Taxable surplus on asset realisation arises when profit is distributed as income rather than mere capital conversion.

Surplus arising from the realisation of company assets was treated as taxable profit where the company was not a mere liquidation vehicle but a new venture carried on for profit. Because the assets were held and sold in a manner showing business activity, gains from sale at enhanced values were not exempt as a simple conversion of investment. Profit was regarded as earned when it was finally dealt with as profit for tax purposes, and the decisive point in this analysis was the distribution of the surplus to shareholders, including bonus and debenture stock distributions. The precise amount and year of assessment were left open for further determination.

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Issues: Whether the surplus arising on realisation of the company's assets and the distribution made out of the realisation reserve account constituted taxable profits, and when such profits were to be treated as earned under the income tax law.

Analysis: The company was not treated as a mere liquidation vehicle for the original bank creditors. It had been formed as a new venture in which shareholders included persons who were not original creditors, and the assets were held and realised in a manner showing that the undertaking was carried on for profit. Surpluses obtained on sale of assets at enhanced values were therefore not exempt as mere conversion of investment, but were profits arising from the carrying on or carrying out of a business. The Court further held that profit, for the purposes of the taxing provision, was earned when it was dealt with as profit, and in this case the final impress of profit arose when the amounts were distributed to shareholders, including the bonus and the debenture stock distribution.

Conclusion: The surplus realised was taxable as income, and the company's appeal succeeded because the case required the tax liability to be determined in accordance with those principles and further inquiries as to exact amount and year were left open.

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