1. Two questions have been referred to us by the Tribunal under sub-section (1) of the section 66 of the Income-tax Act at the Instance of the Commissioner of Income-tax. These questions are :
'1. Whether, on the facts and circumstances of the case, the sum of Rs. 1,75,000 being the profit of the two preceding years, but taxed in the relevant year of account in respect of the Sabarmati contract, should have been taken into consideration in determining the distributable profits
2. Whether, in determining the smallness of profits, the reasonably anticipated tax liability to be imposed by the income-tax authorities could be taken into consideration ?'
2. Mr. Joshi, appearing for the revenue, stated before us that he does not press the second question, which has been raised by the Tribunal suo motu, in view of decision of this court in New Mahalaxmi Silk Mills Limited. Facts giving rise to the present reference are that the assessee is a private limited company carrying on business of civil engineers and contractors. It is not in dispute that the provisions of section 23A are applicable to the assessee company. We are here concerned with the assessment year 1951-52, the relevant accounting year being the one ending 31st March, 1951. It appears that the assessee company had, sometime in the year 1949, taken a contract to build the Sabarmati Broadcasting Station within a period of three years. The assessee company for the purpose of its own accounting had taken into account the profits of the work every year as the work progressed and was completed from stage to stage. In the accounting year 1948-49, a sum of Rs. 1,00,000 was credited in books of account of the assessee-company as profits arising out of the said work. Similarly, in the accounting year 1949-50, a sum of Rs. 75,000 was credited in its books of account as its profit arising out of business during the course of that year. It, however, appears, that, even though the assessee company had shown Rs. 1,75,000 as profits accruing to its from the said business during these two years, the income-tax authorities included the said two amounts aggregating to Rs. 1,75,000 in computing the profits of the assessee for the assessment year 1951-52. After including the sum of Rs. 1,75,000 the Income-tax Officer computed the assessable profits at Rs. 13,38,913. On further appeals to the Appellate Assistant Commissioner and the Tribunal, this sum, however, was reduced to Rs. 6,76,390. The total distributable dividends declared by the assessee company during that year amounted to Rs. 1,80,000. That being less than 60 per cent. of the assessable income, action under section 23A of the Income-tax Act was taken against the assessee company. In these proceedings it was contended that the amount of Rs. 1,75,000 should be allowed as a deduction in considering the question of reasonableness or otherwise of the distribution of dividends having regard to the smallness of profits made by the company. The said amount of Rs. 1,75,000 has been allowed by the Income-tax Appellate Assistant Commissioner and the Tribunal as an allowable deduction in determining the amount of distributable profits. In these circumstances, the aforesaid question No. 1 has been referred to us.
3. It is well settled that, in considering the reasonableness or otherwise of distribution of a larger dividend than one declared, what has to be taken into account is the distributable profits in the hands of the assessee and not the assessable income as determined by the income-tax authorities. Now it is not in dispute that Rs. 1,00,000 has been brought into account by the assessee in its books of account as profits for the year 1948-49 and similarly Rs. 75,000 has been brought in its books of account by the assessee as profits for the year 1949-50. There is no evidence that, in spite of bringing these amounts in its books accounts as profits, the assessee has kept them apart and not included in the distribution of its dividends in the years 1948-49 and 1949-50. That being the position, it cannot be said that the sum of Rs. 1,75,000 was a sum in the hands of the assessee in the relevant accounting year 1950-51. In these circumstances, in our judgment, the Tribunal was right in holding that it was an allowable deduction in determining the distributable profits.
4. Our answer to the first question, therefore, is in the negative. The Commissioner shall pay the costs of the assessee.
5. First question answered in the negative.