FIRST INCOME-TAX OFFICER, SALEM versus M/S. SHORT BROTHERS (P) LTD.

Citation: [1966] 3 S.C.R. 84 · Decided: 15-12-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

FIRST INCOME-TAX OFFICER, SALEM 
v. 
MJS. SHORT BROIBERS (P) Ltd. 
December 15, 1965 
{K. SUBBA RAO, J. C. SHAH ANll S. M. S!KRI, JJ.] 
Income-tax Act (11 of 1922), ss. 
2(6-A)and 12-B-"Accumu/ated 
Profits", meaning of-If inc/ud<s capital gains from sale of lands yielding 
agricultural income. 
After the respondenl-company sold it• asoets, which included agricul-
tural lands and buildings, it wa. re3olved that it 
should be voluntarily 
wound up. On 30rh 
March, the 
liquidator 
distributed R•. 
850,000 
to share-holder.. 
The appellant (Income-tax Officer) proposed to treat 
the amounts distributed as dividends and to call upon the liquidators to 
pay the lax under s. 18(3D) of the Income-tax Act, 1922. The liquida-
rors contended that the amount was capital appreciation realised by the 
sale of agricultural lands and buildings and therefore not liable to tax; 
and that in any event the amounts represented "current profits" of tho 
year in which it was resolved that the company be wound up and so 
were not dividends within the meaning of s. 2(6-A)(c). As the appellant 
did not agree, the liquidators moved the High Court for a writ of prohibi-
tion to rmtrain him from raking further action. The High Court i'3ued 
the writ holding that the demand by the appellant was not in conformity 
with law in that the amount of Rs. 850,000 amid not be deemed to 
be distributed as dividend without determining whether any portion of 
it represented capital gains. which arose out of the sale of capital assets 
con•isting o! land• from which agricultural income was derived. 
Jn appeal to thi• Court. 
HELD : (i) Normally the High Court should not entertain a petition 
under Art. 226, when the parly claiming relief h., an adequate alternative 
remedy, but as the matter is one of discretion and not jurisdiction of the 
High Court, if the High Court thought that the case was one in which 
it< jurisdiction could be invoke<.\, this Court would ordinarily not inrerferc 
with the exercise of the di.<cretion. [86 Fl 
(ii) The decision in Bacha Gutdur v. Commissioner of Income-lax, 
(27 l.T.R. I), wherein it w .. held that dividend received by a abare-holder 
out of profits earned from agricultural 
income wu not exempt 
from 
liability under s. 4(3)(viii), h., no application to the present cue, be· 
cause, the claim of the respondent to exemption from liability to tax was 
not under s. 4(3 )(viii), but on the b.,is tharthe receipt by the share· 
holder was not income chargeable to tax under s. 
12 as dividend. 
[92 BJ 
(iii) By s. 12 tax is payable by an asse3See under tho head "income 
from other sources" which includes dividends. "Dividend" is defined in 
s. 2( 6-A) and cl. ( c) declares that accumulated profits immediatt/y be/or• 
the liquidation of the company are dividends. 
Since it does not say that 
only accumulated profits upto end of the previous year immediately pr,._ 
ceding the year in which liquidation of tho company commences are divi-
dend, all profits earned till immediately before liquidation, if they are 
di•tributed, will be brought to tax wholly if they consist of accumulated 
profits, or partly to the extent they are attributable to accumulated profits. 
In giving effect to tho definition, the taxing authority may have to com-
A 
B 
c 
.. 
D 
• 
F. 
F 
• 
G 
• 
" 
H 
, 
,• 
I 
I.T.O. V. SHORT BROS. (Shah, J.) 
85 
A 
pule profits of the company for a part of the year, but there is nothing 
in the Act which prohibits assessment of profits for a part only of the 
previous year in special circumstances. In fact, the legislative history 
of s. 2(6-A) (c) shows that "current profits", that is, profits of a company 
in liquidation arising after the end of the last previous year and before 
liquidation commenced are brought within the net.of taxation as dividend. 
Further, the explanation to the section plainly implies that within the 
expreasion "accumulated profits"are included capital gains 
outside 
the 
B 
excepted periods specified therein. 
But under s. 12-B while capital gains 
are chargeable in respect of any profits arising from transfer of "capital 
asieti-,," "capital assets" do not include lands from which the income de-
rived is agricultural 
income. 
Therefore, on a combined 
reading of 
s. 12-B and the definition of capital asset in s. 2( 4-A), profits drived by 
transfer of lands from which the income derived is agricultural income 
would not be chargeable to tax. 
[87 F, 88 C, H; 89 A-C, E; 91 B-C, 
C 
D-E] 

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