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TMI Blog1973 (3) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... w, that the diesel consumption of 9,570 gallons showed that the total mileage done should have been 1,43,550 miles at the rate of 15 miles per gallon. He, therefore, estimated the income at Rs. 6,500 per bus for three old buses and allowing the normal depreciation he took the income at Rs. 6,932 for all the three buses. In respect of the new bus, after allowing an additional depreciation, the Income-tax Officer estimated the loss at Rs. 637. The estimate of income at Rs. 6,500 per bus was also agreed to by the assessee's representative. Ultimately, the assessment was completed as "no income no loss." In the previous year ending December 31, 1958, the assessee filed a return showing a loss of Rs. 15,020. The account books showed the actual collections at Rs. 97,566 against the optimum collection of Rs. 2,17,801. In view of the factors referred to above, the Income-tax Officer did not accept the loss returned by the assessee in this year as well, and he, therefore, disallowed the loss but did not estimate any income. In the previous year ending December 31, 1959, relevant for the assessment year 1960-61, the assessee returned an income of Rs. 30,739. After disallowing a sum of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Income-tax Officer for the first two years would alone be relevant and not the book losses. In that view it upheld the order of the Income-tax Officer passed under section 23A. At the instance of the assessee, the following question has been referred to this court under section 66(1) of the Indian Income-tax Act, 1922 : "Whether, on the facts and in the circumstances of the case, the levy of super-tax on the assessee-company for the assessment years 1960-61 and 1961-62 under section 23A of the Income-tax Act is justified ? Section 23A(1) provides that where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the 12 months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company in that previous year as reduced by income-tax and super-tax payable by the company on its total income, he shall, unless he is satisfied that having regard to the losses incurred by the company in the earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax v. Bipinchandra Manganlal & Co. their Lordships of the Supreme Court, while considering the scope of the words "smallness of the profits" occurring in section 23A(1) of the Act expressed : "A company normally distributes dividends out of its business profits and not out of its assessable income. There is no definable relation between the assessable income and the profits of the business concern in a commercial sense. Computation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividend would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account." The above passage is relied on by the asseseee in support of its contention that the assessed income of the first two years cannot come into the picture and it is the actual losses shown in the books of account for those years that have to be taken into account. But we are of the view that the above observations came to be made in an entirely different context. In that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a business man. The yard-stick is that of a prudent business man. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive test for the guidance of the Income-tax Officer. It depends upon the facts of each case." Commissioner of Income-tax v. Jubilee Mills Ltd. was a case in which the expression "losses incurred by the company in earlier years" occurring in section 23A(1) came to be construed by the Supreme Court. There the company adjusted some of the losses of the earlier years by reducing the paid up capital. The assessee wanted the revenue to take into account those loses as well for purpose of computing the "losses incurred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot help us to deal with the question before us. All these cases deal with the scope of section 23A in general and the scope of the words "losses incurred in the earlier years" and "smallness of the profit" occurring in the section in particular. We are here concerned with the question as to whether it is the book losses or the losses as determined by the income-tax authorities that are to be taken up into account. The fact that the book results have not been accepted by the Income tax Officer as correct in the earlier years cannot be altogether overlooked. When the assessee's book results showing losses in the earlier two years have not been accepted by the Income-tax Officer, it cannot be said that the Income-tax Officer is bound to accept the said book results in proceedings under section 23A for finding out the available surplus in the subsequent years. As already stated, the Income-tax Officer ignored the book results and made an estimate on certain basis to which the assessee also agreed. It did not challenge the assessments passed on estimates in the earlier two years. Having regard to this fact that the assessee had not challenged the rejection of his books of account and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,373 and the estimate of profits made by the Income-tax Officer which resulted in the profits available for distribution at Rs. 1,22,693 should not form the proper basis. In that case though the assessee returned an income of Rs. 1,01,902 the Income-tax Officer did not accept the return but had made certain additions towards spare parts, tyres and tubes, suppression of luggage collection, and the difference between depreciation allowed and claimed, As a result of these additions there was difference between the assessable income and the book profits. In answering the assessee's contention that it is the actual book profits and not the assessable income as determined by the Income-tax Officer that should be taken as the "profits made" for the purpose of section 23A, their Lordships of the Supreme Court expressed the view that the profits which are to be taken into consideration under section 23A are the real commercial or accounting profits and that, if an item is deliberately omitted from the accounts, it cannot be said that commercial principles prevent that amount being added to the profits in order to at the real commercial or accounting profits and that the two items relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether the disallowed amount will be a profit available in the hands of the assessee. In Commissioner of Income-tax v. Anamalai Bus Transport Ltd., this court felt that as the levy of penal super-tax under section 23A is not an assessment of the total income to tax in the normal sense of the Income-tax Act, the considerations which may govern assessment of total income to income-tax, particularly in the matter of deductions and allowances, may not in their full vigour and scheme apply to a determination of the total income for purpose of section 23A and that, therefore, even if the claim of an assessee-company for deduction of a sum donated by it as charity is disallowed, that will not be taken into account for the purpose of determining the availability of profits with reference to section 23A. We are, therefore, of the view that the decision of the Supreme Court in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, supports the stand taken by the revenue that as a result of the additions made to the income returned by the assessee in the earlier two years, there are no losses to be wiped out from and out of the profits earned in the subsequent two years and that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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