1979 (3) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 7,28,760 representing profits assessed u/s 41(2) can be treated as accumulated profits for the purpose of section 2(22)(c) of the Income-tax Act, 1961.
2. Whether the Appellate Tribunal was justified in confirming the deletion of the income assessed as deemed dividends under the provisions of section 2(22)(c) in the assessees' case.

Summary:

Issue 1: Treatment of Profits Assessed u/s 41(2) as Accumulated Profits
The primary issue was whether the sum of Rs. 7,28,760, representing profits assessed u/s 41(2) in preceding years, could be treated as accumulated profits for the purpose of section 2(22)(c). The court examined the nature of the balancing charge under section 41(2) and its corresponding provisions in the 1922 Act. It was noted that the balancing charge, though treated as income for tax purposes, retains its character as a capital receipt. The court referenced several judgments, including CIT v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290, which clarified that the balancing charge is a capital return and not business profit. The court concluded that the balancing charge assessed u/s 41(2) does not constitute accumulated profits for the purpose of section 2(22)(c).

Issue 2: Deletion of Income Assessed as Deemed Dividends
The Appellate Tribunal had confirmed the deletion of income assessed as deemed dividends under section 2(22)(c). The court upheld this decision, agreeing with the Tribunal's view that since the balancing charge is not accumulated profit, no part of the dividends distributed could be attributed to accumulated profits. Consequently, no part of the dividends could be treated as income within the meaning of section 2(22)(c).

Conclusion:
The court answered both questions in the affirmative and against the revenue, affirming that the sum of Rs. 7,28,760 could not be treated as accumulated profits and that the Tribunal was justified in confirming the deletion of the income assessed as deemed dividends. The revenue was directed to pay the costs of the assessees.