Liquidation distribution taxation turns on proportional apportionment between accumulated profits and capital for dividend treatment.

A liquidation distribution is taxable as dividend only to the extent attributable to accumulated profits immediately before winding up. Section 2(6A)(c), as amended, permits the taxing authority to examine the liquidator's distribution and apportion it between accumulated profits and capital in the proportion existing before liquidation. The provision does not create separate notional funds for each distribution, nor does it limit dividend treatment to amounts first brought to tax in a particular year. The taxable component is therefore determined by proportional allocation, with only the accumulated profits portion treated as dividend.

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Issues: Whether a distribution made by a liquidator on winding up is taxable as dividend under section 2(6A)(c), and if so, how the amount distributed is to be attributed between accumulated profits and capital.

Analysis: Section 2(6A)(c), as amended, authorises the taxing authority to look at the distribution made by the liquidator and disintegrate it into its constituent elements for the limited purpose of tax liability. The provision does not create separate notional funds in the hands of the liquidator for each distribution, nor does it require that only the amount first brought to tax in a given year can be treated as dividend. Instead, the amount distributed is to be treated as comprising capital and accumulated profits in the same proportion in which those components stood immediately before liquidation, and the part attributable to accumulated profits is taxable as dividend.

Conclusion: A liquidation distribution is taxable as dividend to the extent attributable to accumulated profits immediately before liquidation, and the taxable component must be determined by proportional apportionment between accumulated profits and capital.

Ratio Decidendi: On liquidation, the distribution made by the liquidator is deemed, for income-tax purposes, to consist partly of accumulated profits and partly of capital in the proportion existing immediately before winding up, and only the portion attributable to accumulated profits is dividend.

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