1. At the instance of the revenue, the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, in ascertaining the commercial profits of the company for purposes of s. 23A, the book profit was liable to be enhanced by the difference between the depreciation for the material years actually charged to the profit and loss account, and the depreciation allowed in the assessment ?'
2. Natwar Transport Co. Pvt. Ltd., the assessee, is a limited company doing motor transport business. The question referred to relates to the assessment years 1959-60 and 1960-61, for which the relevant accounting period ended on June 30, 1958, and June, 30, 1959. It is common ground that the assessee is a company in which the public are not substantially interested within the meaning of s. 23A. For the two assessment years, the total income computed was Rs. 1,84,887 for the first year and Rs. 90,514 for the second year. According to the profit and loss statement of the company, the profit was Rs. 92,228 and Rs. 60,745, respectively. The company distributed the sum of Rs. 27,600 as dividends for the year 1959-60 and Rs. 18,720 for the year 1960-61. The distribution was clearly below the statutory percentage of 65% if the assessed income was considered. The Tribunal, however, felt that the company would have escaped the liability under s. 23A(1) if the commercial profit of the company did not justify a larger distribution of dividends than actually made.
3. The ITO referred the matter to the IAC. He passed two separate orders both dated January 25, 1963, and calculated the available profits for the assessment year 1959-60 at Rs. 67,253 and for the assessment year 1960-61 at Rs. 36,657. The manner in which these figures were calculated are indicated at pages 2 and 3 of the statement of case. The amounts distributed as dividends fell short of the statutory percentage even considering the commercial profits as worked out by the IAC. He, accordingly, gave approval to levy of additional super-tax under s. 23A(1) for both the years and in his further order date March 31, 1963, he explained to the ITO how the additional super-tax should be actually calculated. After receipt of these orders, the ITO passed orders under s. 23A(1) levying additional super-tax in the sums of Rs. 22,625 and Rs. 11,491 for the two years respectively.
4. In an appeal by the assessee, the AAC slightly modified the method of computation of commercial profits, as indicated at page 4 and 5 of the statement of case. According to him, for the assessment year 1959-60, a sum of Rs. 71,185 was the available profit and a sum of Rs. 50,671 was the available profit for the assessment year 1960-61. As the available profits computed by the AAC were higher than those ascertained by the IAC, the assessee's appeals failed for both the years.
5. In a second appeal before the Tribunal, the figures given by the AAC in his order were not disputed except for the purpose of determining the quantum of tax liability to be deducted in arriving at the net commercial profits available for distribution. There was a difference in the depreciation allowance adjusted by the company in its accounts and the amount actually allowed by the revenue in the two assessments, the latter being less by Rs. 42,900 in the first year and Rs. 29,000 in the second year. In calculating the commercial profits, the AAC had taken into account only the depreciation allowable under the Act. The Tribunal found that in point of fact, the company had not charged depreciation in its accounts at a higher rate than admissible under the Rules. The rate of depreciation allowable on motor vehicles is 25% of the written down value and the company had only depreciated its fleet of vehicles at this rate. In the past assessments, as and when new vehicles were purchased, the revenue had allowed additional depreciation as provided in the Act. The result was that in the income-tax records the written down value stood at a lower figure, because the company had only debited normal depreciation in respect of all the vehicles. The extra depreciation in the company's accounts for the material years was not the result of claiming depreciation at an unreasonable rate. In the past assessments, the company had not depreciated its new vehicles by the amount of additional depreciation allowable on new assets. Bearing these factors in mind, the Tribunal found that the adjustment made by the AAC in adding back the extra depreciation was not in order. The Tribunal felt that the commercial profits should not have been arrived at by the revenue by enhancing the profits with a difference in the depreciation allowance and if such a view was taken, then there was no justification for the levy of additional super-tax under s. 23A(1). It is from this order of the Tribunal that the above question has been referred to us for our determination.
6. Mr. Joshi on behalf of the revenue submitted that in computing the commercial profits for the purposes of s. 23A regard must be had to the depreciation which is permissible under the Act. If an assessee has departed from such a practice, then the taxing authorities in computing the commercial profits for any year will be justified in determining the written down value as fixed for the purposes of income-tax for the departure that may have been made by the assessee-company in his books of account irrespective of the fact whether any deliberate attempt was made by mistake or by design for inflation or deflation. He submitted that the balance-sheet maintained by the company should not be treated as sacrosanct and in appropriate cases modifications or adjustments are permissible to the taxing authority with a view to consider whether dividends have been declared at the appropriate rate as contemplated by s. 23A. He, therefore, submitted that the Tribunal was in error in setting aside the order passed by the ITO and the AAC whereby additional super-tax was levied for the two assessment years.
7. In the cases of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) , the Supreme Court had laid down that the ITO, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of s. 23A of the Indian I.T. Act, 1922, does not assess any income to tax. He only does what the directors should have done putting himself in their place. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as dividend is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. The ITO must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of the company and deal with the problem with a sympathetic and objective approach. It is further laid down in this case that though the balance-sheet of the company is not final for the purpose of s. 23A it affords a prima facie proof of the financial position of the company on the date when the dividend was declared. But nothing prevents the parties from establishing by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions. Nor is the company precluded from proving that the estimate in regard to certain items had turned out to be wrong and placing the actual figures before the ITO.
8. The short question that has to be determined in the present case is whether for the applicability of s. 23A with a view to justify levy of additional super-tax the taxing authorities or the Tribunal had to go by the company's books or had to adjust profits by reducing the depreciation allowance in accordance with the assessment records. It is common ground that the difference in written down value has not arisen as a result of the company charging depreciation at exorbitant rates. The company had only depreciated the assets at 25% which is a normal rate of depreciation for such assets. It cannot be said that the company was acting contrary to the well-recognized commercial principles, when it charged in its books of account only normal depreciation. It has not been even the case of Mr. Joshi on behalf of the revenue that the balance-sheet of the assessee for the two relevant years can be said to incorporate items which were either by mistake or by design inflated or deflated. If a company had provided for depreciation at a uniform rate of 25% of the written down value and noted down in a matter permitted by the income-tax authorities in respect of new vehicles, there is bound to be some difference between the profits as disclosed by the books of account and the profits as they have been determined bearing in mind the depreciation value as per the assessment records. As stated in Gangadhar Banerjee's case : 57ITR176(SC) , though the balance-sheet need not be accepted as final for the purpose of s. 23A, it should prima facie be taken as affording proof of the company's state of affairs when the dividends were declared. If in the balance-sheet the assets are valued according to the bona fide commercial principles, the directors were clearly justified in taking the figures as therein represented as the basis for arriving at profits available for distribution of dividends. There is no justification for the taxing authorities for enhancing the available profits by the difference in the depreciation amount, more so, when it is not controverted on behalf of the revenue that the depreciation as provided by the company in its books of account was in consonance with the commercial principles. If the figures in the balance-sheet are borne in mind for determining the profits, then it is not possible to take the view that the dividend declared is less than the percentage permissible under s 23A. In that view of the matter, the question referred to us in answered in the negative. The book profit was not liable to be enhanced by the difference between the depreciation for material years actually charged to the profit and loss account and the depreciation allowed in the assessment.
9. The revenue shall pay the costs of the assessee.