Case Note & Summary
The Supreme Court dealt with a batch of civil appeals filed by the Revenue against a common judgment of the High Court of Madras dated 9 March 1979 in Commissioner of Income-tax, Tamil Nadu I v. T.S. Rajam, reported in (1980) 125 ITR 207. The dispute concerned the assessment of shareholders of Tinnevelly Motor Service Company Private Ltd., a company whose vehicles were taken over by the Government and which consequently went into liquidation. The liquidator distributed amounts to shareholders from time to time, and the Income-tax Officer assessed a sum of Rs.7,28,760 as deemed dividend in the hands of shareholders under Section 2(22)(c) read with Section 2(24) of the Income-tax Act, 1961. The amount represented profits on sale of the company's capital assets, which had been subjected to depreciation and shown as capital reserve. The Revenue contended that though the amount was shown as capital reserve, it was purely accumulation of profits assessed under Section 41(2) of the Act from assessment years 1962-63 to 1969-70. The assessees argued that amounts assessed under Section 41(2) cannot be treated as commercial profits in the real sense and therefore cannot come within the mischief of Section 2(22)(c). The Income Tax Appellate Tribunal deleted the additions, and the High Court affirmed that deletion. The High Court 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, but the legal fiction should be limited for the purpose for which it was created. The receipt of excess on written down value on sale of capital assets cannot be held to be profit apart from the legal fiction, cannot form part of commercial profit, and therefore cannot form part of accumulated profits within the meaning of Section 2(22)(c) read with Section 2(24). The High Court relied on CIT v. Bipinchandra Maganlal & Co. Ltd., CIT v. Express Newspapers Ltd., and Cambay Electric Supply Industrial Co. Ltd. v. CIT. Before the Supreme Court, the Revenue argued that the language of Section 41(2) of the 1961 Act is different from the 1922 Act provision and does not contain a fiction similar to the second proviso to Section 10(2)(vii) of the 1922 Act; the income brought to tax under Section 41(2) is by way of restitution and should be treated as profits, and distribution of such amount should be assessed as dividend. The assessees argued that there is difference between profits and commercial profits, dividend can be declared only out of commercial profits, and Section 41(2) contains words akin to a legal fiction. The Supreme Court, after hearing rival pleas, expressed a prima facie view that the language employed in Section 10(2)(vii) of the 1922 Act and Section 41(2) of the 1961 Act are materially different, and it was doubtful whether Section 41(2) creates a legal fiction. The Court observed that earlier three-judge bench decisions were based on the 1922 Act, while a later two-judge bench decision interpreted Section 41(2). The Court was prima facie inclined to hold that once certain amount is treated as income under the Act, it should be so for all intents and purposes and in all situations arising under the Act. However, due to the importance of the questions and the conflict in precedents, the Court did not finally decide the matter. Instead, it directed the Registry to place the matters before the Chief Justice for appropriate orders for constitution of a larger Bench.
Headnote
A) Income Tax - Deemed Dividend - Accumulated Profits - Income-tax Act, 1961, Sections 2(22)(c), 2(24), 41(2) - The question was whether the balancing charge assessed under Section 41(2) on sale of depreciable capital assets could form part of accumulated profits for the purpose of deemed dividend under Section 2(22)(c). The High Court held that Section 41(2) created a legal fiction and the excess could not be commercial profit, hence not accumulated profits; the Supreme Court prima facie differed, noting that once an amount is treated as income under the Act it should be so for all purposes, but due to conflicting precedents refrained from final decision. (Paras 3-4, 6) B) Income Tax - Legal Fiction - Difference Between 1922 Act and 1961 Act - Income-tax Act, 1922, Section 10(2)(vii); Income-tax Act, 1961, Section 41(2) - The Court observed that the language employed in Section 10(2)(vii) of the 1922 Act and Section 41(2) of the 1961 Act are materially different, and it was doubtful whether Section 41(2) created a legal fiction. Earlier three-judge bench decisions were based on the 1922 Act provision, while a later two-judge bench decision interpreted Section 41(2). The conflict required an authoritative pronouncement by a larger bench. (Paras 6-7) C) Reference to Larger Bench - Conflicting Precedents - Need for Authoritative Ruling - Income-tax Act, 1961 - In view of the importance of the questions and the conflicting three-judge and two-judge decisions, the Supreme Court directed the Registry to place the matters before the Chief Justice for constitution of a larger Bench. Held that the batch of cases be heard and disposed of by a larger Bench. (Para 7)
Issue of Consideration
(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in confirming the deletion of the income assessed as deemed dividends under the provisions of Section 2(22)(c) in the assessees' case? (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 Section 41(2) in the preceding years cannot form part of the accumulated profits for the purpose of Section 2(22)(c) of the Income-tax Act, 1961?
Final Decision
The Supreme Court did not decide the merits of the appeals. In view of the importance of the questions and the conflict between three-judge and two-judge bench decisions, the Court directed the Registry to place the matters before the Chief Justice for appropriate orders for constitution of a larger Bench to hear and dispose of the batch of cases.
Law Points
- Balancing charge under Section 41(2) of Income-tax Act
- 1961 is chargeable as income
- once amount treated as income under the Act it should be so for all intents and purposes
- language of Section 10(2)(vii) of Income-tax Act
- 1922 and Section 41(2) of Income-tax Act
- 1961 are materially different
- conflict between three-judge and two-judge bench decisions required larger bench
- deemed dividend under Section 2(22)(c) read with Section 2(24) of Income-tax Act
- 1961
