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1974 Supreme(Cal) 205
HIGH COURT OF CALCUTTA
SABYASACHI MUKHERJI, JANAH AND SHARMA
BANGA LUXMI HOSIERY MILLS PRIVATE LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 212 Of 1970
Decided On : JULY 25, 1974
AJIT SEN GUPTA, BALAI CHANDRA PAUL, S.BHATTACHARJEE
Sums added to profits under the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, to determine the true commercial profit cannot be excluded in considering the applicability of Sections 23A and 104 of the respective Acts.
Headnote:
INCOME TAX - Section 23A of the Indian Income-tax Act, 1922, and Section 104 of the Income-tax Act, 1961 - Applicability - Whether sums added to profits under proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, should be excluded in considering applicability of these sections - Held, no.
Fact of the Case:
The assessee, a hosiery manufacturing company, did not maintain proper records for consumption of yarn and production of hosiery articles. Additions were made to the book profits under the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, to arrive at the correct commercial profits. The Income-tax Officer applied Section 23A of the 1922 Act and Section 104 of the 1961 Act, directing payment of additional super-tax on the distributable incomes. The Appellate Assistant Commissioner upheld the assessee's contention that the additions were improperly made. On appeal, the Tribunal held that the additions were properly made and referred the question of whether the sums added should be excluded in considering the applicability of Sections 23A and 104 to the High Court.
Finding of the Court:
The High Court held that the sums added to the profits under the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, could not be excluded in considering the applicability of Sections 23A and 104. The court reasoned that the additions were made to determine the true commercial profit, and in the absence of any other materials, the assessed income could be taken into consideration in determining the availability of the surplus for declaration of dividend.
Issues: Whether the sums added to the profits under the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, should be excluded in considering the applicability of Sections 23A and 104.
Ratio Decidendi: The distributable income is not synonymous with the assessed income, but the sources of income from which dividend was to be distributed should be taken as the basis. If the incomes added by resort to the proviso to Section 13 of the Indian Income-tax Act, 1922, or Section 145 of the Income-tax Act, 1961, were artificial and notional or fictional incomes, they could be excluded. However, in this case, the additions were made to determine the true commercial profit, and in the absence of any other materials, the assessed income could be taken into consideration in determining the availability of the surplus for declaration of dividend.
Final Decision: The High Court answered the question referred to it in the negative and in favor of the revenue. Each party was directed to pay and bear its own costs.
( 1 ) IN this combined reference under Section 66 (1) of the Indian Income-tax Act, 1922, and Section 256 (1) of the Income-tax Act, 1961, we are concerned with the assessment years 1961-62 and 1962-63. It appears that for the assessment year 1961-62 the income returned was Rs. 2,684. The income that was assessed to tax, however, amounted to Rs. 4,524. For the assessment year 1962-63 the income returned by the assessee was Rs. 12,655, but the income assessed to tax was Rs. 23,034. It appears that the income was assessed at higher figures than the income returned because a sum of Rs. 7,500 in the first year arid a sum of Rs. 9,000 in the second year had been added to the profits disclosed as per books by the assessee on an estimate of the profits made under the proviso to Section 13 of the Indian Income-tax Act, 1922, in respect of the assessment year 1961-62 and under Section 145 of the Income-tax Act, 1961, in respect of the assessment year 1962-63. It appears that the said additions had been made because the assessee which was manufacturing hosiery articles did not have any register for the consumption of the yarn which was the raw material for manufacturing of hosiery articles nor had it maintained production register recording the manufacture of such materials. The additions, therefore, as was made to the book profits was only an addition which had to be made by applying the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, to arrive at the correct figures which in the facts and circumstances of the case represented the correct commercial profits. In the aforesaid view the Income-tax Officer found that the income assessed for the assessment year 1961-62 was Rs. 4,524 and the tax payable thereon was Rs. 2,035. 80. Therefore, there was distributable income of Rs. 2,488. 20. In that year no dividend was declared. For the assessment year 1962-63 the total income was assessed at Rs. 23,034 and the tax payable thereon was Rs. 11,517 and the distributable income was, therefore, Rs. 11,517. In this year also there was no declaration of dividend. The Income-tax Officer in the aforesaid circumstances issued a show-cause notice why Section 23a of the Act of 1922 and Section 104 of the 1961 Act should not be applied for the respective two years. The assessee contended that the distributable surplus considering the paid up capital of Rs. 1 lakh was small and there was no commercial profit available for declaration of dividend for the first year. The assessed income, it was urged, in 1962-63 was higher because an amount of Rs.9,000 had been added to the disclosed profit which was the income of a notional character and the profit and loss appropriation account showed a loss of Rs. 12,249. There was thus no commercial profit for declaration of dividend. The Income-tax Officer, however, passed an order under Section 23a of the Indian Income-tax Act, 1922, for the first year and under Section 104 of the 1961 Act, for the second year directing payment of additional super-tax at 37 per cent, on the distributable incomes of Rs. 2,488. 20 and Rs. 11,355, respectively.
( 2 ) THERE was an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the assessee's contention. There was a further appeal to the Tribunal by the department and the Tribunal heard the appeals of the department together and held that the commercial profit could not be synonymous with the book profit and, therefore, in this case as there was no evidence that the additions made under the proviso to Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961, were improperly made, or that the same represented artificial and notional income and the said two sums of Rs. 7,500 and Rs. 9,000 were properly taken into consideration in considering the distributable surplus. In the aforesaid circumstances, a reference has been made for these t
