Holding

A company in liquidation is not chargeable to super profits tax because the standard deduction is incapable of ascertainment and the distinction between capital, reserve and accumulated profits disappears.

Summary

The Palai Central Bank Ltd went into liquidation on 8 August 1960. The Income‑Tax Officer assessed its taxable income for AY 1963‑64 at Rs 5,79,678 and held that super profits tax was also payable, directing the bank to file a return under the Super Profits Tax Act, 1963. The bank filed a return showing nil chargeable profit, arguing that the formula for the "standard deduction" could not be applied because, after liquidation, there was no paid‑up share capital or reserve to compute the capital required under the Second Schedule. The officer overruled this, applied the minimum deduction of Rs 50,000 and assessed super profits tax of Rs 2,04,740. The Appellate Assistant Commissioner affirmed, but the Income‑Tax Appellate Tribunal held that a liquidated company has only one integrated fund, the distinction between capital, reserve and profits disappears, section 27 of the Act applies, and the standard deduction is incapable of ascertainment, so no super profits tax could be levied. The Kerala High Court affirmed the Tribunal’s view. On appeal, the Supreme Court held that after winding‑up a company cannot be said to have any amount that can be identified as paid‑up share capital or reserve; consequently the standard deduction cannot be computed and section 4 of the Super Profits Tax Act does not attract. The appeal by the Revenue was dismissed with costs.

Issues considered

Whether a company in liquidation is chargeable to super profits tax under the Super Profits Tax Act, 1963.
Whether the "standard deduction" can be ascertained for a liquidated company in the absence of paid‑up share capital and reserves.
Whether section 27 of the Act, which exempts companies with no share capital, applies to a company in liquidation.

Legislation cited

Income Tax Act, 1961
Super Profits Tax Act, 1963 (Act XIV of 1963)s. 2(5), s. 27, s. 2(9), s. 4

Subjects

super profits taxliquidationstandard deductionpaid‑up share capitalsection 27 exemptiontax assessmentcompany winding upIncome‑Tax Act

Judgment

971

COMMISSIONER OF INCOME-TAX, ERNAKULAM.
(KERE!-A)
v. B

THE OFFICIAL LIQUIDATOR, PALA! CENTRAL BANK LTD,
(IN LIQUIDATION)
October 16, 1984
c
[V.D. TULZAPURKAR, V. BALAKRISHNA ERADI AND D. P. MADON JJ.]

Super Profita Tax Act, 1963 (Act XIV of 1961), ss.2 (5), 2 (9) and 4 read
with second Schedule to the A.ct-Company in liquidation-Whether chargeable to
super profits tax.
D
Capital, reserve and accumulated profits-Distinction between-Whether
disappears on winding up of company.

The assessee-company went into liquidation on August 8, 1960. The
Income-tax Officer, while determining the taxable income of the assessee-com-
pany at Rs. 5,79,678 for the assessment year 1963..()4, was of the opinion that
E
this amount would attract liability for super profits tax also and therefore aske,d
the assessee company to file its return. The assessee-company submitted its
return showing the chargeable profits as 'nil', contending that there could be no
liability to super profits tax in respect of a company in liquidation since the
formula laid down in the Second Schedule to the Super Profits Tax Act 1963
for ca1culation of the •standard deduction' was inapplicable on account of the
fact that a company in liquidation could not be said to have paid-up share
capital as on the first day of the previous year relevant to the assessment ye~ F
which was long subsequent to the winding up. The Jncorne.. Tax Officer how-
ever overruled the aforesaid contention and worked out the chargeable pro-
fits at Rs. 2,04,740 after adopting a minimum amount of Rs. 50,000 mentioned
in s.2 (9) of the Act as a "standard deduction". The said order was confirmed
in appeat by the Appellate Assistant Commissioner. But, on further appeal by
the assessee-company the Income-tax Appellate Tribunal while aJlowing the G
appeal held : (1) that in the hands of the liquidator there is only one integral
fund which could not be split up into share capital, reserve profits and there-
fore s.27 of the Act was clearly attracted to the case ; .and (ii) that no assessment
to super profits could be made on a company in liquidation since section 4 of
the Act would not apply to the assessee company in liquidatioa as the standard
deduction was incapable of ascertainment. The High Court, rejected the
reference made at the instance of the Revenue.
ff
972 SUPREME COURT REPORTS [1985] I S.C.R.

Dismissing the appeal by the Revenue,
A
HELD : (1) After a company has gone into liquidation it cannot be said
that as on the first day in any subsequent year forming the previous year
relevant to the assessment year. there exists in the hands of the liquidator any
amount distinctly forming the paid-up share capital of the company or any sum
that can be characterized as 11 reserve." Ute distinction between capital, reserve
and the accumulated profits disappears in respect of a company in Hquidation
B after tbe date of its winding up and there is only one integrated or consolidated
fund in the hands of the liquidator. The concept of a fluctuating share capital
or reserve which is the basic premise necessary to attract the applicability of
rule 1 of the Second Schedule is wholly foreign in respect of a company in
liquidation. [977H; 978E-F)

(2) It is clear from the definition of ''standard deduction" that for the
c purpose of calculation of "standard deduction" one has to ascertain the capital
of the company as computed in the manner specified in Second Schedule. But,
it is 'important to notice from the terms of Rule 1 of Second Schedule that un-
.less the company can be said to have a partl-up share capital as on the first
day of the previous year re!evant to the assessment year the formula laid down
in the rule for computation of capita.I of the company cannot have any app!ica..
tion and the calculation of "standard deduction" being based wholly on the
''
D capital of the company, it becomes wholly incapable of ascertainment.
[976B ; 977F-G]
Commissioners of Inland Revenu• v. George Burrell, 1924 2 [K.B.) 52, 63
aod Birch). Cropper [1889) L.R. 14 App. Cas. 525, 546 referred to.

CommlsSioner of Income-tax v. Girdhardas and Co. Private Ltd1 63 I.T.R.
E 300 ; followed.

(3) Under the scheme of the Income-tax Act 1961, charge of tax will not
get attracted unless the case or transaction falls under the governance of the ·-
relevant computation provisions. The character of the computation provisions
in each case bears a relationship to the nature of the charge. Thus, the charg..
ing section and the computation provisions together constitute an integrated . l
F code. When there is a case to which the computation provisions cannot apply
at all, it is evident that such a case was not intended to fall within the charging
section. The scheme of the Super Profits Tax Act 1963 being similar to that of
the Income-tax Act 196lt it has to be held that inasmuch as the provisions con~
tained in the Act for computing the capital of the company and its reserves and
cannot have any application in respect of a company in liquidation and con..
sequeatly the 'standard deduction' is incapable of ascertainment, the charge of
G super profits tax under section 4 of the Act is not attracted to such a case.
[9780-H ; 979A-C]

Commissioners of Income-tax, Bangalore v. B.C. Srinivasa Setty, 128 I.T.R
294 ; referred to. -

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2090 of 1980
H
C.l.t. v. PALA! CENTRAL BANK'.(Ba/akrishna Eradt, J.) 9H
Appeal by Special leave from the Judgment and Order dated
the 30th January, 1979 of the Kerala High Court in l.T.R. No. 76 A
of 1977.

Abdul Khadder and Miss. A •. Subhashini for the Appellant.
P. Gobindan Nair, N. Sudhakaran and Mrs. Baby Krishnan for
the Respondent. B
The Judgment of the Court was delivered by

BALAKRISHNA ERADI, J. Whether a company in liquidation
is chargeable to super profits tax under the Super Profits Tax Act,
1963-Act XIV of 1963 (hereinafter called 'the Act') is the short ques- c
tion arising for determination in this appeal. The answer thereto
will depend upon whether during the period subsequent to the date
of winding up, any part of the funds in the hands of the official
liquidator can be distinctly classified as representing paid-up share
capital of the company as on the first day of the year of account
relevant to assessment year and whether any portion of the fund can D
be similarly identified as forming as, "reserve",
.
The assessee is a banking company, namely, The Palai Central
Bank Ltd., which went into liquidation on August 8, 1960. On that
date the Official Liquidator took charge of the assets and liabilities
of the company and a balance-sheet had heen prepared as on the E
same date. Thereafter, for every year, the liquidator used to
prepare only an income and expenditure statement for submission
to the Reserve Bank of India. The assessment year, with which we
are concerned is 1963-64 i.e., the year erided March 31, 1963. For
the said assessment year the taxable income of the assessee was . F
determined by the Income-tax Officer at Rs. 5,76,678. The Offi- l
cer was of the opinion that this amount would attract liability for
super profits tax also and s_ince the assessee had not submitted any
return nbder the Act, a notice under section 9 (a) of the Act calling
for 'the return was is.sued. The assessee thereupon, submitted a
return showing the chargeable profits as 'nil'. In support of the G
said return the assessee conteended inter a/ia before the Officer.that
there could be not liability to super profits tax in respect of a com-
pany in liquidation since the formula laid dowri in the Second
Schedule to the Act for calculation of the 'standard deduction' was·~
inapplicable on .account of the fact thai a company in liquidation ·
could not be said to have paid-up share capital as on the first day 'of H
,.
l1
914 StJPl!.EME COURT REPOl!.TS t1985] 1 s.c.I!..

A the previous year relevant to the assessment year which was long
subsequent to the winding up. Certain other contentions were put
forward by the since they are are not of any material relevance at
this stage, it is unnecessary to refer to them.

The Income-tax Officer overruled the contentions raised by
B the assessee and worked out the chargeable profits at Rs. 2,04,740
after adopting minimum amount of Rs. 50,000 mentioned
in 2 (9) of the Act as a "standard deduction" applicable to the case.
The Appellate Assistant Commissioner, before whom the assessee
filed an appeal, confirmed the order of the Income-tax Officer. The
assessee carried the matter in further appeal before the Income-tax
a Appellate Tribunal, Cochin Bench. The Tribunal held that in the
hands of the liquidator, there is only one integral fund which could
not be split up into share capital, reserve and profits. In the opinion
of the Tribunal the exemption provision contained in section 27 Qf
the Act which states that nothing contained in the Act shall apply
to any company which has no share capital was clearly attracted
D to the case. It was further held by the Tribunal that even if the
exemption under section 27 of the Act did not get attracted, section
4 of the Act, which is the charging section would not apply to the
assessee company in liquidation as the 'standard deduction' was
incapable of ascertainment. The Tribunal, accordingly, allowed
the appeal of the assessee and held that no assessment to super pro-
fits tax could be made on a company in liquidation.

Thereafter, at the instance of the revenue, the Tribunal refer·
red the following question of law to the High Court of Kerala for

F
its opinion :
"Whether, on the facts and in the circumstances of the
. (
'
case, was the Tribunal justified in holding that no assess-
'
ment under the Super Profits Tax Act, 1961, can be made
on the assessee company (in liquidation)" ?

0 The High Court agreed with the view taken by the Tribunal
that after a company has gone into liquidation there cannot be said
to be in the hands of the liquidator any amount that can be distin-
ctly designated as paid-up share capital of the company or as
'reserve' with respect to which the capital of the company is to be
worked out as provided in Second Schedule to the Act in order to
arrive at the amount of standard deduction. The question referred
H
C.I.T. v. PALA! CENTRAL BANK (Balakrishna Eradi. J.) 915

was accordingly answered by the High Court in the affirmative, that
A
is, in favour of the assessee aud against the revenue. Aggrieved by
the said decision, the revenue has preferred this appeal to this Court
by special leave.

After hearing Counsel appearing on both sides, we have
unhesitatingly come to the conclusion that the view taken by the
High Court is perfectly correct and that this appeal is devoid of
merit.

Section 4 of the Act which is the charging section reads :
"4. Charge of tax-Subject to the provisions contained in c
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 ca:se may be, as D
exceed the standard deduction, at the rate or rates specified
in the Third Schedule."

The expression "chargeable profits" has been defined in clause
(5) of section 2 thus :
E
"2(5)"Chargeable profits" means the total income of an
assessee computed under the Income-tax Act, 1961 (XLIII
of 1961), for any previous year. of years. as the case may
be, and adjusted in accrodance with the provisions of the
First Schedule."
F
The next definition, that is relevant is contained in clause (9)
of the same section which deals with the expression
"standard deduction". That clause reads as follows :
2(9) "Standard deduction" means an amount equal to six
per cent, of the capital of the company as computed in G
in accrodance 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, t)le aforesaid amount .of
six per cent or, the case may be, of fifty thousand rupees
sh~ll be increased or decreased proportionately : ·
....
H

'
976 SUPllllME COUR.T REPORTS (1985) l S.C.R.

A Provided further that where a company has different
previous years in respect of its income, profits and
gains, the aforesaid increase or decrease, as the case may
be, shall be calculated with reference to the length of the
previous year of the longest duration.

B It is seen from the above definition that for the calculation of
'standard deduction' one has to ascertain the capital of the company
as computed in the manner specified in second Schedule. That
makes it necessary for us to examine the provisions of Second
Schedule of the Act which contains the rules for computing the
capital of a company for the purpose of levy of super profits tax.
0
The relevant provision is contained in rule I of the said Schedule
which is in the following terms :-

"!. Subject to the other provisions contained in this
Schedule, the capital of a company shall be the sum of the
D amounts, as on the first day of the previous year relevant
to the assessment year, of its paid-up share capital and of its
reserve, if any, created under the proviso (b) to clause
(vi-b) of sub-section (2) of section 10 of the Indian Income-
tax Act, 1922 (Xf of 1922), or under sub-section (3) of
section 34 of the Income-tax Act, 1961 (XLIII of 1961), and
E 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 purpose of the Indian Income-tax Act,
1922 (XI of 1922) or the Income-tax Act, 1961 (XLIII of
1961), disminished by the amount by which the cost to it
F of tke 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 ;
G and
(ii) the amount of any fund, 8.ny surplus and any such
peserves is not to be taken into account in computing
the 'apital under this rule.
~xplanation 1-A paid-up share capital or reserve brought
into existence by creating or increasing (by revaluation or
otherwise) any book asset is not capital for computing the
H
C.I.T. v. PALA! CENTRAL llANK (Balakrishna Eradi, J.) 977
capital of a company for the purposes of this Act.
A
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 B
years in respect of its income, profits and gains, the com-
putation of capital under rule 1 and rule 2 of this Schedule
shall be made with reference to the previous year which
commenced first.''

It is maifnest from the terms of rule that the essential com-
c
ponents which will together go to make up the capital of a company
are:
(i) Its paid-up share capital on the first day of the
previous year relevant to the assessment year.
D
(ii) Its reserves, if any, created under the proviso (b) to
clause (vi-b) 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

(iii) Other reserves in so far as the amounts credited there- E
to have not bee.n allowed in computing the profits of
the company for the purposes of the assessment to
income-tax.

From the aggregate of the aforesaid amounts certain deduc-
tions as specified in the section have to be made but the details of F
such deductions are not relevant for the purposes of the present
case. What is important to notice is that unless the company can
be said to have a paid-up share capital as on the first day of the
previous year relevant to the assessment year the formula laid
down in the rule for computation of capital of the company cannot
have any application and calculation of "standard deduction'' being G
bas~d wholly on the capital of the coippany it· becomes wholly
incapa_b_Ie of .:ascertainment. After .a company has gone into liqui-
dation; can it be said that as on the first day in any subsequent year
forming the previous year relevant to the assessment year, there
ei<ists in the hands of the liquidator any amount distinctly forming
the paid up share capital of the company or any sum .that can be H
978 SUPREME COURT REPORTS [1985] I S.C.R. /

A characterized as "reserve"? In our opinion the answer must
clearly be in the negative.
In Commissioners of ln/and Revenue v. George Burre/1,(1) Pollock
M.R. observed :
" ...... it is a misapprehension, after the liquidator has
B assumed his duties, to continue the distinction between
surplus profits and capital. Lord Macnaghten in Birch v.
Cropper(') 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 con- "
clusion to speak of the assets which are the subject of this
c application as "surplus assets" as if they were an accretiou
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
D the company."

The above statement of the law was cited with approval and
adopted by this Court in Commissioner of lncome-tax v. Girdhardas
and Co. Private Ltd.,(8 ) and it was held that in respect of a company
in liquidation after the date of its winding up, the distinction bet-
E ween capital, reserve and the accumulated profits disappears and
there is only one integrated or consolidated fund in the hands of the
liquidator. The concept of a fluctuating share capital or reserve
which is the basic premise necessary to attract the applicability of
rule l of the Second Schedule is wholly foreign in respect of a
company in liquidation.
F
In Commissioner of Income-tax, Bangalore v. B.C. Srinivasa
Setty{'), this Court pointed out that under the scheme of the
Income-tax Act, 1961, charge of tax will not get attracted unlese the
case or transaction falls under the governance of the relevant
g computation provisions. ''The character of the computation provi-
sions in each case bears a relationship to the nature of the charge.
Thus, the charging section and the computation provisions together
(!) (1924] 2 K.B. 52, 63
(2) [1889] L.R. 14 App. Cos. 525, 546
(3) 63 LT .R. 300
H (4) 128 LT.R. 294.
C.I.T. v. !>ALAI CENTRAL EANK (Balakrishna Eradi, J.) 979

constitute an integrated code. When there is a case to which the A
computation provisions cannot apply at all, it is evident that such a
case was not intended to fall within the charging section. Other-
wise, one would be driven to conclude that while a certain income
seems to fall within the charging section there is no scheme of
computation for quantifying it. ·The legislative pattern discernible
B
in the Act is against such a conclusion". Exactly similar being the
scheme of the Super Profits Tax Act; 1963; the above observations
fully apply to case before us. Hence, it has to be held that
inasmuch as the provisions contained in the Act for computing the
capital of the company and its reserves and cannot have any appli-
cation in respect of a company in liquidation and consequently the
'standard deduction' is incapable of ascertainment, the charge of
c
super profits tax under section 4 of the Act is not attracted to such
a case. The judgment of the High Court does not, therefore, call
for any interference.

Thi~ appeal is accordingly dismissed with costs.
D

M.L.A. Appeal dismissed.