Accumulated profits in tea company liquidation include commercial reserves, but land-sale surplus counts only where capital gains are actually taxed.

Commercial profits credited to a tea company's profit and loss account and general reserves remained accumulated profits for dividend on liquidation, even though part of the underlying income was treated as agricultural income under the tea apportionment rule. The 60:40 split governed assessment of tea income, but it did not require a further division of commercial reserves once credited in the accounts. By contrast, surplus arising from sale of tea estate land and related revaluation reserves were not generally includible as accumulated profits because land yielding agricultural income was outside capital gains, except to the limited extent actually brought to tax as capital gains.

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Issues: (i) Whether the balances in the profit and loss account and general reserves of tea companies, though partly attributable to agricultural income under the tea apportionment rule, were includible in accumulated profits for dividend on liquidation; (ii) Whether the surplus arising from sale of tea estate lands and the reserves created on revaluation of those lands were includible in accumulated profits, and whether any part of such surplus could be excluded on the footing that the lands yielded agricultural income.

Issue (i): Whether the balances in the profit and loss account and general reserves of tea companies, though partly attributable to agricultural income under the tea apportionment rule, were includible in accumulated profits for dividend on liquidation.

Analysis: The definition of dividend on liquidation was held to extend to distributions attributable to accumulated profits immediately before liquidation. The Court held that accumulated profits do not lose that character merely because a portion of the underlying business income is not taxable as income under the Act. The 60:40 apportionment under the tea rule governs assessment of tea income, but it does not require a further bifurcation of accumulated profits once those amounts stand credited in the commercial accounts and reserves of the company. The Court also relied on the principle that dividend received by shareholders is not agricultural income merely because the company's own income was partly agricultural.

Conclusion: The balances in the profit and loss account and the general reserves were wholly includible in accumulated profits and were taxable as dividend in the hands of the assessee.

Issue (ii): Whether the surplus arising from sale of tea estate lands and the reserves created on revaluation of those lands were includible in accumulated profits, and whether any part of such surplus could be excluded on the footing that the lands yielded agricultural income.

Analysis: The Court held that land from which agricultural income is derived is excluded from the definition of capital asset. Since the tea estate lands themselves yielded agricultural income, the appreciation in their value and the surplus on their sale did not constitute taxable capital gains in the company's hands and therefore could not be treated as accumulated profits for dividend purposes, except to the limited extent actually brought to tax as capital gains in respect of one company. The Court rejected the argument that 40 per cent of the land value should be treated as capital asset merely because tea income is apportioned 60:40 for tax purposes.

Conclusion: Only the amount actually assessed as capital gains in respect of the relevant sale was includible in accumulated profits, and no further portion of the land surplus or revaluation reserve was includible on the capital-gains theory.

Final Conclusion: The appeals failed, leaving intact the High Court's composite answer: the profit and reserve items were includible in accumulated profits, while the land-sale surplus was includible only to the limited extent of the capital gains actually assessed.

Ratio Decidendi: For liquidation distributions, amounts remain accumulated profits if they are commercial profits or reserves of the company, even though part of the company's income is exempt or not taxable as agricultural income; but surplus attributable to land yielding agricultural income is outside capital gains and cannot be treated as accumulated profits except to the extent the statute has actually brought it within capital gains.

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