Capital receipts from agricultural land distributed to shareholders are not dividend unless they form accumulated profits.

Amounts received by a company as compensation and sale proceeds on the acquisition and sale of agricultural land were treated as capital receipts, not capital gains, because agricultural land was excluded from the definition of capital asset. When such receipts are distributed to shareholders, taxability as dividend depends on whether the distribution is out of accumulated profits within the statutory concept. The commentary notes that earlier Supreme Court principles remain applicable despite arguments based on liquidation or later amendments to the dividend definition, and that a distribution traceable to capital receipts of agricultural land is not taxable as dividend unless it falls within accumulated profits.

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Issues: Whether the distribution to the shareholders of amounts attributable to compensation and sale price received by the company on acquisition and sale of agricultural lands was taxable as dividend in the hands of the shareholders under the Income-tax Act, 1961.

Analysis: The company had received compensation and sale proceeds on acquisition and sale of its agricultural lands. Those receipts were not taxable as capital gains in the company's hands because agricultural land was excluded from the definition of capital asset, and the increase in value represented realization of capital rather than commercial profit. The governing principle, drawn from the earlier Supreme Court authorities, was that when capital receipts are distributed to shareholders in a form that comes to them as income, taxability depends on whether the amount falls within the statutory concept of accumulated profits. The Tribunal's attempt to distinguish the earlier decisions on the basis of liquidation and amendments to the dividend definition was rejected, since the relevant statutory changes did not alter the treatment of distributions out of capital receipts.

Conclusion: The distribution attributable to the compensation and sale price of agricultural lands was not assessable as dividend in the hands of the shareholders, and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: A distribution to shareholders out of capital receipts realised on the transfer of agricultural land is not taxable as dividend unless the amount falls within the statutory expression of accumulated profits.

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