K. Shivashankar Bhat, J.—In respect of the assessment year 1979-80, the following question has been referred under section 256(1) of the Income Tax Act, 1961 ("the Act", for short) :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that profits determined under section 41(2) are not to be taken into consideration for the purpose of computing the distributable profits under section 104(1) read with section 109(i) ?"

2. After the regular assessment for the year in question, the Income Tax Officer opined that the assessee had not distributed dividend during the relevant previous year and hence issued a notice initiating proceedings under section 104 of the Act. The assessee had sold some depreciated assets during the previous year, earning a sum of Rs. 4,23,850 in excess of the written down value, which the Income Tax Officer considered as part of the profits earned by the assessee though, in the profit and loss account, there was a net loss of Rs. 2,18,071. By virtue of section 41(2), the difference between the excess value and the net loss which was Rs. 2,34,580, was taxable. The Income Tax Officer opined that this taxable profi