1965 (12) TMI 25 - SC - Income Tax

Whether capital appreciation in respect of the lands from which the income derived is agricultural income and which was not taxable in the hands of the company as capital gains would still on distribution be liable to be taxed as dividend under section 12 of the Income-tax Act? Held that - Capital gains under section 12B are chargeable in respect of any profits arising from transfer of capital assets , and capital assets do not include lands from which the income derived is agricultural income. 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. Realization of appreciated value of assets in commercial practice is regarded as realization 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. Appeal dismissed.

Issues Involved:
1. Taxability of distributed amount as dividends.
2. Jurisdiction of High Court under Article 226.
3. Definition and scope of "accumulated profits" under Section 2(6A)(c) of the Income-tax Act.
4. Inclusion of capital gains in "accumulated profits."
5. Taxability of current year profits in liquidation.
6. Taxability of capital appreciation of agricultural lands.

Issue-wise Detailed Analysis:

1. Taxability of Distributed Amount as Dividends:
The Income-tax Officer treated the amount of Rs. 8,50,000 distributed by the liquidators of the company as dividends in the hands of the shareholders, invoking Section 18(3D) of the Income-tax Act. The liquidators contested that the distributed amount was capital appreciation from the sale of agricultural lands and buildings, and thus not liable to tax as dividends. The High Court ruled that the amount could not be deemed as dividends without determining if any portion represented capital gains from the sale of agricultural lands, which are not taxable.

2. Jurisdiction of High Court under Article 226:
The Income-tax Officer argued that the High Court bypassed the assessment and rectification machinery prescribed by the Income-tax Act by entertaining the petition under Article 226. However, the High Court has the jurisdiction to issue writs for enforcement of rights, and it exercised its discretion in this case. The Supreme Court upheld this discretion, noting that the High Court's decision to entertain the petition was within its jurisdiction and normally would not be interfered with.

3. Definition and Scope of "Accumulated Profits" under Section 2(6A)(c):
The High Court interpreted "accumulated profits" to include all profits accumulated in previous years and up to the date of the company's resolution for voluntary winding up. The court noted that even capital gains taxable under Section 12B, except for certain periods, are considered dividends when distributed. However, profits from the sale of property used for agricultural purposes, which yield agricultural income, are not considered "dividend" under this section.

4. Inclusion of Capital Gains in "Accumulated Profits":
The Explanation to Section 2(6A) excludes capital gains arising before April 1, 1946, or after March 31, 1948, and before April 1, 1956, from "accumulated profits." The Supreme Court clarified that the substantive clauses of the definition include capital gains outside these periods. Therefore, the capital gains arising from the sale of non-agricultural assets are included in "accumulated profits."

5. Taxability of Current Year Profits in Liquidation:
The liquidators argued that profits arising in the year of voluntary winding up are not "dividends" under Section 2(6A)(c). The Supreme Court rejected this argument, stating that accumulated profits immediately before liquidation are considered dividends, regardless of whether they arise in the current year. The court emphasized that Parliament intended to tax current year profits distributed by a liquidator as dividends.

6. Taxability of Capital Appreciation of Agricultural Lands:
The Supreme Court addressed whether capital appreciation from the sale of agricultural lands, which is not taxable as capital gains under Section 12B, could be taxed as dividends. The court held that such appreciation is not included in "accumulated profits" and thus not taxable as dividends. The court distinguished this from the case of Mrs. Bacha F. Guzdar, where dividends from agricultural income were not exempt from tax, noting that the company claimed exemption because the receipt was not income chargeable under Section 12 as dividends.

Conclusion:
The Supreme Court dismissed the appeal, affirming the High Court's decision that the distributed amount could not be taxed as dividends without determining if any part represented non-taxable capital gains from agricultural lands. The court upheld the High Court's jurisdiction under Article 226 and clarified the scope of "accumulated profits" and the taxability of current year profits and capital appreciation of agricultural lands.

← Previous Next →