1978 (5) TMI 20 - HC - Income Tax

Additional Depreciation, Assessment Year, Commercial Profit, Previous Year, Substantially Interested

Summary

Issues:
1. Interpretation of additional depreciation for determining commercial profit for dividend distribution.
2. Consideration of profits arising under a specific section for dividend distribution.
3. Reasonableness of dividend distribution under section 23A of the Indian Income-tax Act, 1922.

Analysis:
1. The case involved the assessment of M/s. New Gujarat Cotton Mills Ltd. for the assessment year 1961-62 under section 23A of the Indian Income-tax Act, 1922. The issue was whether the additional depreciation of Rs. 2,03,389 allowed in earlier assessment years but provided for in the accounts of the relevant year should be deducted from profits for determining commercial surplus. The Tribunal held that the additional depreciation was relevant for calculating the surplus available for dividend distribution as it aimed at replacing capital assets.

2. Another aspect considered was the treatment of profits under section 10(2)(vii) of the Indian Income-tax Act, 1922. The contention was whether the profit of Rs. 79,262 credited in earlier years should be added to the book loss of earlier years for assessing dividend distribution. The Tribunal found that treating the profit as a capital gain of the relevant year would only increase the previous year's loss, leading to the same net result. Such capital gains are usually reserved for asset replacement and not for immediate dividend distribution.

3. The reasonableness of the dividend distribution of Rs. 90,000 by the assessee was also challenged. The Tribunal considered the past financial performance of the company, noting losses and small profits in earlier years. Despite a surplus in the relevant year, the Tribunal concluded that the dividend declared was reasonable, taking into account the company's history. The High Court upheld the Tribunal's decision, emphasizing that the dividend distribution was commercially justifiable, and dismissed the revenue's appeal.

Conclusion:
The High Court ruled in favor of the assessee, affirming the Tribunal's decision. The additional depreciation and profits under specific sections were considered relevant for determining commercial profits available for dividend distribution. The Court highlighted the importance of past financial performance in evaluating the reasonableness of dividend distribution under section 23A of the Indian Income-tax Act, 1922.