1976 (4) TMI 2 - SC - Income Tax

Balances in profits and loss accounts general reserves and provisions for taxation are includible in the computation of accumulated profits because they are the accumulated profits as per the definition of dividend in s. 2(6A)(c) - capital appreciation in respect of the lands from which the income was derived as agricultural income and was not taxable in the hands of the company as capital gains would not on distribution be liable to be so taxed as dividend under section 12

Summary

Issues Involved:
1. Inclusion of balances in specific accounts in "accumulated profits" under section 2(6A)(c) of the Indian Income-tax Act, 1922.
2. Treatment of surplus from the sale of lands and revaluation reserves.
3. Inclusion of balances in the profit and loss account and general reserves.
4. Interpretation of "accumulated profits" and its tax implications.

Detailed Analysis:

Issue 1: Inclusion of Balances in Specific Accounts in "Accumulated Profits"
The primary question referred to the court was whether the balances in certain accounts are includible in "accumulated profits" under section 2(6A)(c) and to what extent. The accounts in question included the Land Account, Profit & Loss Account, General Reserves, and reserves created on writing up the value of assets. The matter relates to the assessment year 1956-57.

Issue 2: Treatment of Surplus from Sale of Lands and Revaluation Reserves
The Tribunal and High Court had to determine whether the surplus from the sale of lands and the reserves created on revaluation should be included in the accumulated profits. The High Court held that the surplus from the sale of lands and the revaluation reserves are capital gains and not business profits. Therefore, unless included in capital gains, they are not considered accumulated profits for the purpose of dividend under section 2(6A)(c). The High Court concluded that only Rs. 2,47,921, which was assessed as capital gain for TT Co., could be included in the accumulated profits.

Issue 3: Inclusion of Balances in the Profit and Loss Account and General Reserves
The High Court found that the balances in the profit and loss account and general reserves should be wholly includible in the accumulated profits. The court reasoned that these balances represent commercial profits of the undertaking and cannot be bifurcated into agricultural and non-agricultural components once the balance of profit is determined. The court rejected the contention that these amounts should be disintegrated into their component parts for tax purposes.

Issue 4: Interpretation of "Accumulated Profits" and its Tax Implications
The court examined whether 60% of the profits, which constituted agricultural income and were exempt from tax, should be excluded from accumulated profits. The court held that accumulated profits retain their character even if a part of them was not taxed under the Act. The court cited the Constitution Bench decision in Mrs. Bacha F. Guzdar v. Commissioner of Income-tax, which held that dividend income received by shareholders is not agricultural income and is taxable under section 12 of the Act.

Conclusion:
The Supreme Court upheld the High Court's decision, stating that:
- Only Rs. 2,47,921 from capital gains could be included in accumulated profits.
- The balances in the profit and loss account and general reserves are fully includible in accumulated profits.
- Accumulated profits retain their character irrespective of their taxability under the Act.
- The appeals by both the assessee-company and the Commissioner of Income-tax were dismissed, with each party bearing its own costs.

Appeals Dismissed:
The court dismissed both appeals, concluding that the High Court's interpretation and application of the law were correct. The parties were ordered to bear their own costs.