Accumulated profits in liquidation exclude broken-period earnings and later tax refunds not actually available for distribution.

Under section 2(6A)(c) of the Income-tax Act, 1922, "accumulated profits" in a liquidation setting means profits previously accumulated and actually available for distribution, not profits earned during the current broken period before liquidation. On that construction, current broken-period profits were outside the statutory phrase. A later tax refund was also excluded because it was not in fact available when the distribution occurred, had been treated as a debit in the accounts, and a mere contingent right to refund did not create distributable accumulated profits without a statutory fiction.

---

---

Issues: (i) Whether current profits earned during the broken period of liquidation formed part of the "accumulated profits" of the company under section 2(6A)(c) of the Income-tax Act, 1922; (ii) Whether the refunded tax amount of Rs. 1,49,444 could be treated as part of the company's accumulated profits as on the date of distribution.

Issue (i): Whether current profits earned during the broken period of liquidation formed part of the "accumulated profits" of the company under section 2(6A)(c) of the Income-tax Act, 1922.

Analysis: The expression "accumulated profits" was construed as referring to profits previously heaped up or stored, and not to profits arising in the current accounting period. The distinction between accumulated profits and current profits was treated as material, and the omission of the earlier proviso was not read as converting current profits into accumulated profits for the purpose of clause (c) as it stood in 1955. On that construction, profits earned during the broken period before liquidation were outside the statutory phrase.

Conclusion: The current profits of Rs. 81,611 were not part of the accumulated profits, and the finding was in favour of the assessee.

Issue (ii): Whether the refunded tax amount of Rs. 1,49,444 could be treated as part of the company's accumulated profits as on the date of distribution.

Analysis: The amount was not actually available when the distribution was made, since the refund was received only in 1960. The amount had been debited to the profit and loss account and was not treated by the company as accumulated profits. A notional assumption that the levy had never existed was rejected in the absence of a statutory fiction, and a mere right to refund was held insufficient to create distributable accumulated profits on the date of liquidation.

Conclusion: The sum of Rs. 1,49,444 also could not be included in accumulated profits, and the finding was in favour of the assessee.

Final Conclusion: The distributable amount on liquidation did not include either the current broken-period profits or the later tax refund, so the reference was answered against the Revenue.

Ratio Decidendi: Under section 2(6A)(c) of the Income-tax Act, 1922, "accumulated profits" in the liquidation context denotes profits previously accumulated and actually available for distribution, and does not extend to current broken-period profits or to amounts not in fact part of the company's distributable profits on the date of liquidation.

---