1982 (11) TMI 22 - HC - Income Tax

Summary

Issues Involved:

1. Whether the Tribunal was justified in considering penal interest and the difference between depreciation claimed and allowed for judging the smallness of profit for the assessment years 1957-58 to 1961-62.
2. Whether the Tribunal was justified in directing the deduction of the difference between depreciation claimed and allowed for calculating additional super-tax under section 23A(1) for the assessment years 1955-56 and 1956-57.

Issue 1: Penal Interest and Depreciation Difference for Judging Smallness of Profit (1957-58 to 1961-62)

The court examined whether the Tribunal correctly included penal interest and the difference between claimed and allowed depreciation to judge the smallness of profit under section 23A of the Indian Income Tax Act, 1922. The Tribunal had followed the Supreme Court's decision in the case of Capital Matters Service and Gangadhar Banerji & Co. (P.) Ltd., concluding that penal interest should be considered for smallness of profit. The Tribunal also determined that the difference in depreciation should be deducted to avoid declaring dividends out of capital, which is prohibited under the Indian Companies Act.

The court agreed with the Tribunal that penal interest, being an expenditure related to profit-yielding activities, should be considered when judging distributable profits. This aligns with the principle that commercial profits, not just assessable profits, should be considered for determining the reasonableness of dividend declarations. However, the court disagreed with the Tribunal on the depreciation difference, stating that unless it could be shown that the commercially allowable depreciation was larger than the statutory allowance, it should not be considered again for judging smallness of profit.

Issue 2: Deduction of Depreciation Difference for Additional Super-tax Calculation (1955-56 and 1956-57)

The Tribunal had directed the deduction of the difference between claimed and allowed depreciation from the undistributed balance of total income for calculating additional super-tax under section 23A(1). The court noted that the relevant portion of section 23A involves determining whether the distributed dividends are less than the statutory percentage of the total income, reduced by specific items like income-tax and super-tax. The second part of section 23A, acting as a proviso, prevents the imposition of additional super-tax if the smallness of profit makes higher dividend declarations unreasonable.

The court emphasized that for assessing the smallness of profit, commercial profits should be considered, not just assessable profits. However, since the depreciation amount had already been considered in the assessable income, it should not be deducted again unless it was shown that the commercial depreciation was significantly higher. No such evidence was presented. Consequently, the Tribunal's direction to deduct the depreciation difference was incorrect.

Conclusion:

The court concluded that the Tribunal was justified in considering penal interest for judging the smallness of profit for the assessment years 1957-58 to 1961-62 but was not justified in considering the difference between claimed and allowed depreciation for the same purpose. Additionally, the Tribunal was not justified in directing the deduction of the depreciation difference for calculating additional super-tax for the assessment years 1955-56 and 1956-57. Each party was directed to bear its own costs due to partial success.