Commissioner of Income Tax, Kerala, Ernakulam v. V. Damodaran, Trivandrum

**944** **A** **B** COMMISSIONER OF INCOME TAX KERALA, ERNAKULAM _**v.**_ V.DAMODARAN,TRIVANDRUM _October_ 15, 1979 [N. L. UNTWALIA AND R, $. **PATHAK,** **JJ.]** ##### .. •• _Indian Jncome_ ' _Tax Act, 1922-Sections_ 2(6A) _(e)-lnterpretation_ _of_ **h** _"accumulated profits"_ _if_ _include current profits-Section_ _256(i)-Scope_ _of._ **The assessee was the Managing Director** **of -a Company** ~rigin~lly **ass-essed** **C** on a total income of Rs. 43407/- for the assessment year 1959-60. Thereafter **the Income-Tax** **Officer** **came to know that** **th.e** **assessee** **had** **been withdrawing** moneys from the Company and that those amounts were liable to be treated. as dividend under section 2(6A)(e) of the Act, hoe re-opened the assessment. In the assessment proceedings that followed, the assessee claimed that the accumulated profits of the Company amounted to Rs. 1050 only and that amount alone could be considered as dividend und~ section 2 ( 6A )( e) of the **D** Act. The figure was worked out on the basi& that Rs. 11,000 as a provision. - **for** **tax** **and** **Rs.** **6,900 as a provision for dividend** **had** **to be** **adjusted** **against** the balance of Rs. 18,950 in the Profit and Loss Account. The Income Tax Officer rejected the contention of the assessee. The Appellate Assistant Commissioner dismissed the appeal filed by the assessee. The Income Tax Appellate Tribunal in second appeal, upheld th~ claim of the assessee that the words. "accumulated profits" in section 2(6A)(e) of the Act could not be construed **E** as including current profit but it reje<cted the contention that the two suma of Rs. 11,000 and Rs. 6,900 had to be taken into accouot in determining the **figure** **of** **the** **''accumulated!** **profits".** **It determined the "accumulated** **profits"** at Rs. 18,950. The Revenue obtained a reference to the High Court on the· question : ''Whether the Appellate Tribunal was legally correct in holding that **the accumulated** **profit** **will not** **iQ.Clude** **"current** **profits"** **for the purpose** **of** section 2(6A) of the Act." A second question was referred to the High Court at the instance \if the· 8880Ssee : "Whether the Tribunal was right in holding thot Rs. 18,95() constimted accumulated profits for the purpose of section 2(6A) of the Act." The High Court answered both the questions in favour of the assessee, the firs~ **question** **in** **the affirmative** **and** **the second question** **in** **the negative.** .. )... **G** On appeal to this Court, HELD: !. "Current profits" that is to say, profits earned by the Com**pany during** **the** **Year** **in** **which the loans were advanced to the assessee cannot** **be** regarded as included within the "accumulated profits" of a C-Ompany with- « in the meaning of section 2(6A) (e) of the Act. (947G-948E] _Commissioner_ _of Income-Tax,_ _Madras_ v. _**M.**_ _V. Murugappan_ & _Ors._ (1970)**H** 77 I.T.R. 818. followed. / 2. The Appellate Tribunal was not competent to refer the second question, and the 1reference to that Ol<tent must be considered void. .section 256(1) of C.l.T. _v._ V, DAMODARAN _(Pathak,_ _!.)_ 945 the Jacome Tax: Act, 1961 entitles the assessee or the Commissioner, as the case may ·be, to apply to the Appellate Tribunal to refer to the High Court any qnestion of law arising out of the order made by the Appellate Tribunal under section 254. It is clear that the statute expressly contemplates an appli A cation in that behalf by ai party desiring a reference to the High Court. The application has to be filed within a prescribed period of limitation. lf t~·-,,--fe'· application is reje-,;;ted by the Appellate Tribunal, it is the applicant thus refused who is entitled to apply to the High Court. The form _of.:_ reference application prescribed by rule 48 of the Income Tax Rules, 1962 specifically reqtiires the app1ic['jnt to state the questions of law which he desires- to be referred to the High Cour!. Jn every .case, .it .is only the party applying for a ·reference .\vbo· is entitled to· s,pecify .the questions of la\v \Vhich should be referred. No~here rlOOs ·the st<:lti.te confer ·a. right in the flon~a"ppliCali.t ca: phrase used here for conveniem:e) 't~ ask for a 'refC'ren'ce of questions Of law· on the application made by the applicant. [950 A, C-D •E, F,G and 952 E] . The party who is aggrieved and \\'ho desires a refei·ence to the _H{gh_ C6urt must file a reference application for that purpose: ·Ji is not open to him to. n1akC a refcr'eli:ce 'iipf,l!citiori · file'd, by the other party the· ba~i.s of .his clciim that, a l'juestion ·of· !aW sought _by_ him should be referred. But ~011 . .:L r~ft;rcni;,e, application- filed by the .aggrieved party_ it is,,0pen to th.e no_;i:aJJPlic~a.nt .w~10 is not aggri.eved" by the' result of the app,eaI, to ask for a r~ference of those questions of Ja\V which arise on its subn1issions negatived fn ippccll · bY the. Appellate Tribun-11. [951 A-B, CJ CIVIL APPELATE JURISDICTION: Civil Appeal No. 2099 of 1972. From the Judgment and Order dated 18-1-1972 of the Kerala High Court in I.T.R. No. 88/1969. _B. B. Ahuja_ and _Miss_ _A._ _Subhashini_ for the Appellant. _Nemo_ for the Respondent. The Judgment of the Court was delivered by PATHAK, J.-This is an appeal by certificate under section 261 of the Income Tax Act, 1961 against the judgment of the High Court _1'_ of Kcrala interpreting the words "accumulated profits" in section 2(6A)(e) of the Indian Income Tax Act, 1922. The assessee is the Managing Director of a private limited company called R. K. V. Motors & Timber (P) Limited. · The company maintains an account pertaining to him in its books. The accounts G showed that· as on March 31, 1958 a sum of Rs. 36,546.17 np. was clue to him by the company. In January, 1959 for the first time he became indebted to the company in the sum of Rs. 3,757.04 np: His drawings increased, and as on March 31, 1959 the total amount due by him stood at Rs. 25,107.22 np. It is also relevant to state that the Balance Sheet of the company as on March 31, 1958 showed It a net profit of Rs. 18,950.98 np. 6-743SCJ/79 946 SUPREME COURT REPORTS [l980] l s.c.R. A The assessee was originally assessed for the assessment year 1959-60 (the relevant previous year being the year ended March 31, 1959) on a total income of Rs. 43,407. Thereafter, the Income Tax Officer came to know that the asseS&ee had been withdrawing moneys from the company, and in the belief that those amounts were liable to be treated as "dividend" under section 2(6A) (e) of the Indian _B_ Income Tax Act, 1922, he reopened the assessment by virtue of section 147 of the Income Tax Act, 1961. In the assessment proceedings which followed, the assessee claimed that the accumulated profits of the c001pany amounted to Rs. 1,050 only, and that amount alone could be considered as "dividend" under section 2(6A)(e). c The figure was worked out on the basis that a sum of Rs. 11,000 as a provision for tax and of Rs. 6,900 as a provision for dividend had to be adjusted against the balar,ce of Rs. 18,950 .in the Profit & Loss Account. The Income Tax Officer reii'cted the contention of the assessee and determined a sum of Rs. 25,107 as dividend under section 2(6A) (e). He arrived at this figure by including the A D _E_ current profits of the company for the account year ending March 31, 1959. The Appellate Assistant Commissioner dismissed an appeal filed by the assessee. The Income Tax Appellate Tribunal, in second appeal, upheld the claim of the assessee that the words "accumulated profits" in section' 2(6A) (e) could not be construed as including current profits, but it rejected the contention that the two sums of Rs. 11,000 and Rs. 6,900 had to be taken into account in determining the figure of the accumulated profits. Accordingly, it determined the accumul.atcd profits at Rs. 18,950. The Revenue applied for a reference to the High Court of Kerala, and at its instance the Tribunal referred the following quest<: tion to the High Court : "Whether, on the facts and in the circumstances of this case, the Appellate Tribunal was legally correct in holding that the aceumulated profit will not include current profits for the purpose of section 2(6A) of the Indian Income Tax Act, 1922 ?" The assessee also requested the inclusion of a question, and therefore the second question referred to the High Court was : "Whether, on the ;fa(:ts and in the circumstances of 8 the case, the Tribunal was right in holding that Rs. 18,950 constituted accumulated profits for the purpose of section i( 6A) of the Indian Income Tax Act, 1922 ?" # ' C.l.T. _v._ v. DAMODARAN _(Pathak,_ J.) 9-17 The High Court, by its judgment dated January 18, 1972 has .answered the first question in the affinnative and the second question in the negative, both questions being answered in favour of the a"c>Sce. And now, the present appeal by the Revem1e. We have heard Shri B. B. Ahuja, for the Revenue. No one appear> for the assessee. The Indian Income Tax Act, 1922 did not originally contain any definition of "dividend", and the meaning of that word was confined to the connotation it held under the law relating to companies. By section 2 of the Indian Income-Tax (Amendment) Act, 1939, the Indian Legislature inserted sub-section (6A) in section 2 of the Act and set forth an inclusive definition. Certain clauses of the sub-section were amended thereafter, and in their ultimate form section 2(6A) (c) and section 2(6A) (e) read as. follows : "6(A) "Dividend" includes ( c) Any distribution made to the shareholders by a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquid•tion, whether capitalised or not.. Ce) Any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or Joan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits." The question is whether the profits earned by the company during the year in which the loans were advanced to the assessee, tnat is to say the current profits, can be regarded as included within the accumulated profits of tne company. It will be noticed that the expression "accumulated profits" occurs in section 2 ( 6A)( c) of the Act. Construing that clause in _Gird/wrdas_ _&_ _Co._ _Ud .._ v. _Commissioner_ _Qf_ _Income Tax, Ahmedabad,(1)_ the Bombay High Court said : "The limitation imposed by the Legislature is that the profits must in the first place be accumulated in contradistinc (1) [!957] 31 T.T.R. 82, 88. A B c D E G H 948 SUPREME COURT REPORTS (1980] l S.C.R. It.·. tion to the profits being {;Urrent. .... ". The Madras High Court' in _Commissioner_ _of_ _Income Tax, Madras_ v. _M._ _V. Murugappan and_ _Others(')_ and _Commissioner of Income-tax, Madras_ v. _A._ ZH. _M._ _V._ _Valliammai Achi_ _&_ _Others(')_ took the same view. It analysed . the concept of "accumulated profits" and in that connection parti cularly referred to the observations of Isaacs and Rich JJ. in JI; _Hooper_ _&_ _Harrison Limited (In Liquidation)_ v. _Federal Commis-_ _sioner of Taxation,(')_ who relied on _Hollins_ _v._ _Allen(')_ and _Sproule_ v. _Bouch(')_ and _Commissioner_ _of_ _Inland Revenue_ v. Blolt(') where the distinction between current profits and accumulated profits was graphically brought out. The decision of the Madras High Court was affirmed in appeal by this Court in· _Co111missioi1er_ _of_ _Income-_ _9_ _tax, Madras_ v. _M,_ _V. Murugappan_ _&_ _Ors.(')_ and it was observed. that "The profits or the year fo. the course of Which the company was ordered to be wound up not being .accumulated profits were not pan -Of the dividend." Thereafter, the Bombay High Court in _Commissioner_ _of_ _Income Tax (Central) Bombay_ v. _P._ _K. Badiani,(_ _[8]_ _)_ D while interpreting section 2(6A}(e) of the Act, applied the same . construction and held that the expression "accumulated. profits;, in that clause. 111ust mean profits . which had accumulated prior to the accounting. year of _which the income profits and gains were being assessed, while current profit would mean the profits of the accounting year. In a recent case, _Commissioner_ _of_ _Income Tax, Madras-_ £ _TI_ v. _G._ _Sankaran,("}_ the Madras High Court has reaffirmed that the expression "accumulated profits" in section 2(6A)(e) cannot take in current profits. The. position appears to be well-settled. Except for _T._ _Sundaram_ _Chettiar_ v. _Commissioner of- Income Tax, Madras_ and _T. Manicka-_ F _vasagam Chett.iar_ - v. _Comnussioner_ _of_ _Income-tax, Madras,(10)_ in which the ratio is far from clear, a long line of judicial decisions has taken the view that the words "accumulated profits" in section 6(2A) of the Indian Income Tax Act, 1922 cannot be construed (I) J.L.R.[1967] 2 Mad.256.' (!) [1966] 62 I.T.R. 382. (3) 33 C.L.R.158, 480. (4) [1866] 14 W.R. 980. ' (5) [1885] 29 Ch, D. 635. (6) [1921] 2 A.C. 171. _Ci)_ [1970]77 I.T.R. 818. (8) [1970] 76 I.T.R. 369. (9) [19781111 I.T.R. 220. (10) [1963]49 l.T.R. 287.' •• ) ### . C.J.T. _v._ v. DAMODARAN _(Pathak,_ _J.)_ 949 to include current profits. We are in agreement · with that view, being persuaded in that behalf by the reasoning which has prevailed in the aforementioned cases. The distinction between "accumulated profits" and "current profits" has long held the field, and as the learned judges of the High Court of Australia observed in _Hooper_ _&_ _Harrison Ltd. (In Liquidation)(supra),_ it has been well known in judicial decision and in the mercantile world for well over a century. Moreover, this Court in _M._ _V. Murugappan_ (supra) has also taken the view that current profits cannot be included in accumulated profits. It appears to be now the established law of the land. An attractive submission was raised on behalf of the Revenue that in the Twelfth Report of the Law Commission of India, (c) the authors of the Report consider that the intention of the Legislature was to include current profits in the expression "accu- · mulated profits" in section 2(6A) and that the present definition of "accumulated profits" by Explanation 2 to section 2(22) of the Jncome Tax Act, 1961 only clarifies what the true intent was all along. In the view which has found favour with us, we are not) persuaded by that submission. Accordingly, we hold that the High Court was right in answering **the first** **que::t,ion** **in favour of the assessee and against the Revenue.** v. _Commissioner_ _of_ _Income Tax, Ahmedabad.(_ _[2 ]_ _)_ It does not appear that the Revenue contended. before the High Court that the reference made to it by .the Appellate 'l'ribunal was incompetent insofar as the second question was concerned. Since, however, the objection pertains to the competence of the reference _to_ the extent that it covers the second question and, therefor~, relates to the jurisdiction of the High Court to The second question is whether the provision for payment of tax and dividend can be taken into account when computing the accumulated profits as on March. 31, 1958. The Revenue contends that this question should not. have been referred by the Appellate Tribunal to the High Court at the instance of the assessee because no reference application was made by the assessee. The only ref ~rence application, it is pointed out, before the Appellate Tribunal was the reference application filed by the Commissioner of Income Tax. We are of opinion that the Revenue is right. The objection was taken by the Revenue. before the Appellate Tribunal when the statement of case was being prepared, but the Appellate Tribunal overruled the objection, relying on _Girdhardas_ & _Co._ _Ltd._ **A** **B** **c** **D** **E** **F** **G** **H** (I) P. 324 Item 17. (2) [1957] 3! l.T.R. 87 950 SUPREME COURT REPORTS (1980] **l** **s.c.a.** **A** consider and decide that question, we are of opinion that the Revenue is entitled to raise that question before us. Section 256(1) of the Income Tax Act, 1961 entitles the assessee. or the Commissioner, as the case may be, to apply to the Appellate **B** Tribunal to refer to the High Court any question of law arising out of the order made by the Appellate Tribunal under section 254. A period of !imitation for making such application is prescribed. If the application is reiected by the Appellate Tribunal the applicant is entitled to apply to the High Court, again within a prescribed period of limitation, and the High Court may, if it is not satisfied of **c** the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and refer it. It is clear that the statute expressly contemplates an application in that behalf by a party desiring a reference to the High Court. The application has to .be filed within a prescribed period of limitation. If tbe application is **D** rejected by the Appellate Tribunal, it is ·the applicant thus refused who is entitled to apply to the High Court. If the Appellate Tribunal allows the application made to it, s. 256(1) requires it to draw up the statement of the case and refer it to the High Court. The statement of the case is drawn up on the basis of the application made by the applicant, who in that application must specify the questions of .. #### ... ##### **_1_** ### ###### ., F , _<_ ## **B** **c** **E** **F** **G** law which, he claims, arise out of the order of the Appellate Tribunal made under s. 254. The form of reference application prescribed by rule 48 of the Income Tax Rules, 1962 specifically requires the applicant to state the questions of law which he de.sires to be referred to the High Court. He may, in appropriate cases, be permitted by the Appellate Tribunal, to raise further questions of Jaw at the hearing of the reference application. But in every case, it is only the party applying for a reference who is entitled to specify the questions of law which should be referred. Nowhere in the statute do we find a right in the non-applicant (a phrase used here for convenience) to ask for a reference of questions of law on the application made by the applicant. In this connection, two categories of cases can be envisaged. One consists of cases where the order of the Tribunal under section 254 has decided the appeal partly against one party and partly against the other. This may be so whether the appeal consists of a single subject matter or there are more than one independent claims in :the **H** appeal. In the former, one party may be aggrieved by the grant of relief, even though partial, while the other may be aggrieved by the refusal to grant total relief. In the latter, relief may be granted or I •. .. .. C.I.T. _v._ v. DAMODARAN _(Pathak,_ J.) 951 refused with reference to individual items in dispute, and accordingly one party or the other will be aggrieved. In either case, the party who is aggrieved and who desires a reference to the High C~urt must file a reference application for that purpose. It is not open to him to make a reference application filed by the other party the basis of his claim that a question of law sought by him should be referred. The second category consists of cases where the order made by the App~llate Tribunal under s. 254 operates entirely in favour of one party, although in the course of making the order the Appellate Tribunal may have negatived some points of law raised by that party. Not being a party aggrieved by the result of the appeal, it is ncJl open to, that party to file a reference application. But on a reference application being filed by the aggrieved party it is open to the non-applicant, in the event of the Appellate Tribunal agreeii;g to refer the case to the High Court, to ask for a reference of those questions of law also which arise on its submissions negatived in appeal by the Appellate Tribunal. It is, as it were, recognising a right in the winning party to support the order of the Appellate Tribunal also on grounds raised before the Appellate Tribunal but negatived by it. There are, therefore, those two categories, one in which a nonapplicant can ask for the reference of questions of law suggested by it and the other in which it cannot. To the extent to which the Courts have omitted to consider the distinction between these two categories, they have erred. There are cases where it has been held that there is an absolute bar against a non-applicant seeking a reference of questions of law on a reference application made by the other party. They include: _Commissioner_ _of_ _Income Tax, Madras_ v. S. _K._ _Srinivasan(')_ and _Commissioner of Income Tax, Madras_ v. _Ramdas_ _Pharmacy.(')_ cases taking the opposite extreme view are : _Com-_ _missioner_ _of Income Tax_ v. _Bantiah_ _Bank Ltd.,(_ _[3]_ _)_ followed in _Girdhar_ _Das_ & _Co._ _Ltd._ (supra) and _Eudcational"_ & _Civil List Reserve Fund_ _No._ 1 _through_ _H. H._ _Maharana Bhagwat Singhji_ _of_ _Udaipur_ & _Ors ._ v. _Commissioner_ _of_ _Income Tax, Delhi_ _and_ _Rajasthan(')_ _Smt._ _Dhirajben_ R _Amin_ v. _Commission"_ _of_ _Income Tax, Gujarat_ _ll,_ _Ahmedaliad(')_ and _Commissioner_ _of_ _Wealth Tax, Gujorm_ _II_ v. _Mrs._ _Arundhati l3alkrislma.<'·)_ The judgment in the last case was affirmed by this Court in _Commissioner_ _of_ _Wealth Tax, Gujarat_ v. _Arundhati_ (1) (1970) 75 l.T.R. 93. (2) (1970) 77 l.T.R. 276. (3) I.T. Ref. No. 20 of 1950 decided on 10-10-50. (4) (1964) 51 l.T.R. 112. (5) (1968) 70 I.T.R. 194. (6) (1968) 701.T.R. 203. E F G R 952 SUPREME COURT REPORTS [1980] 1 S.C.lt. _J\._ _Balkrishna(")_ but tl1e point raised before, us does not appeal to have been.taken there. The observations in _Bantiah Bank Limited_ (supra) seem to show that the High Court was alive to the possibility of a winning party being deprived' of'tlie righ( to raise questions of law which could properly arise as further questions because they ·would be intimately involved in a decision on the questions referred .at· the B iruiance of the applicant, but it failed to classify such a case separately from the case where a non-applicant seeks to raise independent and unassociated questions of law. Cases in which a distinction was noticed between the iwo categories but· no opinion was expressed on the right phi.winning P.~\h'-,to ~ai~e. qFes\i~ns of .I"\", without applying fpr a reference are _Conimissioner_ _of lncome· Tax_ v: _Jiwaji Rao Sugar_ {: - _Co .. Li4.,(2)._ followed]~ _(;:ommissioner_ _of_ Incom~ _Tax, M.P ._ . v. _Dr._ - _Fida Hu'ssain.G._ _Abbasi(')_ ·and _Commissi011er_ _of Income Tax,_ _Madraa_ v: . _K."_ R~thnam _Nadar._ (') I . Some attention has been given to the dis- tinction between the. two categori~s in _Commissioner_ _of_ _Income Tax,_ _West Bengal_ v. _A._ _K._ _Das.(')·.·.·_ D E In the present case, the question whether the prov1s10n of Rs. 11,000 for tax and Rs. 6,900 for dividend can· be takeri into account \"hen determining the accumulated profits as on March 31, 1958 is - not related to the question whether accumulated profits can take in current profits. The two questions involve the grant of separate and distinct reliefs and the decision on one question does not affect the decision on the other. Acoordihgly, we hold that the Appellate Tribunal was not competent to refer the second question, and the reference to that extent must be considered void. In the circumstances; it is not necessary . to examine the second question on its merits. The judgment of the 11 High Court must be set aside so far as it incorporates its opinion on the second question. Accordingly, the appeal is allowed to the extent that the judgment .· ciftfie ij:igh Court on the second question is set aside while the appeal ' iS "d\Smissed in respect of the judgment on the first question. There G · _\\6.11_ be no order as to costs. _Appeal allowed in part._ ff N.K.A. (1) (1970) 77 I.T.R. 505. (2) (1969) 71 I.T.R. 319. (3) (1969) 71 I.T.R. 314. (4) (1969) 71 I.T.R. 433. (5) (1970) 77 I.T.R. _31,_ 44