TaxTMI 
TaxTMI 
TaxTMI 
1961 (4) TMI 102
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.... amounting to ₹ 2,20,000 and the "Income-tax Fund in excess of requirement" amounting to ₹ 93,387, making in all ₹ 9,38,335. The sum of ₹ 6,24,948 under the heading "Buildings and Machinery Depreciation Fund" had been carried forward from year to year in the balance-sheets of the company from the year 1946 onwards. In 1946 the assessee company had sold its buildings and machinery and realised a sum of ₹ 4,00,000 for its buildings and ₹ 21,99,038 for its machinery. It thus realised in all a sum of ₹ 25,99,038. The original cost of these buildings was ₹ 3,15,264, and that of the machinery was ₹ 10,44,491 making in all ₹ 13,59,755. The sum of ₹ 6,24,948 was made up of various amounts shown in the Buildings and Machinery Depreciation Fund year after year up to and inclusive of the calendar year 1945. In the balance-sheet as on December 31, 1945, the original cost of ₹ 13,59,755 was shown on the "Assets side" and the provision of ₹ 6,24,948 was shown on the Liabilities side "under the head "Buildings and Machinery depreciation Fund". For the assessment year 1952-53 ....
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....Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this sub- section exceed the paid up capital of the company, together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words 'sixty per cent.' the words 'one-hundred per cent.' were substituted." In order that the proviso may apply it is necessary that the reserves shown in the balance-sheet must represent accumulations of past profits. It further contemplates that the past profits must have been such as could have been the subject of an order under sub- section (1) of section 23 A. An order under sub-section (1) of section 23A can be passed where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year, are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, a....
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....set concerned has depreciated in value, the rule would not apply, at least, to the extent of the amount of such depreciation. In order to consider whether a particular reserve represents accumulation of profits or not, it is necessary to have a clear idea as to the meaning of the expression "profits" as commercially understood. The concept of "profits" has been very ably dealt with by Fletcher Moulton L.J. in a classical passage in In re Spanish Prospecting Co. Ltd. [1911] 1 Ch. 92 (C.A.) Says he [1911] 1 Ch. 92, 98 (C.A.): "'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets at the two dates...if the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date (due allowance of course being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the Business during the period in questio....
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....serve not only does not consist of an actual fund but can be said to represent or indicate a fund or property only in a very indirect way, if at all. The balance in the reserve or allowance for accrued depreciation represents just one thing -the estimated expiration is use of the depreciable property shown in other accounts at cost or other gross book value. This can be emphasized by calling attention to the fact that it is quite possible to account for depreciation by avoiding the use of the reserve account entirely through the use of a procedure by which the credits are lodged directly in the plant accounts." In Wixon's Accounts Handbook, fourth edition, it has been stated at page 17.49 in connection with "Significance of Depreciation Allowance" as under: "Many years ago, Hatfield discussed the three common misconceptions regarding the allowance for depreciation: 1. The view that it represents a fund of money. 2. The view that it represents a reservation of profits. 3. The view that it constitutes inherently a provision for replacement. Unfortunately these misconceptions still exist to-day and it is worth reviewing his discussion. None of thes....
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....t had been made by way of depreciation was in excess of the true requirement in that connection. Our attention has been called to a decision of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. [1961] 41 I.T.R. 290 (S.C.). In that case it was observed that there was no definable relation between the assessable income and the profits of a business concern in a commercial sense, that the computation of income for purposes of assessment of income-tax was based on a variety of artificial rules and took into account several fictional receipts, deductions and allowances. That case turned upon the determination of the question whether a larger distribution of dividend by the company concerned would be unreasonable for the purpose of deciding whether a distribution order should be made under section 23A of the Income-tax Act. In that case it was observed that the difference between the written down value of an asset and the price realized by the sale thereof was not really income, but was made taxable income for the purpose of computation of the assessable income by the fiction in the second proviso to section 10(2)(vii) of the Income-tax Act, read with section....