Full Judgment Text
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PETITIONER:
TEA ESTATE INDIA (P) LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX
DATE OF JUDGMENT26/04/1976
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
GOSWAMI, P.K.
CITATION:
1976 AIR 1790 1976 SCR 145
1976 SCC (4) 446
CITATOR INFO :
R 1976 SC2469 (10)
R 1977 SC 489 (22)
RF 1977 SC 560 (11)
RF 1988 SC1453 (33)
ACT:
Income Tax Act 1922-Sec. 2(1), 2(4A), 2(6C), 2(3)(8)
find 2(6A) C.
Income Tax Rules 1922-Rules 23 and 24-Dividends-
Accumulated profits-Composite business activity including
agricultural and non-agricultural-Excess over book value on
land account-Profit and loss account-General reserve account
and reserve created on revaluation whether accumulated
profit-Interpretation of statutes-Whether court can add
word.
HEADNOTE:
The assessee company held certain shares in Dibru
Darang Tea Co. Ltd. (D.D.T. Company) and Taikron Tea Company
Ltd. (TT Company) . Both the Companies were companies
growing, manufacturing and selling tea and owned large tea
estates consisting of land, building plant, machinery etc.
In 1947, both the said companies sold their entire tea
estates including all assets to Brooke Bond Estate India
Ltd. Consequently DDT Company received a surplus is Rs.
17,18,081/-over the book value of its assets. The amount
relating to the land of DDT Company was Rs. 19,30,374/ and
that relaung to the T.T. company was Rs. 10,11,216/-. Both
the companies went into voluntary liquidation in 1954. On
account of the liquidation of the two companies the assessee
company became entitled to receive Rs. 57,69,186/- out of
the total distributable assets of DDT Company and Rs.
36,53,453/- out of the total distributable assets of T.T.
Company.
Section 2(1) defines agricultural income. Section 2(4A)
defines capital asset to mean property of any kind held by
an assessee whether or not connected with his business,
profession or vocation but does not include any land from
which the income derived is agricultural income. It was
defined to include 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
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the company immediately before its liquidation, whether
capitalised or not. Explanation provides that expression
"accumulated profits" shall not include capital gain arising
during certain periods. The income has been defined by s.
2(6C) to include dividend. Section 2(3)(8) provides that;
agricultural income shall not be included in the total
income chargeable to tax under s. 3 or the Act. Rule 23
provides for assessment of income which is partly
agricultural income and partly income chargeable to income
tax. Rule 24 provides that 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 or such income shall be deemed
to be income, profits and gains liable to tax.
The assessee contended before the Income Tax officer
that apart from Rs. 2,47,921/- which had been assessed as
capital gain under s. 12B of Income Tax Act 1922 in respect
of T.T. company, no other amount could be included in the
computation of the accumulated profits available for
distribution under s. 2(6A)(c) of the Act. The Income Tax
officer rejected the claim of the assessee. On an appeal,
the Appellate Assistant Commissioner rejected the main claim
of the assessee.
On further appeal the Tribunal held as far as item 1
(land) and item 4 (reserve on revaluation) are concerned
that since the lands of the two tea estates were utilised
for producing and selling tea it cannot be said that the
said assets were lands from which the income derived was
agricultural income. At best, what could be said is that
barring 40 per cent of such income the balance was
agricultural income. As far as item 2 (profit and loss a/c)
12-833Sup CI/76
146
and item 3 (general reserve) are concerned, the Tribunal
held that the ratio of 60 : 40 as laid down in rule 24 of
the Income Tax Rules, 1922 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 the determination of accumulated
profits. The Tribunal held that the general and taxation
reserves were accumulated profits and the share received by
the assessee company on the distribution of such accumulated
profits was taxable as dividend within the meaning or s.
2(6A) (c) of the Act.
Both the assessee as well as Revenue approached the
High Court in two references arising out of the judgment of
the Tribunal.
The High Court held:
(1) Regarding item No. 1 and 4 the excess of the
prices is not profit of the business, unless such
appreciation has been included in the capital
gains. The High Court arrived at certain figures
of excess profit which was included in the
computation of capital gains and held that only
that figure was includible in the accumulated
profits within the meaning of s. 2(6A) (c).
(2) Regarding items 2 and 3 the High Court held that
the balance in the profit and loss account is
arrived at after deducting or providing for all
out goings including the estimated liability for
both the income tax and agricultural income tax.
Therefore, the balance carried to the balance
sheet is pure profit, i.e. the accumulated profit.
The High Court negatived the contention that each
item in the balance sheet contains in itself the
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proportion of the income attributable to business
activity and to the agricultural activity of the
companies or that they must be disintegrated into
6 components 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 out goings as reflected
in the balance of profit and loss account would
represent the commercial profits of the business
undertaking and though in 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.
In appeals filed by both the assessee and Revenue by
special leave the assessee contended that 60 per cent of the
amounts mentioned in items 2 and 3 were agricultural income
and as such, were not income for the purpose of the Act. To
that extent the said amount did not constitute accumulated
profits within the meaning of s. 2(6A) (c). Revenue
contended that 10% of income derived in respect of item 1
not being agricultural should be held to be capital asset
and, therefore, accumulated profits.
Dismissing both the appeals,
^
HELD: (1) Clause 2(6A) (c) provides that dividend shall
include 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. The proviso is, however, to the effect
that only the accumulated profits so distributed which arise
during the 6 previous year of the company proceeding the
date of liquidation shall be so included. 60 per cent of the
profits made by both the companies by sale of tea grown and
manufactured by them were not liable to be taxed in view of
rule 24. However, once those profits got accumulated with
the two companies they became accumulated profits within the
meaning of h. 2(6A)(c). The contention of the assessee that
only 40 per cent of the profits which got accumulated were
liable to be taxed and therefore only 40 per cent should be
treated as accumulated profit for the purpose of
147
s. 2(6)A) (c) cannot be accepted. I‘he assessee wants to add
to s. 2(6A) (c) the following words:
"as are liable to be taxed under the Act"
It is not permissible for us to construe the clause by
adding those words.
[152 F-G, 154 G-H, 155 A-B]
(2) The decision of the case in Mrs. Bacha F. Guzdar
Bombay v. Commissioner of Income Tax Bombay-27 I.T.R. 1,
followed with approval.
[155 E]
(3) The contention of the Revenue that the land in
question to the extent of 60 per cent would not answer the
description of capital asset, and as 40 per cent of the
income derived from that land was not agricultural income 40
per cent interest in that land should be held to be capital
asset for the purpose of s. 2(4A), is not well founded. The
income which is realised by sale of tea by a tea company
which grows tea on its land and thereafter subject is to
manufacturing process in its factory is an integrated income
consisting of agricultural and non-agricultural components.
Rule 24 prescribes the formula which should be adopted for
apportioning the income realised as a result of the sale of
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tea after it is grown and subjected to manufacturing process
in the factory. So far as the lands held by the company were
concerned they yielded purely agricultural income in the
shape of green tea leaves. 40 per cent of the income on sale
of tea which was received by both the companies was not
income from land. It was income which could be ascribed to
manufacturing process to which the green tea leaves were
subjected in the factories of those companies. As the lands
held by both the companies yielded agricultural income it
would follow that those lands did not constitute capital
asset as defined in s. 2(4A). Section 2(4A) expressly
states that capital asset does not include any land from
which income is derived as agricultural income. Any gain
arising from the transfer of such land would not constitute
capital under the Act and consequently would not be liable
to be taxed as such.
[155H, 156 A-D, 157 B-D]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1491
and 1693 of 1971.
Appeals by Special Leave from the Judgment and order
dated the 13th January 1971 of the Calcutta High Court in
I.T. Reference No. 192 of 1966.
K. Kay and D. N. Gupta, for the Appellant in CA No.
1491/71 for respondent in C.A. 1693/71.
Hardayal Hardy, B. B. Ahuja and S. P. Nayar for
Respondent in CA1491/71 and for Appellant in 1693/71.
The Judgment of the Court was delivered by
KHANNA, J.-This judgment would dispose of two cross
civil appeals Nos. 1491 and 1693 of 1971 which have been
filed by special leave by the assessee M/s Tea Estate India
(P) Ltd. and the Commissioner of Income-tax West Bengal
respectively against the judgment of the Calcutta High Court
answering the following question referred to it under
section 66(1) of the Indian Income-tax Act 1922 (hereinafter
referred to as the Act) partly in favour of the assessee and
partly in favour of the revenue:
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?
148
------------------------------------------------------------
Dibru Darang Taikrong Tea
Tea Co. Ltd. Co. Ltd.
------------------------------------------------------------
Rs. Rs.
Land A/o 19,30,374,- 10,11,216/-
Profit & Loss Account 16,69,285/- 18,73,125/-
General Reserves and liabilities
for taxation 3,50,799/- 2,243/-
Reserve created on writing up the
value of the assets of the ten
estates 15,69,828/- 58,772/-
------------------------------------------------------------
The matter relates to the assessment year 1956-57, the
corresponding accounting year for which ended on June 30,
1955. The assessee company held 52,350 shares out of the
total issued shares of 54,600 in Dibru Darang Tea Co. Ltd
(hereinafter referred to as DDT Co.) and 22,998 shares out
of the total issued shares of 23,000 in Taikrong Tea Co.
Ltd. (hereinafter referred to as TT Co.). DDT Co. and TT Co.
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were tea companies growing, manufacturing and selling tea.
For this purpose, those two companies owned large tea
estates consisting of land, building, plant and machinery.
On August 11, 1947 the said tea companies sold their entire
lea estates, including all the assets, to Brooke Bond Estate
India Ltd. As a result of these sales, DDT Co. received a
surplus of Rs. 17,l8,081 over the book value of its assets.
Likewise, TT Co. received a surplus of Rs. 13,11,339 over
the book value of its assets. The amount relating to the
land of the tea estate of DDT Co. was Rs. 19,30,374 and that
relating to TT Co. was Rs. l0,11,216. DDT Co. realized Rs.
2,12,313 less than their book value on the sale of the other
assets. It may also be mentioned that in 1936 the assets of
the two companies were revalued. On such revaluation the
hook value of the assets of DDT Co. appreciated by an amount
of Rs. l 5,69,828 and Those of TT Co. by an amount of Rs.
58,772. These amounts were carried to the respective
reserves of the two companies.
DDT Co. and TT Co. went into voluntary liquidation on
october 29, 1954. On account of the liquidation of the two
companies, the assessee company became entitled to receive
Rs. 57,69,186 out of the total distributable assets of DDT
Co. and Rs. 36,53,453 out of the total distributable assets
of TT Co. During the relevant accounting period the assessee
received Rs. 52,23,786 and Rs. 34,15,500 (in all Rs.
86,39,286) from the liquidators of DDT Co. and TT Co.
respectively.
On behalf of the assessee company, it was urged before
the lncome-tax officer that apart from Rs. 2,47,921 which
had been assessed as capital gain under section 12B of TT
Co. for the assessment year 1949-SO, no other amount could
be included in the computation of the accumulated profits
available for distribution under section 2(6A) (c) of the
Act. The Income-tax officer rejected this
149
contention and allowed only a deduction of Rs. 27,000 being
payment on share premium account and included the balance of
Rs. 86,11,986 (grossed up to Rs. 91,64,075) as the assessees
dividend income under section 2(6A)(c) of the Act.
On appeal the Appellate Assistant Commissioner allowed
a further deduction of Rs. 1,77,964 representing pre-
incorporation advances in the case of TT Co. The Appellate
Assistant Commissioner rejected all other contentions of the
assessee including the contention that 60 per cent 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.
On further appeal before the Tribunal two main
contentions were raised on behalf of the assessee: (1) that
in determining the quantum of the accumulated profits the
surplus arising from sale of land of the two tea estates as
also the reserves created on the revaluation of the
agricultural assets should be left out and (2) that only 40
per cent of the balance in the profit and loss account and
the general reserves of the two companies should be included
as only 40 per cent of these amounts had been assessed under
the Act. Regarding the first contention the Tribunal
observed:
In the case before us since the lands of the two
tea estates were utilised for producing and selling the
tea it can not 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
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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 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.
Dealing with the second contention of the assessee the
Tribunal observed that the ratio of 60:40 as laid down in
rule 24 of the Income-tax Rules 1922 could not be applied
for finding out the proportion of accumulated profits in a
tea business and that profit whether capitalised or did not
admit of such a bifurcation for determination of accumulated
profits. General and taxation reserves having been included
in the pool of distributable surplus could. in the opinion
of the Tribunal only be held to be excess provisions out of
the profit of the two tea companies which were not required
to be paid out in discharge of any liability. The Tribunal
accordingly held that balance left over after making the
deduction indicated above from the total distributable pool,
was accumulated profits of the two tea companies
150
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 Act.
Accumulated profits in the case of two tea companies
immediately before the liquidation were determined as under:
"DDT Co.
40% of (Rs. 19,30,374+Rs. 15,69,828)+the whole of
(Rs. 16,69,285+Rs. 3,50,799)=Rs. 34,20,165.
TT Co.
40% of (Rs. 10,11,216 Rs. 58,772)-the whole of
(Rs. 18,73,125 + Rs. 2,243)=Rs. 23,03,363".
The Tribunal accordingly came to the conclusion that out of
the distributable surplus an amount of Rs. 57,23,528 was
attributable to accumulated profits and hence was dividend
within the meaning of section 2(6A) (c) of the Act. The
assessee s appeal was allowed to that extent.
Both the assessee company as well as the Commissioner
applied to the Tribunal for reference of certain questions
arising from the order of the Tribunal to the Court. The
Tribunal thereupon referred the question reproduced above in
a composite reference to the High Court.
Dealing with items 1 and 4 mentioned in the question
the High Court held as under:
"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 or 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
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Supreme Court in Short Brothers’(1) case unless such
appreciation has been included in capital gains
distribution thereof by the liquidator will not be
deemed to be divided 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
Darang Tea Company Ltd. showed that the com-
151
pany 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 contentions. 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) .
Regarding items 2 and 3 in the question the finding of the
High Court was as under:
The balance in the profit and loss account is
arrived at after deducting or providing for all out
goings 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. Rays
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 distintegrated 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 out
goings 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 is in this case
also such reserve had been built up of 60 per cent.
agricultural profit such reserve should again be
disintegration into the component parts. We are
entirely unable to accept this contention As pointed
out by Mr. Pal the Supreme Court in Girdhar das’s(2)
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case advocated disintegration of the amount distributed
into two components namely, capital and accumulated
profits. There is no scope for further distintegration
of profits into its component parts.
(1) 63 I.T.R.300
152
The amounts mentioned in terms 2 and 3 of the question were
accordingly held to be wholly includible in the accumulated
profits within the meaning of section 2(6A) (c) of the Act.
Before dealing with the contentions advanced by the
counsel for the parties it would be convenient to set out
the relevant provisions of the Act. section 2(1) defines
agricultural income to mean, inter alia
"(a) any rent or revenue derived from land which
is used for agricultural purposes and is
either assessed to land-revenue in the
taxable territories or subject to a local
rate assessed and collected by officers of
the Government as such;
(b) any income derived from such land by-
(1) agriculture or
(ii) the performance by a cultivator or
receiver of rent-in-kind of my process
ordinarily employed by a cultivator or
receiver of rent-in-kind to render the
produce raised or received by him fit to
be taken to market, or
(iii)the sale by a cultivator or receiver of
rent-in kind of the produced raised or
received by him in respect of which no
process has been performed other than
process of the nature described in sub-
clause (ii);
(c)..........
"Capital asset in section 2(4A) means property of any kind
held by an assessee whether or not connected with his
business profession or vocation but does not include-
(1) .......... ........ ..
(ii) ......... ........ .. .. .
(iii)any land from which the income derived is
agricultural income.
"Dividend" according to section ? (A) (c) includes any
distribution made to the shareholders of a company on its
liquidation to the extent to which the distribution is
attributable to the accumulated pro fits of the company
immediately before its liquidation whether capitalised or
not. The explanation to clause 2(6A) reads as under:
"Explanation.-The expression ‘accumulated profits,
wherever it occurs in this clause shall not include capital
gains arising before the 1st day of April 1946 or after the
31st day of March 1948, and before the 1st day of April
1956.
"Income" has been defined in section 2(C6) to include
dividend. Total income has been defined in section 2(15) to
mean the total amount of income profits and gains referred
to sub-section (1) of section 4 computed in the matter laid
down in the Act. Section 3
153
provides inter alia that income-tax shall be charged for a
year in respect of the total income of the previous year of
every individual and company. Section 4 relates to total
income of a previous year of any person. According to clause
(8) of sub-section (3) of that section agricultural income
shall not be included in the total Income chargeable to tax
under section 3 of the Act. Section 6 enumerated the six
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heads of income to be:
(1)salaries (ii) interest on securities (iii)
income from property. (iv) profits and gains of
business profession or vocation (v) income from other
sources and (vi) capital gains.
According to section 12(1A) income from other sources shall
include dividends. Under section 12B as it stood at the
relevant time 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 affected after
the 31st day of March 1946 and before the 1st day of April
1948 and such profits and gains shall be deemed to be income
of the previous year in which the sale, exchange
relinqishment or transfer took place. Section 59 empowers
the Central Board of Revenue subject to the control of the
Central Government to make rules for carrying out the
purposes of the Act. Indian Income-tax Rules 1922 were
framed in pursuance of that section. Rule 23 of the said
rules provides for assessment of income which is partly
agricultural and partly income chargeable to income-tax.
Rule 24 with which we are concerned reads as under:
"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...."
There is a proviso to this rule but it is not necessary to
reproduced the same.
In appeal filed by the assessee-company, its learned
counsel Mr. Ray, has contended before us in respect of items
2 and 3 of the question that 60 per cent of the amounts
mentioned in these items were agricultural income and as
such were not income for the purpose of the Act. To that
extent it is urged the amounts did not constitute
accumulated profits within the meaning of section 2(6A)(c)
of the Act. The High Court according to the contention was
in error in holding to the contrary. The above contentions
has been controverted by Mr. Hardy on behalf of the revenue
and in our opinion is not well founded.
In Inland Revenue Commissioners v. George Burrell(1) it
was held that super-tax was not payable on the undivided
profits of past years and of the year in which the winding
up of a company occurred were distributed among the
shareholders, because in the winding up
(1) [1924] 2 K. B. 52.
154
they had ceased to be profits and were assets only. It was
further observed in Burrell’s case that the only thing the
liquidator of a company in liquidation may do is to turn the
assets into money and divide the money among the
shareholders in proportion to their shares. Surplus of
trading profit made in a particular year are distributable
rateably among all the shareholders as capital and it is not
right to built up the sums received by the shareholders into
capital and income and thus disintegrate the sums received
by the shareholders subsequently into component parts based
on an estimate of what might possibly have been done but was
not done. As the Indian Companies Act 1913. closely followed
the scheme of the English Companies Act and the view
expressed in Burrell’s case (supra) applied to the Indian
Income tax Act a special definition of "dividend" was
devised by the legislature by the enactment of the Income-
tax (Amendment) Act 7 of 1919 with a view to undo the effect
of Burrell’s (supra) case. Clause (c) of sub-section (6A) as
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originally enacted stood as follows:
" ‘Dividend’ includes-
(c) any distribution made to the shareholders of a
company out of accumulated profits of the company on
the liquidation of the company:
Provided that only the accumulated profits so
distributed which arose during the six previous years
of the company preceding the date of liquidation shall
be so included.
By the Finance Act 1955 the proviso to sub-clause (c) of
clause (6A) was omited. There was a further amendment made
by the Finance Act,. 1956 and clause (c) to the amended
section read as follows:
" ‘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.
As a result of the above distribution which is attributable
to the accumulated profits of the company immediately before
its liquidation is deemed to be dividend and as such liable
to be taxed.
Sixty per cent of the profits made by DDT Co. and TT
Co. by sale of tea grown and manufactured by them were not
liable to be taxed under the Act in view of rule 24 of 19?.2
Rules because they were to be treated as agricultural income
of these two companies. The question with which we are
concerned however is that even though 60 per cent of the
said profits constitute agricultural income in the hands of
DDT Co. and TT Co, once these profits got accumulated with
those two companies did they answer to the description of
accumulated profits as used in the definition of dividend in
section 2(6A) (c) ? The answer to this question in our
opinion should plainly be in the affirmative. We were unable
to accede to the contention of Mr. Ray that as only 40 per
cent of the profits which got
155
accumulated were liable to be taxed in the hands of DDT and
TT companies under the Act and 60 per cent were not liable
to be so taxed only 40 per cent of the amount of accumulated
profits should be treated as accumulated profits for the
purpose of section 2(6A) (c). The acceptance of the
contention would necessarily postulate reading in section
2(6A) (c) the words accumulated profits as are liable to be
taxed under the Act . The words as are liable to be taxed
under the Act are not there in the definition and it would
not in our opinion be permissible to so construe the clause
as if these words were a part of that clause. There is also
nothing in the language or context of that clause as would
warrant such a construction. Accumulated profits would
remain their character as such even though a part of them
were not taxed as profits under the Act. It is pertinent to
mention in this connection that we are concerned in the
appeal of the assessee with items 2 and 3 of the question
which relate to accumulated profits in the ordinary sense
and not to accumulated profits arising out of capital gains
which are dealt with by the explanation to section 2(6A) of
the Act.
There can also be no doubt that whatever amount has
been distributed to the assessee company and is attributable
to accumulate profits in items 2 and 3 mentioned in the
question would constitute dividend in the hands of the
assessee and the whole of the amount so received would be
liable to be taxed as such. This is clear from the
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Constitution Bench decision of this Court in the case of
Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income-tax
Bombay(1). The assessee in that case was a shareholder in
certain tea companies. 60 per cent of whose income was
exempt from tax as agricultural income under section 4(3)
(viii) of the Indian Income-tax Act. The assessee claimed
that 60 per cent of the dividend income received by her on
her shares in those companies was also exempt from tax as
agricultural income. This claim was rejected and it was held
that the dividend income received by the assessee was not
agricultural income but was income assessable under section
12 of the Act. Agricultural income as defined in the Act
according to that decision was intended to refer to revenue
received by direct association with the land which is used
for agricultural purposes and not by indirectly extending it
to cases where that revenue or part thereof changes hands
either by way of distribution of dividends or otherwise.
Mr. Ray has assailed the correctness of the view taken
by the Constitution Bench of this Court in the above
decision and has submitted that the matter should be
reconsidered. Apart from the fact that this Bench is bound
by the decision of the Constitution Bench we find nothing in
that decision as warrants reconsideration of the matter. We
would therefore uphold the answer given by the High Court in
respect of items 2 and 3 of the question.
In appeal by the Commissioner of Income-tax his learned
counsel Mr. Hardy has submitted in respect of items 1 and 4
that as 60 per cent of the income from the land held by DDT
Co. and TT Co. was to be treated as agricultural income in
view of rule 24 of 1922 Rules
(1) 27 I.T.R. 1.
156
the said land to the extent of only 60 per cent would not
answer to the description of capital asset as defined in
section 2(4A) of the Act. As 40 per cent of the income
derived from that land was not agricultural income 40 per
cent interest in that land according to the submission
should be held to be capital asset for the purpose of
section 2(4A) of the Act. Forty per cent interest in that
land it is further submitted. would not be taken out of the
definition of capital by virtue of clause (iii) of section
2(4A) and any appreciation in the value of the land to the
extent of 40 per cent would constitute capital gain. As such
gain arose during the period from April 1 1946 to March 31
1948 the same according to Mr. Hardy would answer to the
description of accumulated profits as mentioned in the
explanation to section (6A) of the Act.
The above contention of Mr. Hardy, in our opinion is
not well founded. Income which is realised by sale of tea by
a tea company which grows tea on its land and thereafter
subjects it to manufacturing process in its factory is an
integrated income. Such income consists of two elements or
components. One element or component consists of the
agricultural income which is yielded in the form of green
leaves purely by the land over which tea plants are grown.
The second element or component consists of non-agricultural
income which is the result of subjecting green leaves which
are plucked from the tea plants grown on the land to a
particular manufacturing process in the factory of the tea
company. Rule 24 prescribes the formula which should be
adopted for apportioning the income realised as a result of
the sale of tea alter it is grown and subjected to the
manufacturing process in the factory. Sixty per cent is
taken to be agricultural income and the same consists of the
first element or component while 40 per cent represents non-
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agricultural income and the same comprises the second
element or component.
We are fortified in the above conclusion by two
decisions of this Court in the cases of Karimtharuvi Tea
Estates Ltd. v. State of Kerala(1) and Anglo-American Direct
Tea Trading Co. Ltd. v. Commissioner of Agricultural Income
tax, Kerala(2). In the case of Karimtharuvi Tea Estates Ltd.
it was observed while dealing with the income derived from
the sale of tea grown and manufactured by the seller in the
context of rule 24:
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.
In the case of Anglo-American Direct Tea Trading Co. Ltd.
the Constitution Bench of this Court held that income from
the sale of tea grown and manufactured by the assessee is
derived partly from business and partly from agriculture.
This income Las to be computed as if it were income from
business under the Central Income-tax Act and the Rules made
thereunder. Forty per cent of the income or com-
(1) 48 I.T.R. 83
(2) 69 I.T.R. 667.
157
puted is deemed to be income derived from business and
assessable to non-agricultural income-tax. The balance of 60
per cent of the income so computed is agricultural income
within the meaning of the Central Income-tax Act.
So far as the lands held by DDT Co. and TT Co. were
concerned they yielded purely agricultural income in the
shape of green tea leaves. Forty per cent of the income on
sale of tea which was received by DDT Co. and TT Co. was not
income from land. It was income which should be ascribed to
manufacturing process to which the green tea leaves were
subjected in the factories of those companies. As the lands
held by DDT Co. and TT Co. yielded agricultural income it
would allow that those lands did not constitute capital
asset as defined in section (4A) of the Act. Clause (iii)
appended to section 2(4A) expressly states that capital
asset does not include any land from which income derived is
agricultural income . Any gain arising from the transfer of
such land would not constitute capital gain under the Act
and consequently would not be liable to be taxed as such.
The distribution; of that amount on the liquidation of the
companies would also not partake of the character of
dividend. It may be apposite in this context to refer to the
case of First Income-tax officer, Salem v. Short Brothers
(P.) Ltd. (supra) wherein this Court dealt with the sale of
a coffee estate by a company which went into liquidation was
held by this Court that the capital appreciation ill respect
of the lands for which the income was derived as
agricultural income and was not to able in the hands of the
company as capital gains would not of distribution be liable
to be so taxed as dividend under section 12 of the Act. We
therefore see no reason to interfere in the appeal filed by
the Commissioner of Income-tax with the answer given by the
High Court in respect of items 1 and 4 or the question. It
is the common case of the parties that items 1 and 4 share
the same fate.
As a result of the above we dismiss both the appeals.
In view of the divided success we leave the parties to bear
their own costs of the appeals.
P.H.P. Appeals dismissed
158
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