Section 211
Form
and contents of balance sheet and profit and loss account
[2003] 45 scl 500 (Mad.)
HIGH COURT OF
v.
Registrar of
Companies
C. NAGAPPAN, J.
CRL. OP NO. 18494 OF 2000
DECEMBER 19,
2001
Section 211 of the Companies
Act, 1956, read with section 468 of the Code of Criminal Procedure, 1973
- Balance sheet - Form and contents of balance sheet - Whether offence under
section 211(7) is not a continuous one and there is a period of limitation for
taking cognisance of such offence - Held, yes - Whether since offence is
punishable with imprisonment for a term which may extend to six months or with
fine which may extend to Rs. 10,000 or with both, under section 468(2)(b) of
the code, period of limitation is one year - Held, yes - Whether where
respondent had knowledge of offence in question on 9-2-1999, when he issued
show-cause notice for prosecution to petitioner, complaint filed on 10-4-2000
under section 211(7) against petitioner for contravention of section 211(2),
read with Schedule VI was beyond period of limitation and, therefore,
prosecution proceedings against petitioner were to be quashed - Held, yes
Facts
The petitioner filed a balance sheet and the profit and loss account for the period ending 31-3-1997 in the office of the respondent. The respondent called for the break-up of other expenses in his letter dated 21-12-1998. The petitioner furnished the same in his letter dated 28-12-1998, pursuant to which, the respondent issued notice, dated 9-2-1999, calling up on the petitioner to show-cause as to why prosecution under section 211(7) for contravention of section 211(2) read with Schedule VI should not be initiated against the petitioner. The petitioner gave explanation, dated 20-2-1999. Thereafter, the respondent issued another show-cause notice, dated 9-8-1999, for which the petitioner submitted his explanation, dated 20-9-1999. Not satisfied with the explanation, a complaint under section 211(7) was registered against the petitioner on 10-4-2000 for its failure to disclose other income, profit on sale of trademark and miscellaneous expenses separately in its profit and loss account. On the contrary, the petitioner had shown other expenses after deducting from total expenses other income and profit on sale of trademark. The petitioner’s case was that since offence complained under section 211(7) was punishable with imprisonment for a term which might extend to 6 months or fine or with both and as alleged default was committed on 1-4-1997, so said complaint was beyond the limitation of one year. According to the petitioner, the contention of the respondent in the complaint stating that the default was a continuing offence within the meaning of section 472 of the Code for the purpose of limitation, was not correct. Therefore, said complaint was barred by limitation and not eligible to be entertained.
Held
Failure to take all reasonable steps to
secure compliance by the company as respects any accounts laid before it in
general meeting with the provisions of the section as to the matters to be
stated in the accounts by the person concerned is undoubtedly an offence
punishable under section 211(7) and it is punishable with imprisonment for a
term which may extend to six months or with fine or with both. A complaint in
respect of such an offence has to be filed within one year as per section
468(2)(b) of the Code. [
As regards the question whether the alleged
offence is a continuing offence reference has to be made to section 211(2). The
section requires every company to give a true and fair view of the profit and
loss of the company for the financial year and shall comply with the
requirements of Part II of Schedule VI and the offence of the breach thereof is
complete with the failure of the person concerned to take all reasonable steps
to secure compliance by the company as respects any accounts laid before the
company with the provisions of the section as to the matters to be stated in
the accounts. Such an offence is committed once and for all as and when one
commits the default. It gives rise to a single default and to a single
punishment. The provision does not contemplate that the obligation to secure
compliance continues from day-to-day until the compliance is actually met nor
does it provide that continuance of business without securing compliance
becomes a continuing offence. Hence, the offence under section 211(7) is not a
continuing offence and there is a period of limitation for taking cognisance of
such offence. [
Insofar as the limitation is
concerned, the question arises as to when the Registrar of Companies can be
said to have had the knowledge of the commission of offence by the petitioner.
In the instant case, the respondent was deemed to have knowledge about the
contents of profit and loss account when he received the same and at any event,
it could not be denied that the respondent had knowledge of offence in question
on 9-2-1999 when he issued show-cause notice for prosecution to the petitioner
and limitation would start running from that date onwards. The complaint had to
be filed within one year from that date while it was filed only on 10-4-2000
beyond that period of limitation. If it was so, there was bar to taking
cognisance of after the lapse of the period of limitation under section 468 of the
Code. [
Cases referred to
State of
Arvind P. Dattar and K. Ramaswamy for the Petitioner. T.S. Sivagnanam for the Respondent.
Order
1. The petitioner is the accused in STR No. 2644 of 2000 on the
file of Sub-Divisional Judicial Magistrate,
2. The respondent filed a complaint under section 211(7) of the Companies Act, 1956 (‘the Act’) against the petitioner in which it is alleged that a sum of Rs. 1,44,71,902 has been shown as other expenses, including bad debts, in schedule J in the profit and loss account filed by the petitioner for the period ending 31st March, 1997 and on a direction to furnish break-up for the said expenses, the petitioner furnished break-up figures in the letter dated 28th December, 1998 and it has been noticed in it that out of the total expense of Rs. 1,50,18,708.23, a sum of Rs. 4,46,806.24 being other income and Rs. 1,00,000 being profit on sale of trade mark had been deducted and the balance of Rs. 1,44,71,901.99 was shown as other expenses. The respondent alleged in the complaint that the profit and loss account for the year ending 31st March, 1997 has not disclosed the other income of Rs. 4,46,806.24 and the profit on sale of trade mark amounting to Rs. 1,00,000 and the miscellaneous expense of Rs. 59,790.74 separately.
2.1 According to the petitioner, the contention of the respondent in the complaint stating that the default commenced on 1st April, 1997 and is a continuing offence within the meaning of section 472 of the Code of Criminal Procedure, 1973 (‘Cr. PC’) is not correct. The offence complained of under section 211(7) of the Act is punishable with imprisonment for a term which may extend to six months or with fine or with both. The limitation for filing the complaint lapses on the expiry of one year. The present complaint was not filed within the time prescribed and hence it is barred by limitation. The learned Magistrate ought not to have taken cognisance of the offence. Hence, proceeding with the present complaint is an abuse of the process of court and the complaint is liable to be quashed. The petitioner has not concealed any material facts. The profit and loss account was audited and certified as true and fair by the qualified chartered accountant. The other income of Rs. 4,46,806 represents recovery of expenses and therefore it has been shown under the head ‘other expenses’. The sale profit of trade mark has been disclosed under clause 3 of schedule D. The accounts reflect true and fair view. The proceedings against the petitioner are unsustainable and liable to be quashed.
3. Mr. Arvind P. Dattar, learned senior counsel, appearing for the petitioner, mainly contended that the offence complained of under section 211(7) of the Act is punishable with imprisonment for a term which may extend to six months or with fine or with both and the limitation for filing the complaint lapses on expiry of one year and since the respondent did not file the complaint within the time prescribed, the learned Magistrate ought not to have taken cognisance of the offence for the reason that the complaint was barred by limitation. Per contra, Mr. T.S. Sivagnanam, learned Additional Central Government Standing Counsel, appearing for the respondent, contended that the offence alleged in the complaint against the petitioner is a continuing offence under section 472 of the Cr. PC and the offence continued till the date of the complaint.
4. As per the complaint, the accused, namely, the petitioner herein, has failed to comply with the statutory requirements of section 211(2) read with Schedule VI, Part II, clause 2(b) of the Act and hence liable for prosecution under section 211(7) of the Act. The relevant portion in the complaint is extracted below :
“7. As per Schedule VI, part II, clause 2(b) under the provisions of section 211(2) of Companies Act, the profit and loss account of the company shall disclose every material feature including credits and debts or expenses in respect of non-recurring transactions or transaction of an exceptional nature and as per Schedule VI, Part II, clause 3(x)(i), the profit and loss account shall disclose the miscellaneous expenses separately.
8. As the P&L account for the year ending 31st March, 1997 has not disclosed separately the other income of Rs. 4,46,806.24 and the Profit or Sale of Trade Mark amounting to Rs. 1,00,000 and the Miscellaneous Expenses of Rs. 59,790.74 separately a show-cause notice under section 211(7) of Companies Act, 1956 was issued to company with copy to the accused managing directors and company vide this office letter dated 9th February, 1999.”
5. The offence under section 211(7) of Act is punishable with imprisonment for a term which may extend to six months or with fine which may extend to Rs. 10,000 or with both and as such, under section 468(2)(b) of the Cr. PC, the period of limitation is one year. The relevant part of section 469(1) of the Cr. PC relating to the commencement of the period of limitation is as follows:
“4. Commencement of the period of limitation.—(1) The period of limitation, in relation to an offender, shall commence,—
(a) on the date of the offence; or
(b) where the commission of the offence was not known to the person aggrieved by the offence or to any police officer, the first day on which such offence comes to the knowledge of such person or to any police officer, whichever is earlier; or
(c) where it is not known by whom the offence was committed, the first day on which the identity of the offender is known to the person aggrieved by the offence or to the police officer making investigation into the offence, whichever is earlier.”
According to the respondent, the offence alleged against the petitioner is a continuing offence and if it is so, a fresh period of limitation shall begin to run at every moment of the time during which the offence continues.
6. The petitioner filed a balance sheet as on 31st March, 1997 and the profit and loss account for the period ending 31st March, 1997 in the office of the respondent. According to the respondent, on technical scrutiny of the profit and loss account, it was noticed that a sum of Rs. 1,44,71,902 was shown as other expenses in scheduled ‘J’ and the break-up of the said expenses was not furnished and the respondent called for the same in his letter, dated 21st December, 1998. The petitioner furnished the breaking figures in his letter, dated 28th December, 1998, pursuant to which, the respondent issued show-cause notice, dated 9th February, 1999, calling upon the petitioner to show-cause as to why prosecution under section 211(7) of the Act for contravention of section 211(2) read with Schedule VI of the Act should not be initiated against the petitioner. The petitioner gave explanation, dated 20th February, 1999. Thereafter, the respondent issued another show cause notice, dated 9th August, 1999, for which the petitioner submitted his explanation, dated 20th September, 1999. Not satisfied with the explanation of the petitioner, the respondent has lodged the present complaint on 10th April, 2000.
7. Failure to take all reasonable steps to secure compliance by the company as respects any accounts laid before it in general meeting with the provisions of the section as to the matters to be stated in the accounts by the person concerned is undoubtedly an offence punishable under section 211(7) of the Act and it is punishable with imprisonment for a term which may extend to six months or with fine or with both. A complaint in respect of such an offence has to be filed within one year as per section 468(2)(b) of the Cr. PC. The question is whether the offence alleged in the complaint is a continuing offence or not for the purpose of limitation.
8. Mr. Dattar, learned senior counsel, contended that there is nothing mentioned in section 211(7) of the Act rendering the offence a continuing one and the offence is complete with the failure to take all reasonable steps to secure compliance as respects any accounts laid before the company and such an offence is committed once and for all as and when one commits the default and the section does not lay down that the person concerned would be guilty of an offence if he continues to carry on without compliance or that the offence continues until the requirement is complied with. In this connection, he pointed out the offences mentioned in sections 113, 162 and 168 of the Act which were made to be continuing offences therein and contended that an act or omission should not be held as a continuing wrong or default, unless there are words in the statute which make out that such was the intention of the Legislature and he relies on two decisions of the Apex Court in this regard.
8.1 In State of Bihar v. Deokaran Nenshi AIR 1973 SC 908, the Apex Court has laid down as follows :
“5. Continuing offence is one which is susceptible of continuance and is distinguishable from the one which is committed once and for all. It is one of those offences which arises out of a failure to obey or comply with a rule or its requirement and which involves a penalty, the liability for which continues until the rule or its requirement is obeyed or complied with. On every occasion that such disobedience or non-compliance occurs and recurs, there is the offence committed. The distinction between the two kinds of offences is between an act or omission, which constitutes an offence once and for all and an act or omission which continues and therefore, constitutes a fresh offence every time or occasion on which it continues. In the case of a continuing offence, there is, thus, the ingredient of continuance of the offence which is absent in the case of an offence which takes place when an act or omission is committed once and for all.
** ** **
9. Regulation 3 read with section 66 of the Mines Act makes failure to furnish annual returns for the preceding year by the 21st of January of the succeeding year an offence. The language of regulation 3 clearly indicates that an owner, manager, etc., of a mine would be liable to the penalty if he were to commit an infringement of the regulation and that infringement consists in the failure to furnish returns on or before January 21 of the succeeding year the infringement therefore, occurs on January 21 of the relevant year and is complete on the owner failing to furnish the annual returns by that day. The regulation does not lay down that the owner, manager, etc. of the mine concerned would be guilty of an offence if he continues to carry on the mine without furnishing the returns or that the offence continues until the requirement of regulation 3 is complied with. In other words, regulation 3 does not render a continued disobedience or non-compliance of it an offence. As in the case of a construction of a wall in violation of a rule or a bye-law of a local body, the offence would be complete once and for all as soon as such construction is made a default occurs in furnishing the returns by the prescribed date. There is nothing in regulation 3 or in any other provision in the Act or the regulations which renders the continued non-compliance an offence until its requirement is carried out.” (p. 909)
In CWT v. Suresh Seth AIR 1981 SC 1106, Their Lordships of the Supreme Court held as follows :
“...In the instant case, the contention is that wrong or the default in question has been altered into a continuing wrong or default giving rise to a liability de die in diem, that is, from day-to-day. The distinctive nature of a continuing wrong is that the law that is violated makes the wrongdoer continuously liable for penalty. A wrong or default which is complete but whose effect may continue to be felt even after its completion is, however, not a continuing wrong or default. It is reasonable to take the view that the court should not be eager to hold that an act or omission is a continuing wrong or default unless there are words in the statute concerned which make out that such was the intention of the Legislature.
** ** **
17. The true principle appears to be that where the wrong complained of is the omission to perform a positive duty requiring a person to do a certain act the test to determine whether such a wrong is a continuing one is whether the duty in question is one which requires him to continue to do that Act. Breach of a covenant to keep the premises in good repair, breach of a continuing guarantee, obstruction to a right of way, obstruction to the right of a person to the unobstructed flow of water, refusal by a man to maintain his wife and children whom he is bound to maintain under law and the carrying on of mining operations or the running of a factory without complying with the measures intended for the safety and well-being of workmen may be Illustrations of continuing breaches or wrongs giving rise to civil or criminal liability, as the case may be, de die in diem.” (pp. 1110-1112)
9. Section 211(2) of the Act requires every company to give a true and fair view of the profit and loss of the company for the financial year and shall comply with the requirements of Part II of Schedule VI and the offence of the breach thereof is complete with the failure of the person concerned to take all reasonable steps to secure compliance by the company as respects any accounts laid before the company with the provisions of the section as to the matters to be stated in the accounts. Such an offence is committed once and for all as and when one commits the default. It gives rise to a single default and to a single punishment. The provision does not contemplate that the obligation to secure compliance continues from day-to-day until the compliance is actually met nor does it provide that continuance of business without securing compliance becomes a continuing offence. Hence, the offence under section 211(7) of the Act is not a continuing offence and there is a period of limitation for taking cognisance of such offence.
10. Insofar as the limitation is concerned, the question would arise as to when the Registrar of Companies could be said to have had the know-ledge of the commission of offence by the petitioner. The learned senior counsel for the petitioner contends that the Registrar of Companies is deemed to have knowledge about the contents of the profit and loss accounts when it was received by him and the limitation will start running from that date onwards and he relies on the decision of this Court in Asstt. ROC v. H .C. Kothari [1992] 75 Comp. Cas. 688 wherein Padmini Jesudural, J. has held as follows :
“After receiving the balance sheets, it is not open to the Registrar to keep these balance sheets in cold storage, keep his eyes closed to them and then to deny knowledge of these contents, thereby defeating the law of limitation. The very object of the bar of limitation would be defeated if the contention of the appellant is accepted. When the balance sheets are received by the Registrar of Companies, he is deemed to have knowledge about the contents of the balance sheets and, consequently, of the offence, and limitation will start running from that day onwards. The complaint relating to the year 1980 will have to be filed within six months from the date of receipt of exhibit P-1, namely, 9th June, 1981, the complaint for the offence relating to the year 1981 within six months from the date of receipt of exhibit P-2, namely, 12th May, 1982, and the complaint relating to the year 1982 within six months from the date of receipt of exhibit P-3, that is, 30th May, 1983. The present complaint is filed only on 2nd February, 1985, which is far beyond the period of limitation....” (p. 693)
In the present case, the petitioner filed profit and loss account for the year ending 31st March, 1997 in the office of the respondent. The respondent by letter, dated 21st December, 1998, required the petitioner to furnish break-up for ‘other expenses’ mentioned in schedule ‘J’ and the petitioner furnished the same by letter dated 28th December, 1998. In his letter, dated 9th February, 1999, the respondent called upon the petitioner to show cause as to why prosecution under section 211(7) of the Act for contravention of section 211(2) read with Schedule VI of the Act shall not be initiated against the directors of the company.
11. The learned Additional Central Government Standing Counsel appearing for the respondent contended that it has to be taken that the respondent had knowledge about the offence only on 9th August, 1999 when the second show-cause notice was issued and the complaint filed on 10th April, 2000 is within the period of one year from that date and it is in time. This contention can never be accepted. As already seen, respondent is deemed to have knowledge about the contents of profit and loss accounts when he received the same and at any event, it cannot be denied that the respondent had knowledge of the offence in question on 9th February, 1999 when he issued show-cause notice for prosecution to the petitioner and limitation will start running from that date onwards. The complaint has to be filed within one year from that date. The present complaint is filed only on 10th April, 2000 beyond the period of limitation. If it is so, there is bar to taking cognisance after the lapse of the period of limitation under section 468 of the Cr. PC.
12. The learned Additional Central Government Standing Counsel for the respondent contended that the court may take cognisance of an offence after the expiry of the period of limitation if it is satisfied that it is necessary to do so in the interest of justice under section 473 of Cr. PC and cited decisions in this regard. It is specifically averred in the complaint that the offence under section 211(7) of the Act is a continuing offence within the meaning of section 472 of the Cr. PC and it is also averred that the offence in the complaint continued for 110 days till the date of the complaint. It is no doubt true, in the last line of the complaint, it is stated that the delay in filing the complaint may be condoned under section 473 of the Cr. PC. This is inconsistent with the earlier averment in the complaint and cannot be taken note of. The complaint is mainly based on the footing that the offence is a continuing one and there is no period of limitation and in such circumstances, the contention with regard to invoking the power under section 473 of the Cr. PC is devoid of merit and cannot be accepted.
13. Since the offence under section 211(7) of the Act is not a continuing one, the learned Magistrate ought not to have taken cognisance of the offence in the present case after the expiry of the period of limitation in view of the bar under section 468 of the Cr. PC and the proceedings are liable to be quashed.
14. In view of the conclusion arrived above, it is not necessary to go into the other contention of the petitioner that the allegations mentioned in the complaint do not constitute the offence alleged.
15. In the result, the petition is allowed and the proceedings against the petitioner in STR No. 2644 of 2000 on the file of Sub-Divisional Judicial Magistrate, Pondicherry are quashed.
Petition allowed.
[1979] 49 COMP. CAS. 268 (KER.)
HIGH COURT OF KERALA
v.
Official Liquidator, Palai Central Bank Ltd.
V.P.
GOPALAN NAMBIYAR, C.J.
AND
M.P. MENON, J.
ITR Case No. 76 of 1977
P.K.R.
Menon for the Applicant.
C.M. Devan for the Respondent.
JUDGMENT
Gopalan Nambiyar, C.J.— The Income-tax Appellate Tribunal, Cochin Bench, has
along with its statement of the case, forwarded the following question of law for
our opinion, viz.:
"Whether, on the facts
and in the circumstances of the case, was the Tribunal justified in holding
that no assessment under the Super Profits Tax Act, 1963, can be made on the
assessee-company (in liquidation) ?"
The assessment year with
which we are concerned is 1963-64, that is, the year ended March 31,1963. The
assessee is a banking company, namely, the Palai Central Bank Ltd., which went
into liquidation oh August 8 1960. On that date, the official liquidator took
charge of the assets and liabilities of the company. A balance-sheet had been
prepared on that date. Thereafter, for every year, the liquidator used to
prepare an income and expenditure statement for submission to the Reserve Bank
of
Section 2(5) of the Act
defines chargeable profits as follows:
"2.
Definitions.
In this Act, unless the
context otherwise requires,—........
(5) 'chargeable profits'
means the total income of an assessee computed under the Income-tax Act, 1961,
for any previous year or years, as the case may be, and adjusted in accordance
with the provisions of the First Schedule."
And s. 2(9) defines
"standard deduction". thus :
"(9) 'Standard
deduction' means an amount equal to six per cent, of the capital of the company
as computed in accordance with the provisions of the Second Schedule, or an
amount of fifty thousand rupees, whichever is greater:
Provided that where the
previous year is longer or shorter than a period of twelve months, the
aforesaid amount of six per cent, or, as the case may be, of fifty thousand
rupees shall be increased or decreased proportionately :
Provided further that where
a company has different previous years in respect of its, income, profits and
gains,the aforesaid increase or dec rease, as the case may be, shall be
calculated with reference to the length of the previous year of the longest duration."
Section 4 is the charging
section, which reads :
"4. Charge of tax.—Subject to the
provisions contained in this Act, there shall be charged on every company for
every assessment year commencing on and from the 1st day of April, 1963, a tax
(in this Act referred to as the super profits tax) in respect of so much of its
chargeable profits of the previous year or previous years, as the case may be,
as exceed the standard deduction, at the rate or rates specified in the Third
Schedule."
And s. 27 is the exemption
section which provides that the Act shall not apply to any; company which has
no share capital. Turning to the Second Schedule., the mode of computation of
the capital of a, company for the purposes of super-tax is provided thus:
"1. Subject to the
other provisions contained in this Schedule, the capital of a company shall be
the sum of the amounts, as on the first day of the previous year relevant to
the assessment year, of its paid up share capital and oi its reserve, if any,
created under the proviso (b)
to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act,
1922, or under sub-section (3) of section 34 of the Income-tax Act, 1961, and
of its other reserves in so far as the amounts credited to such other reserves
have not been allowed in computing its profits for the purposes of the Indian
Income-tax Act, 1922, or the Income-tax Act, 1961, diminished by the amount by
which the cost to it of the assets the income from which in accordance with
clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule
is not includible in its chargeable profits, exceeds the aggregate of—
(i) any money borrowed by it which remains
outstanding ; and
(ii) the amount of any
fund, any surplus and any such reserve as is not to be taken into account in
computing the capital under this rule.
Explanation
1.—A
paid up share capital or reserve brought into exists ence by creating or
increasing (by revaluation or otherwise) any book asset is not capital for
computing the capital of a company for the purposes of this Act.
Explanation
2.—Any
premium received in cash by the company on the' issue of its shares
standing to the credit of the share premium account shall be regarded as
forming part of its paid up share capital. ,
Explanation
3.—Where
a company has different previous years in res pect of its income, profits and
gains, the computation of capital under rule 1 and rule 2 of this Schedule
shall be made with reference to the previous year which commenced
first............."
(Rules 2 and 3 omitted as
unnecessary)
It will be seen from the
charging section, s. 4 that super-tax was imposable only on so much of the
chargeable profits of the company as exceed the standard deduction at the rates
specified in the Third Schedule. It follows, therefore, that Were the standard
deduction itself is incapable of ascertainment, the charge to tax cannot be
levied. The standard deduction has to be computed in accordance with the Second
Schedule, with respect to the share capital and the reserve of the company in
the modes sanctioned by r. 1 of the Schedule. In the case of a company in
liquidation, it is clear on an analysis of the provisions of ss. 210 and 211 of
the Companies Act and rr. 298 and 299 of the Companies (Court) Rules that the
concept of share capital is unknown to a company in liquidation and that, after
liquidation, the liquidator is to file accounts, merely showing receipts and
payments and that the accounts do not show the capital or feserve with respect
to which the capital of the company is to be worked out as provided in the
Schedule. It appears to us, therefore, that the view taken by the Tribunal is
correct having regard to the provisions of the Act.
The Tribunal based its
conclusions on the English decision, in IRC
v.George Burrell [1924] 9 TC 27 ; [1924] 2 KB 52 (CA). We do not propose
to examine the case in full,or in detail. We think the decision supports the
reasoning and the conclusion of the Tribunal. It is enough for- us to refer to
the decision of the Supreme Court in Girdhardas
case [1967] 63 ITR 300, where this English decision is referred to, with
respect to the provisions of the Indian I.T. Act, 1922, for distribution of
dividend income. The copt observed (pp, 303, 305):
"In Commissioners of Inland Revenue v. George Burrett [1924] 2 KB 52, 63 ; 9
TC 27 (CA), Pollock M.R. obseryed:
'............it is a
misapprehension, after the liquidator has assumed his duties, to continue the
distinction between surplus profits and capital. Lord Macnaghten in Birch v. Cropper [1889] 14 App Cas 525, 546 (HL), the case which finally
determined the rights inter se of the. preference and ordinary shareholders in
the Bridgewater Canal, said; "I think it rather leads to confusion to
speak of the assets which are the subject of this application as 'surplus
assets 'as if they were an accretion or addition to the capital of the company
capable of being distinguished from it and open to different considerations.
They are part and parcel of the property of the company —part and parcel of the
joint stock or common fund—which at the date of the winding up represented the
capital of the company.'
The amounts distributed to
the shareholders by a liquidator are therefore distributed as capital of the
company, since the liquidator has no power to distribute dividend, and the sums
received by the shareholders cannot be disintegrated into capital and profits,
by examining the accounts of the company when it was a going concern.
'The scheme of the Indian
Companies Act closely followed the English Companies Act and the, view
expressed in George Burrell's case
[1924] 2 KB 52, 63 (CA) applied to distributions, made by liquidators, and
those distributions were not liable to be taxed as dividend. Parliament, with a
view to avoid escapement of tax, deVised a special definition of the word
'dividend' and incorporated it by Act 7 of 1939 as section 2(6A). The effect of
the provision was to assimilate the distribution of accumulated profits by a
liquidator to a similar distribution by a' company as a going concern, but subject
to the limitation that while in the latter, the profits distributed will be
dividend whatever the length of the period for which they were accumulated, in
the former such profits may be dividend only in so far as they come out of profits
accumulated within six years prior to liquidation. It also appeared from the
language used that profits of the current year during which the company was
ordered or resolved to be wound up could not be included in the expression '
dividend ' [see Seth Haridas Achratlul
v. Commissioner of Income-tax [1955]
27 ITR 684 (Bom)]. By the Finance Act, 1,955, the proviso to clause (c) was deleted and in consequence
thereof the limitation relating to the period during which the profits were
accumulated ceased to apply in, the determination whether the amount
distributed by the liquidator was dividend. Even after the amendment by the
Finance Apt, 1955, the language of the clause was found to be somewhat inapt
and the legislature, by the Finance Act, 1956, recast clause (c)....
The
language used by the legislature in section 2(6A)(c), as amended by the Finance Act, 1956, is fairly clear. There
is in the hands of the liquidator, only one fund. When a distribution is made
out of the fund, for the purpose of determining tax liability, and only for
that purpose, the amount distributed is disintegrated into its
components—capital and accumulated profits—as they existed immediately before
the commencement of liquidation. In any distribution made to the shareholders
of a company by the liquidator, that part which is attributable to the
accumulated profits of the "company immediately before its liquidation,
whether such profits have been capitalised or not, would be treated as dividend
and liable to tax under the Act. The provision was intended to supersede the
application of the principle of George
Burrell's case [1924] 2 KB 52 (CA), that is, to enact that even though
on a winding up of a company the distinction between the assets and the
accumulated profits disappears, the taxing authority may disintegrate the
amount distributed into its component parts and determine the share
attributable to accumulated profits. The amount distributed would, therefore,
be deemed to be received by the shareholders partly as accumulated profits and
the rest as capital, the proportion being the same which the accumulated
profits bore to the capital in the accounts of the company at the commencement
of winding up, and that part of the receipt which is attributable to the
accumulated profits would be taxable. The Income-tax Officer has, therefore, in
the first instance to determine the accumulated profits in the hands of the
company, whether capitalised or not, and the rest of the capital immediately
before the liquidation: he has then to determine the ratio between such capital
and the undistributed profits and to apply the ratio to the amount distributed
to determine the component attributable to accumulated profits. There is in
section 2(6A)(c) no warrant for
the view that in the course of liquidation the accumulated profits exist as a
separate fund even in a notional sense. Each distribution is of a consolidated amount which represents both capital and
accumulated profits. There is also nothing in the clause which supports the
view that whatever is brought to tax by the taxing authorities in a given year
is dividend, and the rest represents the assets of the company. The fund in the
hands of the liquidator is one : when the fund or a part of it is distributed,
the distribution is deemed to take place in the same proportion in which the
capital and accumulated profits stood in the accounts of the company
immediately before the winding up."
The above reasoning makes
it clear that the principle of the decision in Burrell case [1924] 9 TC 27 [1924] 2 KB 52 (CA) was got over
under the Indian I.T. Act, 1922, by the amendment effected by the Finance Act,
1956, to the provisions of the Indian I.T. Act, 1922. There is no such
corresponding amendment to the provisions of the Super Profits Tax Act. In this
view again, the reasoning of the Tribunal, following the principle in Burrell case [1924] 9 TC 27 (CA),
appears to be correct.
We answer the question referred in the affirmative, that is, in favour of the assessee and against the revenue. There will be no order as to costs.