1965 (4) TMI 5 - HC - Income Tax

Fixed Assets - proviso (b) to s. 23A(1) of the IT Act was not applicable to the assessee - company is not obliged to show depreciation in its balance-sheet by way of reserves and indeed ought not to do so under the form prescribed by s. 211, depreciation cannot be considered in the context of reserves

Summary

Issues Involved:
1. Entitlement to rebate on undistributed profits under the Finance Act, 1955.
2. Applicability of proviso (b) to section 23A(1) of the Income-tax Act for the assessment year 1955-56.

Detailed Analysis:

1. Entitlement to Rebate on Undistributed Profits:
The first issue addresses whether the assessee-company is entitled to a rebate of one anna per rupee on the undistributed balance of the profits as provided in clause (i) of the proviso to Item B of Part I of the Schedule to the Finance Act, 1955. The facts reveal that the assessee, a limited company not substantially interested by the public, declared a dividend of 62% of the distributable profit for the assessment year 1955-56. The Income-tax Officer initially denied the rebate on the undistributed profits, citing the potential applicability of section 23A(1) of the Income-tax Act. The Appellate Assistant Commissioner accepted the assessee's contention that section 23A(1) was not applicable since more than 60% of profits were declared as dividends, thereby allowing the rebate. However, the Tribunal remanded the case to the Income-tax Officer for further findings, who then reported that the reserves representing accumulated past profits exceeded the paid-up capital and the actual cost of fixed assets post-depreciation.

2. Applicability of Proviso (b) to Section 23A(1):
The second issue examines whether the provisions of proviso (b) to section 23A(1) were applicable to the assessee-company for 1955-56. The Tribunal needed to determine if the reserves representing accumulated past profits exceeded the actual cost of the fixed assets. The Income-tax Officer's findings showed that the total reserves from accumulated profits were Rs. 37,97,985, while the actual cost of fixed assets, after deducting depreciation, was Rs. 14,92,881. The Tribunal concluded that the term "actual cost" should be interpreted as the original cost, not the depreciated value. This interpretation was supported by references to section 10(5) of the Income-tax Act and relevant case law, which defined "actual cost" as the original cost to the assessee.

The Tribunal also considered whether the mere applicability of section 23A was sufficient to deny the rebate. It followed the ruling in Commissioner of Income-tax v. Afco Private Ltd., which stated that the applicability of section 23A depended on an order made by the Income-tax Officer, not merely on the provisions of the Act. Therefore, the right to obtain the rebate under the Finance Act, 1955, was contingent on the absence of an order under section 23A.

The Tribunal's findings indicated that the reserves did not include depreciation, aligning with the provisions of Schedule VI of Part III of the Indian Companies Act, 1956, which excluded depreciation from reserves. Consequently, the proviso (b) to section 23A(1) was deemed inapplicable to the assessee for the year 1955-56, and the company was entitled to the rebate on the undistributed profits.

Conclusion:
The High Court concluded that the assessee-company was entitled to the rebate of one anna per rupee on the undistributed balance of the profits as per the Finance Act, 1955. The proviso (b) to section 23A(1) was not applicable to the assessee for the year 1955-56. The answers to both questions were in the affirmative and in favor of the assessee, who was awarded the costs of the reference.