Datasets:

aashsach

/

legaleval_rr

like 0

9c6b40bbc5ff4cd9bbc85a8da3c69c37

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

12PREAMBLE

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

12PREAMBLE

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[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

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But since the initial depreciation or the devel- opment rebate

12PREAMBLE

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cannot be equated with normal depreciation

12PREAMBLE

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

12PREAMBLE

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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

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reduce

12PREAMBLE

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the tax liability of the assessee for the year of

12PREAMBLE

32937c4765b746918be84cf709bd5e7a

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

12PREAMBLE

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(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

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

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

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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

d870626cd9584ae3b009b63ca21c67fe

[646B; 645G]

12PREAMBLE

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(5)

12PREAMBLE

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

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

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

12PREAMBLE

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

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

12PREAMBLE

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

12PREAMBLE

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

eee3c069d2b64d44851b39072daafe29

JUDGMENT

12PREAMBLE

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: CIVIL APPELLATE JURISDICTION:

0NONE

322c7c68f16645548c91787ada7c304d

Civil Appeal No. 1695 of 1971.

0NONE

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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

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

0NONE

27e02b4e823347729e138cc762899483

UNTWALIA, J.

0NONE

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

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The assessee is an individual.

11FAC

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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

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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

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

10RLC

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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

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

10RLC

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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

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against the assessee.

10RLC

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Hence this appeal.

11FAC

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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

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

11FAC

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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

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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

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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

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

11FAC

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

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

11FAC

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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

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

11FAC

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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

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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

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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

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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

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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

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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

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

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Finding the highest amount of advance to the assessee.

11FAC

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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

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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

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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

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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

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

6ANALYSIS

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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

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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

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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

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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

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

6ANALYSIS

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

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

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

6ANALYSIS

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

6ANALYSIS

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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

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

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

4PRE_RELIED

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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

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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

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

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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

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,We may just give one example.

4PRE_RELIED

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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

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

8ARG_PETITIONER

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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

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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

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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

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

6ANALYSIS

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

6ANALYSIS

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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

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

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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

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

6ANALYSIS

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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

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

6ANALYSIS

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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

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

6ANALYSIS

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

6ANALYSIS

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

6ANALYSIS

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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

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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

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

6ANALYSIS

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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