LexTHE COMMISSIONER OF INCOME-TAX, MADRAS versus URMILA RAMESH
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THE COMMISSIONER OF INCOME-TAX, MADRAS A v. URMILA RAMESH JANUARY 23, 1998 [S.C. AGRA WAL, B.N. KIRPAL ANDS. RAJENDRA BABU, JJ.] B Income Tax Act, 1961 : Ss. 2(22)(c), 32(/)(iii) and 41 (2)-Assessees-shareholders of company- Liquidation-Amount realized on sale of assets in excess of written down C value but less than purchase price-Distribution of dividends to shareholders-Assessment order treating the sale amount as "accumulated profit" and its distribution to shareholders as "deemed dividend"-Validity of-Held, amount received by the company on sale of assets does not constitute" accumulated profit"-Return of capital on sale of assets is not D capable of being capitalised and hence is not "deemed dividend"-Jncome Tax Act, 1922-Section I 0(2)(vii). Section 2(22)(c)- "accumulated profit"-Nature and scope of S.41(2)-Whether contains any legal fiction as regards income of an E assessee-Held, yes. Respondents-assesses were share-holders of a private Limited Company which went into voluntary Liquidation. After sale of its assets, the liquidator distributed the dividends to the share-holders. The Income Tax Officer by determining the accumulated profits of the company taxable under Section F 41(2) of the Income Tax Act, 1961, passed assessment orders treating the dividends distributed as income of the respective share-holder under Section 2(22)(c) of the Act. The respondents-assesses' appeals against the said assessment orders were allowed by Appellate Assistant Commissioner and further upheld by Income Tax Appellate Tribunal. On reference, High Court G held that the profits assessed under Section 41(2) of the Act could not form >- part of the accumulated profits for the purpose of Section 2(22)(c) of the Act. Hence, the present appeals. The contention of the appellant-Revenue was that if the amount for which the assets were sold, exceeds the written down value, then the amount H 323 1, 324 SUPREME COURT REPORTS (1998] 1 S.C.R. A which is assessed under Section 41(2) of the Act represents accumulated profits .and on its distribution amongst the share-holders it should be assessed as dividend. J ____ , The contention of respondents-assessees was that the amount realized by the liquidator on the sale of the assets admittedly being less than the B purchase price, it only represented the return of capital and the excess of ... realization over the written down could not be regarded as profit under ...L_,. section 2~(2)(c) of the Act; it is only by legal fiction that the excess amount received by the official liquidator was deemed to be income and taxed by virtue of provisions of Sec•ion 41(2) of the Act and cannot be regarded as C profit or capital gain. D E F Dismissing the appeals, this Court HELD : I. The amount received by the company, which was taxed under Section 41(2) of the Income Tax Act, 1961 did not represent "accumulated profits" within the meaning of that expression in Section 2(22) of the Act. 2.1. Section 41(2) of the Act is a special provision whereby the amount received in excess of written down value becomes chargeable to income-tax as income of the business or profession of the previous year in which the money payable for the building, machinery, plant or furniture become due. But for this specific provision, this amount would not have been taxed as income from business. Building, machinery, plant or furniture, on which depreciation has been allowed, would be the capital asset of the assessee. Any sum received in respect thereof would ordinarily represent a capital receipt. But section. 41(2) regards this amount as income from business or profession and of the year in which the amount becomes due. Even though the word "deemed" is not used in Section 41(2) of the Act, as has been used in Section l 0(2)(vii) second proviso of 1922 Act, nevertheless this provision creates a legal fiction whereby an amount received in excess of the written down value is firstly treated as income and secondly regarded as income from business or profession and thirdly it is considered to .be the income of the previous year in which the money payable became due. Thus, both the provisions, viz. G Section 10(2)(vii) second proviso of the 1922 Act and Section 41(2) of the 1961 Act create a legal fiction, difference in language notwithstanding. \ r- Cambay Electric Supply Industrial Co. ltd. v. Commissioner of Income- -t, Tax, Gujarat-II, 113 ITR 84, relied o
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