Deemed profit under capital asset sale fiction cannot expand accumulated profits for dividend classification

A distribution by a liquidator from the excess realised over the written down value of capital assets was treated as a capital return, not real profit, and the legal fiction in the second proviso to section 10(2)(vii) was confined to taxing that excess in computing business income. That deemed profit could not be carried into section 2(6A)(c), because the phrase "accumulated profits" could not be expanded by implication in a taxing statute. The amount therefore did not fall within the statutory definition of dividend.

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Issues: Whether the amount distributed by the liquidator, representing excess realised over the written down value of the company's capital assets and treated as deemed profits under the second proviso to section 10(2)(vii), formed part of "accumulated profits" so as to be dividend within section 2(6A)(c) of the Indian Income-tax Act, 1922.

Analysis: The receipt arising on sale of a capital asset was held to be, in substance, capital return and not real profit; the second proviso to section 10(2)(vii) created a legal fiction only for the limited purpose of bringing the excess to tax in computing the company's business income under section 10. The fiction had to be carried to its logical conclusion only within that field and could not be extended to unrelated provisions. Since section 2(6A)(c) used the expression "accumulated profits", the deemed profit under the second proviso could not be imported into that phrase. In a taxing statute, nothing can be read in by implication, and the distribution therefore did not answer the statutory definition of dividend.

Conclusion: The amount distributed out of the excess over written down value was not a distribution out of accumulated profits and was not dividend within section 2(6A)(c).

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