STANDARD MILLS COMPANY LIMITED Vs. M RAMALINGAM

JUDGEMENT

(1.) The appellant is a public limited company incorporated under the Indian Companies Act, 1913, and has its registered office at Bombay. The company had, in the calendar year 1951, appropriated Rs. 11,68,000 in declaring dividend to the shareholders out of its total book profits of Rs. 55,69,669. For the assessment year 1952-53, Income-tax Officer, Companies Circle I(2), Bombay, estimated the undistributed profits at Rs. 18,24,525 and allowed a rebate thereon under part I of the First Schedule, Paragraph B, proviso 1, Finance Act, 1951, at the rate of one anna per rupee. For the assessment year 1953-54 the net profits of the company in the calendar year 1952 were determined at Rs. 31,03,760 and the taxable income was assessed at Rs. 12,94,872. In that year also the company declared Rs. 11,68,000 as dividend payable to the shareholders. As this amount exceeded the total income as reduced by seven annas in the rupee and a donation of Rs. 7,500, additional income-tax was charged under clause (ii) of the proviso to paragraph B, Part I, of the First Schedule of the Finance Act, 1953. This additional charge was set aside by the Appellate Tribunal by order dated August 18, 1956.

(2.) The Income-tax Officer then addressed a letter dated November 12, 1956, to the company intimating that he proposed to rectify the assessment of the year 1952-53 in exercise of the powers under section 35(10) of the Income Tax Act, and to withdraw the rebate, because in his view the company distributing Rs. 11,68,000 as dividend had utilised the undistributed profits of the previous year held admissible to rebate. The company contended, inter alia, that it was not true that the dividend or any part thereof came out of the undistributed profits of the assessment year 1952-53. By his letter dated February 21, 1958, the Income-tax Officer informed the company that "on a study of the figures of the assessment year 1953-54", it was disclosed that the net book profits amounted to Rs. 31,03,760 out of which Rs. 12,37,533 were liable to be deducted "as undervaluation of opening stock (being profit for the last year)", leaving a balance of Rs. 18,66,227. Out of that amount, Rs. 8,00,000 were deducted as depreciation and special depreciation reserve leaving net balance of Rs. 10,66,227, and deducting therefrom Rs. 7,50,000 as provision for taxation, Rs. 3,16,227 only remained as profit available for distribution. The Income-tax Officer therefore informed the company that in his opinion the dividends had "come out of the profits of the earlier year", represented by undervaluation of the opening stock which was the income of the previous year. The company asserted that the distribution of dividend was out of the current years profit which amounted to Rs. 11,70,889, and there was no ground for withdrawing the rebate.

(3.) The Income-tax Officer rejected the contention of the company and declared that as against the a mount of Rs. 3,16,227, which was the profit available for distribution, the dividend declared in the assessment year 1953-54 was Rs. 11,68,000 and the balance of Rs. 8,51,773 had come out of the undistributed profits of the year 1951 amounting to Rs. 18,24,525 on which rebate was allowed. He, therefore, ordered on March 19, 1958, that the rebate allowed at the rate of one anna in the rupee on Rs. 8,51,773 be withdrawn, and issued a demand notice for Rs. 53,235.13 nP.