1. The assessee is a company in which the public are not substantially interested. The business of the assessee company is of passenger transport. For the assessment year 1958-59 for which the relevant accounting year was from August 1, 1956 to July 31, 1957, the company disclosed an income of Rs. 30,889 according to its profit and loss accounts. In the return the company had shown a loss of Rs. 1,086. The ITO, however, estimated the passenger receipts at Rs. 4,50,000 as against Rs. 3,36,935. Thus, an addition of Rs. 1,13,065 was made and on computation the income of the assessee was assessed at Rs. 99,860.
2. In appeal the total income was reduced by Rs. 9,860 by the AAC. There were cross-appeals for the assessment years 1957-58 and 1958-59. The assessee's appeals came to be dismissed. The references for the assessment year 1957-58 and 1958-59 made under s. 66(2) of the Indian I.T. Act, 1922, arising out of the orders of the Appellate Tribunal for the assessment year 1957-58 and 1958-59 are said to be still pending.
3. The ITO then made an order under s. 23A of the Indian I.T. Act, 1922, and found that the distributable profits were Rs. 69,163 (Rs. 1,21,677 - Rs. 52,514) and levied super-tax at 3 (sic) per cent. on the undistributed profits to the tune of Rs. 25,590. The net income of the assessee was Rs. 1,21,677 and the taxes payable thereon were Rs. 52,514. The assessment was upheld by the AAC.
4. The assessee took the matter in appeal to the Tribunal. The Tribunal accepted the finding that the distributable profits worked out to Rs. 69,163 and directed its attention to the question as to whether after considering the true commercial or accounting profits, the company was required to declare any dividend. The Tribunal considered the losses for the earlier years and found that the balance-sheet of the company showed losses of the earlier years at Rs. 1,23,880, and took the view that in view of the losses of the earlier years it would be unreasonable to except the company to declare any dividend. The Tribunal then considered the effect of replacement of some buses by the assessee in the assessment year in question. It noticed the fact that the balance-sheet of the company showed that five buses were replaced during the year at a cost of Rs. 1,31,730 and that replacement of old buses was in the interest of continuity of the assessee's business. It was found that if the old buses were not replaced, the company ran the risk of its permits being cancelled. The Tribunal found that against the investment of Rs. 1,31,730 in the purchase of new buses, the company had received sale proceeds by sale of old buses amounting to Rs. 36,775 only. Taking into account the profits of the year amounting to Rs. 30,889, the total came to Rs. 67,664 and it was found that the balance amount has to be provided from loans or payment had to be deferred. Such being the position, according to the Tribunal, it would be unreasonable to expect the company to declare dividends out of the profits of the year in question. The Tribunal further considered the assets and liabilities of the company and found that as on July 31, 1957, the balance-sheet showed a loss of Rs. 92,991 arrived at by deducting the profit of Rs. 30,889 from the losses carried forward to the tune of Rs. 1,23,880. The authorised capital of the company was Rs. 1,00,000 and the subscribed and paid-up capital was Rs. 80,000. The Tribunal found that the entire share capital of the company was wiped out by the losses. Further, there were trade liabilities to the tune of Rs. 1,76,927 and the value of the assets in the form of buses was only Rs. 1,50,154. It was found that there was no evidence to suggest that the liabilities were inflated or the assets were deflated and, according to the Tribunal, under such circumstances, it could not be asked to pay any dividend. The Tribunal having thus cancelled the order under s. 23A, the following two question have been referred by the Tribunal at the instance of the Revenue under s. 66(1) of the Indian I.T. Act, 1922 :
'(1) Whether, on the facts and in the circumstances of the case, the estimated addition of Rs. 1,13,065 made in the assessment by applying the proviso to section 13 of the Indian Income-tax Act, 1922, is includible in the amount of commercial profits for purposes of section 23A for the assessment year 1958-59 ?
(2) Whether, on the facts and in the circumstances of the case, the provisions of section 23A(1) of the Indian Income-tax Act, 1922, were applicable for the assessment year 1958-59 ?'
5. The question No. 1 refers to the estimated addition of Rs. 1,13,065 and requires a decision of the question as to whether the said addition made by applying the proviso to s. 13 of the Indian I.T. Act, 1922, is includible in the amount of commercial profits for purposes of s. 23A for the assessment year 1958-59. On hearing the learned counsel for the Revenue, we are satisfied that an answer given to question No. 2 either way could make the consideration of the controversy in question No. 1 wholly academic. We have already referred to the fact that reference under s. 66(2) calling in question the estimated addition of Rs. 1,13,065 is pending in this court. There is a clear possibility of a contradictory decision with regard to these additions if we take a particular view on question No. 1 and then a contrary view is taken in the reference. We would like to obviate that possibility. We are also satisfied that basically the question involved in this reference is whether there was a liability of the assessee under s. 23A(1) of the Indian I.T. Act, 1922, and if for any one reason we find that the order of the Tribunal can be sustained as taking the correct view of the matter, then also it does not become necessary for us to answer answer question No. 1. We are, therefore, proceeding to deal only with question No. 2. The law with regard to the determination of the question as to what are the commercial profits of a company in which the public are not substantially interested is settled in CIT v. Gangadhar Banerjee & Co. (Pvt.) Ltd., : 57ITR176(SC) . It was pointed out, in that case, that the commercial or the accounting profits are actual profits earned by the assessee calculated on commercial principles and that in deciding whether the payment of a dividend or a larger dividend than that declared by the company would be unreasonable, the ITO can take into consideration the smallness of profits, which meant accounting profits and not assessable profits. One of the important circumstances which is considered by the Tribunal in the instant case is the effect of replacement of five buses by the purchase of new buses. The Tribunal has found as a fact that taking into account the profits and sale proceeds of old buses, the balance amount has to be provided from loans or payments had to be deferred. This is on the basis of the correctness of the estimated addition. It is difficult to find any infirmity in the view of the Tribunal that such being the position it would be unreasonable to expect the company to pay dividend out of the profits of the relevant assessment year. The business of the company is of transporting passengers. The Tribunal has found that if the old were not replaced, the company ran the risk of its permit being cancelled. Thus, if the expenditure on the new buses was not incurred, the very profit making machinery would have been adversely affected and the business would have considerably been reduced. Even that one ground, in our view, was sufficient to create an infirmity in the order of the ITO and the AAC who held that the assessee was liable to pay super-tax under s. 23A(1) of the Indian I.T. Act, 1922. This consideration, in our view, is sufficient to answer question No. 2 against the Revenue and as already pointed out above it is not necessary to answer question No. 1. Accordingly, question No. 1 is not answered. Question No. 2 is answered in the negative and against the Revenue. Revenue to pay the costs of this reference.