aashsach/legaleval_rr · Datasets at Hugging Face

id uint32 1.71k 13.7k	annotation_id stringlengths 32 32	text stringlengths 6 2.19k	label class label 13 classes
1,778	9c6b40bbc5ff4cd9bbc85a8da3c69c37	The normal depreciation and the additional depreciation are permitted to be deducted from the written down value.	12PREAMBLE
1,778	503a3abcccdb401c95d014a060333f4e	But the amount of the initial depreciation is not deductible in determining the written down value.	12PREAMBLE
1,778	738e102bfb714237998ec3b6851b5824	[644D-E] (3) Normal depreciation reserve of the company may not form part of the accumulated past profits as held in Commis- sioner of Income-tax, Bombay v. Viramgam .Mills Co. Ltd. (43 ITR 270).	12PREAMBLE
1,778	b7ab75deb53a432cb4f910c3cc6cd16a	But since the initial depreciation or the devel- opment rebate	12PREAMBLE
1,778	50ac65d3adb44f1da387cb725b51661c	cannot be equated with normal depreciation	12PREAMBLE
1,778	5cc6e26a783f4e0c806a36e3c2954e4f	, it is not a deductible item of cost or expenditure in. arriving at the commercial profits.	12PREAMBLE
1,778	a214e834c8144a3a93d00e80c0f15c72	The initial depreciation or the development rebate is not allowed as an extra deductible allowance of business expenses for meeting the costs of replacement in future years, but they are meant merely to	12PREAMBLE
1,778	0d0d690c2e1a4162a5cca1e7b356de4f	reduce	12PREAMBLE
1,778	4e3d0f0233024b9199bc6aafd15146a9	the tax liability of the assessee for the year of	12PREAMBLE
1,778	32937c4765b746918be84cf709bd5e7a	installation only, in order to give him an incentive to instal new machinery or plant [645D-F]	12PREAMBLE
1,778	01b226092f6c41de9deb36320fb3b034	(4) The purpose of s. 2(6A) is to include within the term 'dividend', for the purpose of taxation, certain dis- tributions or payments as deemed dividend.	12PREAMBLE
1,778	8c7055fd19264c9da92dd4a39e7366b0	Section 2(6A)(c) provides that 'dividend' includes any distribution to the shareholders liquidation to the extent to which the distri- bution is attributable to accumulated profits.	12PREAMBLE
1,778	2d85206a23f647049caadf292cc82aaf	In Tea Estate India Pvt. Ltd. v. C.I.T., W. Bengal (103 ITR 785) it was held that accumulated profits in cl. (c) include devel- opment Tebate.	12PREAMBLE
1,778	8eccf501274f449dab8a2c60b59fa114	If for the purpose of distribution the amount of development rebate could form part of the accumu- lated profits of the company, a fortiori, it would be so far the purpose of cl. (e) also.	12PREAMBLE
1,778	d870626cd9584ae3b009b63ca21c67fe	[646B; 645G]	12PREAMBLE
1,778	ea18147dc3c747b68e06252cae45ad8f	(5)	12PREAMBLE
1,778	d77559b5f0934fa8a50239512b17c358	The use of the expression 'whether capitalised or not', as qualifying the expression 'accumulated profits' in cls. (a) to (d), but not in cl. (e), shows that the legisla- ture does not intend to rope in capitalised profits in el. (e).	12PREAMBLE
1,778	80110898a7bf44d893495ad7aaede495	That is, to the extent the profits have been capita- lised in accordance with the law and its Articles of Associ- ation, a company cannot be said to possess any accumulated profits.	12PREAMBLE
1,778	13af7326abec4d86b8793a4b62078044	But in the present case, the accumulated profits of the company were never capitalised.	12PREAMBLE
1,778	9aadb4fc0dcf43e8b5432b4f02145f08	Merely transferring the sum to the development reserve account by debiting it to the profit and loss account did not amount to capitalisation of profits.	12PREAMBLE
1,778	6806ee67fe07478db790d13a655d1bf2	The nature of the assets did not change out continued to remain as profits.	12PREAMBLE
1,778	03fff4447f1048c78ef573d3b51e25fb	[646E-G; 647A-B] Ann Bouch and William Bouch v. William Bouch Sprou (12 Appeal Cases, 385 applied.	12PREAMBLE
1,778	bf39cff4ea4449d99a0edff3dcefb146	Commissioner of Income-tax, Madras v.K. Srinivasan and others 50 ITR 786 approved. Sheth Haridas Achratlal v. Commissioner of Income tax, Bombay North, Kutch and Saurashtra, Baroda 27 ITR 684 referred to.	12PREAMBLE
1,778	eee3c069d2b64d44851b39072daafe29	JUDGMENT	12PREAMBLE
1,778	1ee5faa9991249c1ab6d7b8096d286fe	: CIVIL APPELLATE JURISDICTION:	0NONE
1,778	322c7c68f16645548c91787ada7c304d	Civil Appeal No. 1695 of 1971.	0NONE
1,778	d60bac6140244b008cd682c9634a82fc	From the Judgment and Order dated 2-2-1970 of the Bombay High Court in I.T. Reference No. 54/63) V. Rajagopal and A.G. Pudissery for the Appellant.	0NONE
1,778	4d9d8322332a4bd6985e99d0b6aa3460	S.T. Desai, B.B.Ahuja and R.N. Sachthey for the Respondent.	0NONE
1,778	27e02b4e823347729e138cc762899483	UNTWALIA, J.	0NONE
1,778	2ba95d060dbf461e9703590b492b9eb0	This is an appeal by an assessee on grant of a certificate of fitness by the Bombay High Court under section 66A (2) of the Income-tax Act, 1922-hereinafter referred to as the 1922 Act.	11FAC
1,778	6344be419fa346d0afa51da31fb9c64e	The assessee is an individual.	11FAC
1,778	17ef0f5d27f744a7a29a9c3699e43551	We are concerned in this case with his assessment for the assessment year 1958-59-corresponding accounting year being 1st April, 1957 to 31st March, 1958.	11FAC
1,778	363f31c4a8e24c21a9578cb1b246d320	The Income tax Tribu- nal made a composite order disposing of the assessee's 640 appeals in respect of two assessment years i.e. 1958-59 and 1959-60.	10RLC
1,778	ff3d1ce406b746e1b3d5b0653a95df12	The decision of the Tribunal was partly in favour of the assessee and partly in favour of the Revenue.	10RLC
1,778	59d84eec64c543679e2bab929ded87b8	In respect of the assessment year 1958-59, a reference under section 66(1) of the 1922 Act was made by the Tribunal to the High Court.	10RLC
1,778	1abcf65783ba46de88b2ac12da5f4047	Four questions were referred-one at the instance of the Commissioner of Income-tax and three at the instance of the assessee.	10RLC
1,778	a840e5938a22494b8745ae80810ee0e2	The High Court by' its judgment under appeal which is reported in Commissioner of Income-tax (Central), Bombay v. P.K. Badiani(1) has answered almost all the questions.	10RLC
1,778	a778a54887864e6e830228940fb1e279	against the assessee.	10RLC
1,778	d896f7278f8d49598f905fe7ea839cd5	Hence this appeal.	11FAC
1,778	7adac727ce5943b9a0f3b24231a11721	Mr. V. Rajgopal who had argued the case of the assessee before the High Court appeared before us in support of the appeal also.	11FAC
1,778	42553551eaec4543ad390ae3db10f9d6	He could not and did not attack the decision of the High Court as respects questions 2, 3 and 4.	11FAC
1,778	1805b33062f6440fa34ed2bd63411c1d	But he strenuously urged before us for reversal of the High Court judgment in regard to question No. 1 which was re- ferred at the instance of the Commissioner.	11FAC
1,778	924563109b654e01bc729d2d9424568b	If the assessee could succeed before us in getting an answer in his favour to the said question, then, substantially he would have succeeded in getting the whole of the relief.	11FAC
1,778	9ee3115a4a37484e84695b5577b750de	The first and the only question which falls for our examination in' this appeal was referred by the Tribunal to the High Court in the following terms: "(1) Whether the development rebate reserve created by the company by duly charging the amount to the profit and loss account and being allowable under the Act constituted 'accumulated profits' of the company within the meaning of section 2(6A)(e) of the Act?"	9ISSUE
1,778	582e6faa24074907a9487337f58c0248	We proceed to state the necessary facts for determina- tion of the above question only.	11FAC
1,778	5fe7ec727d054dea9f109fa1b92b532d	The assessee was a major shareholder (although at the relevant time being a major or minor shareholder did not make any difference in law) in the Sadhana Textile Mills Pvt. Ltd. which was indisputably a Company in which the public were not substantially interested within the meaning of Section 23A of the 1922-Act.	11FAC
1,778	7df67c0a5ff74b15b63a385bc4e675fc	The assessee was also the Managing Director of the said Private Limited Company.	11FAC
1,778	d134e5bce2754da595b7bc4085d4bafc	He had a mutual open and current account in the books of the Company--the accounting year of which was the calendar year i.e. commencing from January and ending in December.	11FAC
1,778	ec5503648a2d44819bb45c23bff7a730	The assessee in his accounting year 1957-58 had withdrawn con- siderable amounts of money from the Company's account.	11FAC
1,778	91fbfd82110b485aa728b14df06f8068	The Income-tax Officer' treated the withdrawals made by the assessee as advances or loans given by the Company to him and taxed the amount as dividend under section 2(6A)(e) of the 1922 Act.	11FAC
1,778	e5907511fa9743eab8b40f51796c2189	The Appellate Assistant Commissioner modi- fied the figure of the deemed dividend calculated by the Income-tax Officer and took the highest amount of advance made (I) 76 I.T.R. 369. 641 to the assessee by the Company at a particular point of time in the year in question as the amount of dividend taxable in the hands of the assessee.	11FAC
1,778	9395338677994f03916b28fe8a141464	The said amount was within the total figure of accumulated profits in the hands of the Company at the relevant time, i.e. 31st December, 1956.	11FAC
1,778	416c2802a2ec40769812c02de4333ff9	It may just be stated here that according to the 1922 Act only the accumulated profits possessed by the company at the. end of the corresponding previous year had to be taken into account unlike the corresponding provision engrafted in section 2(22) of the Income-tax Act, 1961--hereinafter referred to as the 1961 Act, read with Explanation II thereto.	11FAC
1,778	d8c55dabede144d0b125ab8b00da1126	It was found that the aggregate amount of develop- ment rebate allowed to the Company under section 10(2)(vi-b) was Rs. 2,36,470/-.	11FAC
1,778	5329550a60fd4d87b7c607659834bd2f	The said amount had been debited in the profit and loss account of the Company for the account- ing year 1966 leaving a balance of Rs. 6,641/- only in the profit and loss account.	11FAC
1,778	399c5b34e4594b37bced83d92df1dd80	The Appellate Assistant Commis- sioner of Income-tax treated the entire sum of Rs. 2,43,111/- as the amount of accumulated profits possessed by the Company.	11FAC
1,778	8069eac2640b439a84048a7513cf13b1	Finding the highest amount of advance to the assessee.	11FAC
1,778	edb3c3f63d104e61af4c02da94510049	at a particular ;point of time to be aggregating to Rs. 1,83,493.70 he directed the addition of the said amount in the assessee's income under section 2(6A)(e) of the 1922-Act.	11FAC
1,778	e0c11e98ae0e48d8a35222540621b77a	The High Court has directed some modification in the calculation of the said amount while answering the other questions referred to it at the instance of the asses- see and we need not go into their details.	11FAC
1,778	719ff99c29ad4baa977fabafd403df25	The main question for our determination in this appeal is whether the aggregate of the development rebates allowed to the Company under section 10(2)(vi-b) of the 1'922-Act could be treated as accumulated profits in the hands of the Company under section 2(6A)(e).	9ISSUE
1,778	bf45914b4f724bfda78642b186517130	The Income-tax Acts have undergone numerous changes from time to time and various amendments have been made both in the 1922Act as also in the 1961-Act.	6ANALYSIS
1,778	a8ec080769eb41368752528600e09324	We shall do well to quote all the subclauses (a) to (e) of section 2(6A) of the 1922-Act.	6ANALYSIS
1,778	1aaff0f71b17490ca3203cc4340750ec	They read as follows: "2(6A) "dividend" includes-- (a) any distribution by a company of accumulated profits whether capitalised or not, if such distri- bution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution by a company of deben- tures, debenture-stock or deposit certificates in any form, whether with or without interest, to the extent to, which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; 642 (d) any distribution by a company on the reduc- tion of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company On behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits;	5STA
1,778	66767e47245e4e7a876fd5420a01f2cc	Explanation--The expression "accumulated profits," wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948 and before the 1st day of April, 1956."	5STA
1,778	244259f2ee99491299cc2b41c5b1e8a8	The expression "accumulated profits" occurring in clause (e) of section 6A, or as a matter of that in any of the other clauses, undoubtedly means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the.1922 Act.	6ANALYSIS
1,778	b948912a6cc3401d95953e49cd8a1874	It is a well known concept of the taxation law that the term 'profits' in the various sections of the Income-tax Acts have not got the same meaning.	6ANALYSIS
1,778	f39ef1f1027b4c80905c0b0918f2dc82	In the context --sometimes it means the assessable profits and sometimes it means the commercial profits.	6ANALYSIS
1,778	ae3a1ffd35dd4ceca8810706f8a5fa10	In Palmer's Company Law, Twenty First Edition at page 662 the distinc- tion between profits, divisible profits and profits avail- able for dividend has been pointed out.	6ANALYSIS
1,778	43181050b4844953b42426b8382fb28d	At the said page occurs an oft quoted classical passage from the judgment of Fletcher Moulton, L.J., in Re Spanish Prospecting Co. Ltd. (1) which runs thus: "'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year.	6ANALYSIS
1,778	64bc1d5d82a34faebd333eac327fadee	The fundamen- tal meaning is the amount of gain made by the business during the year.	6ANALYSIS
1,778	8c91b19eb40446108b35ee8014ee6b16	This can only be ascer- tained by a comparison of the assets of the busi- ness at the two dates ......	6ANALYSIS
1,778	93880234b9e646b88cfde80cfc645410	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 busi- ness during the period in question."	6ANALYSIS
1,778	2719e384e5614e23b60a4809dcddea1b	Bhagwati, J. has quoted the above passage with approval in the case of E.D. Sassoon & Company Ltd. and others v. Com- missioner of Income-tax, Bombay City.('2) Almost to the same effect ,was the view (1) [1911] 1 Ch. 92, 98. (2) 26 I.T.R. 27 at page 46. 643 expressed by Mahajan, J. as he then was, in the case of Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay(1) In Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd.('2) Shah, J., as he then was, delivering the judgment on behalf of the Court while interpreting the expression "smallness of profits" occur- ring in section 23A of the 1922 Act said at page 296: "A company normally distributes dividends out of its business profits and not out of its assessa- ble income.	4PRE_RELIED
1,778	9e8db16b28aa42d88119cc8c135a22f5	There is no definable relation between the assessable income and the profits of a business concerned in a commercial sense.	4PRE_RELIED
1,778	938ee80d1f3f434987f923b16b7126fc	Computation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances ..............	4PRE_RELIED
1,778	a0f9e02eabda4cae93bdef98b416a30d	Smallness of the profit in section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional."	4PRE_RELIED
1,778	9dd36a5c73a943269ef3935ae7d28021	The same view has been expressed by this Court in Gobald Motor Service (P) Ltd. v. Commissioner of Income-tax, Ma- dras(3).	4PRE_RELIED
1,778	fbd5eab5b0dd4dcfa8a12c16ad35176c	We think that the term "profits" occurring in section 2(6A)(e) of the 1922 Act means profits in the com- mercial sense-that is to say the profits made by the Company in the real and true sense of the term.	4PRE_RELIED
1,778	881bfe9b5d194236b0e5b53ae7569091	,We may just give one example.	4PRE_RELIED
1,778	827ffef39fa640fcbde962dee6e200d6	Suppose the assessable profit of a company is Rs. 1,00,000/- out of which the Company had to pay a tax under the Income-tax Act--say to the extent of Rs. 30,000/-. .Although payment of tax is not a sum deductible from the assessable profits of the Company, in the commer- cial sense the Company would be left with a sum of Rs. 70,000/- only as profits.	4PRE_RELIED
1,778	95d8fa7a0ab7438e83092f2af10ca907	We may add that Mr. Rajgopal could not and did not seriously dispute this proposition of law.	8ARG_PETITIONER
1,778	f76ae9f56c03452b84439ef1556e7489	The gravamen of the argument of the assessee has been that development rebate deductible from the assessable profits of the Company is also.	8ARG_PETITIONER
1,778	c4e778eb54504b2aba6c929bcd673db3	a type of outgoing expendi- ture or out-of-pocket cost which is deductible while ascertaining the profits of the Company in the commercial sense.	8ARG_PETITIONER
1,778	10b1047edf894dd7879aac4b51831856	Counsel submitted that it is in the nature of a depreciation allowance and is identical with initial depre- ciation; it should, therefore, be deducted from the commer- cial profits of the Company as held by the Gujarat High Court in the case of Commissioner of Income-tax, Bombay North v. Viramgam Mills Co. Ltd. (4).	6ANALYSIS
1,778	cd771f38a9f844de9380138ccaff46b9	This argument found favour with the Tribunal but was repelled by the High Court.	6ANALYSIS
1,778	6e2d4f472e9d45a49e2cf04c4dc46f76	The point is res integra and we have to examine the correct- ness of the view expressed by the High Court.	6ANALYSIS
1,778	6ad642e9a205491fb38007d6fa0a21b2	Depreciation allowance has been allowed to be deducted from the assessable .profits of an assessee under section 10(2) (vi) of the 1922 Act corresponding to section 32 of the 1961 Act.	6ANALYSIS
1,778	4a4ff45a7cdd48cb9d78baaef07bf08c	It would appear from the report of the Taxation Enquiry Commission 1953-54 Vol. II as to what is the nature of the depreciation allowance; vide Chapter V, page 74.	6ANALYSIS
1,778	87e36f83265047948f7761cf853a5a83	The normal depreciation provided in clause (vi) and the additional depreciation mentioned in clause (vi-a) of section 10(2) of (1) 18 I.T.R. 472 at 502. (2) 41 I.T.R. 290. (3) 60 I.T.R. 417. (4) 43 I.T.R. 270. 644 the 1922 Act is permitted to be deducted from the 'written downvalue'.	6ANALYSIS
1,778	a8d808f8d82a43aeaede14d12de3d970	By and large, the cost of replacements is allowed as deductions in lieu of depreciation in respect of certain assets.	6ANALYSIS
1,778	540f7a235e9f499dabbb319c0b7e2b96	By the amendments made by the Income-tax Amendment Act, 1946., the Finance Act, 1955 and the Finance Act, 1956 certain initial depreciation was allowed in re- spect of buildings newly erected or the machinery and plant newly installed.	6ANALYSIS
1,778	f10c7667d36c49009930220db2a84c29	Obviously, it was by way of an incentive for the new structures or the new installations.	6ANALYSIS
1,778	7fb1ae9ca8094ea582cc6cd9a6ceacd3	The amount of initial depreciation was not deductible in deter- mining the 'written down value' although under proviso (c) it was to be taken into account in the aggregate of all allowances so as not to permit them to exceed the maximum limit provided therein.	6ANALYSIS
1,778	030ede1e8ece41a28788848da330a080	Development rebate was provided in clause (vi-b) with effect from 1st April, 1955 by the Fi- nance Act of 1955.	6ANALYSIS
1,778	592de43b7d1042e5ac84f48315275112	There was an over-lapping period of about two years in relation to the allowance of initial depreciation or the development rebate.	6ANALYSIS
1,778	9bc41945cda4460fb99fd5cc72cc243b	But as provided for in clause (vi) an assessee could not have' had both even in regard to that period.	6ANALYSIS
1,778	e0e1d4ba9a0845169602e340183e27f6	Although initial depreciation and development rebate were not identical as they differed in some material particulars, they were similar in nature as both were by way of incentive for installation of new ma- chinery or plant.	6ANALYSIS
1,778	68bd9d2ba0b04fc3bf9724963d247100	The initial depreciation or the develop- ment rebate was to be allowed, as the case may be; at a certain percentage of the actual cost of the machinery or the plant for the year of installation only.	6ANALYSIS
1,778	3bda7028f6384524ac96498317b02885	It was not a recurring allowance for the subsequent years like; the allowance of the normal depreciation or the additional depreciation.	6ANALYSIS
1,778	0d51635e711343a4b7188cf67db74272	The Taxation Enquiry Commission in its report aforesaid had recommended in Chapter VII, page 98 of Vol. II for assisting the expansion and development of :productive enterprise by allowing them a proportion of new investment in fixed assets to be charged to current costs of production thereby permitting the taxable profits to be brought down to that extent.	6ANALYSIS

1,778

9c6b40bbc5ff4cd9bbc85a8da3c69c37

The normal depreciation and the additional depreciation are permitted to be deducted from the written down value.

12PREAMBLE

1,778

503a3abcccdb401c95d014a060333f4e

But the amount of the initial depreciation is not deductible in determining the written down value.

12PREAMBLE

1,778

738e102bfb714237998ec3b6851b5824

[644D-E] (3) Normal depreciation reserve of the company may not form part of the accumulated past profits as held in Commis- sioner of Income-tax, Bombay v. Viramgam .Mills Co. Ltd. (43 ITR 270).

12PREAMBLE

1,778

b7ab75deb53a432cb4f910c3cc6cd16a

But since the initial depreciation or the devel- opment rebate

12PREAMBLE

1,778

50ac65d3adb44f1da387cb725b51661c

cannot be equated with normal depreciation

12PREAMBLE

1,778

5cc6e26a783f4e0c806a36e3c2954e4f

, it is not a deductible item of cost or expenditure in. arriving at the commercial profits.

12PREAMBLE

1,778

a214e834c8144a3a93d00e80c0f15c72

The initial depreciation or the development rebate is not allowed as an extra deductible allowance of business expenses for meeting the costs of replacement in future years, but they are meant merely to

12PREAMBLE

1,778

0d0d690c2e1a4162a5cca1e7b356de4f

reduce

12PREAMBLE

1,778

4e3d0f0233024b9199bc6aafd15146a9

the tax liability of the assessee for the year of

12PREAMBLE

1,778

32937c4765b746918be84cf709bd5e7a

installation only, in order to give him an incentive to instal new machinery or plant [645D-F]

12PREAMBLE

1,778

01b226092f6c41de9deb36320fb3b034

(4) The purpose of s. 2(6A) is to include within the term 'dividend', for the purpose of taxation, certain dis- tributions or payments as deemed dividend.

12PREAMBLE

1,778

8c7055fd19264c9da92dd4a39e7366b0

Section 2(6A)(c) provides that 'dividend' includes any distribution to the shareholders liquidation to the extent to which the distri- bution is attributable to accumulated profits.

12PREAMBLE

1,778

2d85206a23f647049caadf292cc82aaf

In Tea Estate India Pvt. Ltd. v. C.I.T., W. Bengal (103 ITR 785) it was held that accumulated profits in cl. (c) include devel- opment Tebate.

12PREAMBLE

1,778

8eccf501274f449dab8a2c60b59fa114

If for the purpose of distribution the amount of development rebate could form part of the accumu- lated profits of the company, a fortiori, it would be so far the purpose of cl. (e) also.

12PREAMBLE

1,778

d870626cd9584ae3b009b63ca21c67fe

[646B; 645G]

12PREAMBLE

1,778

ea18147dc3c747b68e06252cae45ad8f

(5)

12PREAMBLE

1,778

d77559b5f0934fa8a50239512b17c358

The use of the expression 'whether capitalised or not', as qualifying the expression 'accumulated profits' in cls. (a) to (d), but not in cl. (e), shows that the legisla- ture does not intend to rope in capitalised profits in el. (e).

12PREAMBLE

1,778

80110898a7bf44d893495ad7aaede495

That is, to the extent the profits have been capita- lised in accordance with the law and its Articles of Associ- ation, a company cannot be said to possess any accumulated profits.

12PREAMBLE

1,778

13af7326abec4d86b8793a4b62078044

But in the present case, the accumulated profits of the company were never capitalised.

12PREAMBLE

1,778

9aadb4fc0dcf43e8b5432b4f02145f08

Merely transferring the sum to the development reserve account by debiting it to the profit and loss account did not amount to capitalisation of profits.

12PREAMBLE

1,778

6806ee67fe07478db790d13a655d1bf2

The nature of the assets did not change out continued to remain as profits.

12PREAMBLE

1,778

03fff4447f1048c78ef573d3b51e25fb

[646E-G; 647A-B] Ann Bouch and William Bouch v. William Bouch Sprou (12 Appeal Cases, 385 applied.

12PREAMBLE

1,778

bf39cff4ea4449d99a0edff3dcefb146

Commissioner of Income-tax, Madras v.K. Srinivasan and others 50 ITR 786 approved. Sheth Haridas Achratlal v. Commissioner of Income tax, Bombay North, Kutch and Saurashtra, Baroda 27 ITR 684 referred to.

12PREAMBLE

1,778

eee3c069d2b64d44851b39072daafe29

JUDGMENT

12PREAMBLE

1,778

1ee5faa9991249c1ab6d7b8096d286fe

: CIVIL APPELLATE JURISDICTION:

0NONE

1,778

322c7c68f16645548c91787ada7c304d

Civil Appeal No. 1695 of 1971.

0NONE

1,778

d60bac6140244b008cd682c9634a82fc

From the Judgment and Order dated 2-2-1970 of the Bombay High Court in I.T. Reference No. 54/63) V. Rajagopal and A.G. Pudissery for the Appellant.

0NONE

1,778

4d9d8322332a4bd6985e99d0b6aa3460

S.T. Desai, B.B.Ahuja and R.N. Sachthey for the Respondent.

0NONE

1,778

27e02b4e823347729e138cc762899483

UNTWALIA, J.

0NONE

1,778

2ba95d060dbf461e9703590b492b9eb0

This is an appeal by an assessee on grant of a certificate of fitness by the Bombay High Court under section 66A (2) of the Income-tax Act, 1922-hereinafter referred to as the 1922 Act.

11FAC

1,778

6344be419fa346d0afa51da31fb9c64e

The assessee is an individual.

11FAC

1,778

17ef0f5d27f744a7a29a9c3699e43551

We are concerned in this case with his assessment for the assessment year 1958-59-corresponding accounting year being 1st April, 1957 to 31st March, 1958.

11FAC

1,778

363f31c4a8e24c21a9578cb1b246d320

The Income tax Tribu- nal made a composite order disposing of the assessee's 640 appeals in respect of two assessment years i.e. 1958-59 and 1959-60.

10RLC

1,778

ff3d1ce406b746e1b3d5b0653a95df12

The decision of the Tribunal was partly in favour of the assessee and partly in favour of the Revenue.

10RLC

1,778

59d84eec64c543679e2bab929ded87b8

In respect of the assessment year 1958-59, a reference under section 66(1) of the 1922 Act was made by the Tribunal to the High Court.

10RLC

1,778

1abcf65783ba46de88b2ac12da5f4047

Four questions were referred-one at the instance of the Commissioner of Income-tax and three at the instance of the assessee.

10RLC

1,778

a840e5938a22494b8745ae80810ee0e2

The High Court by' its judgment under appeal which is reported in Commissioner of Income-tax (Central), Bombay v. P.K. Badiani(1) has answered almost all the questions.

10RLC

1,778

a778a54887864e6e830228940fb1e279

against the assessee.

10RLC

1,778

d896f7278f8d49598f905fe7ea839cd5

Hence this appeal.

11FAC

1,778

7adac727ce5943b9a0f3b24231a11721

Mr. V. Rajgopal who had argued the case of the assessee before the High Court appeared before us in support of the appeal also.

11FAC

1,778

42553551eaec4543ad390ae3db10f9d6

He could not and did not attack the decision of the High Court as respects questions 2, 3 and 4.

11FAC

1,778

1805b33062f6440fa34ed2bd63411c1d

But he strenuously urged before us for reversal of the High Court judgment in regard to question No. 1 which was re- ferred at the instance of the Commissioner.

11FAC

1,778

924563109b654e01bc729d2d9424568b

If the assessee could succeed before us in getting an answer in his favour to the said question, then, substantially he would have succeeded in getting the whole of the relief.

11FAC

1,778

9ee3115a4a37484e84695b5577b750de

The first and the only question which falls for our examination in' this appeal was referred by the Tribunal to the High Court in the following terms: "(1) Whether the development rebate reserve created by the company by duly charging the amount to the profit and loss account and being allowable under the Act constituted 'accumulated profits' of the company within the meaning of section 2(6A)(e) of the Act?"

9ISSUE

1,778

582e6faa24074907a9487337f58c0248

We proceed to state the necessary facts for determina- tion of the above question only.

11FAC

1,778

5fe7ec727d054dea9f109fa1b92b532d

The assessee was a major shareholder (although at the relevant time being a major or minor shareholder did not make any difference in law) in the Sadhana Textile Mills Pvt. Ltd. which was indisputably a Company in which the public were not substantially interested within the meaning of Section 23A of the 1922-Act.

11FAC

1,778

7df67c0a5ff74b15b63a385bc4e675fc

The assessee was also the Managing Director of the said Private Limited Company.

11FAC

1,778

d134e5bce2754da595b7bc4085d4bafc

He had a mutual open and current account in the books of the Company--the accounting year of which was the calendar year i.e. commencing from January and ending in December.

11FAC

1,778

ec5503648a2d44819bb45c23bff7a730

The assessee in his accounting year 1957-58 had withdrawn con- siderable amounts of money from the Company's account.

11FAC

1,778

91fbfd82110b485aa728b14df06f8068

The Income-tax Officer' treated the withdrawals made by the assessee as advances or loans given by the Company to him and taxed the amount as dividend under section 2(6A)(e) of the 1922 Act.

11FAC

1,778

e5907511fa9743eab8b40f51796c2189

The Appellate Assistant Commissioner modi- fied the figure of the deemed dividend calculated by the Income-tax Officer and took the highest amount of advance made (I) 76 I.T.R. 369. 641 to the assessee by the Company at a particular point of time in the year in question as the amount of dividend taxable in the hands of the assessee.

11FAC

1,778

9395338677994f03916b28fe8a141464

The said amount was within the total figure of accumulated profits in the hands of the Company at the relevant time, i.e. 31st December, 1956.

11FAC

1,778

416c2802a2ec40769812c02de4333ff9

It may just be stated here that according to the 1922 Act only the accumulated profits possessed by the company at the. end of the corresponding previous year had to be taken into account unlike the corresponding provision engrafted in section 2(22) of the Income-tax Act, 1961--hereinafter referred to as the 1961 Act, read with Explanation II thereto.

11FAC

1,778

d8c55dabede144d0b125ab8b00da1126

It was found that the aggregate amount of develop- ment rebate allowed to the Company under section 10(2)(vi-b) was Rs. 2,36,470/-.

11FAC

1,778

5329550a60fd4d87b7c607659834bd2f

The said amount had been debited in the profit and loss account of the Company for the account- ing year 1966 leaving a balance of Rs. 6,641/- only in the profit and loss account.

11FAC

1,778

399c5b34e4594b37bced83d92df1dd80

The Appellate Assistant Commis- sioner of Income-tax treated the entire sum of Rs. 2,43,111/- as the amount of accumulated profits possessed by the Company.

11FAC

1,778

8069eac2640b439a84048a7513cf13b1

Finding the highest amount of advance to the assessee.

11FAC

1,778

edb3c3f63d104e61af4c02da94510049

at a particular ;point of time to be aggregating to Rs. 1,83,493.70 he directed the addition of the said amount in the assessee's income under section 2(6A)(e) of the 1922-Act.

11FAC

1,778

e0c11e98ae0e48d8a35222540621b77a

The High Court has directed some modification in the calculation of the said amount while answering the other questions referred to it at the instance of the asses- see and we need not go into their details.

11FAC

1,778

719ff99c29ad4baa977fabafd403df25

The main question for our determination in this appeal is whether the aggregate of the development rebates allowed to the Company under section 10(2)(vi-b) of the 1'922-Act could be treated as accumulated profits in the hands of the Company under section 2(6A)(e).

9ISSUE

1,778

bf45914b4f724bfda78642b186517130

The Income-tax Acts have undergone numerous changes from time to time and various amendments have been made both in the 1922Act as also in the 1961-Act.

6ANALYSIS

1,778

a8ec080769eb41368752528600e09324

We shall do well to quote all the subclauses (a) to (e) of section 2(6A) of the 1922-Act.

6ANALYSIS

1,778

1aaff0f71b17490ca3203cc4340750ec

They read as follows: "2(6A) "dividend" includes-- (a) any distribution by a company of accumulated profits whether capitalised or not, if such distri- bution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution by a company of deben- tures, debenture-stock or deposit certificates in any form, whether with or without interest, to the extent to, which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; 642 (d) any distribution by a company on the reduc- tion of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company On behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits;

5STA

1,778

66767e47245e4e7a876fd5420a01f2cc

Explanation--The expression "accumulated profits," wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948 and before the 1st day of April, 1956."

5STA

1,778

244259f2ee99491299cc2b41c5b1e8a8

The expression "accumulated profits" occurring in clause (e) of section 6A, or as a matter of that in any of the other clauses, undoubtedly means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the.1922 Act.

6ANALYSIS

1,778

b948912a6cc3401d95953e49cd8a1874

It is a well known concept of the taxation law that the term 'profits' in the various sections of the Income-tax Acts have not got the same meaning.

6ANALYSIS

1,778

f39ef1f1027b4c80905c0b0918f2dc82

In the context --sometimes it means the assessable profits and sometimes it means the commercial profits.

6ANALYSIS

1,778

ae3a1ffd35dd4ceca8810706f8a5fa10

In Palmer's Company Law, Twenty First Edition at page 662 the distinc- tion between profits, divisible profits and profits avail- able for dividend has been pointed out.

6ANALYSIS

1,778

43181050b4844953b42426b8382fb28d

At the said page occurs an oft quoted classical passage from the judgment of Fletcher Moulton, L.J., in Re Spanish Prospecting Co. Ltd. (1) which runs thus: "'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year.

6ANALYSIS

1,778

64bc1d5d82a34faebd333eac327fadee

The fundamen- tal meaning is the amount of gain made by the business during the year.

6ANALYSIS

1,778

8c91b19eb40446108b35ee8014ee6b16

This can only be ascer- tained by a comparison of the assets of the busi- ness at the two dates ......

6ANALYSIS

1,778

93880234b9e646b88cfde80cfc645410

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 busi- ness during the period in question."

6ANALYSIS

1,778

2719e384e5614e23b60a4809dcddea1b

Bhagwati, J. has quoted the above passage with approval in the case of E.D. Sassoon & Company Ltd. and others v. Com- missioner of Income-tax, Bombay City.('2) Almost to the same effect ,was the view (1) [1911] 1 Ch. 92, 98. (2) 26 I.T.R. 27 at page 46. 643 expressed by Mahajan, J. as he then was, in the case of Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay(1) In Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd.('2) Shah, J., as he then was, delivering the judgment on behalf of the Court while interpreting the expression "smallness of profits" occur- ring in section 23A of the 1922 Act said at page 296: "A company normally distributes dividends out of its business profits and not out of its assessa- ble income.

4PRE_RELIED

1,778

9e8db16b28aa42d88119cc8c135a22f5

There is no definable relation between the assessable income and the profits of a business concerned in a commercial sense.

4PRE_RELIED

1,778

938ee80d1f3f434987f923b16b7126fc

Computation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances ..............

4PRE_RELIED

1,778

a0f9e02eabda4cae93bdef98b416a30d

Smallness of the profit in section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional."

4PRE_RELIED

1,778

9dd36a5c73a943269ef3935ae7d28021

The same view has been expressed by this Court in Gobald Motor Service (P) Ltd. v. Commissioner of Income-tax, Ma- dras(3).

4PRE_RELIED

1,778

fbd5eab5b0dd4dcfa8a12c16ad35176c

We think that the term "profits" occurring in section 2(6A)(e) of the 1922 Act means profits in the com- mercial sense-that is to say the profits made by the Company in the real and true sense of the term.

4PRE_RELIED

1,778

881bfe9b5d194236b0e5b53ae7569091

,We may just give one example.

4PRE_RELIED

1,778

827ffef39fa640fcbde962dee6e200d6

Suppose the assessable profit of a company is Rs. 1,00,000/- out of which the Company had to pay a tax under the Income-tax Act--say to the extent of Rs. 30,000/-. .Although payment of tax is not a sum deductible from the assessable profits of the Company, in the commer- cial sense the Company would be left with a sum of Rs. 70,000/- only as profits.

4PRE_RELIED

1,778

95d8fa7a0ab7438e83092f2af10ca907

We may add that Mr. Rajgopal could not and did not seriously dispute this proposition of law.

8ARG_PETITIONER

1,778

f76ae9f56c03452b84439ef1556e7489

The gravamen of the argument of the assessee has been that development rebate deductible from the assessable profits of the Company is also.

8ARG_PETITIONER

1,778

c4e778eb54504b2aba6c929bcd673db3

a type of outgoing expendi- ture or out-of-pocket cost which is deductible while ascertaining the profits of the Company in the commercial sense.

8ARG_PETITIONER

1,778

10b1047edf894dd7879aac4b51831856

Counsel submitted that it is in the nature of a depreciation allowance and is identical with initial depre- ciation; it should, therefore, be deducted from the commer- cial profits of the Company as held by the Gujarat High Court in the case of Commissioner of Income-tax, Bombay North v. Viramgam Mills Co. Ltd. (4).

6ANALYSIS

1,778

cd771f38a9f844de9380138ccaff46b9

This argument found favour with the Tribunal but was repelled by the High Court.

6ANALYSIS

1,778

6e2d4f472e9d45a49e2cf04c4dc46f76

The point is res integra and we have to examine the correct- ness of the view expressed by the High Court.

6ANALYSIS

1,778

6ad642e9a205491fb38007d6fa0a21b2

Depreciation allowance has been allowed to be deducted from the assessable .profits of an assessee under section 10(2) (vi) of the 1922 Act corresponding to section 32 of the 1961 Act.

6ANALYSIS

1,778

4a4ff45a7cdd48cb9d78baaef07bf08c

It would appear from the report of the Taxation Enquiry Commission 1953-54 Vol. II as to what is the nature of the depreciation allowance; vide Chapter V, page 74.

6ANALYSIS

1,778

87e36f83265047948f7761cf853a5a83

The normal depreciation provided in clause (vi) and the additional depreciation mentioned in clause (vi-a) of section 10(2) of (1) 18 I.T.R. 472 at 502. (2) 41 I.T.R. 290. (3) 60 I.T.R. 417. (4) 43 I.T.R. 270. 644 the 1922 Act is permitted to be deducted from the 'written downvalue'.

6ANALYSIS

1,778

a8d808f8d82a43aeaede14d12de3d970

By and large, the cost of replacements is allowed as deductions in lieu of depreciation in respect of certain assets.

6ANALYSIS

1,778

540f7a235e9f499dabbb319c0b7e2b96

By the amendments made by the Income-tax Amendment Act, 1946., the Finance Act, 1955 and the Finance Act, 1956 certain initial depreciation was allowed in re- spect of buildings newly erected or the machinery and plant newly installed.

6ANALYSIS

1,778

f10c7667d36c49009930220db2a84c29

Obviously, it was by way of an incentive for the new structures or the new installations.

6ANALYSIS

1,778

7fb1ae9ca8094ea582cc6cd9a6ceacd3

The amount of initial depreciation was not deductible in deter- mining the 'written down value' although under proviso (c) it was to be taken into account in the aggregate of all allowances so as not to permit them to exceed the maximum limit provided therein.

6ANALYSIS

1,778

030ede1e8ece41a28788848da330a080

Development rebate was provided in clause (vi-b) with effect from 1st April, 1955 by the Fi- nance Act of 1955.

6ANALYSIS

1,778

592de43b7d1042e5ac84f48315275112

There was an over-lapping period of about two years in relation to the allowance of initial depreciation or the development rebate.

6ANALYSIS

1,778

9bc41945cda4460fb99fd5cc72cc243b

But as provided for in clause (vi) an assessee could not have' had both even in regard to that period.

6ANALYSIS

1,778

e0e1d4ba9a0845169602e340183e27f6

Although initial depreciation and development rebate were not identical as they differed in some material particulars, they were similar in nature as both were by way of incentive for installation of new ma- chinery or plant.

6ANALYSIS

1,778

68bd9d2ba0b04fc3bf9724963d247100

The initial depreciation or the develop- ment rebate was to be allowed, as the case may be; at a certain percentage of the actual cost of the machinery or the plant for the year of installation only.

6ANALYSIS

1,778

3bda7028f6384524ac96498317b02885

It was not a recurring allowance for the subsequent years like; the allowance of the normal depreciation or the additional depreciation.

6ANALYSIS

1,778

0d51635e711343a4b7188cf67db74272

The Taxation Enquiry Commission in its report aforesaid had recommended in Chapter VII, page 98 of Vol. II for assisting the expansion and development of :productive enterprise by allowing them a proportion of new investment in fixed assets to be charged to current costs of production thereby permitting the taxable profits to be brought down to that extent.

6ANALYSIS