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Issues Involved:
1. Whether profits determined under section 41(2) are to be considered for computing distributable profits under section 104(1) read with section 109(i) of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Consideration of Profits under Section 41(2) for Distributable Profits - Context and Background: The case pertains to the assessment year 1979-80. The Income-tax Officer (ITO) initiated proceedings under section 104 of the Income-tax Act, 1961, on the grounds that the assessee had not distributed dividends despite earning profits from the sale of depreciated assets. The ITO included Rs. 4,23,850, the excess over the written-down value of the assets sold, as part of the profits, despite a net loss in the profit and loss account. This led to additional income-tax under section 104. - Tribunal's Decision: The Appellate Tribunal ruled in favor of the assessee, holding that the difference between the written-down value and the sale price of machinery under section 41(2) is deemed taxable but not actual business profits. This ruling was based on the Supreme Court's decision in CIT v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290, which clarified that such differences are capital returns and not business profits. - Revenue's Argument: The Revenue contended that section 109 of the current Act, unlike the old Act, specifically includes sums chargeable under section 41(2) in the "gross total income" for computing "distributable income." They argued that this inclusion should affect the computation under section 104. - Court's Analysis: The Court examined the similarity between the provisions of the old Act and the current Act, concluding that the fundamental concepts have not changed. The Court reiterated the Supreme Court's interpretation that the difference between the written-down value and the sale price is a capital return, not a commercial profit. The Court emphasized that the "smallness of profit" under section 104(2) should be assessed based on commercial profits, not assessable income, aligning with the Supreme Court's reasoning in Bipinchandra Maganlal and Co.'s case. Precedents and Comparative Analysis: - Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290: The Supreme Court held that the difference between the written-down value and the sale price of machinery is a capital return and not business profit. This principle was deemed applicable to the current Act's provisions. - CIT v. Gangadhar Banerjee and Co. (Pvt.) Ltd. [1965] 57 ITR 176: The Supreme Court emphasized that the reasonableness of dividend distribution should be judged from a business perspective, considering commercial profits rather than assessable income. - Factors (P.) Ltd. v. CIT [1975] 98 ITR 105: The Madras High Court noted that whether capital gains are distributable depends on specific case facts, but generally, capital gains are considered real profits unless they are a return of capital. - CIT v. N. Guin and Co. (P.) Ltd. [1979] 116 ITR 475: The Calcutta High Court held that capital gains are not commercial profits but notional income, relevant only if treated as distributable by the company's directors. Conclusion: - Court's Decision: The Court concluded that the taxable profit under section 41(2) is a capital return and not relevant for determining "distributable income" under section 104. The Revenue failed to establish that the second condition under section 104(2), concerning the reasonableness of dividend distribution, was met. The Court affirmed the Tribunal's decision, answering the reference in favor of the assessee and against the Revenue. Reference Answered: - The question was answered in the affirmative, supporting the Tribunal's decision that profits determined under section 41(2) should not be considered for computing distributable profits under section 104(1) read with section 109(i).
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