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TMI Blog1976 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... , if so, to what extent ? " Dibru Tea Co. Ltd. Rs. Darang Taikrong Tea Co. Ltd. Rs. Land A/c. ... 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 Reserves created on writing up the value of the assets of the tea 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 tea estates, including all the assets, to Brooke Bond Estate India Ltd. As a result of these sales, DDT Co. received a surplus of Rs. 17,18,081 over the book value of its assets. Likewise, TT Co. received a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the surplus arising from sale of lands 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 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 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 accumulate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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' case, unless such appreciation has been included in capital gains, a distribution thereof by the liquidator will not be deemed to be dividend 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 company 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 brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve should again be disintegrated into the component parts. We are entirely unable to accept this contention. As pointed out by Mr. Pal, the Supreme Court in Girdhardas's case advocated disintegration of the amount distributed into two components, namely, capital and accumulated profits. There is no scope for further disintegration of profits into its component parts. " The amounts mentioned in items 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-- (i) agriculture, or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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, relinquishment 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. The 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 reproduce the same. In the 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 those items were agricultural income and as such were not inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 the 1922 Rules because they were to be treated as agricultural income of those two companies. The question with which we are concerned, however, is that even though 60 per cent. of the said profits constituted agricultural income in the hands of DDT Co. and TT Co., once those 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 are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which 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 the 1922 Rules, 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the assessee is derived partly from business and partly from agriculture. This income has 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 so computed 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 follow that those lands did not constitute capital asset as defined in section 2(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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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