# THE COMMISSIONER OF INCOME-TAX, MADRAS v. M. V. MURUGAPPAN & ORS

- **Citation:** [1971] 1 S.C.R. 377
- **Court:** Supreme Court of India
- **Decided:** 1970-04-24
- **Case number:** Civil Appeal No. 566 of 1967
- **Bench:** J.C. Shah, K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-madras-v-m-v-murugappan-ors-5051
- **Pages:** 5

## Headnote

Income Tax Act. 1922, s. 2(6-A)(c)--Company i11 liquidation-Distribution of profits earned in year of liquidation to shareholders if liable to
tax q.s dividend.
The respondents were shareholders of a public limited company. The
Company ll'aintained ito accounts according to the Calendar Y car.
The
company wont into liquidation on October 31, 1954.
The Liquidators
of the company distributed on March IO, 1955 among the sharcnoldero for
each share of the cornpany a share of another company " share of equal
face value.
The d·istribution was made out of profits earned by
the
company between January 1, 1954 and October 31, 1954. The lncorr,etax Officer brought the value of the shares received by the shareho[dors
to ta,~ on the footing that it repr~.sented "accumulated profits" as conterr1plated by s. 2f6A) (c) of the Income-tax Act.
!9122.
In appeal
the
Appellate Assistant Commissioner held that the profits earned between
January 1. 1954 and October 31, 1954 were not accumulated profits and
when d;stributed the amount in question represepted capital in the hands
of the share-holders.
Thi> order was confirmed by the Tribunal and
upon a reference, by the High Court.
On appeal to this Court,
HELD : Dismissing the appeal,
The question whether the distribution was dividend had to be .determined in the light of the provisions of s. 2(6A) (c) o'f the Income-ta" Act as .
•mended by the Finance Act of 1955. The amount distributed by
the
liquid•tor on March 10, 1955, represented the current
profits and not
profits earned before January 1, 1954. The a'!lount distributed as divi.
dend out of the current profih could not, in the state of Jaw in force in
the year of assessment 1955-56, be deemed dividend in the h1nds of the
shareholdm. f.381 A-Bl
Birch v.
Cropper (1889)
L.R,
14
A.C.
525;
Commi.<Sioner
of Inland Revenue v. George Burra! (1924) 2 K.B.
52; Staffordshire
Coal and Iron Co. Ltd. v. Brogan
(Inspector of Taxes)
54 I.T.R.
555; Appavu Chettiar
v.
Co1n1nissioner
of Income-tax,
Madras
29
I.T.R. 768; Girdhardas & Company Ltd. v. Commissioner of Incmne-tai
Ahmedabad 31 I.T.R. 82; First Income-tax
Officer,
Salem s·.
Short
Brothers (P) Ltd. 60 I.T.R. 82, referred to.

## Text

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THE COMMISSIONER OF INCOME-TAX, MADRAS
v.
M. V. MURUGAPPAN & ORS.
April 24, 1970
[J.C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.]
Income Tax Act. 1922, s. 2(6-A)(c)--Company i11 liquidation-Distribution of profits earned in year of liquidation to shareholders if liable to
tax q.s dividend.
The respondents were shareholders of a public limited company. The
Company ll'aintained ito accounts according to the Calendar Y car.
The
company wont into liquidation on October 31, 1954.
The Liquidators
of the company distributed on March IO, 1955 among the sharcnoldero for
each share of the cornpany a share of another company " share of equal
face value.
The d·istribution was made out of profits earned by
the
company between January 1, 1954 and October 31, 1954. The lncorr,etax Officer brought the value of the shares received by the shareho[dors
to ta,~ on the footing that it repr~.sented "accumulated profits" as conterr1plated by s. 2f6A) (c) of the Income-tax Act.
!9122.
In appeal
the
Appellate Assistant Commissioner held that the profits earned between
January 1. 1954 and October 31, 1954 were not accumulated profits and
when d;stributed the amount in question represepted capital in the hands
of the share-holders.
Thi> order was confirmed by the Tribunal and
upon a reference, by the High Court.
On appeal to this Court,
HELD : Dismissing the appeal,
The question whether the distribution was dividend had to be .determined in the light of the provisions of s. 2(6A) (c) o'f the Income-ta" Act as .
•mended by the Finance Act of 1955. The amount distributed by
the
liquid•tor on March 10, 1955, represented the current
profits and not
profits earned before January 1, 1954. The a'!lount distributed as divi.
dend out of the current profih could not, in the state of Jaw in force in
the year of assessment 1955-56, be deemed dividend in the h1nds of the
shareholdm. f.381 A-Bl
Birch v.
Cropper (1889)
L.R,
14
A.C.
525;
Commi.<Sioner
of Inland Revenue v. George Burra! (1924) 2 K.B.
52; Staffordshire
Coal and Iron Co. Ltd. v. Brogan
(Inspector of Taxes)
54 I.T.R.
555; Appavu Chettiar
v.
Co1n1nissioner
of Income-tax,
Madras
29
I.T.R. 768; Girdhardas & Company Ltd. v. Commissioner of Incmne-tai
Ahmedabad 31 I.T.R. 82; First Income-tax
Officer,
Salem s·.
Short
Brothers (P) Ltd. 60 I.T.R. 82, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 566 of
1967.
Appeal from the judgment and order dated November 18, 1965
H
of the Madras High Court in Tax Case No. 162 of 1963.
Jagadish Swarup, Solicitor-General, G. C. Sharma and B. D.
Sharma, for the appellant.
•·
378
SUPREME COURT REPORTS
[1971] 1 S.C.R.
K. Srinivasan and R. Gopa/akrishnan, for respondents Nos.
I to 10.
The Judgment ·of the Court was delivered by
Shah, J.
The Income-tax Appellate Tribunal submitted the
following question under s. 66(1) of the Indian Income-tax Act,
1922, to the High Court of Madras for opinion :
. "Whether on the facts and in the circumstances of
the case the Tribunal was right in holding that the sum
of Rs. 81,611 and Rs. 1,49,444 were not the part of
the accumulated profits of the Company as on December
3 I, 1954 as contemplated under s. 2(GAJ(c) of the Income-tax Act of 1922 ?'"
The High Court answered the question in the affirmative.
The
Commissjoner of Income-tax asked for and obtained a certificate
fron1 the High Court only in respect of the amount of Rs. 81,611.
This appeul is therefore restricted to the claim of the Revenue
that the amount of Rs. 81,611 was not part of the "accumulated
profit!> of the Company as 011 October 31, 1954 as contemplated
by s. 2t6A)lcJ of the Income-tax Act, 1922."
·
Ajax Products Ltd. was a pub!ic limited company incorporated in 1939.
It maintained its accounts accor!iing to the calendar year.
The respondents to this appeal were shareholders of
the Company. The Company "went into liquidation on October
31, 1954". The liquidators of the Company distributed on
March 10, 1955 to the shareholders for each share Rs. 100 by
allotment of a share in Carbornndum Universal Ltd. of the sam~
face value.
Between January l, 1954 and October 31, 1954
the Company earned a profit of Rs. 1,79,704.
On the profit of
Rs.
1, 79, 704
the
Company
was
assessed
to
pay
Rs. 98,09J as
tax, leaving a balarke of
Rs. 81,611 which
formed part of the amount distributed.
The Income-tax Officer
brought the value of the share received by the shareholders to
tax, on the footing that it represented "accumulated profits":
In
appeal the Appellate Assistant Commisioner held that under relaw as it then stood, the amount of Rs. 81,611 was not accumulated profits and when distrib11':;.l it was capital in the hands of
the shareholders.
This order w~confi.rmed by the Tribunal. The
High Court agreed with the.~Yiew of the Tribunal that under the
definition of the expression "dividend" in s. 2 ( 6A )( c) in force in
the year of assessment 1955-56 distribution of the current profits
in the year in which the Company was ordered to be wound up
was not dividend and was on that account not liable to be taxed
;is dividend.
A
B
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C.I.T. V. MURUGAPPAN (Shah, J.)
379
Under the Indian Companies Act, 1913, no dividend could
be paid otherwise· than out cf profits of the year or undistributed
profits of previous years.
A Company as a going concern may
distribute by way of dividend to the shareholders profits of the
year or accumulated profits of the previous years.
But a share
in the assets of the Company distributed i;n the course of winding
up is of the nature of capital and not of dividend, and it cannot
be apportioned into capital and accumulated profits.
In Birch v. Crcpper ( 1 ), Lord Macnaghten observed :
"I think it rather leads to confusion to speak of the
assets which are the subject of this application as 'surplus as!~ts' as if they were an accretion or addition to
the capita\ of the company caP.able of being distinguished from it and open to different considerations.
They are part and parcel of the property of the . company-part and parcel of the jomt stock or common
fund-which at the date of the winding up represented
the capital of the company."
This view was affirmed .in a later J"udgment in Commissioner of
Inland Revenue v. George Burrel ,( 2) where Pollock, M. R. observed :
" ..... It is a misapprehension, after the liquidator
has assumed his duties to continue the distinction bet·
ween surplus profits and capital."
This decisfo.n was receritly affirmed by the House of Lords in
Staffordshire Coal and Iron Co. Ltd. v. Brogan (Inspector of
Taxes)(').
The House of Lords held that there was no ground
for making an exception to the general rule that the surplus assets
of a company, after providing for all liabilities. were divisible
among its members as capital.
Accordingly, the receipt by a
constituent company of its appropriate proportions of the distributed surplus wa~ a receipt of a capital nature.
Lord Evershed
observed at p. 565 :
"It cannot now be in doubt that surplus assets in the
.hands of the liquidator of a limited liability companywhether limited by share capital or by guarantee-are in
his ;iands capital.
Such a conclusion was laid down 1:-v
the Court of Appeal in Inland Revenue Commissioners
v. Burref-(1924)2 K.B. 52 (see e~pecialy per Atkin
L.J. ), and it has never since been questioned."
(I) (1889) L.R. 14 A.C. 525.
(1) 54 J.T.R. 555.
(2) <1924) 2 J<.P. 52.
'UP!>EME COURT REPORTS
(1971] l S.C.R.
A
1'h~ Indian Income-tax Act, 1922, when originally enacted.
c0ntaiued no definition of "dividend" : the expression '·dividend ..
h:id therefore the same meaning as it had in the Indian Companies
f\Cl, 1913, and the amount distributed among the shareholders
1'v the liauidator out of the assets of the company after m~eting
the Jiaoilities was regarded as a capital receipt \n the haP.·.ls of
~le >l:areholders.
In 1939 the Indian Legislature incorp<" ated
, : . 2 of rhe Indian Income-tax (Amendment) Act 7 of 1 'l39, an
incl11Sive deMition of the express "dividend".
Clau>e I cJ cf
tha! definition read :
"any distribution made to th;, shareholders of a ~om
pa·ny 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;"
But the profits of the year in the course of which the Company
was ordered to be wound up not being accumulated profits \Vere
not part of the dividend : Appavu Chettiar v. Commissioner of
Income-tax, Madras;(') Girdhardas & Company Ltd. v. Comrni~
sioner of Income-tax, Ahmedabad;( 2) and also the
observations
of this Court in First Income-tax Officer, Salem x. Short Brothus
(P) Ltd. (6 ) at pp. 88 & 89.
Clause (c) to s. 2(6A) was amended by the Finance Act of
1955 and the proviso :o cl. ( c) was deleted.
The only eftecl
of deleting the proviso was to remove the limitation providing that
distribution of profits of the six previous years preceding the date
of liquidation only was dividend.
·
By the Finance Act of 1956, cl. (c) was replaced by the
following clause :
"any distribution made to the shareholders of a company on its liquidation, rci the extent to which the disB
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tribution is attributable to the accumulated profits of the
G
company immediately before its liquidation,
whether
capitalised or not;"
This amendment came into operation as from April !, 1956
We are in this case concerned with the distribution of Rs. 1.00
by allotment of a share in the Carborundum Universal Ltd. made
H
(I) 29 l.T.R. 768.
(3) 60 l.T.R. 83
•
(21 31 IT. R. 81.
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C.I.T. V, MuRUGAPPAN (Shah, ·J.)
on March 10, 1955.
The questior. whether the distribution was
dividend had to be det~nnined in the light of the Income-tax Act
as amend~d by the Finance Ac.t of 1956.
The amount
0( Rs.
81,611 distributed by the liquidator on March 10, 1955, represented tiy the curreut profits aud not profits eamed before J anuary l, 1954.
The amount distributed as dividend out of the
current profits could not, in the state of the law in force in the
yeJr •Jf a;se~sment 1955-56, be deemed dividend in the hands of
tl:e 'hareholders.
The appeal thet eforc falls and is d1smi,,ed with costs.
RK.P.S.
Appeul dismis~ed .
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