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TMI Blog1992 (10) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profits earned by the assessee though, in the profit and loss account, there was a net loss of Rs. 2,18,071. By virtue of section 41(2), the difference between the excess value and the net loss which was Rs. 2,34,580, was taxable. The Income-tax Officer opined that this taxable profit under section 41(2) attracted the provisions of section 104(i) also ; consequently, he levied additional income-tax under section 104. The assessee failed before the Commissioner (Appeals) also. The Appellate Tribunal accepted the assessee's contention and held that the difference between the written down value and the price at which the machinery is sold is deemed to be taxable profits under section 41(2) by virtue of the fiction created in the said provision, and that, such a difference was not, in fact, the income of the assessee at all ; it is not business profits, as held by the Supreme Court in CIT v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290. It was contended by learned counsel for the Revenue that the aforesaid decision of the Supreme Court was rendered under the provisions of the Indian Income-tax Act, 1922 (old Act), wherein, there was no provision, similar to section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the dividend having regard to the smallness of the profit. Thereafter, the Supreme Court referred to section 2(6C) of the old Act, read with section 10(2), and observed at page 295: "In computing the profits and gains of the company under section 10 of the Act, for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assess able income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realised and the written down value is made charge able to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profits ; it reaches him as part of the capital invested by him, the fiction created by section 10(2)(vii), second proviso, notwithstanding. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though tax is levied under section 9 of the Act on the bona fide annual value of the property, the actual receipts may be considerably less than the annual value and if the test of reasonableness is the extent of the assessable income and not the commercial profit, there may frequently arise cases in which companies may have to sell off their income-producing assets. The Legislature has deliberately used the expression 'smallness of profit' and not 'smallness of assessable income' and there is nothing in the context in which the expression 'smallness of profit' occurs which justifies equation of the expression 'profit' with 'assessable income'. Smallness of the profit in section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional." Therefore, operation of the fiction created by sections 23A and 2(6C) of the old Act was limited to the particular purpose and the Supreme Court held it not possible to extend the fiction to convert the actual " capital return " into a " commercial profit " for other purposes. The receipt on sale of the old machinery is a capital return ; the said receipt cannot be considered to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case." The Supreme Court reiterated that " the words 'smallness of profit' in the section refer to actual accounting profits in comparison with the assessable profits of the year ". (at page 183). Section 23A was held to be in the nature of a penal provision and the Revenue has strictly to comply with the conditions laid down thereunder and the burden was entirely on the Revenue to prove the said conditions. Gobald Motor Service (P.) Ltd V. CIT [1966] 60 ITR 417 (SC) was case where the assessee deliberately omitted and suppressed certain 4 receipts while computing the commercial profits for distribution as dividends. M. R. M. Plantations (P.) Ltd. v. CIT [1986] 160 ITR 213 is a decision of the Madras High Court. The assessee-company had treated certain receipts as part of profits, though the receipts were the result of the sale of immovable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicability of section 23A. Barring such exceptional cases, we are of the view that the Income-tax Officer would be justified in considering the amounts received by way of capital gains as forming part of the profits of an assessee while exercising the powers under section 23A of the Act." The two cases pertain to capital gains ; further they were not concerned with the second part of section 104 (or the second condition under section 23A of the old Act). A different note is found in the decision of the Calcutta High Court in CIT v. N. Guin and Co. (P.) Ltd. [1979] 116 ITR 475. It was held therein that capital gain cannot be equated with commercial profit and it is only a notional or a deemed income. However, the manner in which the directors of the company treated such a receipt, while distributing the dividends, was held to be relevant, as an exceptional case. At page 486, the court observed : "In our view, when a company disposes of any of its capital asset and realises a price higher than its cost price resulting in a surplus then it will be for the directors to decide if such surplus would be treated as part of the profit of the company and included in the distributab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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