Sabyasachi Mukharji, J.
1. This reference arises out of the assessment years 1962-63 and 1964-65. The following question has been referred to us under Section 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the amounts represented by the tariffs and dividends control reserve, contingencies reserve and development reserve did not form part of the accumulated profits of M/s. Upper Ganges Valley Electricity Supply Co. Ltd. immediately before its liquidation for the purpose of working out the distribution made to the shareholders treated as dividend under the provisions of Section 2(22)(c) of the Income-tax Act, 1961 ?'
2. The assessee-company held shares in M/s. Upper Ganges Valley Electricity Co. Ltd. whose electricity supply undertaking was handed over to the U.P. State Electricity Board on 5th May, 1959, and which subsequently went into liquidation on 1st March, 1960. During the previous years relevant to each of the two assessment years 1963-64 and 1964-65, the official liquidator paid to the assessee-company a total sum of Rs. 1,00,750 and the point arose as to whether this amount in each of these two years could be treated as 'deemed dividend' income under Section 2(22)(c) of the I.T. Act, 1961. The ITO did not accept the assessee's contention that in working out the accumulated profits of M/s. Upper Ganges Valley Electricity Co. Ltd. immediately before its liquidation on 1st March, 1960, to which the distribution by the official liquidator could be attributed as 'deemed dividend' (i) the tariffs and dividends control reserve, (ii) contingencies reserve, and (iii) development reserve, should be excluded.
3. Aggrieved by the said order of the ITO, the assessee-company went up in appeal before the AAC. The AAC while giving relief on some other point upheld the action of the ITO on this point. There was a further appeal to the Appellate Tribunal. The Tribunal noted the basic facts, as we have mentioned before and observed that these three reserves had been handed over to the U.P. State Electricity Board under the relevant provisions of the Electricity Act, to which we shall presently refer and compensation money was paid to the assessee. The total amount of compensation assessable to tax, according to the Sixth Schedule of the Indian Electricity Act, 1948, was Rs. 25,38,407 for all the assets of the undertaking and deduction was made of the amounts which had been transferred to the U.P. State Electricity Board on account of, (i) tariffs and dividends control reserve, (ii) contingencies reserve, and (iii) development reserves, and deducting this amount the balance compensation was paid and out of this the distribution was made. Therefore, it was contended that no part of the amount distributed could be attributable to the accumulated profits. Before we consider this aspect further, it is relevant to refer to Section 2(22) which deals with dividends and states that what is included in dividend and we are concerned with Sub-clause (c) of Section 2(22) of I.T. Act, 1961, which reads as follows:
'(c) Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not.'
4. It may be instructive in this connection also to refer to Sub-clauses (a) and (b) of the said Section 2(22) of the Act, which read as follows:
'(22) Dividend includes-
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposits certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not.'
5. The arguments were advanced on the question whether the amounts represented by the three reserves mentioned hereinbefore could be attributable to the profits of the company immediately before its liquidation. In support of his contention, learned advocate for the revenue drew our attention to several authorities to which we shall presently refer.
6. Our attention was first drawn to the decision of the Supreme Court in the case of CIT v. Girdhardas and to. P. Ltd. : [1967]63ITR300(SC) . There, the Supreme Court was considering Section 2(6A)(c) of the Indian I.T. Act, 1922,after it was amended in 1956. The Supreme Court observed that under Section 2(6A)(c) of the Indian I.T. Act, 1922, as amended in 1956, the amount distributed in every distribution by the liquidator of a company was to be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, in the proportion which the accumulated profits bore to the capital in the accounts of the company at the commencement of the winding-up and that part of the receipt which was attributable to the accumulated profits would be taxable as dividends. The ITO, the Supreme Court noted, had, therefore, in the first instance to determine the accumulated profits in the hands of the company, whether capitalised or not, and the rest of the capital immediately before its liquidation, he had then to determine the ratio between such capital and the undistributed profits and to apply the ratio to the amount distributed to determine the components attributable to the accumulated profits. The Supreme Court noted further that there was nothing in Section 2(6A)(c) to support the view that either in the course of the liquidation the accumulated profits exist as a separate fund even in a notional sense, or that whatever was brought to tax by the taxing authorities in a given year was dividend and the rest represented the assets of the company. The fund in the hands of the liquidator was one and when the fund or part of it was distributed the distribution was deemed to take place in the same proportion in which the capital and the accumulated profits stood in the accounts of the company immediately before the winding-up. By the provision of the Companies Act, as it stood at that time, the dividend could not be paid out otherwise than if the profits in the year was accumulated profits. The Supreme Court, at p. 302 of the report, observed the reason for the insertion of this clause. The Supreme Court noted that on the winding-up of a company the distinction between the assets and undistributed profits disappeared. It was well settled, the Supreme Court noted, that a company as a going concern distributing the profits of the year or accumulated profits was regarded as distributing dividend among the shareholders, but if the company was wound up before distributing its accumulated profits, any distribution of profits by the liquidator could not be regarded under the Companies Act as dividend. The Supreme Court noted the observations of Pollock M. R. in the case of IRC v. George Burrell [1924] 2 KB 52 (CA). The amounts distributed to the shareholders by a liquidator were, therefore, distributed as capital of the company since the liquidator had no power to distribute the dividend and the sums received by the shareholders could not be disintegrated into capital and profits by examining the accounts of the company when it was a going concern. The Supreme Court further observed that the scheme of the Indian. Companies Act closely followed the English Companies Actand the view expressed in the decision in the case of George Burrell applied to the distributions made by the liquidator and those distributions were not liable to be taxed as dividend. Parliament, therefore, had with a view to avoid escapement of tax devised a special definition of the word 'dividend' and incorporated it by Act 7 of 1939 as Section 2(6A). The effect of the provision was to assimilate the distribution of the accumulated profits by the liquidator to a similar distribution by the company as a going concern but subject to the limitation that while in the latter the profits distributed would be dividend whatever the length of the period for which they were accumulated, in the former such profits might be dividend only in so far as they come out of profits accumulated, according to the Supreme Court, within six years prior to liquidation. We may incidentally mention that the Supreme Court had to observe this because of the Explanation in the old Act. Respectfully following the aforesaid observations of the Supreme Court, we must further point out that that principle, even if it was applied to the facts and circumstances of the case, would not be relevant. Here, as we have indicated, the distribution that took place was out of the amount that was received by the liquidator from the compensation money and the compensation money was paid to the company by deducting the amounts covered by the three reserves with which we are concerned. Therefore, whether these three reserves could be attributable to the accumulated profits of the company really do not fall for our consideration because the amount that was distributed on liquidation was not in respect of the amount (after) deducting the amounts represented by these reserves. Our attention was also drawn to the observations of the Madras High Court in the case of CIT v. K. Srinivasan : [1963]50ITR788(Mad) . There, the Division Bench of the Madras High Court in that case held that for the purpose of Section 2(6A) of the I.T. Act, 1961, 'accumulated profits included the general reserves'. Unless the profit was capitalised in some form or other, a mere transfer of the profits to any reserve account would not take away from the profits the character of an accumulated profit. In order that payment to a shareholder in a company in which the public were not substantially interested might be treatedas 'dividend' under Section 2(6A)(e) of the I.T. Act, 1961, the payment need not necessarily be loan or advance to the shareholders. The facts of that case were entirely different. There, the company had kept a current account in the name of the shareholders and the shareholders were allowed to withdraw the amounts from the company for their personal expenses, payment of insurance premia, income-tax payments, etc., and the net overdrawing of the share-holders at the close of the previous year would be a payment to the shareholders within the meaning of Section 2(6A)(e) to the extent the company hadaccumulated the profits. As we have mentioned while narrating the facts of the instant case, we found that the observations made by the Division Bench of the Madras High Court, in the facts and circumstances of the case, would not be of any assistance to us in resolving the controversy in the present case. We must, however, deal with the decision of another Division Bench of the Madras High Court in the case of T.M. Rangachari v. CIT : [1976]102ITR50(Mad) . There, the assessee was a shareholder in a public limited company which had carried on the business of generation and distribution of electrical energy. The position of the present shareholder, in the instant reference before us, is also similar. Under the provisions of the Electricity (Supply) Act, 1948, the company which owned the electrical undertaking had to set apart, (i) a reserve called tariff and dividend control reserve, (ii) a reserve called reserve for grant of repayment to the consumer, as provided in Pt. II of Schedule VI to the Electricity (Supply), Act, 1948, and also (iii) a reserve called contingencies reserve as provided in the said Part II of the same Schedule. On 31 March, 1956, certain amounts stood to the credit of these three reserves. These amounts were admittedly appropriation made out of the profits of the company from year to year. The electrical undertaking was taken over by the Andhra Government with effect from 1st May, 1956. In the year 1957, the company prepared the Government acquisition account in which, among others, three reserve amounts were transferred. The company was paid the compensation for the undertaking which was taken over by the Andhra Govt. Taking into account the compensation received by the company, the profits for the year ended 31st March, 1958, were computed at Rs. 15,58,055. The company then went into voluntary liquidation on 28th March, 1959. The liquidator made certain distribution to the shareholders on 1st April, 1959, 28th February, 1961, and 29th September, 1961. The total amount thus districted on 1st April, 1959, was Rs. 8,81,000 and the total amount distributed on 28th February, 1961, and 29th September, 1961, was Rs. 8,63,800.
7. The assessee in that case who was a shareholder of the company was subjected to assessment on the amounts received by him during the assessment years 1960-61, 1961-62 and 1962-63. The ITO considered the amounts received by the assessee as a result of the later distribution on February 28, 1961, and September 28, 1961, included 'deemed dividend' as defined in Section 2(6A)(c) of the Indian I.T. Act to the extent of Rs. 5,87,213 (Rs. 14,68,213 minus Rs. 8,81,000). This was on the basis that the 'accumulated profits' of the company as on 31st March, 1951, was Rs. 14,68,213. The assessee, however, contended that out of the amount of Rs. 4,35,525 treated as part of the 'accumulated profits' in the company's assessments, three reserves referred to above, aggregating to Rs. 2,06,937, created underthe provisions of the Electricity (Supply) Act, 1948, and which could not be dealt with by the company but had to be handed over to the purchaser of the undertaking as per the provisions of that statute, could not be treated as 'accumulated profits' at all. It was also contended that another sum of Rs. 1,34,202 which was the profit for the year ending March 31, 1956, could not be treated as 'accumulated profits' for the purpose of the application of Section 2(6A)(c) of the I.T. Act, 1961. Now, in that background, the question whether the sum of Rs. 4,35,525 represented the accumulated profits for purposes of Section 2(6A)(c) of the I.T. Act was considered by the Division Bench of the Madras High Court. It was held that merely because the said reserves had been created by reason of the provisions in the Sixth Schedule to the Electricity (Supply) Act, 1948, and the amounts had to be ultimately handed over to the purchaser, they did not cease to be accumulated profits. The fact that the amounts standing to the credit of the three reserves could be used only under certain circumstances and subject to certain conditions could not change the character of the amounts as profits of the company, according to the Division Bench of the Madras High Court. Hence, the amounts standing to the credit of the three reserves as also the profit of the year formed part of the accumulated profits for the purpose of Section 2(6A)(c) of the Act. The other aspect of the question, we are not concerned with, which relates to capital gains.
8. It will appear from the narration of the facts which has been set out in extenso that in that case the amounts of the tariffs and dividend control reserve, contingency reserve and rebate to consumers were actually deducted by the statutory authority when compensation was ultimately paid to the assessee-company during which distribution had taken place which is the subject-matter being treated as dividend. This aspect, in our opinion, is important.
9. In this connection, reference may be made to certain provisions of the Indian Electricity Act, 1910. Section 5 of the Act deals with the provisions where the licence of a licensee is revoked. Section 6 of the Act deals with the provisions relating to the purchase of undertakings. And Section 7A of the said Act deals with the determination of purchase price. Subsection (4) of Section 7A of the said Act makes the provisions of Sub-sections (1) and (2) of Section 7A of the said Act liable to be attracted even in a case where the purchase of the undertaking is made under Section 6 of the Indian Electricity Act, 1910. The fact of this compensation is that in case of the purchase of the undertaking, the compensation that has to be paid by the purchaser of the undertaking is determined under the provisions of the Sixth Schedule of the Electricity (Supply) Act, 1948. The said Schedule regulates the determination of the compensation. We may, for instance, refer to Clause H of the Sixth Schedule, Sub-clause (3) whereof provides that on the purchase of theundertaking under the terms of its licence any balance remaining in the tariffs arid dividends control reserve should be handed over to the purchaser and maintained as such tariffs and dividends control reserve. The proviso to the said Sub-clause (3) provides that where the undertaking is purchased by the Board or the State Govt.--in the instant case before us, it was the undertaking for purchase by the U.P. State Electricity Board--the amount of the reserve might be deducted from the price payable to the licensee. The use of the expression may indicate a discretion. We are actually, however, not concerned with whether it is mandatory or directory. But, in any case, that is the language used and similar is the position with Sub-clause (4) of Clause V-A. These are the three relevant sub-clauses dealing with the three amounts of reserves with which we are concerned, in the instant reference.
10. In the case before us, it has been found as a fact that in paying the purchase price these amounts had been deducted and the balance amount had only been handed over to the liquidator which was distributed. Therefore, even if it is contended that it could be attributable to the accumulated profits of the company immediately before its liquidation, the amount that was distributed in the instant case, which is the subject-matter of the reference, did not relate to the amount because the compensation money had been deducted from the amounts standing to the credit of the company. This aspect does not seem to have been the same as before the Madras High Court. At least, no argument on this aspect was advanced before the Division Bench of the Madras High Court. Therefore, in the facts of the case, the decision of the Madras High Court referred to hereinbefore cannot be of any assistance to us.
11. Our attention was also drawn to the decision of the Supreme Court in the case of Tea Estate India P. Ltd. v. CIT : [1976]103ITR785(SC) , where the assessee-company had held a substantial number of shares in two other companies growing, manufacturing and selling tea. The facts upon which the Supreme Court proceeded were entirely different and did not relate to the problems in the background of the fact with which we are concerned. The learned advocate for the Revenue, however, drew our attention to the observations appearing at p. 794 of the report. But the said observations relate to whether this could be treated as attributable to the accumulated profits. But as we have pointed out before, that on the facts found that the amount standing to the credit of these reserves had been deducted in paying the compensation money to the assessee out of which this amount had been deducted, the question whether this could be attributable to the profits of the company does not really fall for our consideration.
12. Our attention was also drawn to the decision of the Supreme Court in the case of P.K. Badiani v. CIT : [1976]105ITR642(SC) . There the SupremeCourt observed that the development rebate reserve created by a company by duly charging the amount to the profit and loss account, although the rebate was allowable as a deduction under the Indian I.T. Act, constituted accumulated profits of a company within the meaning of Section 2(6A)(e) of the Indian I.T. Act, 1922. It was held that for the purpose of assessment to tax the amounts advanced by a private company to the assessee, who was a major shareholder and also its managing director, as 'dividend' under Section 2(6A)(e) of the Indian I.T. Act, 1922, development rebate reserve created out of its profits constituted part of the accumulated profits of the company. The expression 'accumulated profits' occurring in Clause (e) of Section 2(6A) or for the matter of that in any other clause, meant profits in the commercial sense and assessable or taxable profits liable to tax as income under the Indian I.T. Act, 1922. The term 'profits' occurring in Section 2(6A)(e) meant profits in the commercial sense, that was to say, the profits made by the company in the usual and true sense of the term. The allowance of initial depreciation or development rebate, unlike normal depreciation, was in no sense a deductible item of cost or expenditure in the process of settlement of the commercial profits, although it did not form part of the assessable profits, undoubtedly it did form part of the commercial profits, according to the Supreme Court. Mere transferring of an amount from the profit and loss account to the development reserve account did not amount to capitalisation of profits.
13. The aforesaid principles in the background of the facts of this case would not be of much assistance to the revenue, the Tribunal had also made an observation in its order that before any distribution could be attributable to the profits of a company immediately before its liquidation or any part thereof, it was necessary that the company should have been in possession of these accumulated profits or part thereof immediately before its liquidation, and not at any time earlier. If by the aforesaid observations the Tribunal meant that the amount of these reserves even if they are relatable to the accumulated profits as contemplated must be in the possession of the distributing company of which the assessee is a recipient on liquidation, in our opinion, no exception can be taken. If, however, the Tribunal was making the said observation in a general way that before the accumulated profits be taxed under Section 2(22)(c) of the I.T. Act, 1961, the distributing company should be in actual possession of these amounts, we do not propose to examine this observation or express any view. We may incidentally refer to the fact that the expression 'possessed' is significantly absent in Clause (c) of Section 2(22) while it is there in Clause (b) of Section 2(22). But it is not necessary for our present purpose to examine this aspect further in the view we have taken.
14. As we have mentioned before, a good deal of argument was also advanced on the question whether these reserves could be said to be attributable to the accumulated profits of the company immediately before its liquidation which are represented by these reserves. On this aspect certain arguments were advanced before us on the meaning of the expression 'attributable to'.
15. Our attention was drawn to certain observations of Mr. Justice Denning, as the Master of Rolls then was, in the case of Marshall v. Minister of Pensions [1947] 2 All ER 706 (KB), where the question arose of paying compensation to a certain person due to war services under the relevant English Act, because he had suffered from hernia. In that context, Denning J. observed at p. 708 of the report as follows :
'I tried a case the other day of a man who hit another on the nose. The blow was not such as to do harm to an ordinary individual, but, unknown to all concerned, this injured man had a septic antrum. He might have gone on for quite a long time--years--without it causing him much trouble, but the effect of the blow was to release the poison from the antrum into his system so that he died within a few days. One cause of his death, perhaps the most potent cause, was the septic antrum, but another cause was the unlawful blow. The man who struck him was found guilty of manslaughter because he caused the death. So also, in the case of duodenal ulcer or hernia (in each of which inherent weakness or predisposition is a powerful cause) it has been held that conditions of employment may also be a cause entitling the man to pension or compensation, as the case may be : See Huddersfield Corporation v. Watson (1) (duodenal ulcer) [1947] 2 All ER 193 (KB) and Hughes v. Lancaster Steam Coal Collieries Ltd. (2) (Hernia). [1947] 2 All ER 556 (CA).
The essential matter, therefore, to justify a finding of attributability is that war service should be one of the causes of the disease. As I explained in Minister of Pensions v. Chennell [1946] 2 All ER 719 (KB), however, it must be a cause as distinct from being part of the circumstances in or on which the cause operates. Cases often occur when the disease would have arisen in any event, war service or no war service. In such cases it is not attributable to war service. They can be best illustrated by a metaphor. If a rope is weak and on that account breaks when it is carrying a normal load or a load less than a normal load, the cause of the break is not the load but the weakness of the rope. If, however, the rope is weak and breaks when carrying an abnormal load when it might have stood a normal load, there are two causes, one the weakness of the rope and the other the abnormally heavy load. The schizophrenia cases afford a good illustration. If schizophrenia arises in war service without any special stress or strain, it is not attributable to war service but if there is severe war stress or strain immediately preceding the onset of symptoms, then it is.'
16. Reliance was also placed on behalf of the revenue on a decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , and our attention was drawn to the observation of the court at p. 93 where dealing with the expression 'attributable to' occurring in the phrase 'profits and gains attributable to the business of' it was noted that the Legislature had deliberately used the expression 'attributable to' and not the expression 'derived from'. Therefore, the Supreme Court observed that it could not be disputed that the expression 'attributable to' was certainly wider in import than the expression 'derived from'. In the view we have taken on the facts of the case, that is to say, that this distribution out of which the assessee-company was in receipt of a certain sum of money which is the subject-matter for consideration as due dividend was paid out of the purchase money on account of the electricity undertaking received by the distributing company after a deduction of the amount standing to the credit of these three reserves, in our opinion, it is not necessary for us to decide the true import of the expression 'attributable to' to the accumulated profits of the company immediately before liquidation occurring in Clause (c) of Section 2(22) of the I.T. Act, 1961. Under Section 2(22) certain amounts are actually not distributed as are brought within the net dividend for the purpose of taxability. Therefore, it must receive a strict construction and in view of the facts found by the Tribunal that these three reserves deducted from the compensation money and after that the compensation money was paid, in our opinion, the Tribunal was right in its conclusion that the amount received in the instant case in the subject-matter of the reference cannot be treated as income under Section 2(22)(c) of the I.T. Act, 1961.
17. In the premises and the view we have taken we would reframe the question as follows:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in treating the amounts received by the assessee not to be the income of the assessee under Section 2(22)(c) of the Income-tax Act, 1961 ?'
18. We have reframed the question, because it is not necessary for us to embark on the larger question, that is, whether the tariffs and dividends control reserve, contingencies reserve and development reserve do not form part of the accumulated profits of the company immediately before its liquidation for working out the distribution.
19. In the premisess we answer the reframed question in the affirmative and in favour of the assessee. In the facts and circumstances of the case, there will, however, be no order as to costs.
Sudhindra Mohan Guha, J.
20. I agree.