TMI Blog1997 (2) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... estions of law arise for consideration (see [1980] 125 ITR 207, 210) : "(i) Whether, on the facts and in the circumstances of the case, 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 assessee's case ? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 7,28,760 representing profits assessed under section 41(2) in the preceding years cannot form part of the accumulated profits for the purpose of section 2(22)(c) of the Income-tax Act, 1961 ? " The Revenue has preferred the appeals from the common judgment rendered by the High Court of Madras date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eates a legal fiction under which the balancing charge is treated as "business income" chargeable to tax. The legal fiction should be limited for the purpose for which it was created. The receipt of excess on written down value on the sale of capital assets cannot be held to be profit apart from the legal fiction created by section 41(2) of the Act. It cannot form part of commercial profit. So, it cannot form part of "accumulated profits" within the meaning of section 2(22)(c) read with section 2(24) of the Act and any distribution out of such amount cannot be assessed in the hands of the shareholders as "deemed dividends". If at all, it represents only a capital receipt. The above decision was rendered placing reliance on the decisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and section 2(45) of the Act defining "income" and "total income" read with section 5 of the Act, should be given its plain meaning and the balancing charge assessed under section 41(2) of the Act, is "profit" and the distribution thereof to the shareholders should be assessed as "dividend". Placing reliance on the decision in Bishop v. Smyrna and Cassaba Railway Company (No. 2) [1895] 2 Ch. 596, counsel contended that the income brought to tax under section 41(2) of the Act is one by way of restitution ; what had been written off (allowed) for the purpose of accounts, has later been made good by the increase in value. In particular, counsel stressed the following passage occurring at page 601 of the said decision : " It is writing back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 41(2) of the 1961 Act is akin to a legal fiction. The earlier decisions reported in CIT v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290 (SC) and CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC) were based on the relevant provisions of the 1922 Act. The decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) was with reference to section 41(2) of the Income-tax Act, 1961. This later decision was rendered mainly placing emphasis on section 80E of the Income-tax Act, 1961. Incidentally, the language used in section 41(2) of the Act has also been referred to as a fiction. We are prima facie inclined to the view that when once a certain amount is treated as income under the Act, it should be so for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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