Ramanujam, J.
1. As each of the above three references has been made at the instance of a shareholder of one Guntur Power and Light Ltd. and the questions involved therein are identically the same, they are dealt with together.
2. The assessee in all these cases is a shareholder in a public limited company called the Guntur Power and Light Ltd. (hereinafter referred to in this judgment as 'the company'), which carried on the business of generation and distribution of electric energy. Under the provisions of the Electricity (Supply) Act, 1948, the company, which owned the electrical undertaking, had to set apart, (1) a reserve called the 'Tariffs and Dividends Control Reserve'; and (2) a reserve called the 'Reserve for grant of Rebate to Consumers', as provided in Paragraph II of the Sixth Schedule to the Electricity (Supply) Act, 1948, as also a reserve called the 'Contingencies Reserve' as provided in Paragraph III of the same schedule. As on March 31, 1956, the following amounts stood to the credit of the said three reserves:
Rs.Tariffs and Dividends Control Reserve...77,222Contingency Reserve...47,500Rebate to Consumers...82,215
3. These amounts were admittedly appropriations made out of the profitsof the company from year to year.
4. The electrical undertaking was taken over by the Andhra Government with effect from May 1, 1956. In the year 1957, the company prepared a Government acquisition account, to which, amongst others, the above three amounts had been transferred. The company was paid compensation for the undertaking which was taken over by the Andhra Government. Taking into account the compensation received by the company, the profit for the year ending March 31, 1958, was computed at Rs. 15,58,055.
5. The company then went into liquidation on March 28, 1959. The liquidators made the following distribution to the equity shareholders as against the face value of Rs. 100 per share :
Rs.1-4-1959......250 per share28-2-1961......100 ' 28-9-1961......145 '
6. The total amount thus distributed on April 1, 1959, was Rs. 8,81,000, and the total of the amounts distributed on February 28,1961, and September 28, 1961, was Rs. 8,63,800.
7. The assessee before us, who was a shareholder of the company, was subjected to assessment on the amounts received by him during the assessment years 1960-61, 1961-62 and 1962-63. The Income-tax Officer considered that the amounts received by him as a result of the later distribution on February 28, 1961, and September 28,1961, included.'deemed dividend.' as defined in Section 2(6A)(c) of the Income-tax Act to the extent of Rs. 5,87,213 (Rs. 14,68,213--Rs. 8,81,000). This is on the basis that the 'accumulated profits' of the company as on March 31, 1959, was Rs. 14,68,213. The assessee, however, contended that out of the amount of Rs. 4,35,525 treated as part of the 'accumulated profit' in the company's assessments, the three reserves referned to above, aggregating to Rs. 2,06,937, created under the provisions of the Electricity (Supply) Act, 1948, and which could not be dealt with by the company but had to be handed over to the purchaser of the undertaking as per the provisions of that statute, cannot be treated as 'accumulated profits' at all. It was also contended that another sum of Rs. 1,34,202, which was the profit for the year ending March 31, 1956, cannot be treated as 'accumulated profit' for the purpose of the application of Section 2(6A)(c) of the Income-tax Act. This contention was considered by the assessing authority, the Appellate Assistant Commissioner as well as by the Tribunal. It was ultimately held by the Tribunal that the three reserves formed part of the assessee's own profit and that though they were liable to be handed over to the purchasers of the undertaking as per the provisions of the statute (Electricity (Supply) Act, 1948), still they retained the character of 'profit'. They further held that the profits of the company for the year ending March 31, 1956, also stood in the same position. Thus, the entire sum of Rs. 4,35,525 was taken to be part of the 'accumulated profits' for the purpose of Section 2(6AXc) of the Income-tax Act. But, as the same had been taxed in the company's hands, the dividends for the year 1960-61 were directed to be grossed up under Section 16(2) of the Income-tax Act. The benefit of grossing up will not, however, be available for the assessment years 1961-62 and 1962-63, as Section 16(2) had been omitted with effect from April 1, 1960. As regards the balance of Rs. 10,32,688, the Tribunal took note of Section 46(2) of the Income-tax Act, 1961, and held that in view of the said provision the said amount of Rs. 10,32,688 could be brought to charge under 'capital gains' though in the company's assessment the said sum was directed to be deleted from the 'accumulated profits', following the decision of the Supreme Court in First Income-tax Officer, Salem v. Short Bros. Ltd. : [1966]60ITR83(SC) .
8. At the instance of the assessee, the following two questions have been referred to this court in each of the three cases:
'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,35,525 represented the accumulated profits for purposes of Section 2(6A)(c) of the Income-tax Act ?
2. Whether, on the facts and in the circumstances of the case, any portion of the distribution was liable to be assessed as capital gains for the assessment years 1960-61, 1961-62 and 1962-63 ?'
9. Mr. Ramachandran, the learned counsel for the assessee, contends that the Tribunal is in error in treating the entirety of Rs. 4,35,525 as 'accumulated profits' of the company and that the three reserves created by the company as required by the provisions of the Electricity (Supply) Act, 1948, amounting to Rs. 2,06,937 and the profits for the year ending March 31, 1956, amounting to Rs. 1,34,202 cannot at all be treated as 'accumulated profits'.
10. The learned counsel took us through the various provisions in the sixth schedule to the Electricity (Supply) Act, 1948, to show that the company was bound to create the said three reserves out of the profits, that it was bound to hand over those amounts standing to the credit of the three reserves to the purchaser, that the amounts could not also be utilised by the company as it liked and that there are very many statutory conditions prohibiting the user of the moneys standing to the credit of the three reserves.
11. But we are not inclined to agree with the learned counsel that merely because a statute directs the creation of the said reserves and that the amounts ought to be ultimately handed over to the purchaser, the amounts ceased to be 'accumulated profits'. Admittedly, the amounts standing to the credit of these three reserves came out of the profits of the company. They had not been credited to any separate fund as such, so that it could be said that the ownership of the amounts vested with a third person. The fact that the amounts standing to the credit of the three reserves can be used only under certain circumstances and subject to certain conditions cannot change the character of the amounts as 'profits' of the company. On the above considerations, the Tribunal had in fact held earlier in the assessment of the company that the amounts standing to the credit of the three reserves continued to retain the character of 'profits' That order of the Tribunal has become final.
12. Even otherwise, we are satisfied that the amounts standing to the credit of the said three reserves as also the profit for the year ending March 31, 1956, formed part of the 'accumulated profits' for the purpose of Section 2(6A)(c) of the Income-tax Act. Dealing with a similar contention, we had also expressed in G. Ramaswamy Naidu v. Commissioner of Income-tax : [1972]86ITR768(Mad) as follows :
'Whether it is accumulated profit or not depends normally on the question whether it was a transfer of the profits. Unless the profit is capitalized in some form or other, mere transfer of the profits to any reserve account will not take away from profits the character of accumulated profits--vide the decision in Commissioner of Income-tax v. K. Srinivasan : [1963]50ITR788(Mad) . We have, therefore, no doubt that accumulated profits referred to in Section 2(22)(e) includes the amounts in the development rebate reserve.'
13. As already stated, the amounts standing to the credit of the three reserves are appropriations made out of the profits of the company from year to year and it is also not in dispute that they have not been capitalised. In our view, the Tribunal has come to the correct conclusion that the entire sum of Rs. 4,35,525 formed part of the 'accumulated profits' for the purpose of Section 2(6A)(c) of the Income-tax Act. The first question is, therefore, answered in the affirmative and against the assessee.
14. As regards the second question, it is the contention of the assessee that no portion of the amounts distributed by the liquidator to the share-holders could be charged as 'capital gains' under Section 12B of the Income-tax Act. The Tribunal had held that by virtue of Section 46(2) of the Income-tax Act, 1961, a portion of the distribution should be considered as 'capital gains', and that though Section 46(2) was not strictly applicable to the assessments for the assessment years 1960-61 and 1961-62, still the principle of that section would have to be applied for those years too, and, in that view, issued direction to the Income-tax Officer to work out the 'capital gains' for all the three assessment years in accordance with law, bearing in mind the decision of the Supreme Court in Commissioner of Income-tax v. Girdkardas & Company (P.) Ltd. : [1967]63ITR300(SC) . The contention of the learned counsel for the assessee with reference to the said sum of Rs. 10,32,688 is that Section 46(2) of the Income-tax Act is applicable only for the assessment year 1962-63 and, therefore, the decision of the Tribunal that the assessee is liable to capital gains under Section 46(2) of the amounts received by him during the assessment years 1960-61 and 1961-62 is erroneous. The learned counsel refers to the decision of the Supreme Court in Commissioner of Income-tax v. Madurai Mills Co. Ltd. : [1973]89ITR45(SC) in support of his contention. In that case, the amount distributed by the liquidator of a company was brought to charge under Section 12B of the Indian Income-tax Act, 1922, as revised by the Finance (No. 3) Act, 1956. It was contended by the shareholder who received various amounts from the liquidator in the course of the distribution of the assets, that the receipts on distribution of the net assets of the company in liquidation by virtue of his holding the shares in the company and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer, cannot be brought to charge under Section 12B of the Act. This contention of the shareholder was upheld by the Supreme Court. The Supreme Court's observations in that decision are as follows :
'When a shareholder receives money representing his share on distribution of the net assets of the company in liquidation, he receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer. In the circumstances, we find it difficult to hold that the assessee-company is liable to pay tax on capital gains as contemplated by Section 12B of the Act in respect of the amount of Rs. 95,944.'
15. According to the Supreme Court, the charge under Section 12B cannotarise unless there is either a sale or exchange or relinquishment or transferof the capital assets and that in the case of distribution of capital assets ofa company in liquidation, there being no sale, exchange, relinquishment ortransfer involved, it would not attract the charge under Section 12B. Thisruling of the Supreme Court has to apply to the assessee's case so far as the assessment years 1960-61 and 1961-62 are concerned, for, in those years, the charge could be brought only under Section 12B, if at all. The Tribunal having recognised the fact that Section 46(2) was applicable only for the year 1962-63, it held that the principle of that section will apply even for the earlier assessment years. That view of the Tribunal is contrary to the decision of the Supreme Court in the above-said case. As regards the assessment years 1962-63, the order of the Tribunal has, however, to be upheld. In the decision of the Supreme Court just referred to, the scope of Section 46(2) was touched upon and they have expressed the view that the said section had been specifically introduced for charging as 'capital gains' any money or assets received by a shareholder in the liquidation of a company. Having regard to the fact that Section 46 is an express provision for bringing into charge any money or asset received by a shareholder of a company in liquidation treating it as a capital gain, the assessment in regard to sums received in the assessment year 1962-63 has to be upheld.
16. We have to, therefore, answer the second question as follows : No portion of the distribution can be assessed as 'capital gains' for the assessment years 1960-61 and 1961-62, while such distribution is liable to be assessed as 'capital gains' for the assessment year 1962-63. The computation of 'capital gains' for the assessment year 1962-63 will have to be made in accordance with the directions of the Tribunal.
17. As the revenue has succeeded on the first question, it is entitled to costs from the assessee. Counsel's fee Rs. 100 in each case.