TMI Blog1962 (2) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... perties belonging to the company, Dutt Estates Ltd., were allotted to the shareholders including the assessee in this case. Three lots of properties were allotted to the three brothers and the valuation of each lot of property to be transferred from the company to the assessee and his brothers was fixed at ₹ 2,34,473-5-4. The balance-sheet of the company as at 31st March, 1948, showed that the total valuation of the properties exceeded ₹ 22,00,000 so that the loss on distribution of assets amounted to ₹ 15,46,688-7-3 and this was shown in the balance-sheet under the heading Property aid Assets . According to the Income-tax Officer this transaction resulted in the distribution of the assets within the meaning of section 2(6A) of the Indian Income-tax Act and as such the dividend paid out of the undistributed profit by way of distribution of assets must be brought to tax in the hands, of each of the shareholders . Under the relevant portion of section 2(6A) dividend includes: (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany could have written off the reserve from the cost of the properties in which case the Income-tax Officer could not find any reason to add this sum. In fact depreciation reserve is not a reserve on which dividend could be paid. It was merely a reserve created against the depreciation of the property. This reference does not concern the figure of ₹ 2,187-8-0 and the only question before us is whether the Tribunal was right in knocking off the sum of ₹ 46,900 from the quantification of the profits as was done by the Income-tax Officer. There is no question before us as to the applicability of section 2(6A) to the assessment and the parties agreed and proceeded on the basis that there was distribution by the company entailing release of its assets within the meaning of section 2(6A) of the Indian Income-tax Act. Mr. Meyer, learned counsel for the revenue, urged that the order of the Income-tax Officer went to show that it was a property-holding company and as such the computation of profits could only be under section 9 of the Act in which case the question of depreciation would not come in at all. On the other hand, it, was argued for the assessee that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof a part is put to reserve from being taken into computation in the year in question for purposes of assessment. On the contrary, the balance of profits and gains is determined independently altogether of the way in which the trader uses that balance when he has got it; and, if he puts part of it to reserve and carries it forward into the next year, that has no effect whatever upon his taxable income for the year in which he makes the profit. Mr. Meyer also relied on the observations of Lawrence L.J. on the question of reserves in the case of Naval Colliery Co. Ltd. v. Inland Revenue Commissioners [1928] 12 Tax Cas. 1017, 1043: These entries in my opinion show that the company purported to allocate a portion of its receipts during the accounting period to a reserve fund in order to meet the expenditure which the company intended subsequently to incur in making good the capital loss which the company had suffered. It is well settled, and indeed was not disputed, that a sum set aside for reserve to meet apprehended losses in the future is not deductible from receipts when ascertaining profits for income-tax purposes as it is not an expenditure before ascertaining profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company might as well have taken into consideration the depreciation which the fixed assets suffered year by year and shown the value of the assets as reduced by the depreciation suffered at the end of each year in its balance-sheets and if this course had been adopted the value of the properties in the balance-sheet as at 31st March 1948, would not have been ₹ 22,00,000 as shown therein but that amount less ₹ 46,200. If this were done the reserve for depreciation mould not have figured in the balance-sheet at all and the question of distribution of profits thereout would not have arisen. We are not, however, concerned with what the assessee might have done. We are only concerned to see what the assessee has done as a matter of f act and we find that the company's balance-sheet shows that it had created a depreciation fund, which means, that year by year a portion of the profit had been set apart to augment that fund and whether the company would ultimately have, spent the amount on repairs of the properties or modernising the same or in buying a new property to add to the number of properties is not for us to consider. The balance-sheet shows that this fund was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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