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 IT Reference No 192 of 1966
K Kay and D N Gupta for the Appellant in CA No 149171 for respondent in CA 169371
Hardayal Hardy B B Ahuja and section P Nayar for Respondent in CA149171 and for Appellant in 169371
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 Ms 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 661 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 26Ac and if so to what extent 148 Dibru Darang Taikrong Tea Tea Co Ltd Co Ltd Rs Rs Land Ao 1930374 1011216 Profit  Loss Account 1669285 1873125 General Reserves and liabilities for taxation 350799 2243 Reserve created on writing up the value of the assets of the ten estates 1569828 58772 The matter relates to the assessment year 1956 57 the corresponding accounting year for which ended on June 30 1955
The assessee company held 52350 shares out of the total issued shares of 54600 in Dibru Darang Tea Co Ltd hereinafter referred to as DDT Co and 22998 shares out of the total issued shares of 23000 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 17l8081 over the book value of its assets
Likewise TT Co received a surplus of Rs 1311339 over the book value of its assets
The amount relating to the land of the tea estate of DDT Co was Rs 1930374 and that relating to TT Co was Rs l011216
DDT Co realized Rs 212313 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 569828 and Those of TT Co by an amount of Rs 58772
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 5769186 out of the total distributable assets of DDT Co and Rs 3653453 out of the total distributable assets of TT Co During the relevant accounting period the assessee received Rs 5223786 and Rs 3415500 in all Rs 8639286 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 247921 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 26A c of the Act
The Income tax officer rejected this 149 contention and allowed only a deduction of Rs 27000 being payment on share premium account and included the balance of Rs 8611986 grossed up to Rs 9164075 as the assessees dividend income under section 26Ac of the Act
On appeal the Appellate Assistant Commissioner allowed a further deduction of Rs 177964 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 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 26A c dividend
Dealing with the second contention of the assessee the Tribunal observed that the ratio of 6040 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 26A 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 1930374Rs
1569828the whole of Rs 1669285Rs
350799Rs
3420165
TT Co 40 of Rs 1011216 Rs 58772 the whole of Rs 1873125  Rs 2243Rs
2303363
The Tribunal accordingly came to the conclusion that out of the distributable surplus an amount of Rs 5723528 was attributable to accumulated profits and hence was dividend within the meaning of section 26A 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 andor 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 26Ac 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 151 pany was not liable to capital gains tax while the assessment order for that year of Ms
Taikrong Tea Co Ltd showed that a sum of Rs 247921 was brought under tax under the head of Capital gains
It must therefore be held that it is only the sum of Rs 247921 which could be included in accumulated profits for the purpose of determining the dividend under section 26A 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 247921 was includible in the accumulated profits within the meaning of section 26A 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 s2 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 ITR300 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 26A 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 21 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 iiithe 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 24A 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    
iiiany 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 26A 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 2C6 to include dividend
Total income has been defined in section 215 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 heads of income to be 1salaries 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 121A 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 26Ac 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 vs George Burrell1 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 1 154 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 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 192 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 26A 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 26A c
The acceptance of the contention would necessarily postulate reading in section 26A 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 26A 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 vs Commissioner of Income tax Bombay1
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 43 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 1 156 the said land to the extent of only 60 per cent would not answer to the description of capital asset as defined in section 24A 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 24A 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 24A 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 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 vs State of Kerala1 and Anglo American Direct Tea Trading Co Ltd vs Commissioner of Agricultural Income tax Kerala2
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 2 157 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 24A 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 vs 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


Summary:
The assessee company held certain shares in Dibru Darang Tea Co Ltd DDT 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 1718081 over the book value of its assets
The amount relating to the land of DDT Company was Rs 1930374 and that relaung to the TT company was Rs 1011216 
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 5769186 out of the total distributable assets of DDT Company and Rs 3653453 out of the total distributable assets of TT Company
Section 21 defines agricultural income
Section 24A 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 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 section 26C to include dividend
Section 238 provides that agricultural income shall not be included in the total income chargeable to tax under section 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 247921 which had been assessed as capital gain under section 12B of Income Tax Act 1922 in respect of TT company no other amount could be included in the computation of the accumulated profits available for distribution under section 26Ac 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 ac 12 833Sup CI76 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 section 26A 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 section 26A 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 ie the accumulated profit
The High Court negatived the contention that each item in the balance sheet contains in itself the 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 section 26A 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 26A 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 26Ac
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 section 26A c cannot be accepted
Ihe assessee wants to add to section 26A 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 vs Commissioner of Income Tax Bombay 27 ITR 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 section 24A 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 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 section 24A
Section 24A 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