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

Citation: [1967] 1 S.C.R. 777 · Decided: 07-10-1966 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Case Partly allowed

Judgment (excerpt)

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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 toro-
mencement 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 Income-
tax 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 'divi-
dend'. 
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 accumulat-
ed 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 pur-
pose, 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 pro-
Ml7Sup. 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 ac-
cumulated 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 lncomo-
tax 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 attri-
butable to accumulated profits. 
(782 H; 783 CJ 
In the present case therefore the Income Ttax authorities had to deter-
mine what part of the sum of Rs. 75,000 distributed among the share-
holders represented accumulated profits. 
Only that 
part of Rs. 75,000 
which bore the same rat

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