Liquidation distributions and accumulated profits: tax applies only to taxable components, with required apportionment of sale proceeds.

Liquidation distributions were treated as dividend only to the extent attributable to accumulated profits immediately before liquidation, with the word "immediately" extending the charge to profits standing to the company's credit up to the liquidation date. The statutory explanation excluded only capital gains expressly carved out, so other capital gains remained within accumulated profits. However, proceeds from the sale of land yielding agricultural income could not be treated as capital gains under section 12B, and the assessing authority had to apportion composite sale proceeds between taxable and non-taxable components before raising a demand. The demand as framed was therefore not in accordance with law.

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Issues: Whether the distribution made on liquidation was chargeable as dividend only to the extent attributable to accumulated profits immediately before liquidation, and whether the sum demanded could include current profits and capital gains from the sale of assets, including agricultural land.

Analysis: The definition of dividend in section 2(6A)(c) of the Indian Income-tax Act, 1922 was construed as widening the charge on liquidation distributions, and the word "immediately" was treated as significant in bringing within the expression "accumulated profits" the profits standing to the company's credit up to the date of liquidation. The Explanation to the clause was held to exclude only those capital gains expressly excepted by it, so capital gains not falling within the exclusion remained part of accumulated profits. At the same time, profits arising from the sale of land from which agricultural income was derived could not be treated as capital gains under section 12B, and the assessing authority was required to apportion the proceeds between taxable and non-taxable components before demanding tax under section 18(3)(d).

Conclusion: The demand as made was not in accordance with law, and the liquidator was entitled to relief restraining its enforcement.

Ratio Decidendi: On liquidation, a distribution is taxable as dividend under section 2(6A)(c) only to the extent that it is attributable to accumulated profits immediately before liquidation, and the assessing authority must exclude sums not falling within the statutory concept of capital gains and must apportion composite sale proceeds accordingly.

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