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

Citation: [1971] 1 S.C.R. 377 · Decided: 24-04-1970 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Dismissed

Judgment (excerpt)

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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-Distri-
bution 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,e-
tax Officer brought the value of the shares received by the shareho[dors 
to ta,~ on the footing that it repr~.sented "accumulated profits" as conterr1-
plated 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 .determin-
ed 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 In-
come-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 incorpo-
rated in 1939. 
It maintained its accounts accor!iing to the calen-
dar 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 valu

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