Capital gains and distributable profits: compulsory acquisition receipts were not commercial profits for dividend distribution under section 104.

Capital gains arising from compulsory acquisition were held not to constitute commercial profits available for dividend distribution under section 104, because the provision must be applied from the standpoint of a prudent businessman and only real distributable commercial surplus can be considered; the directors' decision to carry the amount to reserve could not be displaced merely because the gain was taxable, and the assessee succeeded on this issue. The computation of distributable income was also upheld because it followed the earlier Tribunal allowance of the deduction for the V.S.T. & Sons liability, and no error was found in the Commissioner (Appeals)'s working, so the revenue failed on that challenge.

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Issues: (i) Whether capital gains arising from compulsory acquisition could be treated as commercial profits available for distribution of dividend for the purpose of section 104; (ii) whether the computation of distributable income was due to the disallowance of the deduction claimed in respect of the liability to V.S.T. & Sons.

Issue (i): Whether capital gains arising from compulsory acquisition could be treated as commercial profits available for distribution of dividend for the purpose of section 104.

Analysis: The amount received represented capital gain on acquisition of a part of the assessee's property and was carried to reserves by the directors. The governing principle is that section 104 has to be applied from the standpoint of a prudent businessman and only commercial profits, not notional or capital receipts, can be treated as distributable surplus. Capital gains arising from capital realisation do not ordinarily constitute commercial profits available for dividend, and the directors' decision to retain the amount in reserve cannot be displaced by the taxing authority merely because the amount was taxable in computing total income.

Conclusion: The capital gains could not be treated as commercial profits, and section 104 was not applicable on that basis. The finding is in favour of the assessee.

Issue (ii): Whether the computation of distributable income was due to the disallowance of the deduction claimed in respect of the liability to V.S.T. & Sons.

Analysis: The computation of distributable income had to follow the earlier order of the Tribunal, which allowed deduction of Rs. 75,000 towards the liability to V.S.T. & Sons. On that basis, the Commissioner (Appeals) worked out the distributable income and the additional income-tax. No error was found in that computation.

Conclusion: The computation adopted by the Commissioner (Appeals) was upheld. The finding is against the revenue.

Final Conclusion: The assessee succeeded on the principal question concerning section 104, while the revenue failed in its challenge to the computation of distributable income.

Ratio Decidendi: Capital gains realised on capital acquisition do not, in the ordinary course, constitute commercial profits available for dividend distribution under section 104, and the taxing authority cannot compel their treatment as distributable surplus contrary to the directors' bona fide decision to carry them to reserve.

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