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TMI Blog1982 (3) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 6,10,034. The ITO, however, referred to the decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT [1961] 42 ITR 57 and held that the penal interest could not be deducted for ascertaining the amounts available. The ITO further looked into the balance sheet of the company and found that the assessee had made a provision for taxation to the extent of Rs. 21,86,619 out of which tax to the extent of Rs. 13,64,800 had been paid leaving a balance of Rs. 8,21,819 and after adjustment of taxes paid between 31-1-1975 and 31-10-1975 the balance in the provision account came to Rs. 7,21,819. The ITO found that this amount was higher than the tax liability in respect of the earlier years and, therefore, he found that the provision for taxes was sufficient to take care of the earlier years' tax demands. 2. The ITO accepted the plea of the assessee that a prudent businessman would consider the past tax liability before declaring dividend. The ITO was of the view that advance tax which was due to be paid on 15th March was after the end of the accounting year, and could not be taken into consideration. The ITO found that the profit as per profit and loss account was Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for determining the smallness of profit. The Commissioner (Appeals) was of the view that all the taxes which were payable for the current year had to be taken into consideration for finding out the availability of funds for distribution of dividend. The Commissioner (Appeals) proceeded to consider the plea of the assessee that though interest under sections 215 and 217 could not be allowed as a deduction for the purpose of determining the distributable income, the liability itself had to be kept in view while considering the question of smallness of profit. The Commissioner (Appeals) then proceeded to consider the total amount available by way of provision for taxes and considered the tax liability including the interest in respect of the earlier years as well as the current year. Thus he found that as against the provision for taxes of Rs. 8,21,819, there was a total tax liability (including current year's liability) at Rs. 11,63,026. This figure he arrived at in the following manner: Rs. "Income-tax liability for assessment years 1970-71, 1971- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas the actual depreciation was allowed at Rs. 1,05,943. It was contended that any such adjustment was not correct and in support he relied on the decision of the Bombay High Court in the case of CIT v. Natwar Transport Co. (P.) Ltd. [1979] 116 ITR 284. In this case, it was held that where an assessee provides for the normal depreciation in accordance with commercial principles, books profit was not liable to be enhanced for the purpose of complying with section 104 by the difference between the depreciation for the material years actually charged in the profit and loss account and the depreciation allowed in the assessment. While doing so their Lordships had relied on the decision of the Supreme Court in the case of CIT v. Gangadhar Banerjee Co. (P.) Ltd. [1965] 57 ITR 176. It was, therefore, contended that the commercial profits should have been taken at Rs. 10,34,427 which was apparent from the profit and loss account. 7. The next contention, which has been raised by the learned counsel, was that the Commissioner (Appeals) should have considered the tax liability for the current year in full and not only the amount of Rs. 3,41,207 as worked out by the Commissioner (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner (Appeals) worked out the total tax liability of Rs. 3,41,207 he had considered the tax liability for the earlier years as well as the full tax liability for the current year. It was, therefore, submitted that there was no further tax liability to be considered against the profits available to the assessee. As regards the determination of the commercial profits, the departmental representative relied on the order of the Commissioner (Appeals). He contended that the overall funds available to the assessee had to be looked into for determining whether the assessee's case fell under the category of smallness of profit. 9. We have considered the facts of the case and the contentions raised by both the parties. The provisions contained in section 104 and the other sections following have been the subject-matter of consideration by the various Courts and by now the principles are more or less settled. For applying these provisions, there are various stages and different standards have to be applied and only in a case which comes under the said provisions the ITO can levy tax on the undistributed income. The jurisdiction of the ITO arises on the fulfilment of certain condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der under sub-section (1), if 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 larger dividend than that declared would be unreasonable. It is at this stage that the ITO must determine the commercial profits and from that he must find out that what are the distributable funds available to the directors, having regard to their known liabilities on the date of declaration of dividend. It is now well established that at this stage it is not the assessable profits but the actual profits or commercial profits that have to be taken into consideration. The first consideration should be the liability for the current tax and then there should be consideration of the other liabilities, e.g., taxes for the earlier years which might have become due or which might have been known at that point of time. It is also established that for the purpose of ascertaining the funds available for distribution one has to consider the matter from business point of view and on commercial principles. In considering the question of smallness of profit or any losses the ITO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, which was shown at Rs. 10,34,427. 13. Once having arrived at the commercial profit we have first to deduct the income-tax actually payable for this year. This amount is Rs. 7,34,664. Thus, after meeting the current tax liability, surplus available to the company would work out to Rs. 3,01,763. 14. It is at this stage that we have to take into consideration whether there is any other liability which has to be considered before the above amount of Rs. 3,01,763 is considered as the amount available for distribution. The only liability to which the assessee has drawn the attention of the ITO as well as the Commissioner (Appeals) is the tax payable in respect of earlier years' assessments. At this stage, we have to take into consideration the fact that there was a taxation reserve of Rs. 21,86,819 in the balance sheet. It had been explained by the counsel for the assessee before the ITO as well as the Commissioner (Appeals) that out of this provision for taxes, taxes to the extent of Rs. 13,64,800 had been paid up to the end of the financial year. This included taxes for some other earlier years as well as the advance tax paid in part for the current year. From the figures given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax liability for earlier years as discussed above 6,27,436 ------------------ Balance 4,06,133" ------------------ From the above we will find that as far as the tax liability for earlier years was concerned the provisions for tax was more than sufficient for meeting it and no funds had to be drawn from the current year's surplus for the payment of taxes for earlier years. 16. In this connection, a reference may be made to the working given in the order of the Commissioner (Appeals) which has also been extracted in the earlier part of this order. The difference between the working given in the Commissioner (Appeals)'s order and the working given above is due to the fact that while the Commissioner (Appeals) has taken into consideration the current tax liability for the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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