TMI Blog1984 (9) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent. of the total income as assessed (distributable income) had not been distributed as dividend. The company being one in which the public was not substantially interested, the Income-tax Officer directed that super-tax amounting to Rs. 74,413 was payable by the company. The order was affirmed by the Appellate Assistant Commissioner. On further appeal, the Tribunal held that the income as assessed was based on the change in the system of accounting effected by the assessee during the assessment year 1960-61, and, in fact, the sum of Rs. 3,30,915 which was added to the assessable income as accrued finance charges had already been taken into consideration by the company for paying dividend to the shareholders in earlier years. It was observed that if the commercial profits of the company were taken into consideration after deducting the said sum of Rs. 3,30,915, then the distribution of dividends actually made to the shareholders in the accounting period relevant to this assessment year was reasonable within the meaning of section 23A, and hence no super-tax should be imposed. This has led to the reference to this court. In order to further elaborate on the factual position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the company's contention and upheld the order of the Income-tax Officer. The appellate order of the Tribunal has further examined the facts. It held that the total income assessed was Rs. 6,58,510, the income returned was Rs. 7,52,617, whereas the book income was Rs. 4,21,702. The additional amount offered for tax by the assessee amounting to Rs. 3,30,915 was the result of a change in the accountancy system, but was not really part of the company's commercial profits. The reasoning of the Tribunal is as follows. For income-tax purposes, the assessments were made from 1956-57 onwards right up to the year in question on a cash basis, i.e., the income was calculated on the sums actually received by the company. However, for the purpose of paying dividends, the company had been exhibiting its accounts on a mercantile system, i.e., it was showing the receivables regarding finance charges, as already received. The Tribunal gave figures from 1956-57 onwards. In the assessment year 1956-57, the actual amount received was 5,872, but in the account for shareholders, the company showed a sum of Rs. 38,220. In 1957-58, the actual amount received was Rs. 1,21,639, but the profit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial profits. It appears to us that this is an argument based not on reality, but on the artificial results flowing from the change to the mercantile system of accounting. The provisions of section 23A of the 1922 Act correspond to the provisions of section 104 of the Income-tax Act, 1961. In the case of certain types of companies, if there is a failure to distribute the statutory percentage of the total (distributable) income as dividend, then super-tax has to be imposed. The total income of a company is to be computed under the Income-tax Act. No doubt, the total income of the company for the purposes of income-tax was Rs. 6,58,510, on account of the change in the system of accounting for income-tax purposes. Out of this sum, taxes had to be paid which amounted to Rs. 2,96,330 as appears from the order of the Income-tax Officer under section 23A of the Act. This left a balance of Rs. 3,62,180 and 60 per cent. of the same would be Rs. 1,97,308. Thus, for income-tax purposes, it could be said that a distribution of only Rs. 1,61,063 was short of 60 per cent. as required by the statute. However, the conclusion of the Tribunal is that Rs. 3,30,915 had already been utilised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts, deductions and allowances. In considering whether a larger distribution of dividend would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The Legislature has not provided in section 23A that in considering whether an order directing that the undistributed profits shall be deemed to be distributed, the smallness of the assessable income shall be taken into account. The test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question. , Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do." These remarks are wholly appropriate to the present situation. Though on paper, the company seems to have an income of Rs. 6,58,510 this is due to the change in the accounting process for tax purpose. As far as the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its. The court also clarified in this judgment that the terms " accounting profits " and " assessable profits " were distinct and different. In determining the assessable profits, the Income-tax Officer may disallow many actual expenses and may include many items on a notional basis. But the commercial or accounting profits are the actual profits earned by the assessee calculated on commercial principles. Therefore, the words " smallness of profits " in the section refer to actual accounting profits and not the assessable profits of the year. The Supreme Court was referring to the fact that the Income-tax Officer has to pass the order under section 23A unless he is satisfied "(i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable ; or... " There were no losses in any previous year in the case of the present assessee and the only question to be examined was the smallness of the profits in this particular year. The Supreme Court has clarified in the above judgment that the term " smallness of profits " re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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