1958 (9) TMI 101 - HC - Income Tax

Summary

Issues:
1. Application of section 23A to a private company for the assessment year 1949-50.
2. Consideration of notional income under section 42(2) in determining the applicability of section 23A.
3. Interpretation of the term "profits" under section 23A(1) for the purpose of making an order.
4. Comparison of actual profits with total income for the purpose of section 23A(1).
5. Relevance of sub-section (5) of section 23A in including notional income in total income.

Analysis:
The judgment by the High Court of Bombay dealt with the application of section 23A to a private company for the assessment year 1949-50. The case revolved around the contention that a sum of notional income under section 42(2) should be excluded while determining the applicability of section 23A. The court analyzed the scheme of section 23A, emphasizing the two conditions for the Income-tax Officer to exercise power - failure to distribute the statutory dividend percentage and consideration of profits made by the company. The court highlighted the distinction between total income and actual profits, stating that notional income under section 42(2) is part of total income but not actual profits from a commercial standpoint.

Moreover, the court clarified that while the first part of section 23A(1) refers to total income, the second part focuses on actual profits. The judges emphasized that the Income-tax Officer must assess actual profits commercially to determine if a larger dividend could have been declared. They rejected the Department's view of including notional income in profits under section 23A(1), highlighting the impracticality of considering non-existent income as actual profits for distribution as dividends.

The judgment referenced previous decisions, such as Sir Kasturchand Ltd. v. Commissioner of Income-tax and Bipinchandra Maganlal & Co. Ltd. v. Commissioner of Income-tax, to support the interpretation that actual profits, not assessable income, should be considered for section 23A orders. Additionally, the court mentioned the Supreme Court's ruling in Mazagaon Dock's case, affirming that income under section 42(2) is notional income.

In conclusion, the court ruled in favor of the assessee, holding that notional income under section 42(2) should not be included in the calculation of profits for section 23A purposes. The judgment emphasized the distinction between total income and actual profits, highlighting the need for a commercial perspective in assessing profits for dividend distribution. The court directed the Commissioner to bear the costs, concluding the case in favor of the assessee.