1979 (1) TMI 10 - HC - Income Tax

Summary

Issues:
Validity of orders passed under section 23A of the Indian Income-tax Act, 1922 for the assessment years 1953-54 and 1955-56.

Analysis:
The judgment delivered by the court pertains to the validity of orders made under section 23A of the Indian Income-tax Act, 1922, for the assessment years 1953-54 and 1955-56. The case involved an assessee-company, a private limited company promoted by a parent company, which took over assets from the parent company at a cost higher than the written down value as per income-tax records. The Income Tax Officer (ITO) allowed depreciation only on the written down value, leading to a dispute. Subsequently, in proceedings under section 23A, the ITO found discrepancies in dividend declarations by the assessee for the two assessment years, resulting in penal tax under section 23A. The orders were confirmed by the Appellate Assistant Commissioner (AAC) but were challenged by the assessee before the Tribunal.

The Tribunal held that while the depreciation charged in the books might not align with income-tax rules, the company was justified in its approach based on its books. It emphasized that the company's directors and auditors had approved the depreciation, and the profits were certified as accurate. The Tribunal allowed the appeals filed by the assessee, leading to the current reference before the High Court.

The High Court analyzed the case in light of the Supreme Court's decision in CIT v. Gangadhar Banerjee and Co. (P.) Ltd., distinguishing between accounting profits and assessable profits. It noted that the ITO's decision under section 23A(1) should be based on commercial principles, considering factors like previous losses, present profits, and future requirements. The Court found that the ITO's order solely relied on assessed profits for income tax purposes, disregarding commercial principles. It highlighted that the company was entitled to consider adequate depreciation based on the asset value in its books, as supported by the Tribunal's findings.

Consequently, the High Court ruled against the revenue, stating that the ITO's order under section 23A(1) was unjustified. The Court emphasized the importance of commercial principles in determining profits and depreciation, ultimately favoring the assessee. The judgment favored the assessee, who was also awarded costs for the reference.