# HARi PRASAD JAYANTILAL & CO. LTD v. INCOME-TAX OFFICER, SPECIAL INVESTIGATION CIRCLE·B

- **Citation:** [1966] 2 S.C.R. 732
- **Court:** Supreme Court of India
- **Decided:** 1965-11-25
- **Case number:** Civil Appeal No. 871 of 1964
- **Bench:** K. SUBBA RAo, J. C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/hari-prasad-jayantilal-co-ltd-v-income-tax-officer-special-investigation-circle-3744
- **Pages:** 8

## Headnote

Income-tax Act (11 of 1922), ss. 2(6A)C and 35(10)-Volun.tary
/iqui"dation of !company-Distribution of accumulated profits by /1quldator-If declaration of dividends by company.
The appellant-company was assessed to
tax in the assessment yea"
1948-49, to 1953-54, in respect of its profits, and was '.'Howe~ rebate on
the undistributed profits. It was resolved to
voluntarily
wmd up the
company with effect from October I, 1957. The liquidator, during the
years 1957 to 1959 distributed, from
time to time, the accul!'ulated
profits to the shareholders and also issued income-tax refund certificates.
The Income-tax Officer, under s. 35(10) of the Income-tax Act, 1922,
withdrew the rebate granted in respect of each of the assessment years
194&-49 to 1953-54
and demanded payment of tax. The company applied for a writ quashing the order, but the High Court dismissed the
petition.
In appeal to this Court, the company contended that : (i) Section
35(10) did not authorise the Income-tax Officer to bring to tax the
amount on which rebate tax was granted in assessment years commencing
prior to !st April 1956. and (ii) the distribution by the liquidator of
accumulated profits could not be regarded as declaration of dividend by
the company within the meaning of s. 35(10).
HELD : (i) The power to withdraw rebate was exercisable within 4
years from the end of the financial year in which the amount on which
rebate was allowed was availed of by the company for declaring dividends.
[735 B-CJ
Ahmedabad Manufacturing and Calico
Printing Co. Ltd. v. S.G.
Mehta, [1963] Supp. 2 S.C.R. 92, followed.
(ii) Distribution of accumulated profits by the liquidator together with
the income-tax refund certificates, in the course of voluntary winding up,
can be regarded as declaration of dividend. so as to attract the applicability
of provisions enabling the withdrawal of rebate and demand
for tax.
[739 CJ
On the passing of a resolution for voluntary winding up the company
does not stand dissolved and its property does not vest in the liquidator.
Ill distributing the assets, including accumulated profits, the liquidator acts
merely as an agent or administrator for and on behalf of the company.
Therefore, distribution by the liquidator is distribution by the company.
[736 B-C, E]
There is nothing in s. 35(10) which
suggests that the expression
dividend was to have a meaning different from the meaning asc;igned to it
by s. 2(6A) in the
interpretation clause.
By the omission of the
proviso to s. 2(6A) (c) by the Finance Act, 1955, distribution of accumulated profits, whether capitalised or not and without any restriction as
to time, was brought within the definition Of dividend.
The provisions
of ss .. 35(10) and 2(6A) (c) are part of a single scheme to declare di•-
fr1but1on of accumulated profits~ capitalize<;l or not, as
dividends,
and
B
c
D
E
F
G
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H. P. JAYANTILAL & CO. V. I.T.O. (Shah, /.)
733
A
to bring the undistributed profits on which rebate was granted to tax, if
availed of by the liquidator of the company for distributing dividends.
[737 F, H; 738C-D]
B
Power under s. 35(10) may be exercised if accumulated profits are
availed of by the company "for declaring dividends in any year", that is,
after following the procedure. in Art. 95 of Table A of the Companies Act,
1913, under which the assessee was registered. But,
the distribution
made by the liquidator, was a distribution of interim dividend, and, in
the matter of distribution of interim dividend, the Companies Act does
not set up any special machinery nor does it impose any special condition
before power in that behalf may be exercised. [739 A-C]

## Text

732
HARi PRASAD JAYANTILAL & CO. LTD.
v.
INCOME-TAX OFFICER, SPECIAL INVESTIGATION
CIRCLE·B.
November 25, 1965
[K. SUBBA RAo, J. C. SHAH ANDS. M. SIKRI, JJ.J
Income-tax Act (11 of 1922), ss. 2(6A)C and 35(10)-Volun.tary
/iqui"dation of !company-Distribution of accumulated profits by /1quldator-If declaration of dividends by company.
The appellant-company was assessed to
tax in the assessment yea"
1948-49, to 1953-54, in respect of its profits, and was '.'Howe~ rebate on
the undistributed profits. It was resolved to
voluntarily
wmd up the
company with effect from October I, 1957. The liquidator, during the
years 1957 to 1959 distributed, from
time to time, the accul!'ulated
profits to the shareholders and also issued income-tax refund certificates.
The Income-tax Officer, under s. 35(10) of the Income-tax Act, 1922,
withdrew the rebate granted in respect of each of the assessment years
194&-49 to 1953-54
and demanded payment of tax. The company applied for a writ quashing the order, but the High Court dismissed the
petition.
In appeal to this Court, the company contended that : (i) Section
35(10) did not authorise the Income-tax Officer to bring to tax the
amount on which rebate tax was granted in assessment years commencing
prior to !st April 1956. and (ii) the distribution by the liquidator of
accumulated profits could not be regarded as declaration of dividend by
the company within the meaning of s. 35(10).
HELD : (i) The power to withdraw rebate was exercisable within 4
years from the end of the financial year in which the amount on which
rebate was allowed was availed of by the company for declaring dividends.
[735 B-CJ
Ahmedabad Manufacturing and Calico
Printing Co. Ltd. v. S.G.
Mehta, [1963] Supp. 2 S.C.R. 92, followed.
(ii) Distribution of accumulated profits by the liquidator together with
the income-tax refund certificates, in the course of voluntary winding up,
can be regarded as declaration of dividend. so as to attract the applicability
of provisions enabling the withdrawal of rebate and demand
for tax.
[739 CJ
On the passing of a resolution for voluntary winding up the company
does not stand dissolved and its property does not vest in the liquidator.
Ill distributing the assets, including accumulated profits, the liquidator acts
merely as an agent or administrator for and on behalf of the company.
Therefore, distribution by the liquidator is distribution by the company.
[736 B-C, E]
There is nothing in s. 35(10) which
suggests that the expression
dividend was to have a meaning different from the meaning asc;igned to it
by s. 2(6A) in the
interpretation clause.
By the omission of the
proviso to s. 2(6A) (c) by the Finance Act, 1955, distribution of accumulated profits, whether capitalised or not and without any restriction as
to time, was brought within the definition Of dividend.
The provisions
of ss .. 35(10) and 2(6A) (c) are part of a single scheme to declare di•-
fr1but1on of accumulated profits~ capitalize<;l or not, as
dividends,
and
B
c
D
E
F
G
H
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T
•.
)
H. P. JAYANTILAL & CO. V. I.T.O. (Shah, /.)
733
A
to bring the undistributed profits on which rebate was granted to tax, if
availed of by the liquidator of the company for distributing dividends.
[737 F, H; 738C-D]
B
Power under s. 35(10) may be exercised if accumulated profits are
availed of by the company "for declaring dividends in any year", that is,
after following the procedure. in Art. 95 of Table A of the Companies Act,
1913, under which the assessee was registered. But,
the distribution
made by the liquidator, was a distribution of interim dividend, and, in
the matter of distribution of interim dividend, the Companies Act does
not set up any special machinery nor does it impose any special condition
before power in that behalf may be exercised. [739 A-C]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 871 of
1964.
c
Appeal from the judgment and order dated January 16, 17,
1961 of the Gujarat High Court in Special Civil Application No.
233 of 1960.
N. D. Karkhanis,
T. A. Ramachandran,
0. C. Mathur,
Ravinder Narain and J. B. Dadachanji, for the appellant.
o
A. V. Viswanatha Sastri, R. Ganapathy Iyer, B. R. G. K. A char
and R. N. Sachthey, for the respondents.
The Judgment of the Court was delivered by
Shah, J,
The appellant-a Company registered under the
E Indian Companies Act, 1913-was assessed in the assessment
years 1948-49 to 1953-54 in respect of the profits earned in its
business, and was allowed rebate under the appropriate provisions contained in the Schedules to the relevant Finance Acts
on the undistributed profits of the previous years. On December
31, 1956 at an annual general meeting of the shareholders the
F Company declared an aggregate sum of Rs. 2,15,232/- as dividend for the year ending December 31, 1956.
Thereafter a
special resolution was passed for voluntary winding up of the
Company with effect from October 1, 1957, and for appointing a
liquidator to wind up the affairs of the Company. On October
20 & 21, 1957
the liquidator distributed to the shareholders
G Rs.
5,17,171-20 and thereafter on February 21 & 22,
1958;
March 31, 1958 and July 27, 1959 the liquidator distributed
diverse other amounts to the shareholders.
In respect of each
such distribution
the liquidator issued an "income-tax refund
certificate" certifying
that the amount was distributed
out of
reser.ves formed out of accumulated profits of earlier years.
H
The Income-tax
Officer,
Special
Investigation Circle-B,
Ahmedabad in exercise of the power under s. 35(10) of the Indian
Income-tax Act, 1922, passed an order withdrawing the rebate
734
SUPREME COURT REPORTS
[1966] 2 S.C.R.
granted in respect of each of the si~ assessment years 1948-49 to
A
1953-54 and demanded payment of tax on the amount of the
rebate. The appellant then applied to the High Court of Bombay
for writs quashing the orders of the Income-tax Officer and the
notice of demand and directing the Income-tax Officer to withdraw
and cancel the order and notice of demand.
The petition was
dismissed by the High Court. With certificate granted by the
B
High Court, this appeal has been preferred.
Two questions are raised for determination in this appeal :
(1) Whether s. 35 (IO) authorises the Income-tax
Officer to bring to tax rebate granted in assessment years
commencing prior to April l, 1956; and
( 2) whether distribution by the liquidator of accumulated profits in the previous years could be regarded
as declaration of dividend within the meaning of s.
35(10) so as to attract the applicability of the provisions enabling withdrawal of rebate and demand for
tax.
The first question is concluded by a recent judgment of this
Court in Ahmedabad Manufacturing and Calico Printing Co. Ltd.
v. S. G. Mehta, Income-tax Officer and Another('). In that case
this Court held that s. 35 ( 10) applied even though dividend was
declared before April 1, 1956. Counsel for the Company urged
that in the Ahmedabad Manufacturing and Calico Printing Co.'s
case it was held that power to withdraw rebate granted in the
year befo-e April 1, 1952 was not exercisable by the Incomec
D
E
tax Officer under s. 35(10) and consistently with that view withdrawal of rebate granted in the years ending on and before March
F
31, 1952 was unauthorised. In Ahmedabad Manufacturing and
Calico Printing Co.'s case(1) declaration of dividend by the Company was made on April 20, 1953. The financial year in which
the amount on which rebate of income-tax was allowed was availed of by the Company for declaring dividends was 1953-54, and
within four years from the end of that year an order calling upon
the Company to show cause why action should not be taken under
s. 35(10) to recall the proportionate part of the rebate was
issued. It was said by Hidayatullah, J. :
"Since the power commenced on April l, 1956, the
utmost reach of the Income-tax Officer would be the
end of the assessment year 1952. Any declaration of
(l) [1963] Supp. 2 S.C.R. 92.
G
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i1. P. JAYANTILAL & CO. V. I.T.O. (Shah, J.)
735
dividend after 1st day of April, 1952, out of accumulated profits of any of the years in which rebate was
earned would be within the time for the recall of any
rebate. But a declaration prior to April 1, 1952, would
be beyond
the power of the Income-tax
Officer to
recall."
Power to withdraw rebate was in that case held exercisable within
four years from the end of the financial year in which
the
amount of rebate was availed of : it was not held that the power
was exercisable in respect of rebate granted only in respect of four
-
years before April, 1956. The argument raised by counsel imC porting a limitation contrary to the plain words of the statute
must therefore be rejected.
D
E
F
G
H
Sub-section (10) of s. 35 was inserted in the Income-tax
Act by s. 19 of the Finance Act, 1956, with effect from April 1,
1956. It provides:
"Where, in any of the assessments
for the years
beginning on the 1st day of April of the years 1948 to
1955 inclusive, a rebate of income-tax was allowed to a
company on a part of its total income under clause (i)
of the proviso to Paragraph B of Part I of the relevant
Schedules to the Finance Acts specifying the rates of
tax for the relevant year, and subsequently the amount
on which the rebate of income-tax was allowed as aforesaid is availed of by the company, wholly or partly, for
declaring dividends in any year, the amount or that
part of the amount
availed of as
aforesaid, as the
case may be, shall, by reason of the rebate of incometax allowed to the company and to the extent to which
it has not actually been subjected to an additional income-tax in accordance with the provisions of clause
(ii) of the proviso to Paragraph B of Part I of the Schedules to the Finance Acts above referred to .. be deemed
to have been made the subject of incorrect relief under
this Act, and the Income-tax Officer shall recompute the
tax payable by the company by reducing the rebate originally allowed, as if the recomputation is a rectification
of a mistake apparent from the record within the meaning of this section and the provisions of sub-section (1)
shall apply accordingly, the period of four years specified
therein being reckoned from the end of the financial
year in which the amount on which rebate of
736
SUPREME COURT REPORTS
[1966] 2 $.C.R.
income-tax was allowed as aforesaid was availed of by
the company wholly or partly for declaring dividends."
It is urged by counsel for the Company that power under sub-s.
(10) of s. 35 cannot be exercised because distribution of accumulated profits by the liquidator is not distribution by the Company. The argument is wholly without substance. On the passing of a special resolution by the Company that it be wound up
voluntarily under the Companies Act 1 of 1956, the Company
does not stand dissolved.
That is so expressly provided by
s. 487, of the Companies Act. A Company which has resolved to
be voluntarily wound up may be dissolved in the manner provided by s. 497 ( 5) : till then the Company has corporate existence and corporate powers. The property of the Company does
not vest in the liquidator : it continues to remain vested in the
Company. On the appointment of a liquidator, all the powers of
the Board of directors and of the managing or whole-time directA
B
c
ors, managing agents, secretaries and treasurers cease (s. 491),
D
and the liquidator may exercise the powers mentioned in s. 512,
including the power to do such things as may be necessary for
winding up the affairs of the Company and distributing its assets.
The liquidator appointed in a members' winding up is merely an
agent of the Company to administer the property of the Company
for purposes prescribed by the statute. In distributing the assets
including accumulated profits the liquidator acts merely as an
agent or administrator for and on behalf of the Company.
E
It is then urged that on the commencement of winding up,
distinction between the capital and accumulated profits of the
Company disappears, and what remains in the hands of the liquiF
dator are the assets of the Company, and distributions made by
the liquidator are distributions of capital, regardless of the source
from which the funds are distributed is capital or accumulated
profits. In distributing the surplus assets in his hands, the liquidator is therefore not "declaring dividends" within the meaning
of s. 35 ( 10). In support of this contention, reliance was placed
upon Inland Revenue Commissioners v. George Burrell('). The
Court in that case held that on the winding up of a limited company the undivided profits of the past year and the year in which
winding up occurred were only assets of the company and on
distribution amongst the shareholders supertax was not payable
on the undivided profits as income.
(I} [1924] 2 K.B. 52.
G
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H, P. JAYANTILAL & CO. V. I.T.O. (Shah, J,)
737
A
Under the Companies Act, 1956, accumulated profits of the
Company at the commencement of the winding up of the Company undoubtedly come into the hands of the liquidator as assets
for the purpose of satisfying liability of the Company and for
distribution among the shareholders.
But the rule in Burrell's
case ( 1) since the amendment of the definition of "dividend" in
B s. 2 ( 6A) by the Finance Act, 1956, no longer applies, when the
liability to assessment of income-tax in respect of amounts distributed out of accumulated profits by a liquidator in a winding
up falls to be determined.
The Parliament had devised by the
Indian Income-tax (Amendment) Act 7 of 1939, a special inclusive definition for the Income-tax Act, 1922 of "dividend" in s.
C 2 ( 6A). Being an inclusive definition, the expression "dividend"
means dividend as ocdinarily understood under the Companies
Act and also the heads of payment or distribution specified therein.
Clause ( c) as
originally enacted, included distributions
made to the shareholders of a Company out of accumulated proD fits on the liquidation of the Company. This was clearly an
attempt to supersede the rule in Burrell's case('). It was pointed
out by this Court in Dhandhania Kedia & Co. v. Commissioner
of Income-tax(2) that s. 2(6A)(c) was enacted to remove the
anomaly which was created by the judgment in Burre/l's case('),
and to assimilate the distribution of accumulated profits by a JiquiE dator to a similar distribution by a Company which is working. But
the language of the clause and the proviso thereto included only
those accumulated profits which had not been capitalized, and
which arose during the six previous years preceding the date of
commencement of the year of account in which the liquidation
commenced.
By the Finance Act, 1955, the proviso to cl. (c)
F was omitted :
thereby accumulated profits whether capitalized
or not and without any restriction as to time were brought within
the definition.
By the Finance Act, 1956, cl. (c) was recast as
follows:
G
"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
capitalized or not."
Amendment to cl. (c) in s. 2(6A) was made and s. 35(10) was
inserted in the Income-tax Act simultaneously by the Finance
H Act, 1956. It would be reasonable to regard the provisions of
s. 35(10) and amended cl. (c) of sub-s. (6A) of s. 2 as part of a
(I) [19241 2 K.B. 52.
(2) 35 l.T.ll.. 400.
L3Sup. Cl/66-18
738
SUPREME COURT REPORTS
[1966] 2 S.C.R.
single scheme to declare distribution of accumulated profits, capitJalized or not, as dividends, and to bring the rebate granted on
~d~stributed profits to tax if availed of by the company or by the
liqmdator o! a company for distributing dividends.
Counsel for the Company contended that the amount distributed out of accumulated profits by the liquidator is not dividend in the hands of the Company.
For this distinction again
there is no warrant.
Distribution of accumulated profits by a
Company not subject to winding up is distribution of dividend
by virtue of s. 2(6A) (a), and distribution of accumulated profits
A
in the course of liquidation is dividend by virtue of s. 2(6A)(c).
It is true that the definition of "dividend" in s. 2(6A)(c) will apply
C
only if there is nothing repugnant in the subject or context in
which the e!lpression "dividend" occurs in s, 35(10), but there is
nothing in s. 35(10) which suggests that the expression "dividend"
was to have a meaning different from the meaning assigned to
it by the interpretation clanse.
It was urged that assuming that accumulated profits of a ComD
pany distributed by the liquidator may be regarded as dividends,
power under s. 35(10) cannot be exercised in respect of those
profits, because the liquidator is not in distributing the profits
"declaring dividends". But the assumption underlying the argument
that the Companies Act provides that dividends may be deemed to
be declared only if cer\ain mandatory provisions are complied with
E
is without substance.
By s. 205 of the Indian Companies Act,
1956 (before it was amended in 1960) it was provided that no
dividend shall be declared or paid except out of the profits of the
company or out of moneys provided by the Central or a State
Government for the payment of the dividend in pursuance of a
guarantee given by such Government. The Company in the preF
sent case was registered under the Indian Companies Act, 1913.
The Articles of Association of the Company are not before us,
but the Articles relating to distribution of dividend being under
s. 17(2) of the Companies Act, 1913, obligatory, Arts.
95, 96
and 97 in Table A of Act 7 of 1913 applied. By Art. 95 it was
provided that a company in general meeting may declare diviG
dends, but no dividends shall exceed the amount recommended.
But to the distribution of interim dividends, the condition that it
must be declared in general meeting of the Company did not
apply, and such interim dividends as appeared to the directors to
be justified by the profits of the company could be distributed
(Art. 96). The only other relevant condition was in Art. 97 that H
no dividend shall be paid otherwise than out of profits of the year
,.
or any other undistributed profits.
H. P. JAYANT!LAL & CO. V. I.T.O. (Shah, J.)
739
A
The liquidator of the appellant company did from time to time
distribute accumulated profits,
and within the meaning of s.
2(6A)(c) read with the provisions of the Companieg Act, they
were distribution of interim dividends. It is true that power under
s. 35(10) may be exercised if accumulated profits are availed of
by the Company "for declaring dividends in any year", but since
B the Companies Act does not in the matter of distribution of interim
dividends set up any special machinery, nor impose any special
condition before power in that behalf may be exercised, no artificial meaning can be attached to the word "declaring dividends".
Distribution of accumulated profits by the liquidator together with
the income-tax refund certificate in the course of voluntary winding
C up may therefore, for the purpose of s. 2(6A)(c), be regarded as
declaration of dividend.
The appeal therefore fails and is dismissed with costs.
Appeal dismissed.