TaxTMI 
TaxTMI 
1955 (2) TMI 28
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....nt year it showed as its net profit Rs. 33,245. The income-tax authorities assessed the profit at Rs. 48,751 and apart from other minor adjustments, substantially the increase was brought about by adding to the net profit of the assessee company a sum of Rs. 15,608. This sum was included for the following reasons. A certain machinery was purchased by the assessee company in December 1945 for Rs. 89.000, and it was sold in March 1947 for the same amount. The written down value of this machinery was Rs. 73,392. Therefore it realised on sale Rs. 15,608 more than the written down value, and the income-tax authorities treated this sum of Rs. 15,608 as an assessable income by reason of the second proviso to section 10(2) (vii). It is not disputed....
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....e question before us is whether, although the sum of Rs. 15,608 may be assessable profits for the purpose of distribution of dividend, this sum of Rs. 15,608 could be considered to be actual profits or not. When we turn to the Income-tax Act, what seems to conclude the matter is the definition of "income" in section 2(6C). This is an inclusive definition and it includes in the definition of "income" any sum deemed to be profits under the second proviso to clause (vii) of subsection (2) of section 10. Therefore, but for this inclusive definition and but for the Legislature making the amount realised by the assessee by sale of an asset which is in excess of the written down value a notional or artificial income, it would not have been inco....
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....be taxed as notional income or notional profit, then obviously from the commercial point of view it cannot find a place in the profit and loss account. The real position, it seems to us, is this that when an asset is depreciated from year to year and the depreciation is debited to the profit and loss account and comes out of the profits of a company, that amount constitutes a reserve created by setting apart a portion of the profits from year to year and not distributing those profits or not otherwise dealing with those profits. If an asset subsequently is sold and is sold for a higher price than its depreciated value, it cannot be said that the higher amount realised is the profit made by the company in that year. The excess may be set off....
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.... account, nor have they contended that by reason of the fact that the asset was sold in the accounting year this depreciation was not permissible or that this depreciation could not come out of the profits made by the assessee company. Therefore the principle that we have laid down must apply to all cases and we cannot make an exception in the case of the assessee; and the principle is this that when you are considering the profits of a company for the purposes of section 23A and when you have to take into consideration the actual or the commercial profits, you cannot take into consideration profits made in the past years which have been allocated to a depreciation reserve or to any other reserve. The only factor to be taken into considerat....