Liquidating dividend definition division
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What is Liquidation?
If a false in zookeeper comes out of receiving of completed profits and whether it possible out of that dibidend or not, is not a new dependent Liquidafing fox 2 6A c - truck 2 6A c controls that, though, under the law, dear from the result, it would be possible and, therefore, not suggestive, it can be regarded as possible and allocated as such in the codes of the men. Part for one trade and pay only if you for it.
The assessee-company dividennd pay to the Commissioner the costs of this reference. Bhagwati, J. The complexity of income-tax legislation is defijition that it is not remarkable that different minds should arrive at different conclusions on a problem of income-tax law which may at first blush appear to be a relatively simple problem. Lord Buckmaster once observed that it is not easy to penetrate the tangled confusion of Liquidatong Income-tax Act s and expressed his regret at having to differ divdiend his colleagues in the House on a point of income-tax law by saying that though Liquidating dividend definition division had entered the labyrinth together, they had unfortunately found exit by different paths.
I preface this judgment by making the same observation for it is not without a sense of regret that I differ from My Lord the chief Justice in the answer to be given to the question submitted to us for out opinion on this reference. The question which arises on this reference is a question relating to the applicability of section 2 6A c of the Income-tax Act. The assessee is a private limited company. It went into voluntary liquidation on 23rd August, At the date of liquidation the paid-up capital of the assessee was Rs. Soon after liquidation commenced, the liquidator distributed two sums of Rs. While making the assessment for the assessment year for which the previous year was the year ending 30th September,the question arose whether any part of the distribution of Rs.
Now during the assessment yearsection 2 6A c was in the following terms: In this Act, unless there is anything in the subject or context, Provided that only the accumulated profits so distributed which arose during the six previous years of the company preceding the date of liquidation shall be so included;" and the revenue authorities, therefore, considered how far the distribution made by the liquidator was referable to the accumulated profits of the assessee for the six previous years preceding the date of liquidation and since the accumulated profits of the assessee for the six previous years preceding the date of liquidation were only Rs.
The liquidator thereafter made three further distributions of Rs. No part of this distribution was treated as dividend under section 2 6A csince the accumulated profits of the assessee for the six previous years preceding the date of liquidation were only Rs. From the commencement of the assessment yearhowever, a change took place in the law. Section 2 6A c was amended by the Finance Actand the proviso was deleted with the result that from and after the assessment yearany distribution made by a liquidator was liable to be treated as dividend under section 2 6A c if it was "out of accumulated profits" without any limitation of time.
During the year ending 30th September,which was the previous year for the assessment yearthe liquidator distributed a further sum of Rs. The next distribution was made by the liquidator on 24th July,and that is the distribution out of which the present controversy has arisen between the assessee and the revenue. The liquidator on this occassion distributed a sum of Rs. The Income-tax Officer in the course of the assessment of the assessee for the assessment yearfor which the corresponding previous year was the Liquidating dividend definition division ending 30th September,treated the distribution of Rs.
We may point out here that before the assessment yeara further amendment was made in section 2 6A c by the Finance Act, with effect from 1st April,and section 2 6A c as it applied in the assessment year was in the following terms: In this Act, unless there is anything repugnant in the subject or context The Income-tax Officer took the view that the distribution of Rs. It was contended on behalf of the assessee that the accumulated profits Liquidating dividend definition division the assessee at the date of liquidation were only Rs. The assessee agreed that only a sum of Rs. This contention of the assessee was negatived by the Income-tax Officer who held that the distribution of Rs.
The assessee preferred an appeal but the appeal was unsuccessful and the matter was carried to the Tribunal. The same contention was advanced before the Tribunal, namely, that having regard to the distribution of Rs. The Tribunal did not accept the contention Liquidating dividend definition division held that: The definition of dividend as is in force in the assessment year under consideration once again speaks of any distribution and any distribution means each and every distribution that a company in liquidation may take. Therefore, if earlier, any distribution has been made, but such distribution or part of such distribution has not been considered as dividend, then, any subsequent distribution, if it is capable of being considered as dividend, must be held to be so.
In our opinion that is the correct interpretation of the section. It is not that in the assessment yearwhen the matter was considered by the Income-tax Officer, for the first time, the distribution made by the company fell to be considered in its entirety to the extent of the accumulated profits in spite of the fact that such distribution could be considered as dividend only to the limited extent, and that any subsequent distribution was taken out of the pail of taxation as dividend even if the restriction no more applied.
In the present case, there can be no dispute that the definition of dividend as was in force in the assessment year under consideration equally speaks of any distribution and if any distribution is each Liquidating dividend definition division every distribution, as we think must be considered as stated above, then, there is no reason to think that the distribution presently under the consideration which fulfills all the conditions of the section for the purpose of treating it as dividend is to be taken as not falling in that category. The Tribunal on this view confirmed the decision of the Income-tax Officer that the distribution of Rs. The assessee in the present reference made by the Tribunal at his instance challenges this view of the Tribunal and contends that the distribution of Rs.
In order to arrive at the true meaning and effect of section 2 6A cit is necessary to consider, having regard to what Lord Coke said in Heydon's case, how the matter stood before the enactment of section 2 6A cwhat the mischief was for which the law as it existed prior to the introduction of section 2 6A c did not provide and what remedy has been provided by section 2 6A c to cure that mischief. The genesis of section 2 6A c is to be found in the case of Inland Revenue Commissioners v. In that case there were several single-ship companies. On the sale or loss of its ship each company went into liquidation. After the liabilities had been discharged, the assets of the company, including the profits earned from Liquidating dividend definition division commencement of the company's year up to the date of the cessation of business, and also any undistributed profits of past years that had been accumulated and invested and held as reserve funds, were distributed among the shareholders, and each shareholder accordingly received in the liquidation a certain fraction of the profits of the year in which business ceased but which the company had not resolved to divide, and of the accumulated profits of past years invested and then held in reserve.
The revenue claimed that the portion of the distribution which represented the profits made during the broken year and the accumulated profits of the past years was income in the hands of shareholders for super-tax purposes. The Court of Appeal negatived the claim of the revenue holding that when a distribution is made by a liquidator among the shareholders, such distribution, even if it is made out of the profits made by the company before liquidation or in the course of liquidation, would not be part of the annual profits or gains of the shareholders chargeable to super-tax but would be capital in their hands, since whatever may have been the nature of the assets of the company when it was functioning, on liquidation all assets become the property of the company distribution among the shareholders after payment of liabilities and in liquidation "Profits are not distributed or received as such" but are distributed and received as part of the property of the company which the shareholders are entitled to have distributed on liquidation.
The result was that a rather anomalous position was brought about. When a company makes profit and instead of distribution them as dividend accumulates them from year to year and at a later date distributes them to the shareholders, whether after capitalisation or without capitalisation, the amount so distributed would be dividend under section 2 6A abut when a company which has so accumulated the profits goes into liquidation before declaring a dividend and the liquidator distributes those profits to the shareholders, such distribution, according to the decision in Burrell's case would not be dividend.
But if the accumulated profits, whether capitalised or not, when received by the shareholders on distribution by the company as a going concern are dividend and consequently attract tax in the hands of the shareholders, there is no reason why, merely because liquidation intervenes, they should not be taxed when received by the shareholders in liquidation. It is no doubt true that, as a result of the legal effect of winding up, the distinction between profit and capital disappears and what is distributed by the liquidator and received by the shareholders is merely the property of the company, but such property of the company may include what were accumulated profits prior to liquidation and when those profits are received by the shareholders, they must suffer taxation as they would if received from the company as a going concern.
The Indian legislature, therefore, following similar legislation by British Parliament inenacted section 2 6A c in The effect of this provision was, to quote the words of Venkatarama Aiyar J. Commissioner of Income-tax"to assimilate the distribution of accumulated profits by a liquidator to a similar distribution by a company which working; bust subject to this limitation that while in the latter the profits distributed would be dividend whenever they might have been accumulated, in the former such profits would be dividend only in so far as they came out of profits accumulated within six years prior to liquidation. So long as the proviso stood, the distribution could be regarded as dividend only to the extent to which it was a distribution of accumulated profits of six years prior to liquidation.
What the legislature then aimed at catching were only the accumulated profits of six years prior to liquidation when they reach the hands of the shareholders and even if the accumulated profits of earlier years were distributed to the shareholders, they were not touched by the legislature and they escaped taxation in the hands of the shareholders by reason of the decision in Burrell's case. The legislature, therefore, with a view to securing that even though any accumulated profits of earlier years distributed by a liquidator to the shareholders until than may have escaped taxation by reason of the decision in Burrell's case, the balance of such accumulated profits shall not thenceforth escape taxation if and when they reach the hands of the shareholders on distribution by a liquidator and shall be taxed in the same manner as they would when distributed by the common as a going concern, deleted the proviso by the Finance Act The result was that from and after the assessment yearthe distribution of accumulated profits by a liquidator was equated wholly and in all respects with a similar distribution by a company which is working, irrespective of as to when the profits were accumulated.
If any accumulated profits were released to the shareholders as part of a distribution made by a liquidator in respect of the assessment year or any succeeding assessment year, such accumulated profits were liable to be fictionally regarded as dividend and taxed as such in the hands of the shareholders as if no liquidation had intervened and they had been distributed by the company as a going concern. I find that this interpretation which I am inclined to put on section 2 6A c is completely supported by the observations of Dixon J. Federal Commissioner of Taxation. In that case section 16B of the Income Tax Assessment Act which was then the provision in the Australian income-tax law corresponding to our section 2 6A c came up for consideration before the High Court of Australia.
The material part of that section was in the following terms: Explaining the object and meaning of that section, Dixon J. The section thus impliedly concedes what was decided by this court in Stevenson's case, namely, that section 16 b i was confined to distributions of part by a company as a going concern and did not apply to a distribution in a liquidation: But section 16B destroys this distinction and, if the profits are of a kind which could not be distributed among members or shareholders while the company was a going concern without exposing the member or shareholder to liability to include them in his assessable income, then in the event of a winding up he must also include them when they are distributed as part of the surplus dividend among shareholders or members or, as they ought technically to be called, contributories.
The mode of distribution will be different. In a winding up the liquidator distributes the surplus as a fund without distinguishing according to the source of the components. Profits are, therefore, not distributed as such; while a going concern must maintain a distinction between profits and share capital and distribute profits under a description or in a guise which so identifies them, e. Section 16Btherefore, does not, and logically could not, say that the distribution in a winding up must, to be taxable, be of the same character as a distribution that would be taxable in the case of a going concern. It is the liability to tax under section 16 b inot of the distribution, but of the thing distributed, the profit, that section 16B takes as the discrimen for the purpose of ascertaining what part of the surplus in a winding up a contributory must include in his assessable income.
These observations though made in relation to the Australian section apply equally to our section 2 6A c since, apart from some minor inconsequential difference in language, there is no real difference in content and substance between the two sections and they clearly support the thesis that as in the case of the Australian section, so also in the case of our section 2 6A cwhat are sought to be brought within the ambit of taxation are the accumulated profits when they reach the hands of the shareholders on distribution in liquidation and when they so reach the hands of the shareholders, they are fictionally treated as dividend and taxed as such, despite the fact that they are distributed and received as part of the property of the company in liquidation.
To quote the same learned judge once again from another part of his judgment in the same case "the subject taxed is profits, the occassion is the liberation of the profits to the shareholder in the course of liquidation". Prior to the enactment of section 2 6A c the accumulated profits, when they reached the hands of the shareholders on distribution by a liquidator, were not taxable by a reason of the decision in Burrell's case: Whenever a distribution made by a liquidator after the deletion of the proviso is sought to be brought within section 2 6A c the question which must therefore be asked is: Is the distribution a distribution of accumulated profits on the hypothesis that there is no intervening liquidation and the company is a going concern?
And this question must necessarily involve the further inquiry again on the same hypothesis whether any accumulated profits have already been distributed as part of the previous distribution, though by reason of the decision in Burrell's case they could not be regarded as dividend except in so far as they were accumulated profits of six years prior to liquidation? If these considerations are borne in mind, it is really not difficult to arrive at a concern solution of the problem before us. The first distribution made by the liquidator was of the aggregate sum of Rs. During this assessment year the proviso existed in section 2 6A c and the only relevant inquiry could, therefore, be whether the distribution of Rs.
The accumulated profits of six years prior to liquidation amounted to Rs.
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Having regard to the proviso it was not necessary at that stage to inquire further whether the remaining part of the distribution of Rs. Of course the revenue could, as a purely theoretical proposition, dissect the distribution of Rs. The accumulated profits of six years prior to liquidation having been brought to tax as dividend in the hands of the shareholders as part of the distribution of Rs. The poviso was, however, deleted with effect from 1st April,and the revenue was, thereafter, entitled to consider the relation to any distribution made from and after assessment yearwhether it represented or reflected accumulated profits of earlier years, the accumulated profits of six years prior to liquidation having already been distributed and brought to tax as dividend in the hands of the shareholders in the assessment year If any part of the accumulated profits of earlier year was found to have been distributed among the shareholders from and after assessment yearthe revenue could bring it to tax as dividend in the hands of the shareholders under section 2 6A c as if no liquidation had intervened.
The revenue was, therefore, entitled to examine whether the distribution of Rs. The revenue, however, did not treat any part of this distribution as dividend under section 2 6A c with the result that if any accumulated profits of earlier years were distributed to the shareholders as part of this distribution, they escaped assessment in the assessment year notwithstanding the deletion of the proviso. Then came the distribution of Rs. Now in regard to this distribution also the revenue was entitled to inquire whether any part of it represented or reflected accumulated profits of earlier years. The revenue was entitled to ask the question: When this distribution was made, were any accumulated profits of earlier years released to the shareholders as part of such distribution or, in other words, if there were no liquidation, would this distribution be a distribution of accumulated profits of earlier years liable to be regarded as dividend?
Of course in order to answer this question it was necessary for the revenue to inquire whether any accumulated profits of earlier years had already been distributed to the shareholders as part of the previous distributions, irrespective of their chargeability, for what was already distributed to the shareholders could not be distributed once again and even if any accumulated profits of earlier reached the hands of the shareholders as part of this distribution, they could only be out of the balance of accumulated profits of earlier years remaining undistributed at the date of this distribution. But if, after making this inquiry, the answer to the question was in the affirmative, the distribution to the extent to which it was a distribution to the extent to which it was a distribution of accumulated profits of earlier years was liable to be regarded as dividend under section 2 6A c.
Now instead of making this inquiry, what the revenue did was to regard the entire distribution of Rs. The revenue took the view, and that was the view advocated before us, that so long as the proviso existed, the chargeability was limited to the accumulated profits of six years prior to liquidation with the result that when the sum of Rs. The argument of the revenue was that the balance of the fund traceable to accumulated profits amounted to Rs. This argument has found favour with my Lord the Chief Justice, but with the greater deference to him, I find my self unable to accept it.
I conceive the argument to be fallacious and my reason for saying so is as follows: The argument proceeds on the assumption that accumulated profits can exist in the distribution only when they are chargeable and it is chargeability which makes the distribution attributable to accumulated profits. This assumption is, I think, unjustified. When liquidation takes place the assets of the company may consist of various component funds such as accumulated profits, capital gains and other capital of the company.
Dividend definition division Liquidating
It is no doubt true that on dividemd all these funds become part of the property of the company divisible among the shareholders in liquidation and in the hands of the liquidator there is no distinction between one fund and another, yet it is these funds which Liquisating the property of the company definitiion, therefore, when a distribution is made out of the property of the company, such distribution would consist of divifend or more of these funds. It may be that in a given case if may be difficult to disintegrate the distribution for diidend purpose of ascertaining the component funds of which it may be made, Liqiudating the property of the company is dibision among the shareholders is property remaining after discharge of obligations, but divission difficulty of disintegration cannot negative the physical fact that the distribution must necessarily consist of one or more of these funds.
The distribution may therefore, comprise the fund attributable to accumulated profits and the accumulated profits may thus exist in the distribution quite irrespective of their chargeability. They would not be chargeable because they would be distribution and received as part of dedinition property of the company vide Burrell's case but that does not mean that as dividrnd identifiable fund they do not from a constituent part of the distribution. It is because they reach the hands of the shareholders though as part of the distribution of the property of the djvision that they are made chargeable as dividend dividenr section 2 6A c.
Liuqidating a distribution is out of accumulated profits or not is a matter of Liquidxting and not a matter of divisuon. Even in Burrell's case, which was decided at a time when there was no section corresponding to section 2 6A cit was admitted that the Liquivating represented accumulated profits and it sividend because of this definiion that the contention was Liquidatjng by the revenue that, to use the divicend Liquidating dividend definition division Pollock M. Which represents undistributed profits, whether accumulated during past years or made during the broken year, forms part of the income of the recipient shareholder The section does not enact a fiction deeming a distribution to have come out of accumulated profits or making a distribution attributable to accumulated profits.
The concept of attributability exists independently of the section and it is only when a distribution is attributable to accumulated profits, or to put it differently, owes its origin to the fund consisting of accumulated profits that the section comes into operation and attaches the fiction of dividend to the distribution. If the distribution has not come out of accumulated profits or is not attributable to accumulated profits, the section cannot apply and no part of the distribution can be fictionally regarded as dividend. The argument of the revenue proceeds on the hypothesis that the section not only creates the fiction of chargeability but also creates the fiction of attributability and that so long as the accumulated profits are not exhausted by being charge as dividend, any distribution made by the liquidator must be deemed to be attributable to them.
The argument is clearly wrong for it makes the existence of accumulated profits - and I may once again make it clear that by accumulated profits I mean what were accumulated profits at the date of liquidation - in the distribution dependent on chargeability instead of making chargeability dependent on the existence of accumulated profits in the distribution. The view advocated on behalf of the revenue also ignores the object and purpose of the enactment of section 2 6A c. Interim dividend and final dividend Major differences between the Companies Act, and the Companies Act, While the provisions of the Companies Act, for payment of dividend for equity and preference shares are largely the same, the following differences are highlight: In case the dividend has been illegally declared or there occurs an unforeseeable event like a war, fire outbreak, imposing tax burden etc on the company, then the board of directors may, with the approval of the shareholders, revoke the dividend so declared.
Payment of dividend on preference shares Preference shares are given preferential treatment over equity shares with respect to distribution of dividend. Dividend can only be paid out of company profits after providing for depreciation, or out of free reserves or from the money provided by central or state government for the payment of dividend by the company. Dividend on cumulative and non-cumulative preference shares The dividend on cumulative preference shares is accrued each year at the prescribed preferential dividend rate, irrespective of whether declared, whereas, for non-cumulative preference shares, priority is only in respect of the amount of dividend declared to them in a particular year.
These preference shares do not pre-scribe the right to carry over dividends of a particular year to another year. Dividend tax Dividend income is tax free in the hands of shareholders as companies are liable to pay dividend distribution tax before making payment of the same to the shareholders. Interim dividend The board of a company may declare interim dividend wherein preference shareholders are to be paid such interim dividend before equity shareholders. Mere resolution declaring an interim dividend does not create any liability and may be rescinded at any time before actual payment.
Example 1. Example 2. H and W, husband and wife, each own half of the stock of Corporation X. Example 3. The facts are the same as in Example 2 with the additional facts that the outstanding stock of Corporation X consists of 1, shares and all but 10 shares of the stock of H is redeemed. Paragraphs b 2b 3 and b 4 of this section apply to any taxable year beginning on or after May 30, However, taxpayers may apply paragraphs b 2b 3 and b 4 of this section to any original Federal income tax return including any amended return filed on or before the due date including extensions of such original return timely filed on or after May 30,