1979 (10) TMI 5 - SC - Income Tax

Accumulated Profits - section 2(6A)(e) - interpretation - whether accumulated profits can take in current profits - section 2(6A)(e) could not be interpreted as includes current profits - appeal of revenue is allowed

Summary

Issues Involved:
1. Interpretation of "accumulated profits" under section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Competence of the Appellate Tribunal to refer a question to the High Court at the instance of the assessee when no reference application was made by the assessee.

Detailed Analysis:

1. Interpretation of "Accumulated Profits" under Section 2(6A)(e) of the Indian Income-tax Act, 1922:
The primary issue in this case was whether the term "accumulated profits" as mentioned in section 2(6A)(e) of the Indian Income-tax Act, 1922, includes current profits. The assessee had withdrawn money from the company, and the Income Tax Officer (ITO) treated these withdrawals as dividends under section 2(6A)(e). The assessee contended that only Rs. 1,050 could be considered as "dividend" since the accumulated profits of the company were Rs. 18,950, after adjusting provisions for tax and dividend. The ITO, however, included current profits for the year ending March 31, 1959, in determining the accumulated profits.

The Income-tax Appellate Tribunal upheld the assessee's claim that "accumulated profits" do not include current profits but rejected the contention regarding the provisions for tax and dividend. The High Court of Kerala affirmed this view, answering in favor of the assessee.

The Supreme Court upheld the High Court's decision, stating that the term "accumulated profits" does not include current profits. The Court referenced multiple judicial decisions, including Girdhardas & Co. Ltd. v. CIT, CIT v. M. V. Murugappan, and CIT v. P. K. Badiani, which consistently held that "accumulated profits" are distinct from current profits. The Court emphasized that this distinction has been recognized in judicial decisions and the mercantile world for over a century. The Court dismissed the revenue's argument that the Law Commission's Twelfth Report intended to include current profits in "accumulated profits."

2. Competence of the Appellate Tribunal to Refer a Question to the High Court at the Instance of the Assessee:
The second issue was whether the Appellate Tribunal was competent to refer a question to the High Court at the instance of the assessee, who had not made a reference application. The revenue contended that the Tribunal should not have referred the question regarding the provision for tax and dividend, as no reference application was made by the assessee.

The Supreme Court agreed with the revenue, stating that Section 256(1) of the I.T. Act, 1961, allows only the party applying for a reference to specify the questions of law. The Court distinguished between two categories of cases: one where the Tribunal's order partly favors both parties, requiring each aggrieved party to file a reference application, and the other where the order entirely favors one party, allowing the non-applicant to raise questions of law only to support the Tribunal's order.

The Court found that the question regarding provisions for tax and dividend was separate and distinct from the question of including current profits in accumulated profits. Therefore, the Tribunal was not competent to refer the second question, and the High Court's judgment on this question was set aside.

Conclusion:
The Supreme Court dismissed the revenue's appeal regarding the inclusion of current profits in "accumulated profits," affirming the High Court's decision in favor of the assessee. However, it allowed the appeal concerning the competence of the Tribunal to refer the second question, setting aside the High Court's judgment on that matter. There was no order as to costs.