Deemed dividend on liquidation applies only when receipts are shown to come from accumulated profits before liquidation.

Liquidation receipts were not taxable as deemed dividend under section 2(22)(c) because the distribution was made only after statutory compensation for the undertaking had been determined and the reserve amounts had already been deducted from that compensation. On those facts, the sums paid to the assessee were not shown to be attributable to accumulated profits immediately before liquidation. The deemed-dividend provision had to be construed strictly, and the wider question whether the reserves themselves formed part of accumulated profits was unnecessary to decide on the facts found. The receipts were therefore not income under section 2(22)(c).

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Issues: Whether the amounts received by the assessee on liquidation were chargeable as income under section 2(22)(c) of the Income-tax Act, 1961.

Analysis: The distribution was made only after the statutory compensation for the undertaking had been determined and the amounts standing to the credit of the relevant reserves had already been deducted from the compensation payable. On those facts, the sum distributed to the assessee was not shown to be a distribution attributable to the accumulated profits of the company immediately before liquidation. The provision creating deemed dividend liability had to be construed strictly, and the broader question whether the reserves themselves formed part of accumulated profits did not require determination on the facts found.

Conclusion: The amounts received by the assessee were not income under section 2(22)(c) of the Income-tax Act, 1961, and the answer is in favour of the assessee.

Final Conclusion: The reference was answered by holding that the liquidation receipts did not fall within the deemed-dividend provision on the facts found.

Ratio Decidendi: A liquidation distribution is taxable as deemed dividend only to the extent it is shown, on the facts, to be attributable to accumulated profits immediately before liquidation; where the compensation paid for the undertaking has already been reduced by the relevant reserve amounts, the resulting distribution is not brought within section 2(22)(c).

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