# • TEA ESTATE INDIA (P) LTD v. COMMISSIONER OF INCOME-TAX

- **Citation:** [1976] Supp. 1 S.C.R. 145
- **Court:** Supreme Court of India
- **Decided:** 1976-04-26
- **Bench:** H. R. Khanna, P. K. Goswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/tea-estate-india-p-ltd-v-commissioner-of-income-tax-7098
- **Pages:** 13

## Headnote

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-agricul1uralExccss 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. 10,11,216/-. Both the companies went into
voluntary liquidation in 1954. On account of the liquigation of the two companies tne assessee company became entitled to receive Rs. 57,69,186/- out of
the total distributable assets of DDT Company Hlld Rs. 36,53,453/- out of
the total distributable assets of T:f. Company,
Section 2(1) defines agricultural income. Section 2(4A) defines capital
asset to mean property ot any kind held by an assessee whether or not
connected with his business, profession or vocation but does not include any
E
land from which the incon1e derived is agricultural income. It was defmed
to include any distribution made to the shareholders of a co1npany 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 s. 2(6C) to include dividend.
Section 2(3)(8) provides that
_agricultural income shall not be included in the total income chargeable to
F
tax under s. 3 of 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
incom:e derived from business and 40 per cent of such income shail 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
G
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 I (land) and item 4
(reser\"e on revaluation) are concerned that since the lands of the two tea
~states were utilised for producing and selling tea it cannot be said that the
H
said assets were lands Jrom which the income derived was agricultural income.
A.t best, what could be said is that barring 40 per cent of such income the
balance was agricultural incont.e.
As far as item 2 (profit and loss a/c)
12-833Sup Cl/76
A
B
c
D
E
F
G
H
146
SUPREME COURT REPoRTS
(1976] SUPPLEMENTARY
an<l 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 ac

## Text

•
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-agricul1uralExccss 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. 10,11,216/-. Both the companies went into
voluntary liquidation in 1954. On account of the liquigation of the two companies tne assessee company became entitled to receive Rs. 57,69,186/- out of
the total distributable assets of DDT Company Hlld Rs. 36,53,453/- out of
the total distributable assets of T:f. Company,
Section 2(1) defines agricultural income. Section 2(4A) defines capital
asset to mean property ot any kind held by an assessee whether or not
connected with his business, profession or vocation but does not include any
E
land from which the incon1e derived is agricultural income. It was defmed
to include any distribution made to the shareholders of a co1npany 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 s. 2(6C) to include dividend.
Section 2(3)(8) provides that
_agricultural income shall not be included in the total income chargeable to
F
tax under s. 3 of 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
incom:e derived from business and 40 per cent of such income shail 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
G
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 I (land) and item 4
(reser\"e on revaluation) are concerned that since the lands of the two tea
~states were utilised for producing and selling tea it cannot be said that the
H
said assets were lands Jrom which the income derived was agricultural income.
A.t best, what could be said is that barring 40 per cent of such income the
balance was agricultural incont.e.
As far as item 2 (profit and loss a/c)
12-833Sup Cl/76
A
B
c
D
E
F
G
H
146
SUPREME COURT REPoRTS
(1976] SUPPLEMENTARY
an<l 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 ·rribunal held
that the general and taxation reserves were accumulated profits and the share
received by the assessee compa!l-Y on the distribution of such accuμiulated
profits was taxable as dividend within the m~aning of 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 9f the
busin~ss, unless such
apprec1at1on
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 iflcludible
in the accumulated profits \Vithin the meaning of s. 2(6A) (c).
(2) Regarding items 2 and 3 the High Court held that the balance
in the profit and losis account is arrived at after deducting
or providing for all outgoings including the e~timated liability
for both the income tax and agricultural income tax. Therefore, the balance carried to the balance sheet is pure profit, l.e.,
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
outgoings
as
reflected in the balance of profit and loss account would represent the commercial profits of the business undertaking and
though a bifurcation i~ necessary for the purpose of assess1nent
and imposition of tax, no further bifurcation could be made
once the balance of profit was finally
dete~mined.
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
\Vithin the meaning of s. 2(6A)(c). Revenue contended that 40% of income
de-rived in respect of item 1 not being agricultural should be held to be capital
asset and, therefore, accumulated profits.
Dismissing both the appeals,
HELD: (I) 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.
·rhe proviso is, however, to the effect that only the accumulated profits so
distributed which arise during the 6 previous years of the company preceding
the date-of ]iquidation 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 'vithin
the meaning of s. 2(6A)(c). The contention of the assessee that only 40 per
;ent 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
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TEA ESTATE (P) LTD. v. C.I.T. (Khanna, J.)
147
•· 2(6A)(c) cannot be accepted. The assessee wants to add to s. 2(6A)(c)
A
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-Bl
(2) The decision of the case in Mrs. Bacha F. Guzdar, Bombay v.
Commissioner of Income Tax, ~ombay-27 I.T.R. 1, followed \vith approval.
(155 El
B
( 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 subjects
it to manμfacturing process in its factory is an integrated incoine consisting
of agricultural and non-agricultural components. Rule 24 prescribes the formula
C
which should be 3.dopted for apportioning the income realised as a result of
the sale of tea after it is grown . apd 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
coljlpanies. As the lands held. by both the companies yielded agricultural
D
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 ca.ipital
gain under the Act and consequently would not be liable to be taxed as such.
[155 H, 156 A-D, 157 B·D]
CNIL APPELLATE JURISDICTION : Civil Appeal Nos. 1491
and
1693 of 1971.
E
Appeals by Special Leave from the Judgment and Order dlj,(ed
the 13th January, 1971 of the Calcutta High Court in I.T. Reference
No. 192 of 1966.
K. Ray 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
F
KHANNA, J .-This judgment would dispose of two cross
civil
appeals Nos. 1491 and 1693 of 1971 which have been filed by special
l~~ by the assessee, M/s Tea Estate India (P) Ltd., and the ComG
m1Ss10ner of Income-tax. West Bengal respectively against the judgment of the Calcutta High Court answering the following question
Nferrcd 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
H
case, the balances in the undernoted accounts are includible
in the 'accumulated profits' within the meaning of section
2(6A) (c) and if so, to what extent?
A
B
c
Q
E
F
G
H
148
SUPREME COURT REPORTS
(1976] SUPPLEMENTARY
---------------------------------
Land A/o
Profit & Loss Account
General Rese~ves and liabilities for taxation
Dibru Darang
Tea Co. Ltd.
Rs.
19,30,374/-
16,69,285/-
3,50, 799/-
Reserve created on writing up the value of the
assets of the ten estates
15,69,828/-
Taikrong Tea
C:o. Ltd.
Rs.
10,11,216/-
18,73,125/-
2,243/-
58,772/-.
The matter relates to the assessment year 1956-57, the corresponding accounting year for which ended on Jnne 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 lo 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 1T Co. were tea companies growing, manufacturing and
selling tea.
For this purpose, those two companies owned large1 tea
estates consisting of land, buifding, 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.
Likewis·e, 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. 10,11,216.
DDT Co.
realized
Rs. 2,12,313 less than their book valu·e 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
book value of
the
assets of DDT Co. apprcciat·:xl. by an amount of Rs. 15,69,828 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
asscssce
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 assess1mnt year 1949-50, 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
" ;
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TEA ESTATE (P) LTD. V. C.I.T.
(Khanna, 1.) 14 9
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.
9L64,075)
as
the
assessee's
dividend income under section 2(6A)(c) of the. Act.
A
On appeal the Appellate Assistant
Commissioner
allowed
a
further deduction of Rs. 1,77,964
representing
pre-incorporation
B
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.
C
On further appeal before the Tribunal, two
main
contentions
were raised on behalf of the assessee : (I) that in determining the
quantum of the accumulated profits, 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
D
general reserves of the two companies should 'be included, as only
40 per cent of thes" 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 1and from
which the income derived was
agricultural income'.
At
best what can be said is that barring 40% of such income
the balance was airricultural 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 IRnrl 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
revafoation were to be excluded in comnuting the accumulated profits for finding out the section 2(6A)(c) dividend."
Dealing with the second contention of the assessee. the Tribunal observE
F
ed that the ratio of 60 : 40 as lair! down in rule 24 of the Income-tax
G
Rules, 1.922 could not be anplied for finning out the nroportion of
~ccumulated profits in a tea business and that profits, whether capital1serl or not. did not 3dmit of such a bifurcation for determinatio,., of
accumulated profits.
Genera! and taxation reserves having been
inclutled in the pool of distributable surplus could. in the ooinion of
the Tribunal, only be held to be excess provisions out of the profits
of the two -tea cpmpanies which were not required to be oaid out in
H
discharge of anv 'liabilitv. The Tribunal accordingly held I.bat bafance
left over. after making the deduction indicated above from the total
distributable pool; was accumulated profits of the two tea companies
15()
SUPREME COURT REPORTS
[1976] SUPPLEMENTARY
A
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.
B
c
D
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.
I
•
Dealing with items 1 and 4 mentioned in the question, the High
Court held as under :
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G
H
"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 of 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 Supreme Court in Short Brothers'(!) 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
comoanies on the transfer of the tea estates in 194 7.
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-
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TEA ESTATE (P) LTD. v. C.I.T. (Khanna, !.)
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 nnder tax nnder 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 Asistant Commissioner as to the capital gains of the
two tea companies in respect of the trausfer 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
incl4dible 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
ater deducting or. providing for all outgoings including the
estimated liability for both
income-tax
and
agricultural
income-tax. Therefore, the balance carried to the ba!ancesheet is pure profit, that is to say, the commercial profit of
the undertaking. We are unable to accept Mr. Ray's 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 jts 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 outgoin!(S, as reflected in the balance of profit and loss
account, wou1d represent the commercial profits of the business und~rtaking of the tea companies and though a bifurcation is necessary for the purpose of assessment and imposition of tax no futrher 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 busines~. So far as the
~eneral and taxation· reserve is co11cerned, Mr. Ray agrees
that such reserve is usually built up out of the profits to meet
future liabilities but contends that ns in this case also such
reserve had been built up of l)O per c~.nt. agricultural profit
such reserve should again be disintegrated into the component
pa~ .• We are entirely unable to accept this contention. As
pomteo out by Mr. Pal, the Supreme Court in
Girdhardas's(') case advocated disintegrath1n of the amount distributed into two components, namelv. capital and accumulated profits.
There is no scope for further distintegration
of profits into its component parts."
(I) 63 I. T. R. 300
.
.
A
B
c
D
E
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B
c
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152
SUPREME COURT REPORTS
[1976] SUPPLEMENTARY
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;
(bj
any income deriv~d from such land by-
(i) agriculture, or
(ii)
the performance by a cultivator or receiver of
rent-in-kind of any process ordinarily employed
J)y a cultivator or receiver of rent-in-kind to
render the produce raised or received by him
fit to be taken to market, or
fiii) the sale by a cultivator or receiver of rent-inkind of the produce raise:! or received by him,
in respect of which IK> process has been performed other than a process of the nature described in sub-clause (ii);
(c) ...... . . . . . . . . . . . .
"Capital asset" in section 2 ( 4A) .nwns property of any kind held by
an assessee, whether or not connected with his bμsiness, profession or
vocation, but does not include-
(i) . . . . . . . . . . . . . . . . . ...... .
(ii)
(iii) any land from which the income derived is agricultural income.
"Dividend", according to section ~(6A)(c), includes "any distribution made to the shareholders of a companv 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 explanation to dause 2(6A) reads as under :
"Explanation.-The expression 'accutnu1ated
profit~, wherever it
occurs in this clause. shall not 1nclmle capital gains arising before the
1st day of April 1946, or after the 3 !st 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 ;;ains referred to sub-section (1) of
section 4 computed in the matter laid down in the Act.
Section 3
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TEA ESTATE (P) LTD. V. C.l.T.
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provides inter alia. that income-tax s~all be charged for .a '.!e~r in respect of the total income of the prev10us year of every md1v1dual and
company. . Section 4 relates to total in~ome of a previous year of :iny
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.
Sectim1 6 enumerates the six
heads of income to be :
(i) salaries, (ii) interest on securities, (iii) income from
property. (iv) profits and gains of business, profession or vocation,
( v l income from other sources,
and (vi) capital gains.
According to section 12(1A), in::ome from other sources shall include
dividends. Under section 12B, as it stood at the relevant time, capital
gains t2x 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 or
Aj)ri! 1948 and such profits and gains shall be deemed to be income
of the previous year in which the sale, exchan§:e, 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.
Indirn1 Income-tax Rules,
19'.!2 were framed in pursuance of that section. Rule ?.3 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
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are concerned, reads as under :
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"Income derived from the sale of tea grown and manuE
factured 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 deef!led to be income, profits
and gains liable to fax ...... "
There is a proviso to this rule, but it is not necessary to reproduce the
same.
In appeal filed by the assessee-company, its learned counsel, Mr.
~ay, has contended before us in respect of items 2 and 3 of the quest10n that 60 per cent of the amounts mentioned in these items were
agricultural income and as such were not income for the purpose of
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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 ih error in
holdmg to the contrary. Tue 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(') it was
held. that super-tax was not payable on the undivided profits, of past
years a~d _of the year in which the winding up of a company occurred
were dJstnbuted among the shareholders, because in the winding up
(!) [1924! 2 K. B. 52.
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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 tnrn the asset5 into money, and
divide the money among the shareholder~ 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
split 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. A> the Indian Companies
Act, l 913, 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 "dh,idend" 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 com-·
pany out of accumulated profits of the company on the liquidation of the company :
Provided that only the accumnlated profits so distributed
which arose during the six previous years of the company
preceding the date of liquidati011 shall be so included."
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By the Finance Act, 1955, the proviso to sub-clause (c) of clause
(6A) was omited.
There was a further amendment made by the
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Finance Act, 1956, and clause (c) to the amended section read as
follows
" 'Dividend' includes-
( c) any distribution made to the shareholders of a com-
. pany 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 abOV\l,
distribution which is attributable to the
accumulated profits of the compauy 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 1922 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 constituted 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 are unable to accede to the contention of Mr. Ray that as only 40 per cent of the profits which got
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TBA ESTATE (P) LTD. v. C.!.T. (Khanna, J.)
155
accumulated were liable to be taxed in the hands of DDT and TT comA
panies 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 hable 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,
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be permissible to so construe the clause as if those 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. Acmmulated profits
would retain 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 ihe appeal of the assessee with
items 2 and 3 of the qnestion which relate to accumulated profits in
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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 accumulated
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 v. Commission£r of Income-tax Bombay('). 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 divide.nd income received by her on her
shares in those companies was also exempt from tax as agricultural
income.
This claim wa.s rejected and it was held that the dividend
inconie received by the assessee was not agricultural income but was
income assessable under section 12 of the Act.
Agricultural income
as c!efined in the ~ct, 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 :,y 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
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Constitution Bepch of this Court in tl1e above decision and bas 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 us warrnnts reconsideration of the
matter.
We would, therefore, uphold the answer given by the High
Court in re&pect of items 2 and 3 of the question.
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In appeal by the Commissioner of Income-tax his learned counsel
Mr. Hardy, ha~ submitted in respect of items 1 and 4 that as 60 pe;
cent of the income from the land held by DDT Co. and TT Co. was
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to be treated as agricultural income in view of rule 24 of 1922 Rules,
(1) 27 I.T.R. 1.
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the said land to the extent of only 60 per cent would not answer to
the description of capifal asset as defir.ed in section 2 ( 4A) of the Act.
As 40 per cent of the income derived from that Jami was not agricultural income, 40 per cent interest in that land, according to the submission, should be held to be cap;tal asset for the purpose of section
2( 4A) of the Act.
Forty per cent interest in that land, it is fnrther
submitted, would not be taken out of t11e 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 2(6A) of the Act.
The above contention of Mr. Hanly, in our opinion, is not well
founded.
Income which is realised by sale of tea by a tea company
which grnws 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-agricnlturnl 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 after it is grown, and subjected to the manufacturing process in the
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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. v. State of
Kercila(') and
Anglo-American Direct Tea Trading Co. Ltd.
v.
Commissioner of Agricultural lnC'Jme·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
'agricu1tural income' witl)_in the meaning of that expressiun
in. the Income-tax Act."
In the case of Anglo-American Direct Tea Trading Co. Ltd. the
Constituti0n Bench of this Court held that income from the sale of tea
grown and manufa_ctured 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
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and the Rules made thereunder. Forty per cent of the income or com-
(!) 48 I.T.R. 83
(2) 69 I.T.R. 667,
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TEA ESTATE (P) LTD. v. C.!.T. (Khanna,!.)
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puled is Cieemed to be income derived from business and assessable
to non-agricultural income-tax.
The balance of 60 per cent of the
income ,o comruted is agricultural income within the meaning of the
Central Incom~tax Act.
So far as the lands held by DDT Co. and TT Co. were concerned,
they yieldec'i 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 manufactming 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 iucome, it
would follow th:J.t 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
whicl1 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 t_axed 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
th1q 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 compa11y which went into liquidation. It
was held by this Court that the capita! appreciation in respect of the
lands lrorn which the income was derived as agricultural income and
was not taxable in the hands of the company as capital gains would
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not on distribution be liable to be '° taxed as dividend under section
12 of the Act. We, therefore, see no reason to interfere in the appeat
filed by the Commissioner of Income-tax with the answer given by the
High Court in respect of items 1 ;md 1 of the question. It is the
common case of the parties that items I 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 both t1;e appeals.
P.H.P.
Appeals dismissed.
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