1965 (12) TMI 25 - SUPREME COURT

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.