1955 (2) TMI 28 - HC - Income Tax

Court excludes excess sale proceeds from machinery as actual profits under Income-tax Act section 23A.

Bipinchandra Maganlal & Co. Ltd. Versus Commissioner of Income-tax

The High Court of Bombay ruled against including an excess amount realized from the sale of machinery as actual profits for the assessment year 1947-48 ... - Issues:Calculation of actual profits for assessment year 1947-48 under section 23A of the Income-tax Act based on the treatment of excess amount realized on sale of machinery as assessable income.Analysis:The High Court of Bombay considered the case of an assessee company that was not substantially interested by the public under section 23A of the Income-tax Act for the assessment year 1947-48. The company reported a net profit of &8377; 33,245, but the income-tax authorities assessed the profit at &8377; 48,751 by including an additional amount of &8377; 15,608. This sum arose from the sale of machinery for an amount exceeding its written down value, treated as assessable income under the second proviso to section 10(2)(vii). The crucial issue was whether this amount should be considered as actual profits for the purposes of section 23A (Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay City [1949] 17 ITR 493).The court emphasized that the determination of actual profits for section 23A should reflect commercial reality, not just assessable profits. The definition of 'income' in section 2(6C) includes amounts deemed as profits under specific provisions, making them taxable. However, the court held that the excess realized from the sale of the asset over its written down value did not constitute true commercial profit but a notional income subject to tax. Therefore, this amount should not be considered as part of the actual profits of the company from a commercial standpoint.The Advocate General argued that the excess amount realized should be treated as profit, similar to depreciation deductions, and reflected in the profit and loss account. However, the court rejected this argument, stating that such notional income could not be equated to actual commercial profits. The court clarified that section 23A focuses on the profits of the relevant year, excluding past reserves or accumulated profits, and emphasized that only the profits shown in the profit and loss account, adjusted as necessary, should be considered as actual profits for section 23A purposes.In conclusion, the court ruled against including the sum of &8377; 15,608 as actual profits for the assessment year 1947-48 under section 23A. The court highlighted the importance of distinguishing between notional income and true commercial profits while assessing the reasonableness of dividends under the Income-tax Act.