1971 Supreme(Cal) 13

HIGH COURT OF CALCUTTA
SANKAR PRASAD MITRA, K. L. RAY
COMMISSIONER OF INCOME-TAX - Appellant
Versus
TEA ESTATES INDIA PRIVATE LTD. - Respondent
Income-Tax Reference 192  Of  1966
Decided On : JANUARY 13, 1971

The accumulated profits of a company in liquidation, for the purpose of determining dividend under Section 2 (6a) (c) of the Income-tax Act, 1922, include only those profits which are commercial profits and those profits which are assessable as capital gains under Section 12b of the Act.

Headnote:

INCOME TAX - Accumulated profits - Whether the balance in the land account, profit and loss account, general reserves and liabilities for taxation appearing in the books of the two tea companies should be included in the computation of accumulated profits for the purpose of Section 2 (6a) (c) of the Income-tax Act, 1922.

Fact of the Case:

The assessee, M/s. Tea Estates India Private Ltd., held shares in M/s. Dibru Darrang Tea Company Ltd. (D. D. T. Co.) and M/s. Taikrong Tea Company Ltd. (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. 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. 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.

Finding of the Court:

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.

Issues: 1. Whether 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). 2. Whether the reserves created on the revaluation of the entire assets of the tea companies and not merely the reserves created on the revaluation of the land of these companies should be included in the computation of accumulated profits. 3. Whether 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. 4. Whether the ratio laid down in Rule 24 could be applied to the case of capital gains. 5. Whether 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. 6. Whether 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). 7. Whether any 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). 8. 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). 9. Whether 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.

Ratio Decidendi: 1. 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. 2. 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). 3. 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). 4. 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). 5. 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.

Final Decision: The question referred is answered as follows: 1. Only the sum of Rs. 2,47,921 was includible in the accumulated profits within the meaning of Section 2 (6a) (c). 2. 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).