TaxTMI 
TaxTMI 
1982 (11) TMI 22
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....the total income of the previous years for the purposes of calculating the additional super-tax payable under section 23A(1) for the assessment years 1955-56 and 1956-57 ? " Briefly stated the facts giving rise to this reference are that the assessee is a private limited company. It was incorporated in the previous year relevant to the assessment year 1953-54 for taking over the business of a going concern run in the name of " M/s. Ram Chand & Sons ". At the time of the take over the written down value of the assets in the books of M/s. Ram Chand & Sons stood at Rs. 11,53,512. The assessee-company, however, paid a sum of Rs. 41,69,881 as consideration for taking over all the assets of the said firm. The ITO, acting under the first proviso to s. 10(5)(a) of the Indian I.T. Act, 1922 (hereinafter referred to as " the Act "), fixed the cost of the said assets at Rs. 24,08,110 for the purposes of calculating depreciation allowance to which the assessee could be entitled. This action of the ITO fixing the cost of the assets at Rs. 24,08,110 for the purpose of computing depreciation allowance was eventually approved by the High Court when this question was referred to it at the instan....
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....bsp; (total income-tax payable) 1956-57 3,28,819 do. 1957-58 1,89,638 do. 1958-59 2,40,463 do. 1959-60 2,65,055 do. 1960-61 &....
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....ld that it was deductible from its assessed income; but it rejected the assessee's case in respect of the amount of difference between the depreciation claimed and allowed in each of these years. Both the assessee and the Department then went up in appeal before the Income-tax Appellate Tribunal which in its order dated 20th September, 1971, observed thus: "Respectfully following the decision of the Supreme Court in the case of Capital Matters Service at pages 421 and 422 quoted in paragraph 15 we hold that even though penal interest cannot be claimed as deduction once it is held that section 23A is applicable that is factor which has to be taken into account in deciding the, smallness of profit, as interpreted by Supreme Court in the case of Gangadhar Banerji & Co. (P.) Ltd. ([1965]57 ITR 176). So far as the difference 'between the depreciation claimed and that actually allowed is concerned, we are of opinion that that has to be deducted not only in deciding the applicability of section 23A, in the context of the smallness of the profit, but has also to be allowed as a deduction even when it is held that section 23A is otherwise applicable, because, as already stated, the co....
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.... assessed penal interest claimed & allowed 1 2 3 4 5 6 ---------------------------------------------------------------------------------------------- 1955-56 2,49,975 1,86,771 30,882 1,16,539 95,783 Surplus 1956-57 5,75,496 2,49,981 30,872 ....
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....stributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section ; ...... the Income-tax Officer shall, unless he is satisfied (i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable; or ......... make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of fifty per cent. in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven per cent. in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total incom....
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....s income he may include many items on notional basis. But commercial or accounting profits are the actual profits made by the assessee calculated on commercial principles. These observations made by Subbarao J. appear to have been approved by the Supreme Court in the later case of Gobald Motor Service (P.) Ltd. v. CIT [1966] 60 ITR 417. Accordingly, for the purposes of the second part of the section, the question whether or not it was reasonable for the company to declare any dividend or to declare the dividend to the extent it had done, will have to be decided in the light of the extent of the profits made by the company as understood on commercial principles and for that purpose the fact that a particular expenditure or item which is normally taken into consideration for determining profits on commercial principles has, under the Act, been ignored for the purpose of determining assessable income, will not be material. In such cases what has to be worked out is the profits made by the company in accordance with commercial principles and, thereafter, the ITO is required to determine as to whether or not having regard to all the circumstances such profits can be considered to be so ....
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....is regard, not in consonance With the observations made by the Supreme Court. We are unable to accept this submission of the learned counsel. The observation made by the Supreme Court merely brings out that for the purposes of the first part of s. 23A and for determining the extent of the amount on which the company would be required to pay super-tax, in case other conditions laid down in the section are fulfilled, the amount paid by the company as penal interest under s. 18A is not to be taken into account. These observations have no bearing for the purpose of considering the question as to whether, as contemplated by the second part of the section in view of the smallness of the profit and the payment of a dividend or a larger dividend than that declared by the company would be unreasonable. In Bhor Industries' case [1961] 42 ITR 57 (SC), the Supreme Court nowhere observed that while determining smallness of profits under the second part of the section, also, the amount of interest part under s. 18A of the Indian I.T. Act cannot be accounted for. The question with regard to the deductibility of the amount of penal interest under s. 18A of the Act has to be determined on the princ....