JUDGMENT
T.L. Viswanatha Iyer, J.
1. This reference at the instance of the assessee under Section 256(1) of the Income-tax Act, 1961 (for short, “the Act”), is of the following question for the opinion of this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of gift of Rs. 75,000 could be treated as part of the accumulated profits available with the company at the time of winding up for the purpose of dividend within the meaning of Section 2(22)(c) of the Income-tax Act, 1961 ?”
2. The assessee was the managing director of a private limited company by name Parkins (P.) Limited which went into voluntary liquidation on December 18, 1971. The general body of the company resolved on November 15, 1971, to make a gift of a sum of Rs. 75,000 to the daughter of the managing director. The amount was given and an amount of Rs. 7,000 was also paid as gift-tax. When the company went into voluntary liquidation subsequently, the assessee was appointed as the liquidator. He received an amount of Rs. 1,677 as the balance of the accumulated profits left with the company. An amount of Rs. 1,560 was also available with him as the balance in the development rebate reserve.
3. While completing the assessments for the years 1974-75 and 1975-76, the Income-tax Officer proposed to treat the amount of the gift as well as the gift-tax paid thereon, totalling Rs. 82,000, as accumulated profits available with the company at the time of winding up, for the purpose of computing “dividend” under Section 2(22)(c) of the Act. His reasoning was as follows :
“Under the provisions of Section 531A of the Companies Act, 1956, any transfer of property, whether movable or immovable, if made within a period of one year before the presentation of a petition for winding up of a company shall be void. Hence, the action of the company in making a cash gift to a close relative of the managing director (who later on was appointed as the liquidator also) and paying gift-tax thereon was against the explicit provisions of the Companies Act referred to above.”
4. The assessee objected to the proposal pointing out that the transfer of Rs. 75,000 was good, valid and enforceable against the whole world and that the Revenue was not entitled to take advantage of the provisions of Section 531A of the Companies Act, 1956. The Income-tax Officer did not accept the objections in the view that the gift was hit by the provisions of Section 531A aforesaid and that, therefore, the amount of the gift and the gift-tax paid thereon should be treated as accumulated profits available with the company for distribution as dividend under Section 2(22)(c) of the Act. He distributed the amount accordingly for the four years, 1972-73 to 1975-76, in proportion to the holdings of the assessee and accordingly assessed the amount as “deemed dividend” for the years 1974-75 and 1975-76 and reassessed him under Section 147(b) for the years 1972-73 and 1973-74.
5. But the Appellate Assistant Commissioner felt otherwise. He held that even if the gift was void as against the liquidator under Section 531 A, since the amount had been expended in fact and irretrievably gone out of the company’s hands, it could not be treated as “accumulated profits” available for distribution as dividend. He also held that Section 531A did not “drag within its net” transactions which had the unanimous approval of the genera! body of the company as in this case. The appeals were, therefore, allowed.
6. On further appeal by the Department, the Income-tax Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and upheld the order of the assessing authority treating the amount as accumulated profits for the purpose of computing dividend within the meaning of Section 2(22)(c) of the Act. In doing so, the Tribunal held that the liquidator was entitled to treat the transfer of the amount to the managing director’s daughter as non est and void, and, therefore, the amount could be treated as accumulated profits of the company available at the time of the winding up. The Departmental appeals were accordingly allowed.
7. The Tribunal has thereafter made this reference at the instance of the assessee.
8. The facts of the case are simple and admit of no controversy. The question is whether the payment of Rs. 75,000 to the managing director’s daughter could be ignored as held by the Appellate Tribunal, and the amount treated as accumulated profits in the hands of the liquidator. Section 2(22)(c), on which reliance has been placed by the Tribunal and by the assessing authority, reads :
“2. Definitions.–In this Act, unless the context otherwise requires –
(22) ‘dividend’ includes-. . . .
(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 ;”.
9. We are omitting the other sub-clauses of the sub-section as also the Explanations thereto as no reliance has been placed thereon by either party. It will be seen from Sub-clause (c) that for a payment to be dividend under this provision, it should be a distribution on liquidation, attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. The distribution itself should be among the shareholders of the company on its liquidation, and is, therefore, necessarily, a post-liquidation distribution.
10. A few more facts may be stated before coming to the discussion of the merits of the case. Pursuant to the decision for voluntary winding up, the balance accumulated profits of the company, namely, Rs. 1,677 as also the amount of Rs. 1,560 being the balance of the development rebate reserve came into the hands of the voluntary liquidator. The liquidator realised the assets and distributed the realisations among the shareholders. Accordingly, the assessee received amounts of Rs. 1,15,500 during the year ending March 31, 1972, Rs. 69,300 during the year ending March 31, 1973, Rs. 46,200 during the year ending March 31, 1974, and an amount of Rs. 50,820 as final payment during the year ending March 31, 1975. The total holding of the assessee in the company was 2,310 shares of the face value of Rs. 100 each, with the result that the amount of Rs. 50,820 received in 1974-75 was appreciation of capital which was assessed as capital gains in his hands in the assessment year 1975-76.
11. Counsel for the assessee contends firstly that the amount in question was not “accumulated profits” in the hands of the liquidator, as it never reached him, and, secondly, that any amount could be assessed as deemed dividend only if there was an actual physical distribution of the accumulated profits which reached the liquidator either actually or constructively.
12. It is a fact which is incontrovertible that the amount of Rs. 75,000 paid to the assessee’s daughter as also the amount of Rs. 7,000 paid as gift-tax never reached the hands of the liquidator, after the company was resolved to be voluntarily wound up. This amount had been expended by payment to the managing director’s daughter by way of gift, and for payment of the gift-tax due thereon before the company went into voluntary liquidation. This amount of Rs. 82,000 was not, therefore, available with the liquidator at any time for distribution among the shareholders, by way of accumulated profits or otherwise ; nor was there any actual physical distribution of this amount by the liquidator among the shareholders. But the assessing authority and the Tribunal have introduced a fiction by treating this amount as available with the liquidator for distribution, based on the alleged invalidity of the transfer under Section 531A of the Companies Act, 1956, and further in putting a fictional distribution of the amount among the shareholders by the liquidator.
13. We shall consider whether Section 531A of the Companies Act bears the effect and the construction which the Income-tax Officer and the Tribunal have placed on it, of rendering the gift of Rs. 75,000 non est and void. We are afraid that both these authorities have misunderstood the scope and effect of Section 531A in treating the gift as non est and void. Section 531A reads :
“531A. Avoidance of voluntary transfer.–Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by or subject to the supervision of the court or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator.”
14. The section forms part of a series of sections relating to the effect of the winding up on certain antecedent transactions of which we will refer to only three. Section 531 deals with fraudulent preferences, namely, transfers of property, movable or immovable, and the like made on the eve of the winding up of a company with a view to favour some creditors over others. Such transfers were deemed to be fraudulent preference of the creditors and are invalid accordingly. We have already extracted Section 531A under which transfers within a period of one year before the presentation of the petition for winding up or the passing of a resolution for voluntary winding up of the company are deemed void against the liquidator. Section 532 deals with another category of transfers, namely, the transfer by a company of all its property to trustees for the benefit of its creditors ; it is provided that such transfers shall be void. Thus, while Section 531 treats certain transactions as invalid and Section 532 treats another category of transfers as void, Section 531A stands in between treating the transfers covered thereby as void against the liquidator. These transfers covered by Section 531A are not rendered totally void or non-est or non-existent as assumed by the Appellate Tribunal. They are declared void only as against the liquidator. In other words, they are valid inter partes and against the rest of the world, except the liquidator. It is open to the liquidator to treat them as void and of no effect, and, accordingly, seek to recover the property covered thereby ignoring the transfers. He need not seek to have the transfers set aside or cancelled. The transfers are voidable at his option so that it will be equally open to the liquidator to honour the transfers and deal with them as such. All that the section implies is that the transfers will not bind the liquidator, and it will be open to him either to treat them as non est or void, or to affirm them. Since the option is with the liquidator, if he does not choose to disown them, they will continue to be valid and operative.
15. A Full Bench of this court had an occasion to deal with the purport and meaning of the expressions “void”, “voidable” and “void as against…” in the decision, Chacko Mathew v. Ayyappan Kutty, AIR 1962 Ker 164 ; [1962] 1 KLR 413, while dealing with assignments in violation of the provisions of Section 21 of the Travancore Ezhava Act. Madhavan Nair J., with whom Velu Pillai J., concurred dealt with this point in paragraphs 5 to 13 of his judgment. Inter alia, he referred to In re Vansittart, Ex parte Brown [1893] 2 QB 377. In re Brail, Ex parte Norton [1893] 2 QB 381, both of which dealt with the expression “void against the trustee in bankruptcy”, in Section 47 of the English Bankruptcy Act, 1883, as also Mariappa Pillai v. Raman Chettiyar [1919] ILR 42 Mad 322 ; AIR 1919 Mad 161 and Rukh-manbai v. Govindram, AIR 1946 Nag 163, besides analogous provisions in Section 54 of the Provincial Insolvency Act, 1920, and Section 64 of the Code of Civil Procedure, 1908, and observed (at page 168) :
“The expression is often used : ‘void as against’ a person or persons. In strict terminology, a thing cannot be void and valid at the same time. As Void’ denotes a nullity, a thing which is void must be a nullity for all. It is totally non-existent. Therefore, ‘void as against A’ can mean only that A can treat it as void ; or, in other words, A can avoid it. It is, strictly speaking, voidable at the option of A ….
It is thus clear that the use of the expression ‘void as against the tarwad’ means only that the involved transaction is ‘voidable by the tarwad’, and not void as regards the tarwad. If a transaction by the karnavan is not a nullity and is not challengeable by any one other than the members of the tarwad, in strict legal terminology we must say ‘it is voidable at the instance of the tarwad’, and not ‘void as against the tarwad’ ; but we find many learned judges have used the latter expression ; and it is that loose usage that gave rise to this reference.”
16. Reference may also be made to the observation of Subba Rao J., in Ramaswami Chettiar v. Official Receiver, AIR 1960 SC 70, where, after referring to Section 54 of the Provincial Insolvency Act, 1920, which uses the expression “void as against the receiver”, the learned judge observed that the transfer in question was not absolutely void and that in the context the expression “void” only meant “voidable”.
17. The fact that a transfer falling within Section 531A is void as against the liquidator implies that it is not a nullity in the absolute sense. Since it is void only as against the liquidator, it means the court will invalidate or ignore the transfer only if the relief is sought by the right person, namely, the liquidator and in appropriate circumstances. For instance, it may be avoided only if it is necessary to satisfy the creditors of the company, or to the extent necessary for that purpose as held by the Madras High Court in Official Receiver v. Palaniswami Chetti alias Ponnuswami Chettiar, AIR 1925 Mad 1051, a case under the Provincial Insolvency Act, 1920. A void transfer is no transfer at all and is completely destitute of any legal effect. A voidable transaction is otherwise a valid transaction and continues to be good until it is avoided by the party aggrieved (Johrilal Soni v. Bhan-wari Bai, AIR 1977 SC 2202). The transfers hit by Section 531A are voidable in the above sense, the avoidance being only at the instance of the liquidator.
18. Sections 53 and 54 of the Provincial Insolvency Act, 1920, are in pari materia with the provisions in question of the Companies Act, 1956, and the construction placed on these provisions must apply to sections 531 and 531A as well. In fact the very purpose of introducing Section 531A into the Companies Act by the amending Act 65 of 1960, was stated in the notes on clauses to be as follows :
“While sections 531 and 533 provide for cases of fraudulent preference, there is no provision in the Act in respect of voluntary transfers dealt with in Section 55 of the Presidency Towns Insolvency Act, and Section 53 of the Provincial Insolvency Act. The proposed amendment supplies the omission.”
19. Therefore, when the liquidator himself does not choose or find it necessary to avoid a particular transfer, or to recover the property concerned, it is not open to a stranger like the Income-tax Officer to ignore it and treat the transferred asset as remaining with the liquidator relying on Section 531A. The assessing authority and the Tribunal are not entitled to ignore the gift to the managing director’s daughter and treat the amount notionally as accumulated profits in the hands of the liquidator. The amount which did not reach the liquidator at any time cannot be treated as accumulated profits in his hands for the purpose of Section 2{22)(c) of the Act, by applying Section 531A. We cannot agree with the contention that Section 531A nullifies the transfer against the whole world, and not merely against the liquidator. In this view of the matter, the amount of Rs. 75,000 which had been distributed by the company before the resolution for winding up was not an amount available with the liquidator for distribution and, in the absence of this amount as accumulated profits with the liquidator, there could be no scope for imputing any distribution of notional accumulated profits by the liquidator under Section 2{22){c).
20. We shall now proceed to deal with the next point that there should be an actual physical distribution of the accumulated profits before it can be assessed as dividend under Section 2(22)(c). In Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1 ; [1965] 35 Comp Cas 541 (SC). Subba RaoJ., speaking for the majority, considered the meaning of the word “distribution” occurring in Section 2(6A)(d) of the 1922 Act corresponding to Section 2(22)(d) of the 1961 Act. It was observed (at page 9) :
“What then is the meaning of the expression ‘distribution’ ? The dictionary meaning of the expression ‘distribution’ is ‘to give each a share, to give to several persons’. The expression ‘distribution’ connotes something actual and not notional. It can be physical ; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him.”
21. Section 2(22)(c), therefore, contemplates an actual distribution of amounts, making them available to the shareholders. The amounts should reach the shareholders either actually by physical distribution or at least constructively by crediting the same to their separate accounts. A notional distribution of amounts not actually available with the liquidator is not contemplated by the provision. Viewed in this angle, it will be clear that the amount of Rs. 75,000 which never reached the liquidator and which was never actually or constructively distributed among the shareholders by the liquidator cannot be taken into the reckoning as accumulated profits available with the liquidator immediately before the winding up resulting in distribution of dividend. The amount had rightly or wrongly been spent by the company even before the resolution for voluntary winding up was passed, and it never reached the liquidator on the winding up.
22. The decisions relied on by counsel for the Revenue, namely, Gautam Sarabhai v. CJT [1964] 52 1TR 921 (Guj) at page 930 and Hari Prasad Jayantilal and Co, v, V. S. Gupta, ITO [1966] 59 ITR 794 (SC) at pages 799 and 800 have no bearing on the question debated above, viz., whether a notional or fictional distribution of amounts could be postulated for the purpose of Section 2{22)(c), assuming that the amount of Rs. 82,000 could be treated as available with the liquidator for distribution.
23. The decision of the Tribunal is therefore unsustainable. But, counsel for the Revenue refers to the order of assessment for the year 1974-75 and points out that the Income-tax Officer has treated a portion of the amount of Rs. 46,200 distributed out of realisation of the assets in liquidation as dividend and assessed it as such. According to counsel, this is a finding of fact which has not been upset by the Tribunal and, therefore, it is binding on this court in the absence of any challenge by the assessee. We find absolutely no substance in this contention. The very question debated before the authorities was whether the amount of Rs. 75,000 plus Rs. 7,000 constituted accumulated profits in the hands of the liquidator. It was only in that context that the Income-tax Officer worked out the proportionate dividend for each year. This was on the basis of his conclusion that the amount of Rs. 82,000 was accumulated profits in the hands of the liquidator. When the conclusion is found unsustainable in law, the consequent working out of the taxable dividend for each year also falls. There is no question of its binding this court as an unchallenged question of fact.
24. Nor is there any substance in the submission for the Revenue based on the decision in Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC), at page 710, that this court should lift the veil of corporate entity and pay heed to the alleged realities behind the legal facade. Such a contention has not been raised before the Tribunal. In any case, the gift of Rs. 75,000 was one unanimously resolved by the company which was entitled to manage its own affairs. The only person entitled to challenge it, if at all, was the liquidator, if it was required for the benefit of the creditors of the company. He has not done so. In fact, no such action was necessary as the assets of the company even left surplus for distribution among the shareholders.
25. This contention, therefore, requires to be stated only to be rejected, even assuming that the Income-tax Officer was entitled to lift the veil as contended by counsel.
26. The amount of Rs. 75,000 gifted to the managing director’s daughter was not therefore liable to be treated as accumulated profits in the hands of the liquidator for the purpose of Section 2{22)(c) of the Income-tax Act, 1961. The decision of the Tribunal is incorrect. The conclusion reached by the Appellate Assistant Commissioner is the correct one. We, therefore, answer the reference in the negative, that is in favour of the assessee and against the Revenue.
27. A copy of this judgment under the signature of the Registrar and the seal of this court shall be communicated to the Income-tax Appellate Tribunal, Cochin Bench.