9911796707
TMI Blog1973 (5) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,57,554 Owner's share of municipal tax borne by the assessee but not allowed in the assessment 46,069 46,059 ---------------- -------------- 1,01,930 1,11,495 Dividends distributed as declared in the Annual General Meeting held on 5-8-1958 and 6-8-1959, respectively 44,000 50,600 The assessee claimed that for the assessment year 1958-59 the profits for the year before deduction for taxes amounted to Rs. 1,92,193 and after providing for Rs. 2,15,000 for taxation there was a loss of Rs. 22,807 in the year in the commercial sense. For the assessment year 1959-60, the profits according to the profit and loss account were Rs. 2,25,497 before providing for taxation. After deducting the provision for taxation for a sum of Rs. 1,99,009, there remained a surplus of Rs. 26,888. The assessee claimed that there was no case for passing an order under section 23A for any of the two years. The Income-tax Officer held that the following items provided for in the accounts could not be considered as expenses for deduction for the purpose of commercial profits : 1958-59 1959-60 Rs. Rs. 1. Reserve for doubtful debts 2,276 6,474 2. Provision for contingencies 1,550 1,550 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee preferred an appeal to the Appellate Tribunal from the aforesaid consolidated order of the Appellate Assistant Commissioner. The department appealed against the order relating to the assessment year 1958-59. The Tribunal considered the assessee's claim that under clause (b) of section 23A(1) deduction had to be allowed in respect of wealth-tax. Wealth-tax assessment came to be made on the assessee starting from the assessment year 1957-58 on the passing of the Wealth-tax Act, 1957, which received the assent of the President on the 12th September, 1957. The Act was declared to have come into force from the 1st of April, 1957. Particulars regarding the first three assessments for wealth-tax on the assessee are as follows : Assessment Valuation Date of Amount of wealth-tax year date assessment payable Rs. 1957-58 31-12-1956 11-5-1959 18,845 1958-59 31-12-1957 13-5-1959 19,036 1959-60 31-12-1958 30-11-1959 20,346 It was contended on behalf of the revenue that since under clause (b) of section 23A(1) it was the tax "levied" that had to be deducted, no deduction should be made in the present case since no assessment or levy of wealth-tax was made during the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Officer should have issued notice to make further distribution to cover up the balance amount was rejected. On the question whether the payment of larger dividends than that declared for the two years would be unreasonable the Tribunal considered the claim for deduction of the items under reserve for doubtful debts, provision for contingencies, contribution to repairs fund and sinking fund for redemption of debentures. The Tribunal considered that the department might well question whether certain items had been correctly charged in the accounts in determining the profits and relied for this on the judgment of the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee and Company (Private) Ltd. With regard to the reserve for doubtful debts, however, the Tribunal held that no objection could be taken to deduction of the amounts in arriving at the commercial profits. The provision for contingencies was found to be in the nature of a general reserve and the Tribunal held that this could not be excluded from the commercial profits. With regard to repairs fund the Tribunal considered the amounts credited to the fund over ten years from 1952 to 1961 and the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serves and the balance in the profit and loss account the Tribunal found it difficult to accept the position that it was not reasonable to declare larger dividends than what were declared, unless adequate provision had been made for setting apart the specified amounts credited to the sinking fund. The Tribunal held that for both the years the commercial profits were sufficient to enable the assessee to declare dividends to the extent required under section 23A of the Act. Thereafter, the following questions have been referred to this court as mentioned hereinbefore under section 66(1) of the Indian Income-tax Act, 1922 : "1. Whether, on the facts and in the circumstances of the case, the wealth-tax to be deducted under clause (b) of sub-section (1) of section 23A from the total income of the previous year 1957 relevant to the assessment year 1958-59 is the wealth-tax payable in respect of the wealth-tax assessment for the year 1957-58 or the aggregate of wealth-tax payable in respect of the wealth-tax assessments for the years 1957-58 and 1958-59 ? 2. Whether, on the facts and in the circumstances of the case, the wealth-tax to be deducted under clause (b) of sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (ii) that the payment of a dividend or a larger dividend than that declared would not have resulted in a benefit to the revenue ; or (iii) that at least seventy-five per cent. of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in the taxable territories for a charitable purpose the income whereof is exempt under clause (i) of sub-section (3) of section 4 ; make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of fifty per cent. in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven per cent, in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Therefore, eligibility for allowance in the computation of the total income of the assessee is a qualification which it must fulfil in order to merit deduction under clause (b) of section 23A(1) of the Indian Income-tax Act, 1922. Wealth-tax paid or imposed can be deducted only to the extent the levy or the tax is in excess of the amount which can be allowed in computation of the total income of the assessee-company. In view of certain decisions of the court Parliament passed a statute known as the Income-tax (Amendment) Act, 1972. Section 4 of the said Act provides as follows : "4. Wealth-tax not deductible in computing the total income for certain assessment years.--Nothing contained in the Indian Income-tax Act, 1922 (11 of 1922), shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head 'profits and gains of business, profession or vocation' or 'income from other sources' for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax. Explanation--For the purposes of this section 'wealth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gangadhar Banerjee & Co. (P.) Ltd. and Commissioner of Income-tax v. Asiatic Textiles Ltd. In the first mentioned case the Supreme Court observed that in deciding whether the payment of dividend or a larger dividend than that declared by the company would be unreasonable, the Income-tax Officer could take into consideration the circumstances other than losses and smallness of the profit. The statute by the words used while making sure that losses and smallness of profits were never lost sight of required that all matters relevant to the question of unreasonableness should be considered. The words "smallness of profit" in section 23A referred to actual accounting of profits and not assessable profits of the year. In arriving at the assessable profits the Income-tax Officer might disallow many expenses actually incurred by the assessee and in computing his income he might include any item on notional basis. But the commercial or accounting profits should be the actual profits earned by the assessee calculated on commercial principles. At page 181 of the report, explaining the scheme of the section, the Supreme Court observed : "What does the expression 'profit' mean? Does it mean o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the computation of the commercial profits. Essentially, the Tribunal seems to have proceeded on the basis that in the facts and circumstances as indicated by the company's position of reserve for the repairs and as indicated by the company's other financial position the provisions for these were far in excess of the legitimate need for which these amounts had been earmarked. In doing so, it appears to us that the Tribunal has followed the principles laid down by the Supreme Court in the aforesaid decision of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. Counsel for the assessee drew our attention to the decision in the case of Commissioner of Income-tax v. Bangodaya Cotton Mills Ltd. The facts of that case, in our opinion, were entirely different from the issues involved in the case before the Tribunal. The principles enunciated by this decision are the same as the principles enunciated by the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. Reliance was also placed on the case of Amalgamation (Pvt.) Ltd. v. Commissioner of Income-tax. There, it was held that, in order to exclude from computation of commercial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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