DIXIT J. - (1.)THIS is a consolidated reference under section 66(1) of the Indian Income -tax Act, 1922. It arises out of the Income -tax Appellate Tribunals orders disposing of the appeals preferred by two assessees. The two questions that have been framed for our opinion are :
'(1) Whether, in the facts and circumstances of this case, the sums of Rs. 1,64,352 and Rs. 3,91,381 received by the assessees, M/s. Shrikrishan Chandmal and Nandlal Bhandari and Sons (P.) Ltd., respectively, out of the sum of Rs. 6,40,000 distributed by Nandlal Bhandari Mills Ltd., amongst its shareholders is dividend and taxable as such in the hands of the respective assessees under the provisions of the Indian Income -tax Act, 1922 ? (ii) Whether, in the facts and circumstances of this case, the Appellate Assistant Commissioner could enhance the assessment, as made by the Income -tax Officer on the assessee company, either at the instance of the Income -tax Officer or suo motu under section 31(3) (a) of the Indian Income -tax Act ?'

(2.)THE material facts are that the assessees, one a private limited company doing business under the name and style of M/s. Nandlal Bhandari and Sons and the other, a Hindu undivided family doing business under the name of M/s. Shrikrishan Chandmal, Indore, are shareholders of Nandlal Bhandari Mills Ltd., Indore. In 1929 this company purchased a textile mill situated at Kalyan, in Maharashtra State, for Rs. 7,00,000. The machinery, stores and other material of the purchased mill were removed from Kalyan to Indore for the expansion of the Nandlal Bhandari Mills Ltd. The cost of this machinery, material, etc., was determined at Rs. 6,40,000 and debited in the account books of the Nandlal Bhandari Mills Ltd., Indore. The balance of Rs. 60,000 was treated as cost of land and building at Kalyan. On 31st March, 1949, the Government acquired the land building at Kalyan from Nandlal Bhandari Mills Ltd., paying Rs. 7,00,000 as compensation. The excess of Rs. 6,40,000 over the valuation of Rs. 60,000 of the land and building was first transferred to the capital reserve account of the mills. Then on 30th August, 1951, the directors of the mills resolved to distribute the amount of Rs. 6,40,000 out of the compensation amount received from the Government to the shareholders as dividend at the rate of Rs. 64 per share. The assessee family, M/s. Shrikrishan Chandmal, received a sum of Rs. 1,64,352 in respect of the shares held by it. The other assessee received a sum of Rs. 3,91,381 in respect of its shares.
In the assessment proceedings for the assessment year 1952 -53, these receipts were disclosed by the two assessees, but they claimed that the amounts received by them in the aforesaid distribution were not dividends within the meaning of the term 'dividend' given in section 2(6A) at it stood at the relevant time and that, therefore, they were not liable to pay any tax on those amounts. The Income -tax Officer first accepted the claim of the assessee company, M/s. Nandlal Bhandari and Sons, in regard to the exemption. He held that under the second proviso to clause (6A) of section 2 capital gains arising after 31st March, 1948, had been excluded from the definition of 'accumulated profits' and that, therefore, the amount received by the assessee company could not be regarded as dividend under sub -clause (a) of section 2(6A). The claim was, however, disallowed in the case of the other assessee, namely, M/s. Shrikrishan Chandmal. This time the Income -tax Officer held that as the 'sale' of land and building by M/s. Nandlal Bhandari Mills Ltd. to the Government was not voluntary but compulsory, the profit of Rs. 6.40,000 earned by the mills was in the nature of capital profit and not capital gain and consequently the distribution made by the mills to its shareholders was dividend. The Income -tax Officer had disallowed the other claims made by the assessee, M/s. Nandlal Bhandari and Sons. Both the assessees, therefore, appealed to the Appellate Assistant Commissioner. While these appeals were pending, the Income -tax Officer addressed a communication to the Appellate Assistant commissioner saying that the sum of Rs. 3,91,381 received by the assessee, M/s. Nandlal Bhandari and Sons, was dividend and properly chargeable to tax and that he had committed an error in not assessing it. The Appellate Assistant Commissioner, therefore, issued a notice to the said assessee to show cause why the assessment should not be enhanced and the dividend amount received by it should not be taxed. The Appellate Assistant Commissioner took the view that the amounts received by the two assessees were dividends and were taxable. The assessees then appealed to the Tribunal against the orders of the Appellate Assistant Commissioner. The Tribunal held that what the two assessees received was only a distribution of a capital asset and not anything out of the profits of M/s. Nandlal Bhandari Mills Ltd. and what was sought to be taxed was the distribution made by the said mills out of the 'capital appreciation of an asset' and that this capital appreciation being in 1949 could not be regarded as accumulated profits under the second proviso to section 2(6A). Accordingly, the exemption claimed by the two assessees was allowed by the Tribunal.

(3.)THE provision of the Act that requires consideration in answering the first question is section 2(6A) giving the definition of 'dividend'. That provision, as it stood on the relevant date and omitting what is not material, was in these terms :
'2. (6A) dividend includes - (a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company :... Provided further that the expression accumulated profits, wherever it occurs in this clause, shall not include capital gains arising before the 1st of April, 1946, or after the 31st day of March, 1948.'