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1970 Supreme(P&H) 16
PUNJAB & HARYANA HIGH COURT
Mehar Singh and R.S.Narula JJ.
Commissioner Of Income-tax
Versus
Avon Cycles Pvt.Ltd.
Income tax Reference No. 44 of 1966,
Decided On : JANUARY 20, 1970
The income which has to be taken into account for coming to a proper decision on the question of smallness of profits or otherwise under Section 23A of the Act is not the gross or the total receipts of the assessee actual or fictional, but the profits earned by the company determined in the light of commercial principles.
Headnote:
INCOME TAX - SECTION 23A - APPLICABILITY - LOSSES IN EARLIER YEARS - SMALLNESS OF PROFITS - INTERPRETATION.
Fact of the Case:
The assessee, Avon Cycles Private Ltd., Ludhiana, submitted returns of income for the assessment years 1956-57 and 1957-58, on the basis of accounts which were found to be defective. The Income-tax Officer invoked the proviso to Section 13 and computed the profits of the assessee at certain flat rates with the agreement of the assessee. The assessee had not declared any dividend in respect of either of the two years, and the Income-tax Officer levied super-tax at the rate of 25% on the assessed income after allowing due deductions under Section 23A(1) of the Act.
Finding of the Court:
The Tribunal allowed the appeals of the assessee, holding that the approach of the revenue, both on the facts of the case and in law, was erroneous. The Tribunal found that the bulk of the surplus in the hands of the assessee was due to the fact that the books of account of the assessee had not been accepted, and the income of the assessee was computed on an estimate basis. The Tribunal also found that the avoidance of super-tax was not a motive behind the non-declaration of dividends and it was the loss (in the earlier years) and the smallness of profits which was responsible for the non-declaration of dividends.
Issues: Whether the provisions of Section 23A of the Act were applicable to the case, inasmuch as the assessee company had declared no dividends in the years in question.
Ratio Decidendi: The Court held that the provisions of Section 23A of the Act were applicable to the case, inasmuch as the assessee company had declared no dividends in the years in question. However, the Court also held that the order of the Tribunal setting aside the assessments under Section 23A was correct in view of its finding on the question of losses in the earlier years. The Court held that the Tribunal was in error in observing that in determining the commercial profits, the assessing authority cannot take into consideration the income estimated by the Income-tax Officer under the proviso to Section 13. The Court held that estimated additions to commercial income of an assessee partake of the same character as the income returned by an assessee himself on the basis of inaccurate or incomplete accounts.
Final Decision: The Court answered the question referred to it as follows: "On the facts and in the circumstances of the case, the provisions of Section 23A of the Act were applicable to the case, inasmuch as the assessee company had declared no dividends in the years in question, but the order of the Tribunal setting aside the assessments under Section 23A was correct in view of its finding on the question of losses in the earlier years."
R.S.Narula, J.
1. The question, "whether, on the facts and in the circumstances of the case, provisions of Section-23A were applicable to the case?" has been referred to us under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called "the Act"), at the instance of the Commissioner of Income-tax, Punjab, Jammu & Kashmir, and Himachal Pradesh, Patiala, in the following circumstances:
Messrs. Avon Cycles Private Ltd., Ludhiana (hereinafter referred to as "the assessee"), submitted returns of income for the assessment years 1956-57 and 1957-58, on the basis of accounts which were found to be defective, inasmuch as no day-to-day record had been kept by the assessee for the consumption of raxv materials and stores. In his order, dated February 9, 1959, relating to the 1956-57 assessment year, the Income-tax Officer did not, therefore, accept the figures of profit furnished by the assessee and after invoking the proviso to Section 13, computed the profits of the assessee at certain flat rates with, the agreement of the assessee, and worked out the gross profits on that basis. The result was that the gross profit computed by the Income-tax Officer was Rs. 36,603 more than that shown by the assessee in his return. The other add-baeks ordered by the Income-tax Officer due to inadmissible expenditure, etc., are not relevant for our purposes. Similarly, in his order of the same date relating to the assessment year 1957-58, a sum of Rs. 10,488 was added to the gross profits of the assessee on the basis of the same flat rates (as agreed to by the assessee for the year 1956-57) by invoking the proviso to section 13 of the Act.
2. Two separate orders (annexures "B" and "B-l " to the statement of case) were then passed by the Income-tax Officer on February 11, 1960, under Section 23A of the Act, on the ground that even if the entire disputed add-backs were deleted in appeal, the assessee would still be left with an income of the order of Rs. 25,000 or so in respect of the assessment year 1956-57 and Rs. 92,145 in respect of the assessment year 1957-58. Inasmuch as no dividend had been declared by the assessee in respect of either of the two years, super-tax at the rate of 25 rip. in a rupee was levied on the assessed income after allowing due deductions under Section 23A(1) of the Act. Two separate appeals were preferred by the assessee against the orders of the Income-tax Officer under Section 23A of the Act in respect of the two years in question. While disposing of those appeals by his orders, dated March 26, 1962, and March 28, 1962, the Appellate Assistant Commissioner of Income-tax, Jullundur Range, considered the question of loss in the earlier years floss of Rs. 13,400 in 1953-54, and loss of Rs. 3,000 in the assessment year 1954-55), but held that if the losses of 1953-54 and 1954-55 assessment years were set off against the commercial profits of the assessment year 1955-56, there would still be left some profit in that year; and there was a profit of Rs. 47,000 in the assessment year 1956-57. It was, therefore, held that after deducting the tax payable on the profit of Rs. 47,000 there would still be sufficient amount which was available with the assessee for distribution of dividends, and, therefore, the order of the Income-tax Officer under Section 23A of the Act was justified.
3. When the second appeals of the assessee against the abovesaid two orders came up for hearing before the Income-tax Appellate Tribunal, it was found that the figure of total income had not been properly analysed for purposes of determination of the question of applicability of Section 23A. The Income-tax Officer was, therefore, directed (as stated in paragraph 2 of the appellate order of the Tribunal, dated September 11, 1964) to furnish a separate analysis of each year in a prescribed form. On receipt of the requisite analysis the Tribunal by its order, dated September 11, 1964, allowed the appeals of the assessee on the following fi
