COMMISSIONER OF INCOME-TAX, ERNAKULAM (KERALA) versus THE OFFICIAL LIQUIDATOR, PALAI CENTRAL BANK LTD. (IN LIQUIDATION)

Citation: [1985] 1 S.C.R. 971 · Decided: 16-10-1984 · Supreme Court of India · Bench: V.D. TULZAPURKAR · Disposal: Dismissed

Judgment (excerpt)

COMMISSIONER OF INCOME-TAX, ERNAKULAM. 
(KERE!-A) 
v. 
971 
THE OFFICIAL LIQUIDATOR, PALA! CENTRAL BANK LTD, 
(IN LIQUIDATION) 
October 16, 1984 
[V.D. TULZAPURKAR, V. BALAKRISHNA ERADI AND D. P. MADON JJ.] 
Super Profita Tax Act, 1963 (Act XIV of 1961), ss.2 (5), 2 (9) and 4 read 
with second Schedule to the A.ct-Company in liquidation-Whether chargeable to 
super profits tax. 
Capital, reserve and accumulated profits-Distinction between-Whether 
disappears on winding up of company. 
The assessee-company went into liquidation on August 8, 1960. The 
Income-tax Officer, while determining the taxable income of the assessee-com-
pany at Rs. 5,79,678 for the assessment year 1963..()4, was of the opinion that 
this amount would attract liability for super profits tax also and therefore aske,d 
the assessee company to file its return. The assessee-company submitted its 
return showing the chargeable profits as 'nil', contending that there could be no 
liability to super profits tax in respect of a company in liquidation since the 
formula laid down in the Second Schedule to the Super Profits Tax Act 1963 
for ca1culation of the •standard deduction' was inapplicable on account of the 
fact that a company in liquidation could not be said to have paid-up share 
capital as on the first day of the previous year relevant to the assessment ye~ 
which was long subsequent to the winding up. The Jncorne .. Tax Officer how-
ever overruled the aforesaid contention and worked out the chargeable pro-
fits at Rs. 2,04,740 after adopting a minimum amount of Rs. 50,000 mentioned 
in s.2 (9) of the Act as a "standard deduction". The said order was confirmed 
in appeat by the Appellate Assistant Commissioner. But, on further appeal by 
the assessee-company the Income-tax Appellate Tribunal while aJlowing the 
appeal held : (1) that in the hands of the liquidator there is only one integral 
fund which could not be split up into share capital, reserve profits and there-
fore s.27 of the Act was clearly attracted to the case ; .and (ii) that no assessment 
to super profits could be made on a company in liquidation since section 4 of 
the Act would not apply to the assessee company in liquidatioa as the standard 
deduction was incapable of ascertainment. The High Court, rejected the 
reference made at the instance of the Revenue. 
B 
c 
D 
E 
F 
G 
ff 
A 
B 
c 
'' 
D 
972 
SUPREME COURT REPORTS 
[1985] I S.C.R. 
Dismissing the appeal by the Revenue, 
HELD : (1) After a company has gone into liquidation it cannot be said 
that as on the first day in any subsequent year forming the previous year 
relevant to the assessment year. there exists in the hands of the liquidator any 
amount distinctly forming the paid-up share capital of the company or any sum 
that can be characterized as 
11reserve." Ute distinction between capital, reserve 
and the accumulated profits disappears in respect of a company in Hquidation 
after tbe date of its winding up and there is only one integrated or consolidated 
fund in the hands of the liquidator. The concept of a fluctuating share capital 
or reserve which is the basic premise necessary to attract the applicability of 
rule 1 of the Second Schedule is wholly foreign in respect of a company in 
liquidation. 
[977H; 978E-F) 
(2) It is clear from the definition of ''standard deduction" that for the 
purpose of calculation of "standard deduction" one has to ascertain the capital 
of the company as computed in the manner specified in Second Schedule. But, 
it is 'important to notice from the terms of Rule 1 of Second Schedule that un-
.less the company can be said to have a partl-up share capital as on the first 
day of the previous year re!evant to the assessment year the formula laid down 
in the rule for computation of capita.I of the company cannot have any app!ica .. 
tion and the calculation of "standard deduction" being based wholly on the 
capital of the company, it becomes wholly incapable of ascertainment. 
[976B ; 977F-G] 
Commissioners of Inland Revenu• v. George Burrell, 1924 2 [K.B.) 52, 63 
aod Birch). Cropper [1889) L.R. 14 App. Cas. 525, 546 referred to. 
CommlsSioner of Income-tax v. Girdhardas and Co. Private Ltd1 63 I.T.R. 
E 
300 ; followed. 
F 
G 
H 
(3) Under the scheme of the Income-tax Act 1961, charge of tax will not 
get attracted unless the case or transaction falls under the governance of the 
relevant computation provisions. The character of the computation provisions 
in each case bears

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