CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1491 and 1693 of 1971.
Appeals by Special Leave from the Judgment and order dated the 13th January 1971 of the Calcutta High Court in I.T. Reference No. 192 of 1966.
K. Kay and D. N. Gupta, for the Appellant in CA No. 1491/71 for respondent in C.A. 1693/71.
Hardayal Hardy, B. B. Ahuja and S. P. Nayar for Respondent in CA1491/71 and for Appellant in 1693/71.
The Judgment of the Court was delivered by
This judgment would dispose of two cross civil appeals Nos. 1491 and 1693 of 1971 which have been filed by special leave by the assessee M/s Tea Estate India (P) Ltd. and the Commissioner of Income-tax West Bengal respectively against the judgment of the Calcutta High Court answering the following question referred to it under section 66(1) of the Indian Income-tax Act 1922 (hereinafter referred to as the Act) partly in favour of the assessee and partly in favour of the revenue:
Whether on the facts and in the circumstances of
the case the balances in the under noted accounts are
includible in the accumulated profits within the
meaning of section 2(6A)(c) and if so to what extent?
Dibru Darang Taikrong Tea
Tea Co. Ltd. Co. Ltd.
Rs. Rs. Land A/o 19,30,374,- 10,11,216/Profit & Loss Account 16,69,285/- 18,73,125/General Reserves and liabilities for taxation 3,50,799/- 2,243/Reserve created on writing up the value of the assets of the ten estates 15,69,828/- 58,772/-
The matter relates to the assessment year 1956-57, the corresponding accounting year for which ended on June 30, 1955. The assessee company held 52,350 shares out of the total issued shares of 54,600 in Dibru Darang Tea Co. Ltd (hereinafter referred to as DDT Co.) and 22,998 shares out of the total issued shares of 23,000 in Taikrong Tea Co. Ltd. (hereinafter referred to as TT Co.). DDT Co. and TT Co. were tea companies growing, manufacturing and selling tea. For this purpose, those two companies owned large tea estates consisting of land, building, plant and machinery. On August 11, 1947 the said tea companies sold their entire lea estates, including all the assets, to Brooke Bond Estate India Ltd. As a result of these sales, DDT Co. received a surplus of Rs. 17,l8,081 over the book value of its assets. Likewise, TT Co. received a surplus of Rs. 13,11,339 over the book value of its assets. The amount relating to the land of the tea estate of DDT Co. was Rs. 19,30,374 and that relating to TT Co. was Rs. l0,11,216. DDT Co. realized Rs. 2,12,313 less than their book value on the sale of the other assets. It may also be mentioned that in 1936 the assets of the two companies were revalued. On such revaluation the hook value of the assets of DDT Co. appreciated by an amount of Rs. l 5,69,828 and Those of TT Co. by an amount of Rs. 58,772. These amounts were carried to the respective reserves of the two companies.
DDT Co. and TT Co. went into voluntary liquidation on october 29, 1954. On account of the liquidation of the two companies, the assessee company became entitled to receive Rs. 57,69,186 out of the total distributable assets of DDT Co. and Rs. 36,53,453 out of the total distributable assets of TT Co. During the relevant accounting period the assessee received Rs. 52,23,786 and Rs. 34,15,500 (in all Rs. 86,39,286) from the liquidators of DDT Co. and TT Co. respectively.
On behalf of the assessee company, it was urged before the lncome-tax officer that apart from Rs. 2,47,921 which had been assessed as capital gain under section 12B of TT Co. for the assessment year 1949-SO, no other amount could be included in the computation of the accumulated profits available for distribution under section 2(6A) (c) of the Act. The Income-tax officer rejected this contention and allowed only a deduction of Rs. 27,000 being payment on share premium account and included the balance of Rs. 86,11,986 (grossed up to Rs. 91,64,075) as the assessees dividend income under section 2(6A)(c) of the Act.
On appeal the Appellate Assistant Commissioner allowed a further deduction of Rs. 1,77,964 representing preincorporation advances in the case of TT Co. The Appellate Assistant Commissioner rejected all other contentions of the assessee including the contention that 60 per cent of the amounts appearing under the head balance of appropriation account in the balance-sheets as also the general reserves and liabilities for taxation appearing in the books of the two tea companies should be excluded from the computation of accumulated profits.
On further appeal before the Tribunal two main contentions were raised on behalf of the assessee: (1) that in determining the quantum of the accumulated profits the surplus arising from sale of land of the two tea estates as also the reserves created on the revaluation of the agricultural assets should be left out and (2) that only 40 per cent of the balance in the profit and loss account and the general reserves of the two companies should be included as only 40 per cent of these amounts had been assessed under the Act. Regarding the first contention the Tribunal observed:
In the case before us since the lands of the two
tea estates were utilised for producing and selling the
tea it can not 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 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. Dealing with the second contention of the assessee the Tribunal observed that the ratio of 60:40 as laid down in rule 24 of the Income-tax Rules 1922 could not be applied for finding out the proportion of accumulated profits in a tea business and that profit whether capitalised or did not admit of such a bifurcation for determination of accumulated profits. General and taxation reserves having been included in the pool of distributable surplus could. in the opinion of the Tribunal only be held to be excess provisions out of the profit of the two tea companies which were not required to be paid out in discharge of any liability. The Tribunal accordingly held that balance left over after making the deduction indicated above from the total distributable pool, was accumulated profits of the two tea companies and the share received by the assessee on distribution of such accumulated profits was dividend within the meaning. Of section 2(6A) (c) of the Act.
Accumulated profits in the case of two tea companies immediately before the liquidation were determined as under:
"DDT Co.
40% of (Rs. 19,30,374+Rs. 15,69,828)+the whole of
(Rs. 16,69,285+Rs. 3,50,799)=Rs. 34,20,165.
TT Co.
40% of (Rs. 10,11,216 Rs. 58,772)-the whole of
(Rs. 18,73,125 + Rs. 2,243)=Rs. 23,03,363". The Tribunal accordingly came to the conclusion that out of the distributable surplus an amount of Rs. 57,23,528 was attributable to accumulated profits and hence was dividend within the meaning of section 2(6A) (c) of the Act. The assessee s appeal was allowed to that extent.
Both the assessee company as well as the Commissioner applied to the Tribunal for reference of certain questions arising from the order of the Tribunal to the Court. The Tribunal thereupon referred the question reproduced above in a composite reference to the High Court.
Dealing with items 1 and 4 mentioned in the question the High Court held as under:
"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 or 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 realised over the book
value of the lands as shown in the land account balance
and as envisaged in the question referred or whether
the excess on the sale of the entire tea estates over
the book value of the assets are to be considered for
inclusion in the accumulated profits under section
2(6A)(c) there can be no doubt that such excess or
profit is a realisation of capital rise and not profit
of the business. As according to the decision of the
Supreme Court in Short Brothers’(1) case unless such
appreciation has been included in capital gains
distribution thereof by the liquidator will not be
deemed to be divided for the purpose of the Income-tax
Act we have to find out how much of such excess or
profit has been included in the computation of capital
gains of the two tea companies on the transfer of the
tea estates in 1947. In his order the Appellate
Assistant Commissioner has recorded that for the
assessment year 1949-50 the assessment order on Dibru
Darang Tea Company Ltd. showed that the com-
pany was not liable to capital gains tax while the
assessment order for that year of M/s. Taikrong Tea
Co. Ltd. showed that a sum of Rs. 2,47,921 was brought
under tax under the head of Capital gains. It must
therefore be held that it is only the sum of Rs.
2,47,921 which could be included in accumulated profits
for the purpose of determining the dividend under
section 2(6A) (c). Mr. B. L. Pal contended that there
was no conclusive finding in the order of the Appellate
Assistant Commissioner as to the capital gains of the
two tea companies in respect of the transfer of the tea
estates and the proper determination of capital gains
payable in respect thereof had not been established. We
are unable to accept this contentions. Accordingly so
far as the first and last items in the referred
question are concerned the answer would be that only
the sum of Rs. 2,47,921 was includible in the
accumulated profits within the meaning of section 2(6A)
(c) . Regarding items 2 and 3 in the question the finding of the High Court was as under:
The balance in the profit and loss account is
arrived at after deducting or providing for all out
goings 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 profit of the
undertaking. We are unable to accept Mr. Rays
contention that each item in the balance-sheet contains
in itself the proportion of the income attributable to
the business activity and to the agricultural activity
of the tea companies and must be distintegrated into
its component parts at the time of inclusion in
dividends. Tea companies carry on a business activity
though such activity may include agricultural operation
as part thereof. Overall excess of incomings over out
goings as reflected in the balance of profit and loss
account, would represent the commercial profits of the
business undertaking of the tea companies and though a
bifurcation is necessary for the purpose of assessment
and imposition of tax no further bifurcation could be
made once the balance of profit was finally determined
of such balance it could not be said that a part
represents agricultural income and the rest represents
income from business. So far as the general and
taxation reserve is concerned, Mr. Ray agrees that such
reserve is usually built up out of the profits to meet
future liabilities but contends that is in this case
also such reserve had been built up of 60 per cent.
agricultural profit such reserve should again be
disintegration into the component parts. We are
entirely unable to accept this contention As pointed
out by Mr. Pal the Supreme Court in Girdhar das’s(2)
case advocated disintegration of the amount distributed
into two components namely, capital and accumulated
profits. There is no scope for further distintegration
of profits into its component parts.
(1) 63 I.T.R.300 The amounts mentioned in terms 2 and 3 of the question were accordingly held to be wholly includible in the accumulated profits within the meaning of section 2(6A) (c) of the Act.
Before dealing with the contentions advanced by the counsel for the parties it would be convenient to set out the relevant provisions of the Act. section 2(1) defines agricultural income to mean, inter alia
"(a) any rent or revenue derived from land which
is used for agricultural purposes and is
either assessed to land-revenue in the
taxable territories or subject to a local
rate assessed and collected by officers of
the Government as such;
(b) any income derived from such land by-
(1) agriculture or
(ii) the performance by a cultivator or
receiver of rent-in-kind of my process
ordinarily employed by a cultivator or
receiver of rent-in-kind to render the
produce raised or received by him fit to
be taken to market, or
(iii)the sale by a cultivator or receiver of
rent-in kind of the produced raised or
received by him in respect of which no
process has been performed other than
process of the nature described in sub-
clause (ii); "Capital asset in section 2(4A) means property of any kind held by an assessee whether or not connected with his business profession or vocation but does not include-
(iii)any land from which the income derived is
agricultural income. "Dividend" according to section ? (A) (c) includes any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated pro fits of the company immediately before its liquidation whether capitalised or not. The explanation to clause 2(6A) reads as under:
"Explanation.-The expression ‘accumulated profits, wherever it occurs in this clause shall not include capital gains arising before the 1st day of April 1946 or after the 31st day of March 1948, and before the 1st day of April 1956. "Income" has been defined in section 2(C6) to include dividend. Total income has been defined in section 2(15) to mean the total amount of income profits and gains referred to sub-section (1) of section 4 computed in the matter laid down in the Act. Section 3 provides inter alia that income-tax shall be charged for a year in respect of the total income of the previous year of every individual and company. Section 4 relates to total income of a previous year of any person. According to clause (8) of sub-section (3) of that section agricultural income shall not be included in the total Income chargeable to tax under section 3 of the Act. Section 6 enumerated the six heads of income to be:
(1)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. According to section 12(1A) income from other sources shall include dividends. Under section 12B as it stood at the relevant time capital gains tax shall be charged in respect of any profits or gains arising from the sale exchange relinquishment or transfer of a capital asset affected after the 31st day of March 1946 and before the 1st day of April 1948 and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange relinqishment or transfer took place. Section 59 empowers the Central Board of Revenue subject to the control of the Central Government to make rules for carrying out the purposes of the Act. Indian Income-tax Rules 1922 were framed in pursuance of that section. Rule 23 of the said rules provides for assessment of income which is partly agricultural and partly income chargeable to income-tax. Rule 24 with which we are concerned reads as under:
"Income derived from the sale of tea grown and
manufactured by the seller in the taxable territories
shall be computed as if it were income derived from
business and 40 per cent. Of such income shall be
deemed to be income profits and gains liable to
tax...." There is a proviso to this rule but it is not necessary to reproduced the same.
In appeal filed by the assessee-company, its learned counsel Mr. Ray, has contended before us in respect of items 2 and 3 of the question that 60 per cent of the amounts mentioned in these items were agricultural income and as such were not income for the purpose of the Act. To that extent it is urged the amounts did not constitute accumulated profits within the meaning of section 2(6A)(c) of the Act. The High Court according to the contention was in error in holding to the contrary. The above contentions has been controverted by Mr. Hardy on behalf of the revenue and in our opinion is not well founded.
In Inland Revenue Commissioners v. George Burrell(1) it was held that super-tax was not payable on the undivided profits of past years and of the year in which the winding up of a company occurred were distributed among the shareholders, because in the winding up
(1) [1924] 2 K. B. 52. they had ceased to be profits and were assets only. It was further observed in Burrell’s case that the only thing the liquidator of a company in liquidation may do is to turn the assets into money and divide the money among the shareholders in proportion to their shares. Surplus of trading profit made in a particular year are distributable rateably among all the shareholders as capital and it is not right to built up the sums received by the shareholders into capital and income and thus disintegrate the sums received by the shareholders subsequently into component parts based on an estimate of what might possibly have been done but was not done. As the Indian Companies Act 1913. closely followed the scheme of the English Companies Act and the view expressed in Burrell’s case (supra) applied to the Indian Income tax Act a special definition of "dividend" was devised by the legislature by the enactment of the Incometax (Amendment) Act 7 of 1919 with a view to undo the effect of Burrell’s (supra) case. Clause (c) of sub-section (6A) as originally enacted stood as follows:
" ‘Dividend’ includes-
(c) any distribution made to the shareholders of a
company out of accumulated profits of the company on
the liquidation of the company:
Provided that only the accumulated profits so
distributed which arose during the six previous years
of the company preceding the date of liquidation shall
be so included. By the Finance Act 1955 the proviso to sub-clause (c) of clause (6A) was omited. There was a further amendment made by the Finance Act,. 1956 and clause (c) to the amended section read as follows:
" ‘Dividend’ includes-
(c) 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. As a result of the above distribution which is attributable to the accumulated profits of the company immediately before its liquidation is deemed to be dividend and as such liable to be taxed.
Sixty per cent of the profits made by DDT Co. and TT Co. by sale of tea grown and manufactured by them were not liable to be taxed under the Act in view of rule 24 of 19?.2 Rules because they were to be treated as agricultural income of these two companies. The question with which we are concerned however is that even though 60 per cent of the said profits constitute agricultural income in the hands of DDT Co. and TT Co, once these profits got accumulated with those two companies did they answer to the description of accumulated profits as used in the definition of dividend in section 2(6A) (c) ? The answer to this question in our opinion should plainly be in the affirmative. We were unable to accede to the contention of Mr. Ray that as only 40 per cent of the profits which got accumulated were liable to be taxed in the hands of DDT and TT companies under the Act and 60 per cent were not liable to be so taxed only 40 per cent of the amount of accumulated profits should be treated as accumulated profits for the purpose of section 2(6A) (c). The acceptance of the contention would necessarily postulate reading in section 2(6A) (c) the words accumulated profits as are liable to be taxed under the Act . The words as are liable to be taxed under the Act are not there in the definition and it would not in our opinion be permissible to so construe the clause as if these words were a part of that clause. There is also nothing in the language or context of that clause as would warrant such a construction. Accumulated profits would remain their character as such even though a part of them were not taxed as profits under the Act. It is pertinent to mention in this connection that we are concerned in the appeal of the assessee with items 2 and 3 of the question which relate to accumulated profits in the ordinary sense and not to accumulated profits arising out of capital gains which are dealt with by the explanation to section 2(6A) of the Act.
There can also be no doubt that whatever amount has been distributed to the assessee company and is attributable to accumulate profits in items 2 and 3 mentioned in the question would constitute dividend in the hands of the assessee and the whole of the amount so received would be liable to be taxed as such. This is clear from the Constitution Bench decision of this Court in the case of Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income-tax Bombay(1). The assessee in that case was a shareholder in certain tea companies. 60 per cent of whose income was exempt from tax as agricultural income under section 4(3) (viii) of the Indian Income-tax Act. The assessee claimed that 60 per cent of the dividend income received by her on her shares in those companies was also exempt from tax as agricultural income. This claim was rejected and it was held that the dividend income received by the assessee was not agricultural income but was income assessable under section 12 of the Act. Agricultural income as defined in the Act according to that decision was intended to refer to revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise.
Mr. Ray has assailed the correctness of the view taken by the Constitution Bench of this Court in the above decision and has submitted that the matter should be reconsidered. Apart from the fact that this Bench is bound by the decision of the Constitution Bench we find nothing in that decision as warrants reconsideration of the matter. We would therefore uphold the answer given by the High Court in respect of items 2 and 3 of the question.
In appeal by the Commissioner of Income-tax his learned counsel Mr. Hardy has submitted in respect of items 1 and 4 that as 60 per cent of the income from the land held by DDT Co. and TT Co. was to be treated as agricultural income in view of rule 24 of 1922 Rules
(1) 27 I.T.R. 1. the said land to the extent of only 60 per cent would not answer to the description of capital asset as defined in section 2(4A) of the Act. As 40 per cent of the income derived from that land was not agricultural income 40 per cent interest in that land according to the submission should be held to be capital asset for the purpose of section 2(4A) of the Act. Forty per cent interest in that land it is further submitted. would not be taken out of the definition of capital by virtue of clause (iii) of section 2(4A) and any appreciation in the value of the land to the extent of 40 per cent would constitute capital gain. As such gain arose during the period from April 1 1946 to March 31 1948 the same according to Mr. Hardy would answer to the description of accumulated profits as mentioned in the explanation to section (6A) of the Act.
The above contention of Mr. Hardy, in our opinion is not well founded. Income which is realised by sale of tea by a tea company which grows tea on its land and thereafter subjects it to manufacturing process in its factory is an integrated income. Such income consists of two elements or components. One element or component consists of the agricultural income which is yielded in the form of green leaves purely by the land over which tea plants are grown. The second element or component consists of non-agricultural income which is the result of subjecting green leaves which are plucked from the tea plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 prescribes the formula which should be adopted for apportioning the income realised as a result of the sale of tea alter it is grown and subjected to the manufacturing process in the factory. Sixty per cent is taken to be agricultural income and the same consists of the first element or component while 40 per cent represents nonagricultural income and the same comprises the second element or component.
We are fortified in the above conclusion by two decisions of this Court in the cases of Karimtharuvi Tea Estates Ltd. v. State of Kerala(1) and Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner of Agricultural Income tax, Kerala(2). In the case of Karimtharuvi Tea Estates Ltd. it was observed while dealing with the income derived from the sale of tea grown and manufactured by the seller in the context of rule 24:
Of the income so computed 40 per cent is under
rule 24 to be treated as income liable to income-tax
and it would follow that the other 60 per cent only
will be deemed to be agricultural income within the
meaning of that expression in the Income-tax Act. In the case of Anglo-American Direct Tea Trading Co. Ltd. the Constitution Bench of this Court held that income from the sale of tea grown and manufactured by the assessee is derived partly from business and partly from agriculture. This income Las to be computed as if it were income from business under the Central Income-tax Act and the Rules made thereunder. Forty per cent of the income or com-
(1) 48 I.T.R. 83
(2) 69 I.T.R. 667. puted is deemed to be income derived from business and assessable to non-agricultural income-tax. The balance of 60 per cent of the income so computed is agricultural income within the meaning of the Central Income-tax Act.
So far as the lands held by DDT Co. and TT Co. were concerned they yielded purely agricultural income in the shape of green tea leaves. Forty per cent of the income on sale of tea which was received by DDT Co. and TT Co. was not income from land. It was income which should be ascribed to manufacturing process to which the green tea leaves were subjected in the factories of those companies. As the lands held by DDT Co. and TT Co. yielded agricultural income it would allow that those lands did not constitute capital asset as defined in section (4A) of the Act. Clause (iii) appended to section 2(4A) expressly states that capital asset does not include any land from which income derived is agricultural income . Any gain arising from the transfer of such land would not constitute capital gain under the Act and consequently would not be liable to be taxed as such. The distribution; of that amount on the liquidation of the companies would also not partake of the character of dividend. It may be apposite in this context to refer to the case of First Income-tax officer, Salem v. Short Brothers (P.) Ltd. (supra) wherein this Court dealt with the sale of a coffee estate by a company which went into liquidation was held by this Court that the capital appreciation ill respect of the lands for which the income was derived as agricultural income and was not to able in the hands of the company as capital gains would not of distribution be liable to be so taxed as dividend under section 12 of the Act. We therefore see no reason to interfere in the appeal filed by the Commissioner of Income-tax with the answer given by the High Court in respect of items 1 and 4 or the question. It is the common case of the parties that items 1 and 4 share the same fate.
As a result of the above we dismiss both the appeals. In view of the divided success we leave the parties to bear their own costs of the appeals. P.H.P. Appeals dismissed