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TMI Blog1962 (8) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... te 31st July, 1954, was ₹ 1,32,054. The Income-tax Officer, finding that the dividends declared by the assessee company was less than 60% of the assessable income of the company as reduced by the amount of income-tax and super-tax payable in respect thereof, made an order under section 23A that the undistributed portion of the income of the assessee as reduced by the amount of tax payable thereon be deemed to be the dividends distributed among the shareholders. It appears that before the Income-tax Officer the assessee had contended that it had to pay ₹ 21,320 as secret commission for the purpose of its business and this should be taken into account in determining the smallness of the profits. It was also the contention of the assessee that it had paid a sum of ₹ 50,000 to Dr. Jariwala in the year of account in pursuance of a compromise arrived at between Dr. Jariwala on the one hand and the company on the other in a then pending litigation. The assessee company claimed that this item should also be taken into account in determining the issue of smallness of profits. According to the assessee if these amounts are taken into account in determining the available pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed the amount on the ground that the expenditure was of a capital nature. He held that even after allowing the amount of ₹ 21,320, the distributed profits fell short of 60% and, in this view of the matter, he affirmed the order of the Income-tax Officer. The assessee took a further appeal to the Income-tax Appellate Tribunal and the Tribunal has accepted the contention of the assessee and allowed the appeal. 4. To appreciate the argument of Mr. Joshi, learned counsel for the revenue, it would be convenient to reproduce paragraphs 6, 7 and 8 of the order of the Tribunal containing its reasons for allowing the appeal : 6. After carefully considering the matter, we are of the opinion that the assessee must succeed. Section 23A is a highly technical anti-avoidance device. Its main purpose is to stop the avoidance of super-tax by the simple means of not distributing the dividends and carrying forward the profits, either as reserves or as unappropriated profits which is quite easy when the company is controlled by a few persons having large incomes. To plug this loophole it was enacted in the year 1939 that the Income-tax Officer could pass an order under section 23A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und on which the Tribunal has accepted the contention of the assessee is that the sum had gone out of the coffers of the assessee company. According to Mr. Joshi the mere fact that an assessee has expended a part of its profits is not sufficient to entitle him to claim that that amount be excluded in computing the amount of available profits for the purpose of section 23A. In order to enable the assessee to claim a deduction of any amount expended by it, out of its profits, it must be established that the expenditure is in some way or the other connected with the business of the assessee. The managing agency was terminated in 1947. In 1951 when the payment was made the managing agency was not in existence. There was no reason for the assessee to make any payment to Dr. Jariwala in the year 1951. According to Mr. Joshi even Dr. Jariwala in his suit had claimed no relief against the assessee company, but, on the other hand, the assessee company was joined as a pro forma defendant because it had refused to join Dr. Jariwala as a plaintiff. Mr. Joshi stated before us that Dr. Jariwala had even asked the court that the amount claimed by him be decreed in favour of himself as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llness of profits, it has been well-settled that the Income-tax Officer has to take into account the commercial profits of the company and not the assessable income of the company. Certain amounts may not be allowable as expenses wholly and exclusively laid out for the purpose of business in the assessment of the company, but nevertheless they may be genuine payments and could be claimed as deductions in ascertaining the commercial profits of the assessee. The commercial profits of an assessee is not one and the same thing as the assessable income of an assessee. It is after ascertaining the commercial profits of the company that the Income-tax Officer has further to consider whether payment of dividend or a larger dividend than that declared would be unreasonable. It is only when the Income-tax Officer is so satisfied that declaration of a larger dividend than that declared would not be unreasonable that he is entitled to make an order under section 23A. It is not in dispute before us that for an assessee to claim a deduction of an amount in computation of its commercial profits, the expenditure has to be in some manner connected with the business of the assessee. An expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not possible to hold that the finding of the Tribunal contained in paragraph 7 that the payment was an actual and genuine payment is in any manner vitiated. Further it does not appear that there was any contention raised before the Tribunal that the payment was a payment, which was in no manner connected with the business of the assessee. On the other hand, the ground on which the Appellate Assistant Commissioner has rejected the contention of the assessee was that it was a payment of a capital nature. 7. Now, a payment, which is of a capital nature, cannot be said to be a payment unconnected with the business. That finding of the Appellate Assistant Commissioner, however, has not been accepted by the Tribunal. Before us Mr. Joshi has argued that the payment was made by the assessee to Dr. Jariwala because the assessee company wanted to get rid of Dr. Jariwala and secure afresh the managing agency of M/s. Estrella Batteries Limited. The case does not appear to have been put in that form before the Tribunal. The Tribunal has found that the payment was made to get rid of a disturbing element. This is a finding of fact and, having regard to the context and the long pendency of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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