TaxTMI 
TaxTMI 
1984 (5) TMI 70
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....pany within 12 months immediately following the expiry of the previous year were Rs. 6,500 for the assessment year 1974-75 and Rs. 3,07,800 for the assessment year 1975-76. The ITO held that considering the capital gains, on sale of land, which amounted to Rs. 12,90,988 for the assessment year and Rs. 38,40,479 for the assessment year 1975-76, the dividends distributed by the company fell short of the statutory percentage. The ITO did not accept the claim of the assessee-company that the capital gains should not be included in the commercial profits. He, therefore, subjected the assessee-company to additional income-tax on undistributed income for both the assessment years 1974-75 and 1975-76. When the matter went up in appeal, the Commissi....
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....ch had a plot of land acquired some time in 1955 which was being sold year after year resulting in capital gains and since no other land was purchased to replace the land already sold, the capital gains on sale of land were not required for replacement of the capital assets. This was according to Shri Mahadeshwar, an exceptional case where the capital gain should be treated as forming part of the profits of the assessee-company for the purpose of determining whether the distribution of dividends out of the profits was, considering the totality of the facts and circumstances, adequate or not. It was also brought to our notice that the Hon'ble Supreme Court in the case of CIT v. Sumani (P.) Ltd. had granted special leave to the department aga....
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....ng to Shri Dastur, when the land was sold the assessee-company made other investments in gems and jewellery, part of which was sold in the subsequent years at profit and this itself indicated that the assessee-company had to replace the capital asset sold with other capital assets in order to carry on as an investment company. Our attention was invited to the assessment order for the assessment year 1973-74, i.e., immediately preceding to the two assessment years under appeal before us, where also even though the assessee-company had earned capital gains of Rs. 15,70,987, the ITO had given a specific finding in the assessment order that no action under section 104 was being taken in view of the commercial profits being very low. Referring t....
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....ccount but has been credited to the profit and loss appropriation account and after deducting the tax on capital gains arising from the sale of capital assets, the balance has been transferred to the capital reserve or utilised for acquisition of other capital assets, e.g., gems and jewellery, which in the subsequent years were sold in part at a profit. Proceeding further, Shri Dastur submitted that in the case of Factors (P.) Ltd., the company treated the capital gains arising on sale of capital assets as part of the commercial profits by crediting them to the profit and loss account unlike in the present case where the profit on sale of land was not treated as part of the commercial profits and was not credited in the profit and loss acco....
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....f capital assets sold and for creation of a reserve for this purpose and in any case we should follow the ruling of the Hon'ble Bombay High Court in the case of Gannon Dunkerley & Co. Ltd., which is a binding for us, and the ruling of the Hon'ble Calcutta High Court in the case of N. Guin & Co. (P.) Ltd., which is the latest decision on the subject. 5. We have carefully considered the rival submissions. It is the admitted position of both the sides that the applicability of sub-section (1) of section 104, on the facts and in the circumstances of the present case will depend solely on whether the capital gains arising on sale of land can be included in the commercial profits and, consequently, the distributable income of the assessee-compan....
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....s appropriation account and was utilised after deduction of capital gains tax arising therefrom either for creation of reserves or for acquisition of other capital assets, e.g., gems and jewellery. The facts of the case of Factors (P.) Ltd. were, therefore, different from the facts of the present case and the ruling of the Hon'ble Madras High Court in that case will, therefore, not be applicable here. Besides, the Hon'ble Bombay High Court in the case of Gannon Dunkerley & Co. Ltd. has laid down that in ordinary circumstances, directors of business experience would never distribute amounts received by way of capital gains and instead these amounts would ordinarily be reserved for the purpose of replacement of the assets sold so as to carry ....