Liquidation distributions are taxable as dividend only when attributable to accumulated profits, not current-year profits.

On liquidation, a distribution is taxable as dividend only if it is attributable to accumulated profits within section 2(6A)(c) of the Income-tax Act, 1922. Surplus assets received by shareholders are treated as capital in liquidation, and the statutory concept of accumulated profits does not extend to current profits earned in the year of liquidation where they are not brought forward from earlier years. Because the amount distributed represented current-year profits rather than accumulated profits, it was not chargeable as dividend in the shareholders' hands.

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Issues: Whether, on the facts and in the circumstances of the case, the amount distributed on liquidation represented accumulated profits so as to be taxable as dividend under section 2(6A)(c) of the Income-tax Act, 1922.

Analysis: On liquidation, the surplus assets available after meeting liabilities are treated as capital in the hands of shareholders, and the distinction between capital and surplus profits is not maintained in the same manner as in the case of a going concern. Under the statutory definition then in force, only distributions attributable to accumulated profits could be treated as dividend. The amount in question represented current profits earned in the relevant year and not accumulated profits brought forward from prior years. As current profits distributed in the year of liquidation were not within the statutory concept of accumulated profits applicable for the assessment year, the distribution could not be taxed as dividend in the shareholders' hands.

Conclusion: The amount distributed was not taxable as dividend under section 2(6A)(c) of the Income-tax Act, 1922, and the answer was in favour of the assessee and against the Revenue.

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