Law:

Section:

section 2(22)(c) of the income-tax act, 1961-deemed dividend-whether capital gains distributed by company could be assessed as deemed dividend in the hands of shareholders when such capital gains were not taxable in the hands of company- held, no Facts A company sold its machinery, land, etc., in 1958 and made a profit thereon and credited the same in the capital reserve account. This profit was not subjected to capital gains tax in the hands of the company because there was no profit left after substituting the market value of assets as on 1-1-1954 as the cost of, acquisition. Upon liquidation of the company, the assessee shareholder received Rs. 17,000 as his share out of the capital reserve account of the company. The assessee claimed exemption in respect of this sum on the ground that the capital gain was not subjected to tax in the hands of the company. The ITO rejected this contention and brought this sum to tax on the ground that the company did make capital profit and that the distribution was made out of the accumulated profits of the company which amounted to deemed dividend under section 2(22)(c). The AAC confirmed the ITO's order. The Tribunal, however, set aside the AAC's order and directed him to decide the appeal de noyo in accordance with its finding that the distribution from capital gains would be assess- able as deemed dividend in the hands of the shareholder only if the company itself was subjected to capital gains tax. On reference: Held The expression "accumulated profits" in section 2(22)(c) would not include capital gains not chargeable, to tax. Therefore, distribution made to a shareholder of the company out of non- taxable capital gains of the company would not form part of accumulated profits and any thing attributable to such capital gain shall not be deemed to be dividend in the hands of the share-holder under the provisions of section 2(22)(c). Case review First, ITO v. Short Brothers (P.) Ltd. [1966] 60 ITR 83 (SC) and Tea Estate India (P.) Ltd, v. CIT [1976] 103 ITR 785 (SC) followed. Cases referred to First, ITO v. Short Brothers (P.) Ltd. [1966] 60 ITR 83 (SC) and Tea Estates India (P.) Ltd. v. CIT [1976] 103 ITR 785 (SC).…

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