# FIRST INCOME-TAX OFFICER, SALEM v. MJS. SHORT BROIBERS (P) Ltd

- **Citation:** [1966] 3 S.C.R. 84
- **Court:** Supreme Court of India
- **Decided:** 1965-12-15
- **Case number:** Civil Appeal No. 97 of 1965
- **Bench:** K. Subba Rao, J. C. SHAH ANll S. M. S!KRI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/first-income-tax-officer-salem-v-mjs-short-broibers-p-ltd-3772
- **Pages:** 9

## Headnote

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.
After the respondenl-company sold it• asoets, which included agricultural 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 liquidarors 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 prohibition 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) 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 dividend, 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 comA
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I.T.O. V. SHORT BROS. (Shah, J.)
85
A
pule profits of the company for a part of the year, but there is nothing
in the Act which prohibits assessment of profits for a part only of the
previous year in special circumstances. In fact, the legislative history
of s. 2(6-A) (c) shows that "current profits", that is, profits of a company
in liquidation arising after the end of the last previous year and before
liquidation commenced are brought within the net.of taxation as dividend.
Further, the explanation to the section plainly implies that within the
expreasion "accumulated profits"are included capital gains
outside
the
B
excepted periods specified therein.
But under s. 12-B while capital gains
are chargeable in respect of any profits arising from transfer of "capital
asieti-,," "capital assets" do not include lands from which the income derived is agricultural
income.

## Text

FIRST INCOME-TAX OFFICER, SALEM
v.
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.
After the respondenl-company sold it• asoets, which included agricultural 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 liquidarors 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 prohibition 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) 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 dividend, 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 comA
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I.T.O. V. SHORT BROS. (Shah, J.)
85
A
pule profits of the company for a part of the year, but there is nothing
in the Act which prohibits assessment of profits for a part only of the
previous year in special circumstances. In fact, the legislative history
of s. 2(6-A) (c) shows that "current profits", that is, profits of a company
in liquidation arising after the end of the last previous year and before
liquidation commenced are brought within the net.of taxation as dividend.
Further, the explanation to the section plainly implies that within the
expreasion "accumulated profits"are included capital gains
outside
the
B
excepted periods specified therein.
But under s. 12-B while capital gains
are chargeable in respect of any profits arising from transfer of "capital
asieti-,," "capital assets" do not include lands from which the income derived is agricultural
income.
Therefore, on a combined
reading of
s. 12-B and the definition of capital asset in s. 2( 4-A), profits drived by
transfer of lands from which the income derived is agricultural income
would not be chargeable to tax.
[87 F, 88 C, H; 89 A-C, E; 91 B-C,
C
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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 97 of
1965.
Appeal by special leave from the judgment and order dated
October 3, 1963 of the Madras High Court in Writ Petition No.
1242 of 1962.
S. T. Desai, N. D. Karkhanis and R. N. Sachthey, for the
appellant.
A. V. Viswanatha Sastri, B. R. Agarwal and H. K. Puri, for
the respondent.
The Judgment of the Court was delivered by
Shah, J.
On December 24, 1959, M/s. Short Brothers
(Private) Ltd. sold its coffee estates and other assets, and by resolution, dated February 6, 1960, it was resolved that it be voluntarily wound up and liquidators be appointed to administer its
affairs.
Out of the proceeds reafo1ed by sale of its assets, the
liqui<iators of the Company distributed on March 30, 1960
Rs. 8,50,000 to the shareholders. By letter, dated D~cember 19,
1960, the Income-tax Officer, Salem, informed the liquidators
that he proposed ro treat that amount distributed as dividends ir.
the hands of the shareholders, and to call upon the liquidators to
G pay the amount of tax deductible under s. 18(3D) of the Incometax Act.
The liquidators submitted that the amount distributed
to the sha~holders was capital aiwreciation realised by sale of
agricultural lands and buildings of the Company, and was not
liable to tax, and that in any event the ameunts distributed
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represented "current profits" of the year in which it was reselved
that the Company be wound up and were on that account not
dividend within the meaning of s. 2(6A)(c) of the Income..tax Act.
After some correspondence the Income-tax Officer, Salem. by his
86
SUPREME COURT REPORTS
[1966] .1 SC.R.
order, dated October 18, 1962, finally called upon the liquidators
A
to pay Rs. 4,11,700 which was retained by the liquidators
from the distribution made to the shareholders.
The liquidators then moved the High Court of Judicature at
Madras, for a writ of prohibition restraining the First Income-tax
Officer from taking further action to enforce collection of the
amount referred to by him in his communication, dated October
18, 1962.
Holding thut the demand made by the Income-tax
Officer was "not in conformity with the law" in that the amount
of Rs. 8,50,000 which had been distributed could not be deemed
to be distrib.utcd as dividend without determining whether any
portion of the amount represented capital gains, which arose out
of the sale of capital assets consisting of lands from which agricultural income was derived, the High Court issued a writ restraining the Income-tax: Officer from enforcing the demand for
tax. The High Court reserved liberty to the Income-tax Officer
to examine the question afresh, and to determine "the correct
amount of dividend within the meaning of s. 2(6A){c)". With
special leave, the First Income-tax Officer has appealed to this
Court.
It was submitted on behalf of the Income-tax Officer that the
High Court in entertaining the petition in its extra-ordinary jurisdiction under Art. 226 of the Constitution, bypassed the machinery
of assessment and rectification of orders of assessment prescribed
by the Indian Income-tax Act which is both adequate and efficacious.
But the High Court has under Art. 226 of the Constitution jurisdiction to issue to any person or authority within the
territories in relation to which it exercises jurisdiction, directions,
orders, or writs in the nature, amongst others, of mandamus,
prohibition and cerliorari for the enforcement of any of the rights
conferred by Part III and for any other purpose. It is true that
normally tqe High Court will not entertain a petition in exercise
of its jurisdiction under Art. 226 of the Constitution when the
party claiming relief has an alternative remedy which is adequate
and efficacious.
The question however is one of discretion of
the High Court and not of its jurisdiction, and if the High Court
in exercise of its discretion thought that the case was one in which
its jurisdiction may be permitted to be invoked, this Court would
normally not interfere with the exercise of that discretion.
The High Court was of the view that all profits accumulated
in the previous years and the profits till the date on which it was
resolved that the Company be voluntarily wound up would
he
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1.T.O. v. SHORT BROS. (Shah, J.)
87
included in the expression "accumulated profits" under s. 2(6A)
( c) of the Indian Income-tax Act read with the Explanation.
They held that even capital gains taxable under s. 12B except
for the period mentioned in the Explanation were when distributed, "dividend" withln the definition, but profits realised by
transfer of property used for agricultural purposes and which
yielded agricultural income not being capital gains taxa hie under
the law are not "dividend", and on that account the order of
the Income-tax O(ficer bringing to tax the entire amount distributed without determining whether any portion of that amount
represented capital gains arising from the sale of capital assets
consisting of lands from which agricultural income was derived
was not within his authority.
Counsel for the liquidators contended in the first instance
that all profits whatever may be their character arising in the year
in which the Company is voluntarily wound up are not liable
to be taxed as they did not fall within the definition of "dividend"
in s. 2 ( 6A) ( c). Counsel for the Department while supporting
the view of the High Court relating to the chargeability to tax
of "current profits'', contended
that the
entire
amount of
Rs. 8,50,000 distributed to the shareholders, whatever may be
the source from which the profits were earned, was liable to be
brought to tax under s. 12 of the Income-tax Act as dividend
distributed.
By s. 12 of the Income-tax Act, tax is payable by an assessee
under the head "Income from other sources" in respect of income,
profits and gains of every kind which may be included in his
total income if not included under any of the preceding heads in
ss. 7 to 10 of the Act.
By sub-s. (lA) "income from other
sources" includes dividends.
Section 2(6A) defined "dividend"
and at the relevant time cl. ( c) and the Explanation to the clause
stood as follows :
" 'dividend' includes-
( c) any distribution made to the shareholders of a
company on its liquidation, to the extent to which tli!e
distribution is attributable to the accumulated profits
of the company immediately before its liquidation,
whether capitalised or not;
Explanation.-The expression "accumulated profits"
wherever it occurs in this clause, shall not include
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SUPREME COURT REPORTS-,-[1966] 3 S.C.R.
\\apital gains arising before the ~st day of April, 1946,
or after the 31st day of March, 1948, and before the
1st day of April, 1956:" · ·
By the Explanation to s. 2 ( 6A)
accumulated profits inciude
·capital 'gains not arising within the excepted period.
The Explanation is undoubtedly couched in negative form, but there is no
· ground for accepting the argument of counsel that in the sub-
. stantive clauses oL the definition, accumulated profits do
not
include capital gains.
The Explanation plainly implies
that
within the expression "accumulated profits" are included capital
_ gains outside the excepted periods.
On the interpretation contended for by counsel, the Explanation which seeks to exclude
. "capital gains" from the content of accumulated profits would
have no meaning. By sub-s. (1) of s.12B tax-is payable by an
assessee under the head "capital gains" in respect of any profits
· or gains arising .from the sale, exchange, relinquishment or transfer of a capital asset effected. after the 31st day of March, 1956,
' and such profits and gains shall be deemed to be income of the
previous year. in which· the sale, exchange, relinquishment or
transfer took place.
Under the Indian Income-tax Act, 1922, ·
·"capital gains" arising after March 31, 1946 were made charge-
. able by the Income-tax and Excess Profits Tax (Amendment)
Act, 194 7, which inserted s. 12B in the Act. _ The levy was,
however, abolished by the Finance Act, 1949, and the operation
· of s. 12B ::is enacted by the Amendment Act of 1947 was restricted
to capital gains arising before April l, 1948. By the Finance
. Act 3 of 1956 which introduced a new s. 12B, capital gains were
·again made chargeable to tax with effect from April 1, 1957
· on the profits or gains arising from the transfer. of capital assets,
which expression is defined in s. 2 ( 4A) as meaning "property
of any kind held by an assessee, whether or not connected with
his business, profession or vocation, but does not include-· -
(i)
(ii)
(iii) any land from which the income derived is agri-
. cultural income;"
The c:mtention raised by counsel for the Company that the
profits earned in the "current year" i.e., the year iri which it was
resolved that the Company be .wound up, were not "dhidend"
within the meaning of s. 2(6A)(c) of the
Act
cannot be
· aceepted. Sub-clause (c) of s. 2(6A) declares "that accumulated
. profits immediately before the liqitidatiori of the company. are
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1.T.O. V. SHORT BROS. (Shah, /.)
89
dividend : it does not say that accumulated profits up to the end
of the previous year immediately preceding the year in which
liquidation of the company commences are dividend. It is true
that in giving effect to the definition, the taxing authorities have
to compute profits of the company for a part of the year, but
that is not a ground for reading the plain words of the statute in
an artificial sense.
Under s. 3 of the Act read with s. 4, the
charge to income-tax is on the total income of the previous year,
and in accordance with and subject to the provisions of the
Indian Income-tax Act. But there is nothing in the Act which
prohibits assessment of profits for a part only of the previous
year iu
certain special circumstances. For instance, under
s. 26 ( 2) it is provided that in the case of succession to a person
carrying on any business, profession or vocation, in such capacity
by another person, such person and such other person shall each
be assessed in respect of his actual share of the profits of the
previous year.
In amending the definition in s. 2(6A)(c) by the Finance
Acts of 1955 and 1956, the Parliament has sought to clarify its
meaning and to avoid the argument which was successfully raised
in certain cases on the interpretation of the statute before it was
amended.
By the terms of the definition, distribution which is
attributable to the . accumulated profits of the Company immediately before its liquidation is to be deemed dividend. Thereby
all profits earned till immediately before liquidation, if they. are
distributed, will be brought to tax wholly if they consist of
accumulated profits, or partially to the extent they are attributable
to accumulated profits.
Amendments which have been made from time to time in the
Act clearly disclose the intention of the Parliament that it was
not intended to allow the profits of the current year distributed
by a liquidator of a company to escape liability to tax. In
Inland RevenuP Commissioners v. Geon:e Burrell, ( 1 ) it was held
that on the undivided profits of past years and of the year in
which the winding up of a company occurred which were distributed among the shareholders, super-tax was not payable, because
in the winding up they had ceased to be profits and were assets
only. It was observed in Burre/l's case(') that the only thing the
liquidator of a company in liquidation may do is to turn the
assets into money, and divide the money among the shareholders
in proportion to their shares.
Surplus of trading profit made
in a particular year are distributable rateably among all the
(I [J 924] 2 KB. 52.
L9Sup. CI/66-7
90
SUPREME COURT
REPORTS
[1966] 3 S.C.R.
shareholders as capital, and it is not right to split up the sums
received by the shareholders into capital and income, by examining the accounts of the company when it carried on business, and
disintegrating the sum received by the shareholders subsequently
into component parts based on an
estimate of what might
possibly have been done, but was not done. As the Indian Companies Act, 1913, closely followed the scheme of the English
Companies Act, and the view expressed in
Burrell's
case( 1 )
applied to the Indian Income-tax Act, a special definition of
"dividend'' was devised by Parliament by the enactment of
Income-tax (Amendment) Act 7 of 1939, with a view to super-
&ede the view in Burrell's case( 1). Clause (c) of sub-s. (6A) as
originally enacted stood as follows :
" 'dividend' includes-
( c) any distribution made to the shareholders of a
company out of accumulated profits of the company
A
B
c
on the liquidation of the company :
D
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 the Finance Act, 1955 the proviso to sub-cl. (c) of cl. (6A)
E
was omitted.
There was a f\Jrther amendment made by the
Finance Act, 1956 and cl. ( c) to the amended section read as
follows :
" 'dividend' includes-
( c) any distribution made to the shareholders of a
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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;"
Under Act 7 of 1939 profits which arose within six previous
G
years preceding the date of liquidation when distributed were to
be deemed dividends.
But the effect of the definition was that
distribution of profits accumulated after the last day of the previous year whatever their nature could
not be
regarded as
Cistribution of dividend : Sheth Haridas Achratlal v. The Commissioner of Income-tax. (2 )
It was held in that case by the
H
Bombay High Court that for the purpose of s. 2(6A)(c) as it
(I) [192-4] 2 K.B. S2.
(2) 27 I.T.R. 684.
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I.T.O. V. SHORT· BROS. (Shah, J.)
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stood in 1949, a ·broken period between the last day of the
previous year of a company, and the commencement of winding
up could not be considered "a previous year". The Parliament
with a view to supersede the view in Sheth llaridas Achratlal's
case(') deleted by the Finance Act,· 1955, the proviso to subclause tc ).
To make its meaning more clear Parliament by
the Finance Act. 1956, recast the substantive clause ( c). Viewed
in the context of this legislative history, there is no doubt that
"current profits" i.e., profits of a company in liquidation arising
after the end of the last previous year and before liquidation
commenced, were brought within the net of taxation as dividend.
The contention raised by counsel for the Company on this part
of the case must fail.
The question which remains to be considered
is
whether
capital appreciation in respect of the lands from
which
the
income derived is agricultural income and which was not taxable
in the hands of the company as capital gains would still on
distribution be liable to be taxed as dividend under s. 12 of the·
Income-tax Act.
As we have already pointed out capital gains
under s. 12B are chargeable inirespect of any profits arising from
transfer of "capital assets", and "capital assets" do not include
lands from which the income· derived is
agricultural . income.
Profits derived by transfer of lands from which
the income
derived is agricultural income would not therefore be chargeable on a combined reading of s. 12B with s. 2( 4A) of the
Income'tax Act under the head "capital gains".
The expression "accumulated profits" does not include capit'!I gains arising
within the excepted periods: vide Explanation to
s.
2(6A).
"Accumulated profits" are therefore profits which are so regarded
in commercial practice, and capital gains as
defined
in the
Income-tax Act.
Realization of appreciated value of assets in
commercial practice is regarded as realization of capital rise,.
and not of profits of the business.
Unless, therefore, appreciation in the value of capital assets is included in the capital gains,
distribution by the liquidator of the rise in the capital value wiff
not be deemed dividend for the purpose of the Income-tax Act.
Counsel for the Department contended, relying upon
Mrs:.
Bacha F. Guzdar, Bombay v.
Commissioner
of Income-tax,
Bombay(') that since dividend received by a shareholder of a
company out of the profits earned from agricultural income is
not exempt from liability to pay tax under s. 4(3) (viii), dividend
(1) 271.T.R. 684.
(2) 27 I.T.R. !.
92
SUPREME COURT REPORTS
[1966] 3 S.C.R.
-distributed from profits earned out of sale of capital
assets
inclusive of lands from which the income derived is agricultural
income is also not exempt from income-tax.
But the Company
.<Joes not claim exemption from liability to tax under s. 4(3) (viii):
it c!aims exemption because the receipt is not income which is
chargeable to tax under s. 12 under the head "dividend". The
case of Mrs. Bacha F. Guzdar(') has therefore no application to
this case.
The appeal therefore fails and is dismissed with costs.
Appeal dismissed.
(1) 27 1.T.R. I.
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