DELHI FARMING AND CONSTRUCTION (P) LTD. versus COMMISSIONER OF INCOME TAX, DELHI

Citation: [2003] 3 S.C.R. 35 · Decided: 26-03-2003 · Supreme Court of India · Bench: RUMA PAL · Disposal: Appeal(s) allowed

Judgment (excerpt)

DELHI FARMING AND CONSTRUCTION (P) LTD. 
A 
v. 
COMMISSIONER OF INCOME TAX, DELHI 
MARCH 26, 2003 
[RUMA PAL AND B.N. SRIKRISHNA, JJ.] 
B 
Income Tax Act, 1961: 
Sections 2(24)(vi) and (45), 45, 47(viii), 104 and 109(1)-levy of Super 
Tax on undistributed income of investment company-Capital gain to assessee-
C 
company prior to 1.3.1970 by compulsory acquisition of agricultural land-
Decision by Directors of the assessee-company not to use the money for 
payment of dividend due to past losses and meagreness of the profit for the 
current years-income tax officer holding the company liable to additional 
income tax-Propriety of levy-Held : The Capital gain could not have been D 
subjected to tax as it was wholly exempted from 'capital gains' and was not 
part of the 'gross income' or 'distrib11table income' for the purpose of Section 
104-Whether capital gains are commercial or business profits on which 
dividends could be distributed would depend on the facts and circumstances 
of each case based upon commercial decision of Directors of the company-
Deci:;ion of the Directors was not unreasonable and hence the income tax E 
officer was not justified in sitting in appeal over the business decision of the 
Directors of the Company. 
Section 104-Jurisdiction of income tax officer-Scope of-Held, income 
lax officer can only consider whether the Board of Directors acted reasonably-
Cannot arrive at conclusion that payment of dividend or larger dividend than 
that declared would be unreasonable in view of losses incurred or due to 
smallness of the profits in the current years since it is business consideration. 
Appellant-assessee, an investment company got compensation prior 
F 
to 1.3.1970, by reason of compulsory acquisition of agricultural land. The G 
Directors of the company decided not to fritter away the money of 
compensation by payment of dividend due to past losses and the smallness 
of the profit for the current year and they transferred the amount to 
capital reserve. Assessee was subjected to levy of income tax under Section 
104 of Income Tax Act, 1961 for the assessment years 1974-75, 1975-76 
35 
H 
36 
SUPREME COURT REPORTS 
[2003) 3 S.C.R. 
A and 1976-77 for its failure to distribute the required statutory percentage 
of dividend during the concerned previous years ending on 31.3.1973, 
31.3.1974 and 31.3.1975 respectively. Income Tax Officer held that there 
was sufficient money in the hands of the appellant which could and ought 
to have been declared as dividend and thus held the Company liable to 
B additional income tax for the years 1974-75 and 1975-76. The order was 
upeheld by Appellate Commissioner in appeal. In further appeal Income 
Tax Appellate Tribunal held that provisions of Section 104 of the Act could 
not be invoked in both the assessmen1: years and gave full relief to the 
appellant-Company. On reference with respect to the three assessment 
years, High Court decided in favour of Revenue. 
c 
In appeal to this Court appellant contended that the sale proceeds 
of agricultural land are totally exempt from the charge of tax under 
Section 45 of the Act by reason of Section 47(viii), hence, the capital gains 
accruing as a result of the compensation paid could never have formed 
part of the "total income" of the appellant-assessee; that capital gains are 
D not commercial or business profits, nor are they income in the true sense 
of the term, although by legislative fiction they have been included within 
the scope of 'income' and made subject to tax; and that the income-tax 
officer cannot sit in appeal over the business decision taken by the Board 
of Directors of the appellant company. 
E 
Allowing the appeals, the Court 
HELD: I The entire amount of capital gains which accrued as a 
result of acquisition (and hence compulsory transfer) of the agricultural 
land could not have been subjected to tax under Section 104 of the Income 
F Tax Act, 1961 as it was wholly exempted from capital gains and not part 
of the 'gross income' or the 'distributable income' for the purpose of 
Section 104 of the Act. Even assuming that compulsory acquisition of land 
is transfer of a capital asset within the meaning of Section 45 of the Act, 
Section 47(viii) specifically exempts any transfer of agricultural land in 
India effected before the !st day of March, 1970 from the scope of Section 
G 45 of the Act. Thus, the compensat1ion which became payable to the 
appellant as a result of the acquisition o

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