COMMISSIONER OF INCOME TAX Vs. BAGCHI R N

JUDGEMENT

(1.) AS directed by the High Court under Section 66(2) of the Indian Income-tax Act, 1922 (hereinafter called the Act), the Income-tax Appellate Tribunal, Patna Bench, has stated a case referring the following question of law :

(2.) THE facts mentioned in the statement of case prepared by the Tribunal are these. THE assessee, a private limited company, was engaged in the business of coal mining, its name and style being R. N. Bagchi and Brothers, Dabri Colliery Private Ltd. In the assessment year 1958-59 the total income of the assessee was determined at Rs. 42,810. THE company had returned an income of Rs. 34,790 only. It had declared a dividend of Rs. 1,701 which the Income-tax Officer held was below the statutory limit of 45 per cent. under Section 23 A of the Act as it stood at the relevant time. Calculating on the basis of the statutory percentage of 45 per cent. the Income-tax Officer held that the assessee-company ought to have declared a dividend of Rs. 9,418. Under Section 23A of the Act, an opportunity was given to the assessee to declare dividend within three months of the receipt of the notice which was issued by the Income-tax Officer on December 18, 1961. THE assessee was also called upon to show cause why proceedings under Section 23A(1) should not be initiated and additional super-tax should not be levied for deficiency in the distribution of statutory dividend. On March 18, 1962, the assessee, in a letter addressed to the Income-tax Officer, took the stand that owing to the smallness of profit coupled with the fact that the company suffered losses in the earlier years and in view of the pending tax liability it was not possible for the company to declare a larger dividend than that declared by it. THE contention of the assessee was rejected by the Income-tax Officer. In doing so, he took into consideration the fact that the company itself had declared an income of Rs. 34,790 which was not a small profit. He, therefore, levied additional super-tax on the undistributed income which worked out to Rs. 20,929 at the rate of 37 paise per rupee. THE total amount of the additional super-tax imposed was Rs. 7,743.73. THE assessee went up in appeal, and the Appellate Assistant Commissioner upheld the order of the Income-tax Officer keeping in view the principle of law decided by the Bombay High Court in Commissioner oj Income-tax v. F. L. Smidth & Co. (Bombay) Ltd. [1959] 35 I.T.R 183 and New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income-tax, 1959 37 ITR 423 THE Appellate Assistant Commissioner took into consideration the figures of profit shown by the company in its balance-sheet and the profit and loss account. THE assessee took the matter in second appeal to the Appellate Tribunal. THE Tribunal took the view that the commercial profit had to be taken into consideration. After making certain adjustments in the figure of the assessed profit, the Tribunal determined the commercial profit and thereafter accepting the case of the assessee that the tax liability ol the assessment year 1957-58 to the tune of Rs. 19,187 was paid in the accounting year 1957, relating to the assessment year 1958-59, on the basis of the decision of the Madras High Court in Gobald Motor Service Ltd. v. Commissioner of Income-tax, [1963] 47 I.T.R. 734 the Tribunal found that the net result from the commercial point of view was a loss. Hence, it could not be said that the declaration of the dividend by the company was unreasonable.

(3.) IN Commissioner of INcome-tax v. F. L. Smidth & Co. (Bombay) Ltd., to the company's profits was added under Section 42(2) of the Act a profit amounting to Rs. 1,63,377. Relying upon a decision of the Supreme Court in Mazagoan Dock Ltd. v. Commissioner of INcome-tax, 1958 34 ITR 368 it was held that the profit assessed under Section 42(2) of the Act was a notional income and a profit in the commercial sense of the term. The expression "smallness of profit" was interpreted to mean not the assessable profit or the assessable income but profit in the commercial sense. That being so, leaving out of consideration the notional income added to the profits of the company, it was held that action under Section 23A, on the facts and in the circumstances of the case, was not justified. The same principle was laid down by the Bombay High Court in New Mahalaxmi Silk Mills Ltd. v. Commissioner of INcome-tax wherein it was pointed out by Shah J. at page 428 :