1. This reference arises out of orders made under s. 23A of the Indian I. T. Act, 1922, in respect of the assessment years 1953-54 and 1955-56. The question which has been referred at the instance of the revenue is as follows :
'Whether, on the facts and in the circumstances of the case, the orders passed by the Income-tax Officer under section 23A (1) of the Indian Income-tax Act, 1922, for the assessment years 1953-54 and 1955-56 were valid ?'
2. The assessee-company which is a private limited company and was promoted by the parent company, M/s. Kilachand Devchand and Co. Ltd., which holds 100% shares of the assessee-company, took over some oil and ginning mills, factories and lands belonging to and used in its business by the parent company. The assets were taken over at a cost of Rs. 13,50,000 though the written down value of these assets as per the income-tax records of this company just before the transfer was only Rs. 2,21,142. The original cost of purchase to the parent company was Rs. 5,52,475.
3. The ITO, in exercise of his powers under the first proviso to s. 10 (5) (a), allowed depreciation to the assessee-company only on the written down value as found in the transfer's books in respect of the assets transferred by the transferor-company to the assessee-company. To the written down value, the profits made under s. 10 (2) (vii) in the hands of the transferor-company were also added. The assessee's case that it was entitled to depreciation on the value of Rs. 13,50,000 was finally negatived by the Income-tax Tribunal.
4. Later, in proceedings under s. 23A, the ITO found that on the basis of the assessed income, the total income after deduction of the tax came to Rs. 84,883 for the assessment year 1953-54 on which dividend should have been declared at Rs. 50,929. The assessee-company had, however, declared dividend at Rs. 35,006 and the ITO held that the declaration of a larger dividend would not have been unreasonable. He, therefore, held that to the extent of Rs. 49,877, the dividend should be deemed to have been declared. Similarly, for the assessment year 1955-56, he held that there was a surplus of Rs. 32,827 and since the assessee had failed to show any reason for not declaring adequate dividend, it was held that the assessee was liable to penal tax under s. 23A. Both these orders for the two years were confirmed by the AAC.
5. The matter was taken by the assessee to the Tribunal in two separate appeals. The Tribunal, however, took the view that though the depreciation charged in the books might not be found admissible for the purposes of income-tax, it could not be said that the company was not justified in charging depreciation on the basis of the value taken in its books and that the company was entitled to take the stand that it had charged the correct depreciation in the books and the profits so arrived at after charging such depreciation had been certified to be true and fair by the auditors. The Tribunal also found that the depreciation charged in the books had not been considered to be excessive either by the board of directors or the auditors who certified the accounts. Having taken this view, the appeals filed by the assessee were allowed.
6. The answer to the question which has now been referred to this court depends on whether the ITO was right in proceeding to make his orders under s. 23A (1) merely on the ground that in assessment proceedings he had disallowed the claim of the assessee for depreciation on the total cost of Rs. 13,50,000, which was the cost entered in the books. Now, so far as the determination of commercial profits for the purposes of s. 23A (1) is concerned, the principles are well settled by the decision of the Supreme Court in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) . The Supreme Court has pointed out the difference between the accounting profits and the assessable profits, the difference being that while in arriving at the assessable profits, the ITO may disallow many expenses actually incurred by the assessee, and in computing the income of the assessee, he may include many items on notional basis, the commercial or accounting profits are the actual profits earned by the assessee calculated on commercial principles. The Supreme Court has pointed out in that case that the smallness of profits referred to in. s. 23A (1) refers to the actual accounting profits in comparison with the assessable profits of the year. In that case, the Supreme Court has also pointed out that when the ITO considers 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, he does not assess any income to tax and he only does what the directors should have done putting himself in their place. It was further pointed out that 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. If these principles are borne in mind and the order of the ITO is scrutinised, it discloses that the decision to make the order under s. 23A (1) has been taken by the ITO solely on the basis of the assessed profits for the purposes of the I. T. Act which he was not entitled to do. As found by the Tribunal, the value of the assets of the company entered in the balance-sheet was Rs. 13,50,000 and the company was, therefore, entitled for the purposes of determining its own commercial profits to take into account adequate amount of depreciation with reference to this value in this books. As the Tribunal has found, neither the board of directors nor the auditors had found any fault with the depreciation in the books. The Tribunal had also found that as to what was the proper value of the assets was the question which was not fee from doubt. In these circumstances, the Tribunal was entitled to take the view that the ITO was not justified in making the order under s. 23A (1) of the Act.
7. Having regard to the facts and what we have observed above, the question referred must be answered in the negative and against the revenue. The assessee to get the costs of this reference.