CIVIL APPELLATE JURISDICTION : C.A. Nos. 2348-2349 of 1969, 1139 of 1969 and Civil Appeals Nos. 2006 & 2007 of 1971. Appeals by certificate under Article 133 ’of the Constitution of India from the judgment and order dated January- 15, 1966 of the Gujarat High Court in Ahmedabad in I.T.R. Nos. 2 and 1 of 1966. B.Sen, B. B. A huja and-B. D. Sharma for the appellant (in C.A. Nos. 2348-2349/69 & 2006-2007/71.) B.Sen and B. D. Sharma, for the appellant (in C.A. No. 1 139/69). N. A. Palkhivala, S. T. Desai, M. C. Chagla, V. M. Tarkunde, A. K. Verma, J. B. Dadachanji, O. C. Mathur and Ravinder Narain, for the respondents (in C.A. Nos. 2348-2349/69 and 2006-2007/71). N.A. Palkhivala, A. K. Verina, J. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the respondent in C.A. No. 1139/69).
The Judgment of the Court was delivered by Hegde, J. The principal question of law arising in these appeals by certificate is whether on the facts and in the circumstances of each of these cases the Department was right in applying s. 44-F read with s. 2(6A)(c) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act). The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal answered that question in favour of the Department but the High Court answered the same in favour of the assessee. As we are in agreement with the conclusion reached by the High Court, we do not think it necessary to examine the other questions arising in these appeals. For deciding the said question of law, it is sufficient if we take up the facts of any one of these cases. For the sake of convenience, we shall set out the facts in Civil Appeal No. 2348 of 1969. The assessee in that case is Vadilal Lallubhai. He is assessed as an individual. The relevant assessment year is 1958-59, the accounting year being the year ending on March 31, 1958. The assessee belongs to the well-known family of Vadilal Lallubhai Mehta of Ahmedabad. The members of this family (who for the sake of convenience will hereinafter be referred to as the "Mehta Group") owned shares in and controlled several companies including certain managing agency companies, Those managing agency companies were Private Ltd. companies. The managed companies were also companies in which the members of the "Mehta Group" had controlling interest. This Group had also selling agency rights in the companies which they were managing. On the coming into force of the Companies Act, 1956, the managing agency companies gave up their managing agency rights in order to safeguard their selling agency rights. Thereafter the assessee sold his share holdings to the employees of some "Mehta Group" companies or the relations of such employees. In addition he sold some shares to one of the family trusts. A few days after the sales in question, those managing agency employees went into voluntary liquidation. Consequently the assets of those companies were distributed among the shareholders who were borne on the registers of the companies as on the dates of liquidation. These shareholders included those persons who had newly purchased the shares. One of the new shareholders as mentioned earlier was a charitable trust which was not liable to pay any tax. The remaining shareholders were either not liable to pay any tax or were liable to pay tax at a lower rate than the assessee would have had to pay bad be received the amount distributed by the liquidators.
The Income-tax Officer brought to tax a portion of the assets distributed on liquidation by applying s. 44-F read with s. 2 (6A) (c) of the Act. The Appellate Assistant Commissioner agreed with this view. The assessee’s appeal to the Income-tax Appellate Tribiunal was unsuccessful. Thereafter at the instance of the assessee, certain questions were referred to the High Court for its opinion. Various contentions were advanced before the High Court on behalf of the assessee. We do not think it necessary to refer to those contentions as in our view the High Court was right in taking the view that to the facts and circumstances of the case, s. 44-F read with s. 2 (6A) (c) was inapplicable.
It was contended on behalf of the Revenue that the distribution of the assets of the various managing agency companies on liquidation is ’-dividend" within the meaning of s. 2 (6A) (c) and consequently as "income" as defined in s. 2(6C). Further the assessee sold his shares with a view to avoid income-tax and super-tax and consequently the assets distributed which would have fallen to his share had he not sold his share are liable to be brought to tax under the provisions of s. 44-F of the Act. On the other hand, it was contended on behalf of the assessee that the definitions contained in. s. 2 are only to be applied " unless there is anything repugnant in the subject or context". The definition of "dividend" given in s. 2 (6A) (c) is repugnant to the subject dealt with under s. 44-F and consequently the distribution of the assets in liquidation of the several managing agencies concerns cannot be considered as "income" within the meaning of s. 44-F. It was urged that s. 44-F concerns itself with the income from securities or shares which are of a periodical nature but which an assessee may seek to convert into a capital receipt by adopting certain devices. The provisions therein do not deal with the compensation received for the very destruction of the income-yielding assets viz. the securities or shares. We shall now consider which one of these two contentions is acceptable. But before doing so it will be convenient to make reference to the relevant provisions in the Act. Section 2, the definitions section, starts by saying that the definitions given therein apply ’unless there is anything repugnant in the subject or context". Hence if the definition of "dividend" found in s. 2(6A)(c) is either repugnant to the subject or context with which we are dealing, that definition will not be applicable. Section 2(6A) gives an inclusive definition of "dividend". In this case we are concerned with s. 2(6A)(c) which reads :
" any distribution made to the shareholders
of a company on its liquidation, to the extent
to which the dis-
tribution is attributable to the accumulated
profits of the company immediately before its
liquidation whether capitalised or not." Section 2(6C) gives an inclusive definition of "income". Dividend is included therein. Hence if a receipt can be considered as a "dividend", it has to be considered as an "income" under s. 2(6C). This takes us to S. 44-F, which reads:
"(1) Any person upon whom notice is served by
the Income-tax Officer requiring him to
furnish a statement of particulars relating,
to any securities in which, at any time during
the period specified in the notice he has had
any beneficial interest, and in respect of
which, within such period, either no income
was received by him or the income received ’by
him was less than the sum to which the income
would have amounted if the income from such
securities had accrued from day to day and
been apportioned accordingly, shall, whether
an assessment to income-tax or Super-tax in
respect of his total income has or has not
been made for the relevant year or years of
assessment, furnish such a statement and such
particulars in the form and within the time
(not being less than twentyeight days)
required by the notice.
(2) If it appears to the Income-tax Officer by
reference to all the circumstances in relation
to the securities of any such person
(including circumstances with respect to
sales, purchases, dealings, contracts,
arrangements, transfers, or any other
transactions relating to such securities) that
such person has thereby avoided or would avoid
more than ten per cent of the amount of the
income-tax or super-tax for any year which
would have been payable in his case in respect
of the income from those securities if the
income had ’been deemed to accrue from day to
day and had been apportioned accordingly, and
the income so deemed to have been apportioned
to him had been treated as part of his total
income from all sources for the purposes of
income-tax or super-tax, then those securities
shall be deemed to be securities to which sub-
section (3) applies.
(3) For the purposes of assessment to
income-,tax or super-tax in the case of any
such person, the income from any securities to
which this sub-section applies shall be deemed
to accrue from day-to-day and
10 63
in the case of the sale or transfer of any
such securities by or to him shall be deemed
to have been received as and when it is deemed
to have accrued :
Provided that this section shall not apply if
such person proves to the satisfaction of the
Income-tax Officer that the avoidance of
income-,tax or super-tax was exceptional and
not systematic and that there was not in his
case in any of the three preceding years any
such avoidance of income-tax or super tax, or
that the provisions of section 44-E have been
applied in his case in respect of such income.
(4)
(5)
(6) For the purpose of this section the
expression "securities"includes stocks and
shares." From a reading of sub-ss. 1 to 3 of s. 44-F, it is clear that the income referred to therein should arise from shares or securities. Further it must be a periodical income which is capable of being apportioned on the basis that it is deemed to have accrued from day to day. Section 44-F(1) empowers the Income-tax Officer to serve a notice on any person "requiring him to furnish a statement of particulars relating to any securities in which at any time during the period specified in the notice he has had any beneficial interest and in respect of which, within such period either no income was received by him or the income received by him was less than the sum to which the income would have amounted if the income from such securities has accrued from day to day and had been apportioned accordingly. The power conferred on the Income-tax Officer under this provision is not confined to any stipulated period. Now turning to subs.(2) of s.44-F, it speaks of "the amount of the income-tax or super-tax for any year which would have been payable in his cause in respect of the income from those securities if the income had been deemed to accrue from day to day and had been apportioned accordingly. Again sub-(3) of s.44-F speaks of ",the income from any securities to which this sub-section applies shall be deemed to accrue from day to day, and in the case of the sale or transfer of any such securities by or to him shall be deemed to have been received as and when it is deemed to have accrued.. ."
It is clear from what we have said earlier that s.44-F concerns itself with income arising from securities or shares, during a period of time. When a company goes into liquidation, the share-scripts are no more income yielding -assets, They are mere pieces of paper. No income arises from those shares thereafter. What the shareholder gets on liquidation is not any income from shares but a share of the assets of the quondam company. Such a receipt is incapable of being deemed to accure from day to day. In the case of interest on securities or dividends on shares, they are paid at certain intervals. Hence it is possible to deem them as having accrued from day to day but in the case of distribution of assets of a company in liquidation, it is not possible to deem the same to have accrued from day to day. We have to bear in mind that some of the ’dividends’ mentioned in s. 2(6A) are only deemed dividends. They are not real dividends. By a legal fiction, they are deemed as dividends. This Court held in Commissioner of Income-Tax, Andhra Pradesh v. C.P. Sarathy Mudaliar,(1) that the definition of "dividend" contained in s. 2 (6A) (c) is an artificial definition of "dividend". It does not take in dividend actually declared or received. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The same would be the position in the case of the ’dividend" mentioned in s. 2 (6A) (c). As held by this Court in Commissioner of Income-tax, Bombay City-1 v. Amarchand N. Shroff,(2) legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. It is established on high authorities that the subject is not to be taxed unless the charging provision clearly imposes the obligation see Commissioner of Income-tax Madras v. Ajax Products Ltd. (3) As is often said that in interpreting a taxing provision one has merely to look to the words of the provision. The language employed in S. 44F cannot be said to be plain enough to bring to tax the receipts of the character with which we are concerned in these appeals. To accept the contention of the Revenue, we have to adopt threefold assumptions. Firstly the fictional dividend contemplated by s. 2 (6A) (c) is an "income" within the meaning of S. 44-F. Secondly we must assume that that dividend is capable of being deemed to accrue day to day and lastly we must assume that the day to day distribution contemplated in S. 44-F commences from the commencement of the relevant accounting year and ends with the distribution of the assets as contended on behalf of the Department. To do so we have to read into the section many more
words than it contains at present which is wholly impermissible in construing any provision much less a taxing provision. In the case of deemed dividend under s. 2(6A) (c), the assets distributed will be considered as income in the account year in which it is distributed but that conception would be inapplicable in cases coming under s. 44-F. A company may go into liquidation long after the accounting year ends. What period the Income-tax Officer should take into consideration for applying the fiction that "the income had deemed to accrue from day to day ?" The scheme of s. 2(6A) (c) is incompatible with the scheme of s. 44-F. The two provisions are intended to meet totally different situations. The former provision cannot be dovetailed into the latter. In order to find out the legislative intent, we have to find out what was the mischief that the legislature wanted to remedy. The Act was extensively amended in the year 1939. Section 44-F was not in the draft bill. That section was recommended by the Select Committee consisting of very eminent lawyers. It will not be inappropriate to find out the reasons which persuaded the Select Committee to recommend the inclusion of s. 44-F, if the section is considered as ambiguous-see Commissioner of Income-tax, Madhya Pradesh and Bhopal v. Sodra Devi etc.(1). In recommending the inclusion of s. 44-F, this is what the Select Committee observed :
"The new Sections 44E and 44F are
designed to prevent avoidance of tax by what
-are known as "bondwashing" transactions,
involving the manipulation of securities so
that the securities will pass temporarily in
the legal ownership of some second person who
is either not liable at all or liable in a
lessor degree to tax, under such conditions
that the interest on the securities is the
income of this second person. A common form
of the process is the sale of securities-cum-
interest with a simultaneous contract to
purchase them ex-interest. Where foreign
securities are concerned this second person
may be a foreigner resident abroad entitled to
claim exemption from the tax on the interest.
More often a financial concern in India is
utilised whose computation of profits includes
the results of realising securities, so that
the concern can profitably offer "bond-
washing" facilities to the owner of securities
bearing fixed interest where the owner himself
is not liable to taxation on the realisation
of the securities."
Section 44-F of the Act, immaterial changes apart, is a reproduction of s. 33 of the English Finance Act, 1927 which was (1) 32 I.T.R. 615 at p. 627.
subsequently replaced by s.237 of the English Income-tax Act, 1952. Dealing with that section this is what is observed in the law of Income-tax, Surtax and Profits Tax by Wheateroft at p. 1669 (Paragraph 1-1358) :
We now come to the more difficult problem
which arises when a taxpayer sells, for a
capital sum, securities which are about to pay
interest, and the purchaser acquires the right
both to the securities and the interest.
It is the custom on British stock exchanges to
notify in advance the dates in respect of each
security before which a buyer of that security
will be entitled to the next income payment.
Up to that date the security is sold Cum
dividend"; after that date the security is
sold "exdividend" and the next income payment
when received after the sale will remain the
property of the seller. Apart from the
general market fluctuations, the price will
gradually rise up to the day when the security
goes "exdiv." it will then normally fall
sharply by a sum appropriately equals to the
anticipated income payment less tax at
standard rate, as the average investor values
the income at its net amount. If the amount
is at a fixed rate, such as on Government
stock, the likely fall for this reason can be
calculated with considerable accuracy in
advance.
A surtax payer, who pays more than the
standard rate of tax, can thus find it
profitable to sell his securities just before
they go "ex div." as he will receive as
capital the equivalent of the net dividend,
instead of receiving a dividend subject to tax
in his hands at higher rate than that deducted
from the dividend.
To deal with taxpayers who used this, and
similar devices, on a substantial scale, it
was provided by the Finance Act, 1927, that if
it appears to the Revenue by reference to all
the circumstances in relation to the assets of
any individual (including circumstances with
respect to sales, purchases, dealings,
contracts, arrangements, transfers or any
other transactions relating to such assets)
that the individual has thereby avoided or
would avoid more than 10 percent of the amount
of surtax for any year which would have been
payable in his case if the income from those
assets had been deemed to accrue from day to
day and had been apportioned to him as part of
his total income, then such income is to be so
apportioned to him for the purpose of com-
puting his surtax. If the individual can
prove that the
avoidance was exceptional and not systematic, and that there was no such, avoidance in the following three years, he can avoid liability under this provision. Extensive powers are given to the Revenue to obtain information for the purpose of this provision." The marginal note for S.44-F reads "avoidance of tax by sales cum dividend". This marginal note also gives an indication as to what exactly was the mischief that was intended to-be remedied. The legislature was evidently trying to circumvent the devices adopted by some of the assessees to convert their revenue receipts into capital receipts. The marginal note also throws light on theintention ’of the legislature. From what has been stated above, it is clear that the deemed dividend contemplated by s. 2 (6A) (c) cannot be considered as "income" under s. 44-F. For the reasons mentioned above we agree with the High Court that s.44-F is inapplicable to the facts of the assessee’s case. This question is common to all the above-mentioned appeals. Hence we need not go into the other subsidiary questions arising for decision in any of those appeals. In the result these appeals fail and they are dismissed with costs. One hearing fee. V.P.S. Appeal dismissed..