COMMISSIONER OF INCOME-TAX, GUJARAT versus VADILAL LALLUBHAI ETC. ETC.

Citation: [1973] 1 S.C.R. 1058 · Decided: 29-08-1972 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Cited by 1 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

1058 
COMMISSIONER OF INCOME-TAX, GUJARAT 
V. 
V ADILAL LALLUBHAI ETC. ETC. 
August 29, 1972 
[K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R. KHANNA, JJ.J 
Income-Tax Act (l I o/ 1922) ss. 2(6A\ (c), 2(6C) and 44F-Decmed 
dividend, if income under s. 44F. 
The assessee sold his share holdings in certain managing agency com-
panies. 
A few days thereafter the managing agency ciompanies went into 
voluntary liquidation. 
Omsequenlly, the asselll of those companies were 
A 
8 
· distributed among the shareholders then on the registers of the com-
panies. 
They included the persons who had newly purchased the shares. 
C 
They were either not liable to pay any income-tax or were liable to pay 
tax at a rate lower than whan the assessee would have had to pay had 
he rece.ived the amount distributed. 
The Departmeni and the Appellate 
Tribunal held that' the amounts distributed were dividends within the 
meaning of s. 2(6A) (c) of the Income-tax Act, 1922, that the assessee 
<~Id his shares with a view to avoid income-tax &nd super tax, and that, 
consequently, the assets distributed, which would have fallen to his share 
had he not sold his shares, were liable to be b110ught to tax under s. 44F 
D 
Of the Act. The High Court, on reference, held in favour of the assessee. 
· Dismis:;ing the appeal to this C·ourt, 
HELD : (I J Sec1f,ion 2 ( 6C) of the lI1.:ome-tax Act gives an inclusive 
defin'ition of 'income' and dividend is included therein, 
There ·>re, if a 
receipt can be considere1i as dividend it has .to be considered a.:i income 
under 2(6C). 
Section 2(6A) gives an inclusive definition of Jividend' 
E 
and under sub"cl. (c), any distribution made to the sharehoi·krs of a 
company o~ its liquidati\)n would be deemed to be dividend; but, this 
definition applies oniy if there is nothing repugnant in the ,.,bject or 
context. [1061G-l!; 1062 A-BJ 
(2) Legal fictions are only for a definite purpose and they are limited 
to the purpose for which they are created and should not be extended 
beyond their legitimate field. 
In the case of deemed dividend under s. 
F 
2(6A)(c) the assets distributed will be considered as income in the 
account year in which it is distril>uted but that conception would be in-
ap;ilicable in cases coming under s. 44F. [1064 C·E] 
Commissioner of Income-tax, Andhra Pradesh v. C.P. Sarathy MudG/iar. 
82 I.T.R. 170; and Commissioner of l11come-tax, Bombay City-! v. Amar-
.chand N. Shroff, 48 I.T.R. 59, referred to. 
(3) Under s. 44F (!) to (3) the income referred 1" therein should 
arise from shares or securities during a period of time. 
Further, it must 
be a periodical income which is capable of being apportioned on the basis 
1hat it is deemed to have accrued from day to day. 
In the c~e of interest 
on 
securities or dividends on shares they are paid at certain intervals 
and hence they c:an be deemed as bavin~ accrued from day to day; bu! 
in the case of distrihution of the assets of a c<>mpany on liquidation it is 
not possible to deem it as having aC'crucd from day to day. 
When a 
oompany goes into liquidation the share scripts are nothing but pieces of 
paper and no income arises from those 'shares after the liquidation. What 
the share holder f;ets on liquidation is not any income 'from shares but 
G 
H 
A 
ll 
c 
D 
, 
E 
F 
) 
G 
!I 
C,I.T. v. VADILAL (Hegde, !.) 
10"59 
a share of the assets of the quondam company and such a receipt "is in-
capable of being deemed to have accrued from day to day._ Moreover, 
the company may go into iiquidation long after the accounting year ends 
and there is nothing to indicate what period the income-tax officer should 
take into c~nsideration for applying the fictioJn that "the Income had 
<.:eemed to accrue from day to day." [1065A-CJ 
(4) The two provisions, namely, s. 2(6A)(c) and s. 44F cannot be 
dovetailed unless three a'sumptions are made, (a) that 
the 
fictional 
dividend cctntemplated by s. 2(6A)(c) is 'income' within the meaning of 
s. 44F; (b) that the dividend is capable of being deemed to have accrued 
day to day; and ( c) that the day to day distribution contemplated in s. 
~F commences on the commencement of the relevant accounting year 
and ends with the distribution of the assets. 
To dn so, words would 
have to be read into the section _which is impermissible in construing a 
provision of Jaw. 
Hence, the deemed dividend contemplated by s. l. 
(6A)(c), cannot be considered as income under s. 44F. [1064 G-H] 
Commiss•ioner of Income

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