THE COMMISSIONER OF INCOME-TAX, MADRAS versus URMILA RAMESH ETC.

Citation: [1997] 1 S.C.R. 918 · Decided: 04-02-1997 · Supreme Court of India · Bench: B.P. JEEVAN REDDY, K.S. PARIPOORNAN · Disposal: Disposed off

Judgment (excerpt)

A 
THE COMMISSIONER OF INCOME-TAX, MADRAS 
v. 
URMILA RAMESH ETC. 
FEBRUARY 4, 1997 
B 
[B.P. JEEVAN REDDY AND K.S. PARIPOQRNAN, JJ.] 
Income Tax Act, 1961 : Sections 2(22)(c), 2(24) and 41(2). 
Income Tax Act, 1922 : Section 10(2)(vii) : 
C 
Income Tax-Assessee shareholder of a Transport Company--Liquida-
tion of Company-Distribution of dividends from time to time by liquida-
tor-Assessment for 197(}-71, 1971-72 and 1972-73-Expression 
"Accumulated profits''-Meaning of-Whether covers balancing charge 
brought to tax and shown as capital reserve by Company-Amount assessed 
D · under Section 41(2) as profits on sale of liquidated company's capital assets 
whether covered and distribution made out of such an amount whether 
assessable in the hands of shareholders as deemed dividends-Held an 
indepth analysis of the provisions of 1922 Act vis-a-vis the provisions of 1961 
Act is called f or--ln view of the importance of questions involved matter 
ref erred to a larger Bench. 
E 
Commissioner of Income-tax Tamil Nadu Iv. T.S. Rajam, (1980) 125 
ITR 207; C.l.T. v.Bipinchandra Magan/al & Co. Ltd., (1961) 41 ITR290 SC; 
CIT v. Express Newspap:rs Ltd., (1964) 53 ITR 250 SC; Cambay Electric 
Supply Industrial Co. Ltd. v. CIT, (1978) 119 ITR 113; Cambay Electric 
Supply Industrial Co. Ltd. v. Commissioner of Income-tax, Gujarat - II, 113 
F 
ITR 84 and Bishop v. Smyrana and Cassaba Railway Company (No. 2), 
(1895) 2 Ch. 596, referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2141-43 
of 1982 Etc. 
G 
From the Judgment and Order dated 9.3.79 of the Madras High 
Court in T.C. No. 267 of 1975. 
Dr. V. Gaurishankar, S. Rajappa and B.K. Prasad for the Appellant. 
·~ 
T.A. Ramachandran and A.T.M. Sampath for the Respondent in 
H C.A. No. 2150-52/82. 
918 
. 
C.I.T. v. URMILARAMESH 
919 
J. Ramamurthy, Ms. Janki Ramachandran for the Respondent in A 
C.A. No. 3274/84. 
The following Order of the Court was delivered : 
In this batch of cases, the followi.ng two questions of law arise for 
consideration : 
(i) · Whether, on the facts and in the circumstances of the case, 
the Appellate Tribunal was justified in confirming the dele-
tion of the income assessed as deemed dividends under the 
B 
provisions of S. 2(22)(c) in the assessees' case? 
C 
(ii) Whether, on the facts and in the circumstances of the case, 
the. Appellate Tribunal was right in law in holding that the 
sum of Rs. 7,28,760 representing profits assessed under ·sec-
tion 41(2) in the preceding years cannot form part of the 
accumulated profits for the purpose of section 2(22)(c) of the D 
Income-tax Act, 1961? 
2. The Revenue has preferred the appeals from the common judg-
ment rendered by the High Court of Madras dated 9.3.1979, reported as 
Commissioner of Income-tax, Tamil Nadu Iv. T.S. Rajam, (1980) 125 ITR E 
207. 
3. We heard counsel at some length. The main facts are not in 
dispute. The respondents are assessees under the Income-tax Act. They 
were shareholders of a company known as "Tinnevelly Motor Service 
Company Private Ltd.". The company carried on transport business. 
F 
government took over all the vehicles owned by the company. The company 
went into liquidation. The Liquidator distributed the dividends from time 
to time. Assessments were made for the years 1970-71, 1971-72 and 1972-
73. The Inco.me-tax Officer assessed a sum of Rs. 7,28,760, as representing 
profits on sale of company's capital assets, which had· been subjected to G 
depreciation and not trading or business profits, and the comp<iny had 
shown it as a capital reserve. The plea of the Revenue was that though the 
amount was shown as capital reserve, it was purely the accumulation of 
profits, either assessed or equal to the amounts assessed under Section 
41(2) of the Act from 1962-63 to 1969-70. On this basis, it was concluded 
that the said amount represented the income of the shareholders under H 
920 
SUPREME COURT REPORTS 
[ 1997] 1 S. C.R. 
A Section 2(24) read with Section 2(22)(c) of the Income-tax Act. The plea 
of the assessees was that the amounts assessed under Section 41(2) of the 
Act cannot be treated as 'commercial profits' at all in the real sense and 
so it can not come within the mischief of Section 2(22)( c) of the Act. 
B 
4. The High Court of Madras held that Section 41(2) of the 1961 act 
creates a legal fiction under which the balancing charge is treated as 
"business income" chargeable to tax. The legal fiction should be limited for 
the purpose for w

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