1984 (9) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 3,30,915 included as finance charges for the purpose of assessment, out of which dividend had already been declared in the past, could again be included as commercial profit for the purpose of section 23A of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Background and Facts:
For the assessment year 1960-61, the Income-tax Officer passed an order under section 23A of the Indian Income-tax Act, 1922, directing that super-tax amounting to Rs. 74,413 was payable by the company because 60% of the total income as assessed had not been distributed as dividend. The company, not being one in which the public was substantially interested, was subject to this order. The Appellate Assistant Commissioner affirmed this order. On further appeal, the Tribunal found that the sum of Rs. 3,30,915, which was added to the assessable income as accrued finance charges, had already been considered by the company for paying dividends in earlier years.

2. Change in Accounting System:
The company was following the mercantile system of accounting for the purpose of distributing dividends but used the cash system for income-tax purposes. For the assessment year 1960-61, the company switched to a mercantile system for income-tax purposes, leading to an increase in assessable income due to the inclusion of accrued finance charges. The Tribunal noted that this change resulted in an artificial increase in taxable income, which did not represent the true commercial profits of the company.

3. Tribunal's Findings:
The Tribunal observed that the sum of Rs. 3,30,915 had been shown in the accounts for the shareholders and used for dividend distribution in earlier years. Therefore, this sum should not be considered as available for distribution in the current year. The Tribunal concluded that the commercial profits of the company, excluding the Rs. 3,30,915, were reasonable for the purpose of dividend distribution under section 23A.

4. Legal Reasoning:
The Tribunal's reasoning was based on the distinction between commercial profits and assessable income. The Tribunal held that the sum of Rs. 3,30,915, though included in the assessable income due to the change in the accounting system, was not part of the company's commercial profits. The Supreme Court's judgments in CIT v. Bipinchandra Maganlal & Co. Ltd. and CIT v. Gangadhar Banerjee and Co. (P.) Ltd. were cited to support the view that commercial profits should be considered for dividend distribution, not the artificially inflated assessable income.

5. Supreme Court Precedents:
In CIT v. Bipinchandra Maganlal & Co. Ltd., the Supreme Court stated that a company normally distributes dividends out of its business profits and not out of its assessable income. The computation of income for tax purposes involves artificial rules and fictional receipts, which should not influence the determination of commercial profits. Similarly, in CIT v. Gangadhar Banerjee and Co. (P.) Ltd., the Supreme Court emphasized that "smallness of profits" refers to actual accounting profits shown in the balance-sheet, not assessable profits.

6. Conclusion:
The High Court agreed with the Tribunal's conclusion that the sum of Rs. 3,30,915, though included in the assessable income, was not part of the commercial profits available for distribution. The true commercial profits were those shown in the company's balance-sheet, and the dividend distribution based on these profits was reasonable. The Tribunal's decision was upheld, and the question referred to the court was answered in the affirmative.

Costs:
Considering the nature of the question involved, the parties were directed to bear their own costs.