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TMI Blog1982 (11) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... us years for the purposes of calculating the additional super-tax payable under section 23A(1) for the assessment years 1955-56 and 1956-57 ? " Briefly stated the facts giving rise to this reference are that the assessee is a private limited company. It was incorporated in the previous year relevant to the assessment year 1953-54 for taking over the business of a going concern run in the name of " M/s. Ram Chand Sons ". At the time of the take over the written down value of the assets in the books of M/s. Ram Chand Sons stood at Rs. 11,53,512. The assessee-company, however, paid a sum of Rs. 41,69,881 as consideration for taking over all the assets of the said firm. The ITO, acting under the first proviso to s. 10(5)(a) of the Indian I.T. Act, 1922 (hereinafter referred to as " the Act "), fixed the cost of the said assets at Rs. 24,08,110 for the purposes of calculating depreciation allowance to which the assessee could be entitled. This action of the ITO fixing the cost of the assets at Rs. 24,08,110 for the purpose of computing depreciation allowance was eventually approved by the High Court when this question was referred to it at the instance of the assessee in connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been made both for the amount of penal interest under s. 18A of the Act paid by the assessee in each of the assessment years as also for the difference in the depreciation claimed and allowed by the ITO. The AAC accepted the assessee's claim with regard to the amount of penal interest paid by it in respect of each of the relevant assessment years and held that it was deductible from its assessed income; but it rejected the assessee's case in respect of the amount of difference between the depreciation claimed and allowed in each of these years. Both the assessee and the Department then went up in appeal before the Income-tax Appellate Tribunal which in its order dated 20th September, 1971, observed thus: "Respectfully following the decision of the Supreme Court in the case of Capital Matters Service at pages 421 and 422 quoted in paragraph 15 we hold that even though penal interest cannot be claimed as deduction once it is held that section 23A is applicable that is factor which has to be taken into account in deciding the, smallness of profit, as interpreted by Supreme Court in the case of Gangadhar Banerji Co. (P.) Ltd. ([1965]57 ITR 176). So far as the difference 'betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shortfall assessed penal interest claimed allowed 1 2 3 4 5 6 ---------------------------------------------------------------------------------------------- 1955-56 2,49,975 1,86,771 30,882 1,16,539 95,783 Surplus 1956-57 5,75,496 2,49,981 30,872 1,88,154 1,56,489 Surplus 1957-58 3,15,076 1,61,634 26,152 1,27,696 406 Shortfall 1958-59 4,95,799 2,55,336 54,578 2,31,342 45,457 Shortfall 1959-60 3,56,459 1,83,577 68,488 2,02,178 97,662 Shortfall 1960-61 2,77,897 1,25,053 25,326 1,44,903 17,385 Shortfall 1961-62 3,49,040 1,57,069 33,008 1,51,521 7,443 Surplus ----------------------------------------------------------------------------------------------- It held that in view of the changed circumstances and on the principle already enunciated by it in its order dated 20th September, 1971, the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany by way of dividends are below the statutory percentage of the total income of the company, as reduced by various items specified therein; the second part the section which is in the nature of a proviso to the first part, lays down that no order for payment of super-tax contemplated by the first part shall be made in cases where the ITO is, having regard to losses incurred by the company in any earlier order or to the smallness of the profit made in the previous year, payment of a dividend or a larger dividend than that declared by the company would be unreasonable. This section makes a clear distinction between the total income of a company and its profits and gains which it eventually distributes as dividend. Viewed in the light of the definition of the words " total income " contained in s. 2(15) of the Act and the provisions contained in s. 4 of the Act, the said expression used in s. 23A obviously refers to the income assessed by the ITO on which the company has been required to pay income-tax. For the purposes of assessment, the total income contemplated by the Act is arrived at by adding to or deducting from the profits and gains of the company as understood in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with and in relation to its profit-yielding activity has necessarily to be accounted for before the amount of actual profits available for distribution by it is worked out. The amount of penal interest paid by a company under s. 18A of the Act, even though it is required to be paid because of some default or lapse on the part of the company, is none the less an expenditure which the company is compelled to incur in connection with and in relation to its profit-yielding activity and any prudent businessman would take it into account before deciding upon the amount which it intends to distribute as dividend from out of the profits made by it. Accordingly, such payment has necessarily to be taken into consideration in judging distributable profits in a particular assessment year. Learned counsel for the Revenue invited our attention to a decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT [1961] 42 ITR 57 (SC), wherein while considering the question as to whether or not the interest that was charged to the company under s. 18A ought to have been deducted along with the income-tax before the fictional dividends as contemplated by s. 23A as it stood at the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was entitled also to consideration of the difference between the amount of depreciation allowance claimed by it and that allowed by the ITO. Admittedly, the amount of depreciation was taken into consideration while determining the assessable income of the company. The extent of such depreciation allowance is determined in accordance with the provisions contained in the I.T. Act. Accordingly, such depreciation allowance cannot be taken into consideration over again while determining the smallness of profit unless it can be shown that an amount large than that allowed under the Act should have been allowed on commercial principles. In the instant case, no material has been placed before the Tribunal on which it could have come to a conclusion that the depreciation admissible under the provisions of the Act is much smaller than that what should have been allowed on commercial principles. In the circumstances, no question of considering the difference between the depreciation claimed and allowed by the ITO while determining the question of smallness of profit under s. 23A of the Act arises. We are accordingly of opinion that the Income-tax Appellate Tribunal erred in holding that on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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