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Issues:
1. Interpretation of whether certain reserves and profits are to be considered as "accumulated profits" for the purpose of income tax assessment. 2. Determination of whether any portion of the distribution made to shareholders by the liquidator is liable to be assessed as "capital gains" for specific assessment years. Analysis: The judgment by the High Court of Madras involved the interpretation of whether reserves and profits of a company should be classified as "accumulated profits" for income tax assessment purposes. The case revolved around a shareholder of a public limited company, which was taken over by the Andhra Government. The shareholder received distributions from the company post-takeover and was assessed for income tax. The primary contention was whether certain reserves created under the Electricity (Supply) Act, 1948, and profits for a specific year should be considered as "accumulated profits" under the Income-tax Act. The Tribunal had held that these reserves and profits formed part of the accumulated profits, a decision upheld by the High Court. The Court rejected the argument that reserves created under statutory obligations could not be classified as profits. It emphasized that the reserves were sourced from the company's profits and had not been segregated into a separate fund. The Court cited precedents to support its conclusion that unless profits were capitalized, mere transfer to reserve accounts did not change their character as accumulated profits. Consequently, the Court affirmed that the reserves and profits in question were indeed part of the accumulated profits for income tax assessment. Regarding the second issue, the Court examined whether any part of the distributions made to shareholders by the liquidator should be treated as "capital gains." The Tribunal had applied section 46(2) of the Income-tax Act, 1961, to determine capital gains, even for assessment years where the provision was not strictly applicable. The Court disagreed with this approach, citing a Supreme Court ruling that capital gains tax liability arises only when there is a sale, exchange, relinquishment, or transfer of capital assets. It held that for the relevant assessment years, no portion of the distribution could be assessed as capital gains except for the assessment year 1962-63, where section 46(2) applied explicitly. In conclusion, the Court upheld that the reserves and profits were part of the accumulated profits for income tax purposes. It clarified that while no portion of the distribution was liable to be assessed as capital gains for certain assessment years, it should be treated as capital gains for the assessment year 1962-63. The judgment favored the revenue on the first issue, entitling it to costs from the assessee.
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