shareholders partly as accumulated proMl7Sup. C!/66--5
778
SUPlll!MB COURT llBPOllTS
[1967) l S.C.R.
flta and the r<SI u capital, the proportion being the same which the accumulated profits bore to the capital iu tlie
accouots of the company
al the commencement of winding up, and that part of the receipt which "
attributable to the accumulated profits would be taxable.
The lncomotax Officer has therefore in the first instance to determine the accumulated
profits in the h•nds of the company whether capitalised or not, and tho
remainiog capito: 'rnimdiately before the liquidation : he has to determine
the ratio between SUCD C. ;'••l anu the un.Jistributed profits, and then to
apply the ratio to the amount a"" :~'.·•ed to determine the component attributable to accumulated profits.
(782 H; 783 CJ
In the present case therefore the Income Ttax authorities had to determine what part of the sum of Rs. 75,000 distributed among the shareholders represented accumulated profits.
Only that
part of Rs. 75,000
which bore the same ratio to Rs. 75000 which the accumulated profits at
the liquidation bore to the total assets of the company immediately before
liquidation was dividend.
(783 OJ
Commissioners of Inland Revenu.e v. George Burrell, L.R. (1924) 2
K.B. 52, referred to.
CML APPELLATE JURJSDJcnON: Civil Appeal No. 690 of
1965.
Appeal from the judgment and order dated June 22, 1964 of
the Gujarat High Court in Income-tax Reference No. 10of1963.
B. Sen, T. A. Ramachandran and R. N. Sachthey, for the
appellant.
S. T. Desai and I. N. Shroff, for the respondent.
The Judgment of the Court was delivered by
Shah, J. By a resolution dated August, 23, 1952, it was resolved
to wind up the respondent company and to appoint a liquidator for
that purpose. The paid-up capital of the assesscc was Rs. 25 lakhs,
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and on the date of commencement of winding up it had an accumulated profit of Rs. 5,34,041.
From time to time the liquidator
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distributed the assets in his hands among the shareholders. The
following table sets out the distributions made by the liquidator:
Distribution
Date of
Amount
Assessment year
per share
distribution
distributed
Rs.
Rs.
1953-54
600
9-9-1952
15,00,000
Do
'°
25-9-1952
2,25,000
1954-55
60
10-11-1952
1,50,000
Do
30
6-5-1953
75,000
Do
30
23-2-1953
75,000
1955-56
80
10-11-1953
2,00,000
Out of the distribution made on September 9, 1952, the Income-tax
-Officer brought, in the assessment year 1953-54, to tax Rs. 52,400
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C.I.T. v. GIRDHARDAS & CO. (Shah, /.)
779
as "dividend" within the meaning of s. 2(6A)(c) of the Income-true
Act, 1922, as it then stood. On July 24, 1957, the liquidator distributed Rs. 30/- per share among the shareholders. The Income-tax
Officer in the course of assessment for the year 1958-59 sought
to bring the entire amount of Rs. 75,000/ distributed to tax as
"dividend" within the meaning of s.2(6A)(c) of the Income-tax Act
as amended by the Finance Act, 1956. The objections raised by
the liquidator were rejected and the amount was brought to tax.
The Appellate Assistant Commissioner confirmed the order of the
Income-tax Officer. In appeal to the Tribunal on behalf of the
assessee, it was urged that the entire accumulated profit was exhausted when Rs. 17,25,000/ were distributed in the year 1952 and
thereafter there were no accumulated profits in the hands of the
liquidator which could be distributed: and that in any event whenever distribution is made of the assets in the hands of the liquidator,
accumulated profits and the capital must be deemed to be distributed in the same proportion in which the accumulated profits and
the capital stood at the date of liquidation. The Tribunal rejected
the first contention and did not consider the second.
The Tribunal refened the following question to the High Court
of Judicature at lfombay under s. 66(1) of the Income-tax Act,
1922:
"Whether on the facts and in the circumstances of the
case the sum of Rs. 75,000/ or any part thereof could be
treated as dividend under s. 2(6A)(c) of the Indian Incometax Act, 1922 ?"
The reference was transferred after reorganisation of the State
under the Bombay State Reorganisation Act, 1960, to the High
Court of Gujarat for hearing and disposal. The reference was
heard before a Bench consisting of Shelat, C. J. and Bhagwati J.,
The two learned Judges differed, and the case was referred to
Bakshi, J. Bakshi, J., agreed with Bhagwati, J., and answered the
question referred to in the negative.
To appreciate the arguments advanced at the Bar, it is necessary to notice the changes which were made from time to time in
s. 2(6A)(c) of the Inilian Income-tax Act, 1922, and the reasons for
enacting and amending that clause. Clause (6A) which defines
'dividend' was inserted in the Indian Income-tax Act by Act 7 of
1939. As originally enacted, it provided insofar as it is material
for the purpose of this appeal:
" 'dividend' includes:-
(a)
(b)
780
SUPREME COURT REPORTS
(1967] l S.C.R.
(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;"
By s. 3 of the Finance Act, 1955, the proviso to cl. (c) was deleted
and bys. 3 of the Finance Act, 1956, with effect from April I, 1956,
the following clause (c) was substituted:
"(c) 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, whether capitalised or not;"
By s. 17(2) of the Indian Companies Act, 1913, Reg. 97 of
Table A was one of the obligatory regulations which had to be
adopted in tenns identical with or to the same effect in the Articles
of Association of every Company.
Regulation 97 provided that
"No dividend shall be paid, otherwise than out of profits of the year
or any other undistributed profits." Distribution of the profits of
the year or of accumulated profits was therefore "dividend" within
the meaning of the Companies Act, 1913, and also of the Incomctax Act, 1922. By Act 7of1939 an inclusive definition of'dividend'
was devised, so as to include therein heads of distribution by a
Company which may not normally be regarded as dividend: and
one such head wa~ in cl. (c).
The reason for insertion of the clause
was that on winding up of a company the distinction between the
assets and undistributed profits disappears. It is well settled that a
Company as a going concern distributing profits of the year or
accumulated profits is regarded as distributing dividend among the
shareholders, but if the company is wound up before distributing
its accumulated profits, any distribution of profits by the liquidator
is not regarded under the Companies Act as dividend.
In Commissioners of /11/and Revenue v. George Burrell, Pollock, M. R., observed:
". . . it is a misapprehension, after the liquidator
ha.s assumed his duties, to continue the distinction between
surplus profits and capital. Lord Macnaghtcn in Birch v.
Cropper ( 14 App. Cas. 525, 54ti), the case which finally
determined the rights inter S<' of the preference and ordinary
shareholders in the Bridgewater Canal, said:
'I think it
rather leads to confusion to speak of the assets which arc
the subject of this application as 'surplus assets' as if they
were an accretion or addition to the capital of the company
capable of being distinguished from it and open to different
(I) L.R: {1924) 2 K.B. 52, 63.
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C.I.T. v. GIRDHARDAS & CO. (Shah,/.)
781
considerations. They are part and parcel of the property of
the company-part and parcel of the joint stock or common
fund-which at the date of the winding up represented the
capital of the company'."
The amounts distributed to the shareholders by a liquidator
are therefore distributed as capital of the company, since the liquidator has no power to distribute dividend, and the sums received by
the shareholders cannot be disintegrated into capital and profits,
by examining the accounts of the Company when it was a going
concern.
The scheme of the Indian Companies Act closely rollowed the
English Companies Act and the view expressed in George Burrell's
case(') applied to distributions made by liquidators, and those
distributions were not liable to be taxed as dividend. The Parliament with a view to avoid escapement of tax devised a special
definition of the word 'dividend' and incorporated it by Act 7 of
1939 as s. 2(6A)(c). The effect of the provision was to assimilate
che distribution of accumulated profits by a liquidator to a similar
distribution by a company-as a going concern,
but su!JNct to the
limitation that while in the latter the profits distributed will be
dividend whatever the length of the period for which they were
accumulated, in the former such profits may be dividend only insofar
as they come out of profits accumulated within six years prior to
liquidation. It also appeared from the language used that profits of
the current year during which the Company was ordered or resolved
to be wound up could not be included in the expression "dividend":
>Ce Sheth llaridas Achratlal v. Commissioner of Income-tax , Bombay
North, Kutch and Saurashtra, Baroda(2). By the Finance Act, 1955;
the proviso to cl. (c) was deleted and in consequence thereof the
limitation relating to the period during which the profits were
accumulated ceased to apply in the determination whether the
amount distributed by the liquidator was dividend. Even after
the amendment by the Finance Act, 1955, the language of the clause
was found to be somewhat inapt and the Legislature by the Finance
Act 1956 recast cl. (c).
The Tribunal was of the view that "if earlier any distribution
has been made, but such distribution or part of such distribution
has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend must be so
held to be so." Shelat C. J., opined thats. 2(6A)(c) is not a charging section which levies tax on a particular fund from out of which a
limited fund is carved out by the proviso. The learned Chief Justice
observed: "The legislative intent is clear, namely, to treat that
portion of the amount distributed by the liquidator as chargeable as
(I) L.R. [1924] 2 K.B. S2, 63.
(2) 27 l.T.R. 684.
782
SUPllEMB COURT REPORTS
[1967) l S.C.R.
dividend which the Income-tax Department can trace to accumulated profits of the last six years and that portion only.
. . . and
therefore it is in respect of that limited fund only that the Department is permitted to go behind the liquidation proceedings and to
disintegrate the assets lying with the liquidator". The reasoning
underlying these observations of the learned Chief Justice is that in
the process of disintegration of an amount distributed, only the
share which is brought to tax is dividend and th~ rest continues to
bear the character of capital.
Bhagwati, J., observed "that what the Legislature intended to
achieve by enacting s. 2(6A)(c). was to bring \\~thin the ambit of
taxation the fund constituted of what were accumulated profits at
the date of liquidation when it reaches the hands of the shareholders
in liquidation. If a distribution in liquidation comes out of the
source of accumulated profits-and whether it comes out of that
source or not is not a question dependent on s. 2(6A)(c)-s.
2(6A)(e) declares that though under law, apart from the section, it
would be capital and, therefore, not chargeable, it shall be regarded
as dividend and taxed as such in the hands of the shareholders."
Bakshi, J., substantially agreed with Bhagwati, J., and held that
since the Tribunal had not disintegrated Rs. 75,000/- distributed, for
ascertaining whether any part of it came out of the accumulated
profits, no part of Rs. 75,000/- could be regarded as dividend.
The Tribunal was therefore of the view that in a distribution by
a liquidator in any year, only that amount which is brought to tax
as dividend may be jeemed to come out of the accumulated profits
on disintegration of the two components, and that process will go
on till the accumulated profit account in a notional sense 's exhausted. On this view the amount distributed is disintegrated, as if it
came out of two funds notionally distinct-to the extent to which
any part bears tax, it is to be regarded as coming out of the accumulated profits, and the rest out of the capital. Shel at, C. J., expressed
substantially the same view.
Bhagwati & Bakshi, JJ., were of the
view that since the enactment of s. 2(6A)(c), in the hands of the
liquidator, accumulated profits and capital may be deemed separate
ful"ds, and in the case of each distribution the source from which the
amount is withdrawn should be determined. If the source from
which the amount is distributed is capital,
th~ distribution is not
taxable, if it is accumulated profit, it is taxable.
The language used by the Legislature ins. 2(6A)(c) as amended
by the Finance Act, 1956, is fairly dear. There is in the hands of
the liquidator only one fund.
When a distribution is made out of
the fund, for the purpose of determining tax liability, and only for
tbat purpose, the amount distributed is disintegrated into its components-<:apital and accumulated profits-as they existed immediately
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C.J,T, V. GIRDHARDAS &: CO. (Shah, J.)
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before the commencement of liquidation. In any distribution made
to the shareholders of a company by the liquidator, that part which
is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and liable to tax under
the Act. The provision was intended to supersede the application
of the principle of George Burrell' s case('), that is to enact that
even though on a winding up of a company the distinction between
the assets and the accumulated profits disappears, the taxing
authority may disintegrate the amount distributed into its component
parts and determine the share attributable to accumulated profits.
The amount distributed would therefore be deem¢ to be received by
the shareholders partly as accumulated profits and the rest as capital,
the proportion being the same which the accumulated profits bore
to the capital in the accounts of the company at the commencement
of winding up, and that part of the receipt which is attributable to
the accumulated profits would be taxable. The Income-tax Officer
has therefore in the first instance to determine the accumulated profits
in the hands of the Company whether capitalised or not, and the
rest of the capital immediately before the liquidation: he has then to
determine the ratio between such capital and the undistributed
profits and to apply the ratio to the amount distributed to determine the component attributable to accumulated profits. There is in
s. 2(6A)(c) no warrant for the view that in the course of liquidation
the accumulated profits exist as a separate fund even in a notional
sense. Each distribution is of a consolidated amount which represents both capital and accumulated profits. There is also nothing in the clause which supports the view that whatever is brought
to tax by the taxing authorities in a given year is dividend, and the
rest represents the assets of the company.
The fund in the hands
of the liquidator is one: when the fund or a part of it is distributed,
the distribution is deemed to take place in the same proportion in
which the capital and accumulated profits stood in the accounts
of the company immediately before the winding up.
We discharge the answer recorded by the High Court, and
record the answer that "that part of Rs. 75,000/- which bears the
same ratio to Rs. 75,000/- which the ·accumulated profits at the
date of liquidation bore to the total assets of the company immediately before liquidation is dividend". In the present case the Tribunal
has not determined what part of Rs. 75,000/-represents accumulated
profits. But on the view we have taken of the true meaning of s.
2(6A)(c) of the Act, the Tribunal was bound to do so.
The appeal is therefore partially allowed. There will be no
order as to costs.
G.C.
Appeal allowed in part.
(!) L.R. [1924] 2 K.B. 52.