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Commissioner of Income-tax Vs. Tea Estates India Private Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 192 of 1966
Judge
Reported in[1972]86ITR705(Cal)
ActsIncome Tax Act, 1922 - Sections 2(6A), 12B and 66(1); ;Income Tax Rules, 1922 - Rule 24
AppellantCommissioner of Income-tax
RespondentTea Estates India Private Ltd.
Appellant Advocate B.L. Pal and ;N.L. Pal, Advs.
Respondent AdvocateK. Ray, Adv.
Cases ReferredSalem v. Short Brothers
Excerpt:
- k.l. roy, j.1. this is a composite reference under section 66(1) of the indian income-tax act, 1922, by the income-tax appellate tribunal, calcutta, to this court whereby a consolidated statement of the case has been submitted in response to applications by both the commissioner and the assessee. the assessee is m/s. tea estates india private ltd. and the assessment year concerned is 1956-57, the corresponding accounting year ending on the 30th june, 1955. the assessee held 52,350 shares out of the total issued shares of 54,600 in m/s. dibru darrang tea company ltd. (hereinafter referred to as 'd.d.t. co.') and 22,998 shares out of the totalissued shares of 23,000 in m/s. taikrong tea company ltd. (hereinafter referred to as 't.t. co.'). the latter two companies were tea companies.....
Judgment:

K.L. Roy, J.

1. This is a composite reference under Section 66(1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Calcutta, to this court whereby a consolidated statement of the case has been submitted in response to applications by both the Commissioner and the assessee. The assessee is M/s. Tea Estates India Private Ltd. and the assessment year concerned is 1956-57, the corresponding accounting year ending on the 30th June, 1955. The assessee held 52,350 shares out of the total issued shares of 54,600 in M/s. Dibru Darrang Tea Company Ltd. (hereinafter referred to as 'D.D.T. Co.') and 22,998 shares out of the totalissued shares of 23,000 in M/s. Taikrong Tea Company Ltd. (hereinafter referred to as 'T.T. Co.'). The latter two companies were tea companies growing, manufacturing and selling tea for which purpose they owned large tea estates containing land, buildings, plant, machinery, etc. On the 11th August, 1947, the two tea companies sold their entire tea estates, including all the assets, to M/s. Brooke Bond Estates India Ltd., and on such sales D.D.T. Co. received a surplus of Rs. 17,18,061 over the book value of its assets and T.T. Co. similarly received a surplus of Rs. 13,11,339 over the book value of its assets. Of these figures the amounts relating to the lands of the tea estates of the two companies were Rs. 19,30,374 and Rs. 10,11,216, respectively. It would thus appear that on the sale of its other assets D.D.T. Co. realised Rs. 2,12,313 less than their book value. It should be mentioned here that in 1936 the two tea companies revalued their assets and on such revaluation the book value of the assets of D.D.T. Co. were appreciated by an amount of Rs. 15,69,828 and of T.T. Co. by Rs. 58,772 Which were carried to the respective reserves of the two companies created on such writing up of the value of the assets. On the 29th October, 1954, the said two tea companies went into voluntary liquidation. On such liquidation the assessee became entitled to receive Rs. 57,69,186 out of the total distributable surplus of Rs. 58,81,273 of M/s. D.D.T. Co. and of Rs. 36,53,443 of M/s. T.T. Co. During the relevant accounting period the assessee received from the liquidators of the two tea companies the sums of Rs. 52,23,786 and Rs. 34,15,500 (Total Rs. 86,39,286), respectively.

2. The Income-tax Officer rejected the assessee's claim that, apart from the sum of Rs. 2,47,921, which was assessed as capital gains under Section 12B on T.T. Co. for the assessment year 1949-50, no other amount should be included in the computation of accumulated profits available for distribution within the meaning of Section 2(6A)(c) of the Act. The Income-tax Officer only allowed a deduction of Rs. 27,300 being payment on share premium account and included the balance of Rs. 86,11,986 (grossed up to Rs. 91,64,075) as the assessee's dividend income under Section 2(6A)(c).

3. On appeal, the Appellate Assistant Commissioner allowed a further deduction of Rs. 1,77,964 representing pre-incorporation advances in the case of T.T. Co. but rejected all the other contentions of the assessee including the contention that 60% of the amounts appearing under the head 'balance of appropriation account' in the balance-sheets as also the general reserves and liabilities for taxation appearing in the books of the two tea companies should be excluded from the computation of accumulated profits.

4. On further appeal before the Tribunal, two main contentions were raised on behalf of the assessee, namely, (i) that in determining the quantum of the accumulated profits the surplus arising from sale of lands of the twotea estates as also the reserves created on the revaluation of the agricultural assets should be left out, and (ii) that only 40% of the balance in the profit and loss account and the general reserves of the two companies should be included as only 40% of these amounts had been assessed under the Indian Income-tax Act, 1922. It is to be mentioned that the assessee also contended that the reserves created by the re-valuation of the assets in 1936 was not to be added to the excess of the sale price over the book value of the assets of the two tea estates. The Tribunal observed as follows :

'In the case before us, since the lands of the two tea estates were utilised for producing and selling the tea, it cannot be said that the said assets could be termed as ' land from which the income derived was agricultural income '. At best what can be said is that barring 40% of such income, the balance was agricultural income. We must, therefore, hold that only 40% of the profits derived on sale of the land of tea estates as also the reserves created on writing up the value of the assets of the land of the tea estates was referable to land from which the income derived was agricultural income. To that extent, therefore, the total of the profit on sale of the land of tea estates and reserves created on revaluation were to be excluded in computing the accumulated profits for finding out the Section 2(6A)(c) dividend.'

5. So far as the second contention of the assessee was concerned, the Tribunal said that the ratio of 60 : 40 as laid down in Rule 24 could not be applied for finding out the proportion of accumulated profits in a tea business and that profits, whether capitalised or not, did not admit of such a bifurcation for determination of accumulated profits. Moreover, general or taxation reserves having been included in the pool of the distributable surplus, could only be held to be excess provisions out of the profits of the two tea companies which were not required to be paid out in discharge of any liability. The Tribunal, accordingly, held that the balance left over, after deducting from the total distributable pool the various items discussed aforesaid, was accumulated profits of the two tea companies and the share received by the assessee on. distribution of such accumulated profits was dividend within the meaning of Section 2(6A)(c) of the Income-tax Act.

6. The Tribunal, accordingly,, determined the accumulated profits in the case of each of the two tea companies immediately before the liquidation as under :

Dibru Darrang Tea Co. Ltd.

40% of (Rs. 19,30,374 + Rs. 15,69,828) + the whole of (Rs. 16,69,285 + Rs. 3,50,7^9) = Rs. 34,20,165.

Taikrong Tea Co. Ltd.

40% of (Rs. 10,11,216 + Rs. 58,772) + the whole of (Rs. 18,73,125 + Rs. 2,243) = Rs. 23,03.363.

7. Accordingly, the Tribunal held that out of the distributable surplus, Rs. 57,23,528 was attributable to accumulated profits and, hence, was dividend within the meaning of Section 2(6A)(c) and allowed the appeal in part.

8. Both the assesses and the Commissioner applied for reference of a certain question arising from the aforesaid order of the Tribunal and the Tribunal has referred the following composite question for the opinion of this court:

'Whether, on the facts and in the circumstances of the case, the balances in the under-noted accounts are includible in the 'accumulated profits' within the meaning of Section 2(6A)(c) and, if so, to what extent ?'

Dibru Darrang Tea Co. Ltd.Taikrong Tea Co. Ltd. Rs.Rs.

Land A/C19,30,37410,11,216Profit ft loss Account16,69,28518,73,125General Reserves and Liabilities for taxation

3,50,7992,243Reserve created on writing up the value of the assets of the tea estates.15,69,82858,772

9. Before dealing with the respective contentions of learned counsel, it would be convenient to set out the relevant provisions of the Income-tax Act, 1922. Section 2(1) defines agricultural income to mean any rent or revenue derived from land which is used for agricultural purposes or any income derived from such land by agriculture, or the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind. 'Capital asset' in Section 2(4A) means property of any kind held by an assessee but does not include, inter alia, any land from which the income derived is agricultural income. Section 2(6A)(c) includes in dividend 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. By the Explanation to this clause the expression 'accumulated profits', wherever it occurs, is not to include capital gains arising before the 1st April, 1946, or after the 31st March, 1948, and before the 1st April, 1956. Dividend and capital gains chargeable under Section 12B are included in the definition of income in Section 2(6C) while Section 2(15) defines 'total income' to mean the total amount of income, profits and gains referred to in Section 4(1) computed in the manner laid down in the Act. Section 6 enumerates the 6 heads of income chargeable to income-tax, namely, (i) salaries, (ii) interest on securities, (Hi) income from property, (iv) profits and gains of business, profession or vocation, (v) income from other sources, and (vi) capital gains. Section 4(3)(viii) excludes agricultural income from the computation of total incomechargeable to tax under Section 3 of the Act. Section 12(1 A) provides that income from other sources shall include dividend. Under Section 12B the capital gains tax shall be charged in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st March, 1946, and before the 1st April, 1948, and such profits find gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place. The other provisions of that section provide, inter alia, for the computation of such capital gains. Section 59 empowers the Central Board of Revenue to make rules for carrying out the purposes of the Act and under Sub-section (2), without prejudice to the generality of the foregoing power, such rules may, inter alia, prescribe the manner in which, and the procedure by which, the income, profits and gains shall be arrived at in the case of incomes derived in part from agriculture and in part from business. The Indian Income-tax Rules, 1922, were framed in exercise of the power conferred by Section 59 and Rule 23 of the said Rules provided for assessment of income which is partly agricultural income and partly income chargeable to income-tax under the head 'business' and lays down the procedure to be followed in determining that part which is chargeable to income-tax. Rule 24, relied on by both the learned counsel in support of their respective contentions, is as follows:

'Income derived from the sale, of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business, and 40 per cent., of such income shall be deemed to be income, profits and gains liable to tax . . . .'

10. There is a proviso to this rule which is not relevant for our purpose.

11. Mr. K. Ray, the learned counsel for the respondent, strongly contended that the Tribunal was under' a misapprehension in framing the question referred to this court as it was nobody's case before the Tribunal that the excess balance in the land account of the two tea companies was includible in the accumulated profits within the meaning of Section 2(6A)(c). The real controversy before it has been correctly stated by the Tribunal in paragraph 14 of its order, at page 28 of the paper book, namely, 'the real controversy centres round the questions as to whether the excess of the sale price over the book value of the tea estates was or was not to be included in computing the accumulated profits of the said two tea companies'. The excess of such sale price over the book value in the case of D.D.T. Co. was Rs. 17,18,061 and in the case of T.T. Co., Rs. 13,11,339. The question as referred gives the figures as the balances of the land account as Rs. 19,30,374 and Rs. 10,11,216, respectively. Mr. Ray further pointed out that while taking the balances in the kind account of the two tea companies the Tribunal has taken the figures .of the reserves created on the revaluationof the entire assets of the tea companies and not merely the reserves created on the revaluation of the land of these companies. Mr. Ray, accordingly, submitted that the question should be suitably reframed so as to bring out the real controversy between the parties to this reference.

12. Mr. B. L. Pal, learned counsel for the department, contended that after finding that the lands of the two tea estates utilised for producing and selling tea could not be held to be assets which were lands from which the income derived was agricultural income, the Tribunal was in error in holding that barring 40 per cent. of such income, the balance was agricultural income and that 60 per cent. of the profit derived on sale of the lands of the tea estates as also the reserves created on writing up the value of the assets of the lands of the tea estates were referable to land from which the income derived was agricultural income. Once it was held that the lands of the two tea companies were not assets from which the income derived was agricultural income, there was no question of the application of Section 2(4A)(iii) and, therefore, the entire profit derived from the sale of the assets should have been held to be accumulated profit within the meaning of Section 2(6A)(c). Mr. Pal further contended that Rule 24 requires that1 income derived from the sale of the tea grown and manufactured by the seller to be computed as income from business. This rule does not at all contemplate income derived from the sale of tea grown as such. It considers the growing of the tea leaves and their subsequent manufacture into finished tea as an integrated business operation and the income derived from such operation is to be computed in accordance with the provisions of Section 10 of the Act and, thereafter, 40 per cent. of such income was to be assessed under the Indian Income-tax Act. Where the income is partly derived'from a business operation and partly derived from an agricultural operation the income is computed under Rule 23 and not under Rule 24. As Rule 24 contemplates assessment of the income of a tea company as business income under Section 10, capital gains, which are assessable under Section 12B, do not attract Rule 24 and the ratio laid down, in that Rule cannot be applied to the case of capital gains. As the income of a tea estate is deemed under Rule 24 to be income from business, no part of the assets of such an estate including the land on which tea is grown can be taken to be an asset from which agricultural income is derived. The legal fiction arising from Rule 24 could not be applied to Section 2(4A)(iii) or Section 12B. Where the Act provides for the application of deemed provisions, it expressly says so, and reference was made to sections 4(1)(a), (b) and (c), 18(4), 16(1)(c), 16(2), 58E, etc. In the absence of such express provision the fiction arising under Rule 24 cannot be applied to Section 2(4A) or Section 12B. Section 12B(2) provides for its own computation of capital gains and there is no provision therein for any deemed capital gains. In Commissioner ofIncome-tax v. Amarchand N. Shroff, [1963] 48 I.T.R. (S.C.J59; [1963] 88 ; [1963] Supp. 1 S.C.R. 699 (S.C.). the Supreme Court observed, at page 66, that legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field. Mr. Pal contended that the fiction in Rule 24 was created for computing the income accruing and arising from the composite activity of growing and manufacturing tea and such fiction could not be extended and applied to capital gains assessable under Section 12B. Mr. Pal also referred us to the decision of the Supreme Court in Karimtharuvi Tea Estates Ltd. v. State of Kerala, : [1963]48ITR83(SC) . where it was said that :

'The result of Rule 24 is that the income derived from the sale of tea grown and manufactured by the seller is to be computed in the first instance as if it was income derived from business. Consequently, the income would be computed in accordance with the provisions of Section 10 of the Income-tax Act. .... Of the income so computed, 40 per cent. is, under Rule 24, to be treated as income liable to income-tax and it would follow that the other 60 per cent. only will be deemed to be ' agricultural income ' within the meaning of that expression in the Income-tax Act.'

13. The above observations were considered and reiterated by that court in Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner of Agricultural Income-tax, : [1968]69ITR667(SC) which was also cited by Mr. Ray, where, at page 672, it was said :

'Income from sale of tea grown and manufactured by the seller is derived partly from business and partly from agriculture. This income has to be computed as if it we're income from business under the Central Income-tax Act and Rules. 40 per cent. of the income so computed is deemed to be income derived business and assessable to non-agricultural income-tax. Having regard to the decision in Karimtharuvi Tea Estates Ltd. v. State of Kerala, we are bound to hold that, (a) the Explanation to Section 2(a)(2) of the Kerala Agricultural Income-tax Act adopts this rule of computation, and (b) the balance of 60 per cent. of the income so computed is agricultural income within the meaning of the Central Income-tax Act and the Constitution.'

14. From the aforesaid two decisions it would appear, that Rule 24 only lays down the method of computation and once the computation is completed, 40 per cent. of the amount so computed is taken as income chargeable to Indian income-tax while the balance 60 per cent. is taken as agricultural income within the meaning of Section 2(a)(1) of the Act. There is, therefore, no deemed provision in the said rule as urged for by Mr. Pal.However, as both Mr. Pal, and Mr. Ray agree that the Tribunal was in error in purporting to apply the ratio of 40 : 60 to the excess of the sale price of the assets over their book value, it may not be necessary to refer to this part of the argument any further at this stage. The contention of the department is that the whole of such excess, including the reserves created by revaluation, should have been included in the accumulated profits under Section 2(6A)(c) while the contention of the assessee is that no part of such excess including the said reserves, which constitute the assessee's capital profits, could be so included except Rs. 2,47,921 which was assessed as capital gains of T.T. Co. for the year 1949-50.

15. Mr. Ray, learned counsel for the respondent, reiterated his suggestion that the question should be suitably reframed in order to bring out the real controversy between the parties, namely, whether the excess of the sale price over the book value of the assets of the two tea companies including the reserves created by writing up such book value of the two companies was to be included in computing the accumulated profits for the purpose of Section 2(6A)(c). Mr. Pal, on the other hand, pointed out that the parties agreed that the statement of the case has correctly set out the facts and Mr. Ray was himself present at the time when the statement was finalised by the Tribunal. Further, at the time of passing the original order the Tribunal referred to the figures of Rs. 17,18,061 and Rs. 13,11,339 as surplus on sale of the two tea estates and it was at the instance of the assessee that the Tribunal by its order under Section 35 changed the figures to the figures of Rs. 19,30,374 and Rs. 10,11,216 and substituted the words 'this was a profit on the sale of the land' for the words 'surplus over the book value of the assets'. Mr. Pal further submitted that, as the Tribunal has made it clear in paragraph 16 of its order that the reserves created on writing up the value of the assets of the land of the tea estates was referable to land from which income derived was agricultural income, the fourth item in the referred question might be reframed by introducing the word 'agricultural' between the words 'value of the' and 'assets of the tea estates'. As it appears that it was at the instance of the assessee that the Tribunal changed the expression 'excess realised on the sale of the assets of the tea estates' to 'excess on the sale of lands' and the statement of the case was finalised after both the parties agreed that the facts have been correctly stated, we do not think that it should be proper to interfere any further with the statement of the case or, with the question referred (see Commissioner of Income-tax v. Calcutta Agency Lid, 11951J 19 I.T.R. 191 ; [1950] S.C.R. 1008 (S.C.)),

16. Mr. Raj contended that if the question in the form referred to is maintained then he would contend that the balance in the land account could in no event be taken into consideration in the computation of 'accumulated profits' for the purpose of determining the dividend income under Section 2(6A)(c). He submitted that the Tribunal confused the excess received on the sale of the land (which is a capital receipt) as income derived from land to which the ratio of 40 : 60 of Rule 24 was applied. The Tribunal has not given a finding that the amount of Rs. 19,30,374 and Rs. 10,11,216 being the balance in the land account in the two tea companies, constituted capital gains in the hands of those two companies and were assessable as such under Section 12B. So far as the reserves of Rs. 15,67,828 and Rs. 58,777 created on writing up the book value of the assets of the two companies are concerned, Mr. Ray agrees that they should be given the same treatment as the excess either in the land account or the excess price of assets over their book value. Learned counsel submitted that, as under the decision of the Supreme Court in Karimtharuvi Tea Estates case and the Anglo-American Direct Tea Company's case, the income derived from the sale of tea grown and manufactured by the grower, though to be computed as if it was income from business, was derived partly from business and partly from agriculture and 60 per cent. of such income is agricultural income within the meaning of the Income-tax Act and the Constitution. The lands of the tea estate on which the tea is grown, undoubtedly, are agricultural lands from which the aforesaid agricultural income is derived. As such, such lands could not be called assets within the meaning of the Income-tax Act and any profit derived from the sale of such lands would not be profits derived from the sale of capital assets within the meaning of that Act and could not come within the computation of accumulated profits for the purpose of Section 2(6A)(c). In any event, therefore, the excess in the land account must be excluded from the computation of such accumulated profits.

17. Mr. Ray pointed out that it was only in 1939 that Section 2(6A)(c) wasintroduced into the Act to include a distribution by the liquidator of acompany in liquidation of accumulated profits in the definition of dividendto bring such distribution within the net of taxation. Under the Companylaw any distribution by a company on liquidation would be a distributionof capital assets. Accumulated profits of the company so distributed wouldalso be regarded as receipt of capital by the shareholders. Even after theintroduction of Section 2(6A)(c) in 1939, no attempt was made to tax distribution of capital profits or capital gains of a company in liquidation asdividend. It was only after the introduction of Section 12B in the Actimposing a tax on capital gains that Section 6 was amended by adding afresh head of income chargeable to tax, namely, capital gains. The Explanation to Section 2(6A)(c) gave effect to the introduction of the capital gainstax by negatively excluding the capital gains arising in the excepted period from the definition of dividend and thereby including such capital gains within 'accumulated profits' if such capital gains arose within the taxable period and were assessable under Section 12B. No part of any capital profits, except capital gains as assessable under Section 12B, of a company in liquidation distributed by the liquidator can be included in 'accumulated profits' for the purpose of determination of dividend under Section 2(6A)(c). Strong reliance was placed by Mr. Ray on a decision of the Supreme Court in First Income-tax Officer, Salem v. Short Brothers (P.) Ltd., : [1966]60ITR83(SC) . That was a case where on the liquidation of a company owning a coffee estate a distribution was made by the liquidator and the Income-tax Officer called upon the liquidator to pay a certain sum towards tax deductible at source under Section 18(3D) of the Act. On a writ petition filed by the liquidator the Madras High Court held that the amount distributed could not be deemed to be dividend without determining whether any portion of the amount represented capital, gains which arose out of the sale of capital assets consisting of lands from which agricultural income was derived. On appeal, the Supreme Court said :

'Profits derived by transfer of lands from which the income derived is agricultural income would not, therefore, be chargeable on a combined reading of Section 12B with Section 2(4A) of the Income-tax Act under the head 'capital gains'. The expression 'accumulated profits' does not include capital gains arising within the excepted periods : vide Explanation to Section 2(6A). 'Accumulated profits are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act, Realisation of appreciated value of assets in commercial practice is regarded as realisation of capital rise, and not of profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act.'

18. Mr. Ray argued that in accordance with the aforesaid decision only those profits which were commercial profits and those profits which were assessable as capital gains under Section 12B could be included in 'accumulated profits'. In this case, after the transfer of their tea estates both the tea companies had been assessed to income-tax and M/s. Dibru Darrang Tea Company Ltd. has been held to have made no capital gains in the assessment for the year 1949-50 from the said transfer while the capital gains assessed in the case of M/s. Taikrong Tea Co. Ltd. was Rs. 2,47,921. Mr. Ray, therefore, submitted that it was only the last sum that could beincluded in the computation of accumulated profits for determining the dividend distributed under Section 2(6A)(c).

19. As both the learned counsel agree that the same treatment should be given to the reserves created on writing up the value of the assets as to the excess and/or profit realised on sale either of the lands or of the assets of the tea estates, it should be sufficient to consider the case of such excess arising from the sale and/or transfer by the two tea companies. Whether the excess of the price realised over the book value of the lands as shown in the land account balance and as envisaged in the question referred or whether the excess on the sale of the entire tea estates over the book value of the assets are to be considered for inclusion in the 'accumulated profits' under Section 2(6A)(c), there can be no doubt that such excess or profit is a realisation of capital rise and not profit of the business. As according to the decision of the Supreme Court in Short Brothers' case , unless such appreciation has been included in capital gains, a distribution thereof by the liquidator will not be deemed to be dividend for the purpose of the Income-tax Act, we have to find out how much of such excess or profit has been included in the computation of capital gains of the two tea companies on the transfer of the tea estates in 1947. In his order the Appellate Assistant Commissioner has recorded that for the assessment year 1949-50 the assessment order on Dibru Darrang Tea Company Ltd. showed that the company was not liable to capital gains tax, while the assessment order for that year of M/s. Taikrong Tea Co. Ltd. showed that a sum of Rs. 2,47,921 was brought under tax under the head of 'Capital gains.' It must, therefore, be held that it is only the sum of Rs. 2,47,921 which could be included in 'accumulated profits' for the purpose of determining the dividend under Section 2(6A)(c). Mr. B. L. Pal contended that there was no conclusive finding in the order of the Appellate Assistant Commissioner as to the capital gains of the two tea companies in respect of the transfer of the tea estates and the proper determination of capital gains payable in respect thereof had not been established. We are unable to accept this contention. Accordingly, so far as the first and last items in the referred question are concerned the answer would be that only the sum of Rs. 2,47,921 was includible in the accumulated profits within the meaning of Section 2(6A)(c).

20. Coming now to the part of the question referred at the instance of the assessee, namely, whether the general reserves and provision for taxation and the profit and loss balances are to be included in the computation of accumulated profits for the purpose of Section 2(6A)(c), the Tribunal held, firstly, that Rule 24 was not applicable for finding out the proportion of the accumulated profits in a tea business as profits, whether capitalised or not, did not admit of such bifurcation and, secondly, that the general or taxation reserves having been included in the pool of the distributable surplus could only be held to be excess provision out of the profits of the two tea companies, which were not required to be paid out in discharge of any liability.

21. Mr. Ray repeated his contention that as under the two above cited decisions of the Supreme Court, 60 per cent. of the income derived from the combined operation of growing, manufacturing and selling tea was agricultural income, 60 per cent. of such income would go out of the computation of accumulated profits in Section 2(6A)(c). Strong reliance was placed by Mr. Ray on the observations of the Supreme Court in Commissioner of Income-tax v. Girdhardas & Co. (P.) Ltd., : [1967]63ITR300(SC) . where, at page 305, it is said :

'The language used by the legislature in Section 2(6A)(c), as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components--capital and accumulated profits--as they existed immediately before the commencement of liquidation. In any distribution made to the shareholders of a company by the liquidator, that part which is attributable to the accumulated profits of the company immediately before its liquidation, whether such profits have been capitalised or not, would be treated as dividend and liable to tax under the Act. The provision was intended to supersede the application of the principle of George Burrell's case, [1924] 2 K.B. 52 (C.A.) that is, to enact that even though on a winding-up of a company the distinction between the assets and the accumulated profits disappears, the taxing authority may disintegrate the amount distributed into its component parts and determine the share attributable to accumulated profits. The amount distributed would therefore be deemed to be received by the shareholders partly as accumulated profits and the rest as capital, the proportion being the same which the accumulated profits bore to the capital in the accounts of the company at the commencement of winding-up, and that part of the receipt which is attributable to the accumulated profits would be taxable.'

22. It was contended by learned counsel that the balances in the profit and loss account of the two tea companies in each year represented the balance of profits of which 60 per cent. was agricultural. When such balances were taken to the balance-sheet and transferred to assets at the end of the year, they had still to be disintegrated at the time of the determination of dividend under Section 2(6AXd) and on such disintegration the part attributable to the agricultural income must be left out. The same remarks would also apply to the general reserves. Once, the balance of the profit and loss account and the reserves are taken to the balance-sheet they become capital assets both under the company law and the principles of accountancy. The ratio of Girdhardas's case would be attracted and at the time of distribution those capital items would have to be disintegrated into their component parts to find out how much was income under the Income-tax Act. So 60 per cent. of the aggregate of the second and third items in the referred question should be excluded from the computation of dividend under Section 2(6A)(c). It was emphasised that a receipt which was not treated as a profit under the Income-tax Act could not be a profit for the purpose of Section 2(6A)(c). Section 4(3)(viii) specifically excluded agricultural income from inclusion in the total income chargeable to tax under the Act.

23. Mr. Pal, on the other hand, contended that the balances in the profit and loss account of the two tea companies when taken to the balance-sheet would constitute the commercial profits of the two companies, no matter what source such profits had been derived from. The same would also be true of the general and taxation reserves created out of the profits of the two companies. Mr. Pal pointed out that in Girdhardas's case the Supreme Court had laid down that in the case of a distribution, only for the purpose of determining tax liability, the amounts distributed would be disintegrated into two components--capital and accumulated profits. There is no further scope for disintegration of each item of profit into taxable and non-taxable profit.

24. The balance in the profit and loss account is arrived at after deducting or providing for all outgoings including the estimated liability for both income-tax and agricultural income-tax. Therefore, the balance carried to the balance-sheet is pure profit, that is to say, the commercial profit of the undertaking. We are unable to accept Mr. Ray's contention that each item in the balance-sheet contains in itself the proportion of the income attributable to the business activity and to the agricultural activity of the tea companies and must be disintegrated into its component parts at the time of inclusion in dividends. Tea companies carry on a business activity though such activity may include agricultural operation as part thereof. Overall excess of incomings over outgoings, as reflected in the balance of profit and loss account, would represent the commercial profits of the business undertaking of the tea companies and though a bifurcation is necessary for the purpose of assessment and imposition of tax no further bifurcation could be made once the balance of profit was finally determined. Of such balance it could not be said that a part represents agricultural income and the rest represents income from business. So far as the general and taxation reserve is concerned, Mr. Ray agrees that such reserve is usually built up out of the profits to meet future liabilities but contends that as in this case also such reserve had been built up of 60 per cent. agricultural profit such reserve should again be disintegrated into the component parts. We are entirely unable to accept this contention. As pointed out by Mr. Pal, the Supreme Court in Girdhardas's case advocated disintegration of the amount distributed into two components, namely, capital and accumulated profits. There is no scope for further disintegration of profits into its component parts.

25. The amounts mentioned in the 2nd and 3rd items of the question referred must be held to be wholly includible in the 'accumulated profits' within the meaning of Section 2(6A)(c).

26. As the success has been equally divided there would be no order as to costs.

Sankar Prasad Mitra, J.

27. I agree.


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