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TMI Blog1971 (1) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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., and 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. Of these figures the amounts relating to the lands of the tea estates of the two companies were Rs. 19,30,374 and Rs. 10,11,216, respectively. It would thus appear that on the sale of its other assets D.D.T. Co. realised Rs. 2,12,313 less than their book value. It should be mentioned here that in 1936 the two tea companies revalued their assets and on such revaluation the book value of the assets of D.D.T. Co. were appreciated by an amount of Rs. 15,69,828 and of T.T. Co. by Rs. 58,772 which were carried to the respective reserves of the two companies created on such writing up of the value of the assets. On the 29th October, 1954, the said two tea companies went into voluntary liquidation. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot 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 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 the 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." So far as the second contention of the assessee was concerned, the Tribunal said that the ratio of 60 : 40 as laid down in rule 24 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 determination of accumulated profits. Moreover, general or taxation reserves having been included in the pool of the distributable surplus, could only be held to be excess pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee but does not include, inter alia, any land from which the income derived is agricultural income. Section 2(6A)(c) includes in dividend 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. By the Explanation to this clause the expression "accumulated profits", wherever it occurs, is not to include capital gains arising before the 1st April, 1946, or after the 31st March, 1948, and before the 1st April, 1956. Dividend and capital gains chargeable under section 12B are included in the definition of income in section 2(6C) while section 2(45) defines "total income" to mean the total amount of income, profits and gains referred to in section 4(1) computed in the manner laid down in the Act. Section 6 enumerates the 6 heads of income chargeable to income-tax, namely, (i) 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. Section 4(3)(viii) excludes agricultural income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s round the questions as to whether the excess of the sale price over the book value of the tea estates was or was not to be included in computing the accumulated profits of the said two tea companies". The excess of such sale price over the book value in the case of D.D.T. Co. was Rs. 17,18,061 and in the case of T.T. Co., Rs. 13,11,339. The question as referred gives the figures as the balances of the land account as Rs. 19,30,374 and Rs. 10,11,216, respectively. Mr. Ray further pointed out that while taking the balances in the land account of the two tea companies the Tribunal has taken the figures of 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. Mr. Ray, accordingly, submitted that the question should be suitably reframed so as to bring out the real controversy between the parties to this reference. Mr. B. L. Pal, learned counsel for the department, contended that after finding that the lands of the two tea estates utilised for producing and selling tea could not be held to be assets which were lands from which the income derived was agricultural income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Section 12B(2) provides for its own computation of capital gains and there is no provision therein for any deemed capital gains. In Commissioner of Income-tax v. Amarchand N. Shroff, the Supreme Court observed, at page 66, that legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field. Mr. Pal contended that the fiction in rule 24 was created for computing the income accruing and arising from the composite activity of growing and manufacturing tea and such fiction could not be extended and applied to capital gains assessable under section 12B. Mr. Pal also referred us to the decision of the Supreme Court in Karimtharuvi Tea Estates Ltd. v. State of Kerala, where it was said that: "The result of rule 24 is that the income derived from the sale of tea grown and manufactured by the seller is to be computed in the first instanceas if it was income derived from business. Consequently, the income would be computed in accordance with the provisions of section 10 of the Income-tax Act..... Of the income so computed, 40 per cent. is, under rule 24, to be treated as income liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tably reframed in order to bring out the real controversy between the parties, namely, whether the excess of the sale price over the book value of the assets of the two tea companies including the reserves created by writing up such book value of the two companies was to be included in computing the accumulated profits for the purpose of section 2(6A)(c). Mr. Pal, on the other hand, pointed out that the parties agreed that the statement of the case has correctly set out the facts and Mr. Ray was himself present at the time when the statement was finalised by the Tribunal. Further, at the time of passing the original order the Tribunal referred to the figures of Rs. 17,18,061 and Rs. 13,11,339 as surplus on sale of the two tea estates and it was at the instance of the assessee that the Tribunal by its order under section 35 changed the figures to the figures of Rs. 19,30,374 and Rs. 10,11,216 and substituted the words "this was a profit on the sale of the land" for the words "surplus over the book value of the assets". Mr. Pal further submitted that, as the Tribunal has made it clear in paragraph 16 of its order that the reserves created on writing up the value of the assets of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agricultural income is derived. As such, such lands could not be called assets within the meaning of the Income-tax Act and any profit derived from the sale of such lands would not be profits derived from the sale of capital assets within the meaning of that Act and could not come within the computation of accumulated profits for the purpose of section 2(6A)(c). In any event, therefore, the excess in the land account must be excluded from the computation of such accumulated profits. Mr. Ray pointed out that it was only in 1939 that section 2(6A)(c) was introduced into the Act to include a distribution by the liquidator of a company in liquidation of accumulated profits in the definition of dividend to bring such distribution within the net of taxation. Under the company law any distribution by a company on liquidation would be a distribution of capital assets. Accumulated profits of the company so distributed would also be regarded as receipt of capital by the shareholders. Even after the introduction of section 2(6A)(c) in 1939, no attempt was made to tax distribution of capital profits or capital gains of a company in liquidation as dividend. It was only after the introduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of the Income-tax Act." Mr. Ray argued that in accordance with the aforesaid decision only those profits which were commercial profits and those profits which were assessable as capital gains under section 12B could be included in "accumulated profits". In this case, after the transfer of their tea estates both the tea companies had been assessed to income-tax and M/s. Dibru Darrang Tea Company Ltd. has been held to have made no capital gains in the assessment for the year 1949-50 from the said transfer while the capital gains assessed in the case of M/s. Taikrong Tea Co. Ltd. was Rs. 2,47,921. Mr. Ray, therefore, submitted that it was only the last sum that could be included in the computation of accumulated profits for determining the dividend distributed under section 2(6A)(c). 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 of 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , whether capitalised or not, did not admit of such bifurcation and, secondly, that the general or taxation reserves having been included in the pool of the distributable surplus could only be held to be excess provision out of the profits of the two tea companies, which were not required to be paid out in discharge of any liability. Mr. Ray repeated his contention that as under the two above cited decisions of the Supreme Court, 60 per cent. of the income derived from the combined operation of growing, manufacturing and selling tea was agricultural income, 60 per cent. of such income would go out of the computation of accumulated profits in section 2(6A)(c). Strong reliance was placed by Mr. Ray on the observations of the Supreme Court in Commissioner of Income-lax v. Girdhardas Co. (P.) Ltd. where, at page 305, it is said: The language used by the legislature in section 2(6A)(c), as amended by the Finance Act, 1956, is fairly clear. There is in the hands of the liquidator only one fund. When a distribution is made out of the fund, for the purpose of determining tax liability, and only for that purpose, the amount distributed is disintegrated into its components--capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of section 2(6A)(c). Section 4(3)(viii) specifically excluded agricultural income from inclusion in the total income chargeable to tax under the Act. Mr. Pal, on the other hand, contended that 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. The same would also be true of the general and taxation reserves created out of the profits of the two companies. Mr. Pal pointed out that in Girdhardas's case the Supreme Court had laid down that in the case of a distribution, only for the purpose of determining tax liability, the amounts distributed would be disintegrated into two components-capital and accumulated profits. There is no further scope for disintegration of each item of profit into taxable and non-taxable profit. The balance in the profit and loss account is arrived at after deducting or providing for all outgoings 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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