TEA ESTATE INDIA (P) LTD. vs. COMMISSIONER OF INCOME-TAX

CIVIL APPEAL No. 1491/1971Supreme Court1976 INSC 12726 April 1976Bench: 2 JudgesAuthor: HANS RAJ KHANNA, P.K. GOSWAMI TEA ESTATE INDIA13 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court dismissed both the appeals filed by the assessee and the Revenue. Regarding the land (Item 1) and reserve on revaluation (Item 4), the Court held that since the lands were utilized for producing agricultural income, they did not constitute a capital asset as defined in Section 2(4A) because Clause (iii) expressly excludes land from which agricultural income is derived. Any gain from the transfer of such land would not be capital gain and, consequently, not taxable as such. Therefore, its distribution on liquidation would not partake of the character of dividend. The Court relied on the principle that capital appreciation of lands yielding agricultural income, which is not taxable as capital gains, is not taxable as dividend upon distribution. For the profit and loss account (Item 2) and general reserve (Item 3), the Court held that once profits are accumulated by the companies, they become accumulated profits within the meaning of Section 2(6A)(c), irrespective of whether a portion of the underlying income was agricultural and not directly liable to tax. The assessee's attempt to add words like 'as are liable to be taxed' to Section 2(6A)(c) was not permissible. The Court affirmed the High Court's decision that the balance in the profit and loss account, arrived at after deducting all outgoings, represents pure accumulated profit.

What were the facts?

The assessee company held shares in two tea companies, DDT Company and TT Company, which grew, manufactured, and sold tea. In 1947, these companies sold their tea estates and assets, resulting in a surplus over book value. DDT Company had a surplus of Rs. 17,18,081, with Rs. 19,30,374 attributable to land. TT Company had a surplus of Rs. 10,11,216 attributable to land. Both companies went into voluntary liquidation in 1954. The assessee became entitled to receive substantial amounts from their distributable assets. The dispute centers on whether certain amounts received by the assessee upon liquidation of these companies are taxable as dividends under Section 2(6A)(c) of the Income Tax Act, 1922, specifically concerning accumulated profits.

What were the issues?

1. Whether the excess over the book value of land (Item 1) and the reserve created on revaluation (Item 4) of the tea estates, which generated agricultural income, constitute accumulated profits within the meaning of Section 2(6A)(c) of the Income Tax Act, 1922, for the purpose of taxation as dividend upon liquidation. 2. Whether the balances in the profit and loss account (Item 2) and general reserve (Item 3) of the tea companies, which were derived from a composite business activity including agricultural and non-agricultural components, represent accumulated profits taxable as dividend under Section 2(6A)(c). Assessee's contentions: The assessee argued that apart from Rs. 2,47,921 assessed as capital gain, no other amount should be included in accumulated profits. They contended that 60% of the amounts in Items 2 and 3 were agricultural income and thus not taxable, meaning they did not constitute accumulated profits. Revenue's contentions: The Revenue argued that 40% of the income derived from land was not agricultural and should be held as a capital asset, making any appreciation in its value accumulated profits. They also contended that 40% of income derived from land was not agricultural, and therefore, 40% interest in that land should be held as a capital asset.

Which sections of the Income-tax Act were involved?

Section 2(1),Section 2(4A),Section 2(6A),Section 2(6A)(c),Section 2(3)(8),Section 3,Section 12B,Section 2(4A)(iii)

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Cited by 8 judgments on BharatTax

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• TEA ESTATE INDIA (P) LTD. v. COMMISSIONER OF INCOME-TAX April 26, 1976 [H. R. KHANNA AND P. K. GOSWAMI, JJ.] 145 4 "

Income Tax Act 1922-Sec. 2(1), 2(4A), 2(6C), 2(3)(8) and 2(6A) C.

Incon1e Tax Rules 1922-Rules 23 and 24-Dividends-Accumulated profits -Conzposite business activity including a!ricultural and non-agricul1ural- Exccss over book value on Land account-Profit and loss account-General restTve account and reserve created on revaluation whether accumulated profits -Interpretation of statutes-Whether court can add words to a section.

The assessee company held ~ertain shares in Dibru Darang Tea Co. Ltd. (D.D.T. Company) and Taikron Tea Company Ltd. (IT Company). Both the companies were companies growing, manufacturing and s~Uing tea and A B c owned large tea estates consisting of land, building plant, machinery etc. In 1 1947. both the said companies soid their entire tea estates including all assets !" to Brooke Bond Estate India Ltd. Consequently DDT Company rec~ived a surplus is R!;. 17,18,081/- over the book Value of its assets. 'fhe amount reialing to the land of D1DT Company was Rs~ 19,30,374/- and that retaang D ·to the T.T. company was Rs

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