1971 (1) TMI 45 - HC - Income Tax

Surplus from sale of assets and reserves created on revaluation of agricultural assets - computation of accumulated profits available for distribution within the meaning of section 2(6A)(c)

Summary

Issues Involved:
1. Inclusion of surplus from the sale of land and revaluation reserves in accumulated profits.
2. Applicability of rule 24's 40:60 ratio for determining accumulated profits.
3. Inclusion of general reserves, provision for taxation, and profit and loss account balances in accumulated profits.

Detailed Analysis:

1. Inclusion of Surplus from the Sale of Land and Revaluation Reserves in Accumulated Profits:
The assessee argued that the surplus from the sale of lands and reserves created from revaluation should be excluded from accumulated profits. The Tribunal held that only 40% of the profits from the sale of land and revaluation reserves should be included, as these were partly agricultural income. The Tribunal's decision was challenged on the grounds that the entire profit should be considered as accumulated profit. The court agreed with the assessee that the surplus from the sale of land and revaluation reserves should not be included in accumulated profits except for the amount assessed as capital gains under section 12B, which was Rs. 2,47,921 for T.T. Co. for the year 1949-50.

2. Applicability of Rule 24's 40:60 Ratio for Determining Accumulated Profits:
The Tribunal applied the 40:60 ratio from rule 24 to the profits from the sale of land and revaluation reserves, considering 40% as business income and 60% as agricultural income. However, the court found that rule 24 should not apply to capital gains. The court held that the entire profit from the sale of assets should be considered as accumulated profit unless it was assessed as capital gains. The court concluded that only Rs. 2,47,921, which was assessed as capital gains, should be included in accumulated profits.

3. Inclusion of General Reserves, Provision for Taxation, and Profit and Loss Account Balances in Accumulated Profits:
The Tribunal held that general reserves and provision for taxation, as well as profit and loss account balances, should be included in accumulated profits. The assessee contended that 60% of these amounts should be excluded as they were derived from agricultural income. The court rejected this argument, stating that once the profits are transferred to the balance sheet, they become commercial profits and should not be bifurcated further. The court held that the entire amounts in the general reserves, provision for taxation, and profit and loss account balances should be included in accumulated profits.

Conclusion:
The court concluded that the surplus from the sale of land and revaluation reserves should not be included in accumulated profits except for the amount assessed as capital gains. Rule 24's 40:60 ratio does not apply to capital gains. The entire amounts in general reserves, provision for taxation, and profit and loss account balances should be included in accumulated profits. The success was equally divided, and there was no order as to costs.