Accumulated profits on liquidation include only uncapitalised earnings from the six completed accounting years before liquidation.

For section 2(6A)(c) of the Income-tax Act, the six previous years preceding liquidation were the six completed accounting years immediately before liquidation, not a broken period caused by discontinuance of business. On that construction, only accumulated profits arising within those six years were relevant, and the period identified was 1943 to 1948. Profits that had already been transferred to capital account before liquidation lost their character as distributable accumulated profits and were not taxable under the provision. The ratio is that liquidation distributions under section 2(6A)(c) include only uncapitalised accumulated profits of the relevant six-year period.

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Issues: (i) Whether, for the proviso to section 2(6A)(c) of the Income-tax Act, the six previous years preceding liquidation meant the six accounting years immediately preceding the date of liquidation; (ii) Whether profits transferred to capital account before liquidation retained the character of accumulated profits for the purpose of section 2(6A)(c).

Issue (i): Whether, for the proviso to section 2(6A)(c) of the Income-tax Act, the six previous years preceding liquidation meant the six accounting years immediately preceding the date of liquidation.

Analysis: The proviso limits the taxable distribution to accumulated profits arising during the six previous years preceding liquidation. The relevant period is determined by the company's accounting year and the date of liquidation, not by a broken period arising from discontinuance of business. On that basis, the six previous years were the six completed calendar years immediately before liquidation.

Conclusion: The six previous years were 1943 to 1948.

Issue (ii): Whether profits transferred to capital account before liquidation retained the character of accumulated profits for the purpose of section 2(6A)(c).

Analysis: The expression "accumulated profits" in sub-clause (c) is not qualified by the words "whether capitalised or not" used in other parts of the definition. Once profits were capitalised and transferred to capital account, they ceased to be distributable profits and became part of the company's capital. Only uncapitalised accumulated profits could fall within the provision.

Conclusion: The capitalised amount did not remain accumulated profits and was not taxable under section 2(6A)(c).

Final Conclusion: The reference was answered mainly in favour of the assessee, with the first two questions decided in the assessee's favour and the third question not requiring decision.

Ratio Decidendi: For section 2(6A)(c), only uncapitalised accumulated profits of the six completed accounting years immediately preceding liquidation are included in taxable liquidation distributions; profits already converted into capital fall outside the provision.

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