Law:

Section:

Section 2(22) of the Income-tax Act, 1961 [Corresponding to section 2(6A) of the Indian Income-tax Act, 1922] - Deemed dividend - Assessment year 1955-56 - Assessees were shareholders of a company which maintained its account according to calendar year - Company went into liquidation on 31-10-1954 - Between 1-1-1954 and 31-10-1954, company had earned profits which after meeting tax liability was distributed to shareholders - Whether amount distributed by liquidator on 10-3-1955, represented current profits and not profits earned before 1-1-1954 - Held, yes - Whether amount distributed as dividend out of current profits could not, in state of law in force in year of assessment 1955-56, be deemed dividend in hands of shareholders - Held, yes FACTS Ajax Ltd. was a public limited company which maintained its accounts according to the calendar year. The assessee were shareholders of the company. It went into liquidation on 31-10-1954. The liquidators distributed on 10-3-1955, to the shareholders for each share of Rs. 100 by allotment of a share in another company of the same face value. Between 1-1-1954 and 31-10-1954, the company had earned a profit of Rs. 1,79,704. After deducting taxes, there was a balance of Rs. 81,611 which formed part of the amount distributed. The Income-tax Officer brought the value of the shares received by the shareholders to tax, on the footing that it represented the "accumulated profits." In appeal, the Appellate Assistant Commissioner held that under the law as it then stood, the amount of Rs. 81,611 was not accumulated profits and when distributed, it was capital in the hands of the shareholders. This order was confirmed by the Tribunal. The High Court agreed with the view of the Tribunal that under the definition of the expression "dividend" in section 2(6A)(c) in force in the year of assessment 1955-56, distribution of the current profits in the year in which the company was ordered to be wound up was not dividend and was on the account not liable to be taxed as dividend. On appeal to the Supreme Court : HELD The question whether the distribution was dividend had to be determined in the light of the Act, as amended by the Finance…

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