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Issues Involved:
1. Whether the Tribunal was right in holding that the additions sustained to the income or loss disclosed in the statement of account represented the actual commercial profits for the purpose of section 23A of the Indian Income-tax Act, 1922. 2. Whether the Tribunal was right in holding that the Appellate Assistant Commissioner of Income-tax, Range 'D', Calcutta, was not justified in vacating the order under section 23A in this case. Issue-wise Detailed Analysis: Issue 1: Tribunal's Holding on Additions Representing Actual Commercial Profits under Section 23A The assessee, a private limited company, was assessed under section 23A of the Indian Income-tax Act, 1922. For the assessment year 1961-62, the Income Tax Officer (ITO) rejected the assessee's claimed loss of Rs. 66,737 from bridge construction work and estimated a positive income of Rs. 65,182, resulting in an addition of Rs. 1,31,919 to the total income. The Appellate Assistant Commissioner (AAC) reduced the total income to Rs. 2,04,440. The Tribunal further reduced the total income and deleted the addition of profits but sustained the disallowance of loss, stating: "The overall gross profit of Rs. 3,75,916 on total receipts of Rs. 20.93 lakhs amounted to 18%... no need to estimate any profit with reference to the receipts of this year in isolation." For the Ondal flyover bridge, the Tribunal noted discrepancies in the valuation of work-in-progress and disallowed the loss claim but did not estimate any profit. In proceedings under section 23A, the ITO considered the disallowed loss as commercial profit for calculating the distributable surplus. The Tribunal upheld this view, stating: "The addition would also represent actual commercial profit... the income of the assessee had been understated, though not deliberately, to the extent of such loss claimed." The Tribunal concluded that the disallowed amount represented actual commercial profit, even if there was no deliberate suppression of profit. Issue 2: Justification of the Appellate Assistant Commissioner's Decision to Vacate the Order under Section 23A The AAC allowed the assessee's appeal, but the Tribunal overturned this decision, reasoning: "Even in a case where there is no deliberate attempt at suppression of profit or under-statement thereof, the method of accounting adopted may be such as not to bring out the true profits made." The Tribunal emphasized that adjustments to book profits to arrive at actual profit are permissible under the proviso to section 13 (corresponding to section 145 of the I.T. Act, 1961). It held that the AAC's view that only deliberate understatement or suppression of income could justify adjustments was incorrect. Counsels' Arguments and Court's Analysis Mr. Kalyan Ray, counsel for the assessee, argued that section 23A being a penal provision required the revenue to prove that the disallowed loss was actual commercial profit. He contended that the ITO did not proceed under the proviso to section 13, making the Tribunal's decision erroneous. Mr. B. L. Pal, counsel for the revenue, argued that the disallowed loss should be considered commercial profit, citing precedents like Mehar Singh & Co. (P.) Ltd. v. CIT and Gobald Motor Service (P.) Ltd. v. CIT. The court noted that in Mehar Singh's case, the income was assessed on a "best judgment assessment" after rejecting the books, which was not the case here. In Gobald Motor's case, deliberate suppression of income was involved, unlike the present case where the books were not rejected. The court referenced CIT v. Mettupalayam Coonoor Service (P.) Ltd., emphasizing that not all additions to total income in assessments can be treated as commercial profits unless based on suppression of income or inflated expenditure. The court concluded that the Tribunal misread its earlier order in the quantum appeal and did not apply commercial principles to determine actual commercial profits. It held that the Tribunal must ascertain primary facts and give both parties an opportunity to adduce evidence. Conclusion The court remanded the case to the Tribunal to determine the primary facts and apply commercial principles to ascertain whether the disallowed losses were actual commercial profits for the purposes of section 23A. The answer to question 2 depends on the primary facts of question 1, thus both questions were remanded for further determination. The reference was disposed of with no order as to costs.
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