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PETITIONER: TEA ESTATE INDIA (P) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX

DATE OF JUDGMENT26/04/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ GOSWAMI, P.K.

CITATION:  1976 AIR 1790            1976 SCR  145  1976 SCC  (4) 446  CITATOR INFO :  R          1976 SC2469  (10)  R          1977 SC 489  (22)  RF         1977 SC 560  (11)  RF         1988 SC1453  (33)

ACT:      Income Tax  Act 1922-Sec.  2(1), 2(4A),  2(6C), 2(3)(8) find 2(6A) C.      Income  Tax   Rules  1922-Rules  23  and  24-Dividends- Accumulated profits-Composite  business  activity  including agricultural and  non-agricultural-Excess over book value on land account-Profit and loss account-General reserve account and  reserve  created  on  revaluation  whether  accumulated profit-Interpretation  of  statutes-Whether  court  can  add word.

HEADNOTE:      The assessee  company  held  certain  shares  in  Dibru Darang Tea Co. Ltd. (D.D.T. Company) and Taikron Tea Company Ltd. (TT  Company)  .  Both  the  Companies  were  companies growing, manufacturing  and selling  tea and owned large tea estates consisting  of land,  building plant, machinery etc. In 1947,  both the  said companies  sold  their  entire  tea estates including  all assets  to Brooke  Bond Estate  India Ltd. Consequently  DDT Company  received a  surplus  is  Rs. 17,18,081/-over the  book value  of its  assets. The  amount relating to  the land  of DDT Company was Rs. 19,30,374/ and that relaung  to the  T.T. company was Rs. 10,11,216/-. Both the companies  went into  voluntary liquidation  in 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  Company  and  Rs. 36,53,453/- out  of the  total distributable  assets of T.T. Company.      Section 2(1) defines agricultural income. Section 2(4A) defines capital  asset to  mean property of any kind held by an assessee  whether or  not connected  with  his  business, profession or  vocation but  does not  include any land from which the  income derived  is agricultural  income.  It  was defined to include 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

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the company  immediately  before  its  liquidation,  whether capitalised or  not. Explanation  provides  that  expression "accumulated profits" shall not include capital gain arising during certain  periods. The  income has  been defined by s. 2(6C) to  include dividend.  Section 2(3)(8)  provides that; agricultural income  shall not  be  included  in  the  total income chargeable  to tax  under s.  3 or  the Act.  Rule 23 provides  for   assessment  of   income  which   is   partly agricultural income  and partly  income chargeable to income tax. Rule  24 provides  that 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 or such income shall be deemed to be income, profits and gains liable to tax.      The assessee  contended before  the Income  Tax officer that apart  from Rs.  2,47,921/- which  had been assessed as capital gain  under s. 12B of Income Tax Act 1922 in respect of T.T.  company, no  other amount  could be included in the computation  of   the  accumulated   profits  available  for distribution under  s. 2(6A)(c)  of the  Act. The Income Tax officer rejected  the claim  of the  assessee. On an appeal, the Appellate Assistant Commissioner rejected the main claim of the assessee.      On further  appeal the  Tribunal held  as far as item 1 (land) and  item 4  (reserve on  revaluation) are  concerned that since  the lands  of the  two tea estates were utilised for producing  and selling  tea it  cannot be  said that the said assets  were lands  from which  the income  derived was agricultural income.  At best,  what could  be said  is that barring  40   per  cent  of  such  income  the  balance  was agricultural income. As far as item 2 (profit and loss a/c)      12-833Sup CI/76 146 and item  3 (general  reserve) are  concerned, the  Tribunal held 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 profits whether capitalised or not did not admit of such a  bifurcation for  the  determination  of  accumulated profits. The  Tribunal held  that the  general and  taxation reserves were  accumulated profits and the share received by the assessee company on the distribution of such accumulated profits was  taxable as  dividend within  the meaning  or s. 2(6A) (c) of the Act.      Both the  assessee as  well as  Revenue approached  the High Court  in two references arising out of the judgment of the Tribunal.      The High Court held:      (1)  Regarding item  No. 1  and 4  the  excess  of  the           prices is  not profit of the business, unless such           appreciation has  been  included  in  the  capital           gains. The  High Court  arrived at certain figures           of  excess   profit  which  was  included  in  the           computation of  capital gains  and held  that only           that figure  was  includible  in  the  accumulated           profits within the meaning of s. 2(6A) (c).      (2)  Regarding items  2 and  3 the High Court held that           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 the  income tax  and agricultural income tax.           Therefore, the  balance  carried  to  the  balance           sheet is pure profit, i.e. the accumulated profit.           The High  Court negatived the contention that each           item in  the balance  sheet contains in itself the

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         proportion of  the income attributable to business           activity and  to the  agricultural activity of the           companies or  that they must be disintegrated into           6 components  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 and though in 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.      In appeals  filed by  both the  assessee and Revenue by special leave the assessee contended that 60 per cent of the amounts mentioned  in items 2 and 3 were agricultural income and as  such, were not income for the purpose of the Act. To that extent  the said  amount did not constitute accumulated profits  within   the  meaning  of  s.  2(6A)  (c).  Revenue contended that  10% of  income derived  in respect of item 1 not being  agricultural should  be held  to be capital asset and, therefore, accumulated profits.      Dismissing both the appeals, ^      HELD: (1) Clause 2(6A) (c) provides that dividend shall include 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. The  proviso is, however, to the effect that only the accumulated profits so distributed which arise during the  6 previous  year of  the company  proceeding the date of liquidation shall be so included. 60 per cent of the profits made  by both the companies by sale of tea grown and manufactured by  them were not liable to be taxed in view of rule 24.  However, once  those profits  got accumulated with the two companies they became accumulated profits within the meaning of  h. 2(6A)(c). The contention of the assessee that only 40  per cent  of the profits which got accumulated were liable to  be taxed and therefore only 40 per cent should be treated as accumulated profit for the purpose of 147 s. 2(6)A) (c) cannot be accepted. I‘he assessee wants to add to s. 2(6A) (c)  the following words:           "as are liable to be taxed under the Act" It is  not permissible  for us  to construe  the  clause  by adding those words.                                  [152 F-G, 154 G-H, 155 A-B]      (2) The  decision of  the case  in Mrs. Bacha F. Guzdar Bombay v.  Commissioner of  Income Tax  Bombay-27 I.T.R.  1, followed with approval.                                                      [155 E]      (3) The  contention of  the Revenue  that the  land  in question to  the extent  of 60 per cent would not answer the description of  capital asset,  and as  40 per  cent of  the income derived from that land was not agricultural income 40 per cent  interest in that land should be held to be capital asset for  the purpose of s. 2(4A), is not well founded. The income which  is realised  by sale  of tea  by a tea company which grows  tea on  its land  and thereafter  subject is to manufacturing process in its factory is an integrated income consisting of  agricultural and non-agricultural components. Rule 24  prescribes the  formula which should be adopted for apportioning the  income realised as a result of the sale of

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tea after it is grown and subjected to manufacturing process in the factory. So far as the lands held by the company were concerned they  yielded purely  agricultural income  in  the shape of green tea leaves. 40 per cent of the income on sale of tea  which was  received by  both the  companies was  not income from  land. It  was income which could be ascribed to manufacturing process  to which  the green  tea leaves  were subjected in  the factories of those companies. As the lands held by  both the  companies yielded agricultural  income it would follow  that those  lands did  not constitute  capital asset as   defined  in s.  2(4A).  Section  2(4A)  expressly states that  capital asset  does not  include any  land from which income  is derived  as agricultural  income. Any  gain arising from  the transfer of such land would not constitute capital under  the Act  and consequently would not be liable to be taxed as such.                                     [155H, 156 A-D, 157 B-D]

JUDGMENT:      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      KHANNA, J.-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? 148 ------------------------------------------------------------                                  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.

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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 149 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  pre- incorporation 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

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    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 150 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

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    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- 151      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)

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    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.300 152 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);           (c).......... "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-           (1)  .......... ........ ..           (ii) ......... ........ .. .. .           (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 3 153 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

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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. 154 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 Income- tax (Amendment) Act 7 of 1919 with a view to undo the effect of Burrell’s (supra) case. Clause (c) of sub-section (6A) as

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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 155 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

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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. 156 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 non-

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agricultural  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. 157 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 158

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