TMI Blog1970 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4,62,974. The profits made by the Madras branch amounting to Rs. 1,15,848 for the period April 1, 1946, to November 30, 1946, were, under the agreement for sale, agreed to belong to the purchaser firm. Admittedly, for the assessment year 1947-48 (the accounting year being the year ending March 31, 1947), the above two items Of Rs. 4,62,974 and Rs. 1,15,848 were includible in the income of the assessee-company for computation of income-tax. In the profit and loss account for the above accounting year the company disclosed commercial profit, at Rs. 45,861. Even so, having regard to diverse disallowances and the inclusion of the above two amounts in the income, the Income-tax Officer assessed the assessable income of the company at Rs. 9,92,007. The Income-tax Officer considered the question of "distributable surplus " in terms of section 23A of the Act and held that the provisions Of the section were applicable to the facts of the assessee-company. In making that finding he rejected the contention of the assessee-company that the above items of Rs. 1,15,848 and Rs. 4,62,974 should be left out of consideration because these could not be considered part of the commercial profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders.... and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. . . . " (Underlining is ours). Mr. Joshi for the revenue has argued that the finding of the Appellate Tribunal that capital gains are not commercial profits of the company is not warranted by the provisions in the Income-tax Act. His argument was that capital gains are actual profits and, therefore, liable to be described as commercial and/or accounting profits. These profits were, therefore, includible in ascertaining the " distributable surplus " for exercising powers under section 23A. He submitted that there was no obstruction in law in distributing as dividend amounts received by way of capital gain.These amounts were not notional profits. These amounts would have to be shown as profits in the profit and loss account of a company. In developing these contentions he referred to tbe provisions in sections 6, 12B and 2(6A)(e) of the Act. He relied upon the observations of the Supreme Court in the case of Navinchandra Mafatlal v. Commissioner of Income-tax and of the High Court at Calcutta in Indra S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion of the assessable income of any company........ shall be deemed to have been distributed as dividends amongst the shareholders if he is satisfied that : (i) the company has not distributed 60% of its assessable income of the previous year reduced by the income-tax and super-tax payable, (ii) unless payment of a dividend, or a larger dividend than that declared, having regard to (a) losses incurred by the company in the earlier years, or (b) the smallness of the profit made in the previous year, be unreasonable." " The section is in three parts : the first part defines the scope of the jurisdiction of the Income-tax Officer, to act under section 23A of the Act ; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder ; and the third part provides for the assessment of the statutory dividends, in the hands of the shareholders. This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the section the Income-tax Officer was not assessing any income to tax : " He only does what the directors should have done. He puts himself in the place of the directors..... the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others." The Supreme Court approved the observations of the judicial Committee in the case of Commissioner of Income-tax v. Williamson Diamonds Ltd. that : "...... the statute by the words used, while making sure that' losses and smallness of profits' are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered Capital losses if established, would be one of them." The observation of the court in Commissioner of Income- tax v. Bipinchandra Mangalal Co. that : " Smallness of the profit in section 23A has to be adjudged in the light of commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The Supreme Court, however, refused to accept the contention that in entry 54 the phrase had the same restricted meaning as in the Income-tax Act. The above Act, XXII of 1947, was accordingly held intra vires and legal. In connection with the natural and grammatical meaning of the word " income ", it was stated that : " According to the dictionary it means 'a thing that comes in.... In the United States of America and in Australia both of which also are English speaking countries the word 'income' is understood in a wide sense so as to include a capital gain. . . . such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received....As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power." We have found it difficult to accept Mr. Joshi's contention that the phrases " income " and/or " profit " as contained in different sections of the Income-tax Act are liable to be construed in accordance with the wide meaning of the word " income " as stated by the Supreme Court in the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a continuous period of long time before the 6th head of capital gains was added in section 6 by Act XXII of 1947. Mr. Mehta is right in his submission that the object of the provisions in section 23A was to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. There was no taxation on capital gains for a considerable number of years when section 23A was part of the Income-tax Act. His submission that the phrase " smallness of profit " mentioned in the section had no relation with the capital gains made by a private limited company cannot be rejected because of the above legislative history of levy of tax on capital gains. In this connection, it is important to notice that levy of tax on capital gains was remove within two years of its imposition in 1948 and up to 1954 tax was not payable on capital gains. Mr. Joshi's submission that, even prior to the Act XXII of 1947, the amounts of capital gains could be considered by the Income-tax Officer as part of profits in connection with the exercise of powers under section 23A is not justified having regard to the above legislative history. This is so because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the amount taxed under the provisions of 10(2)(vii) and the capital gains earned. The Supreme Court held in the case of Commissioner of Income- tax v. Bipinchandra Maganlal Co. that the difference between the sale price and the cost price was profit and this was so in spite of the amount of the sale price being available in the hands of the assessee. For the same reason, amount earned as capital gains must be held to be notional profits. The availability of these gains in the hands of a company does not render these gains commercial profits. As observed by the Supreme Court in the case of Commissioner of Income- tax v. Gangadhar Banerjee Co. the Income-tax Officer would always have to treat the amounts received by way of capital gains as if he was a director of the co private limited company. Sitting in the position of such a director, the Income-tax Officer should always find it impossible to hold that capital gains acquired by sale of old assets are not necessary for re-employment for the purposes of normal business activities of the company. Therefore, except in exceptional cases, the Income-tax Officer would not be justified in considering amounts received by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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