Per Shri S. N. Rotho, Accountant Member - This appeal has been filed by the assessee against the order dated 28-11-1981 of the Commissioner (Appeals), by which he confirmed the order under section 104 of the Income-tax Act, 1961 (the Act), passed by the ITO demanding additional tax of Rs. 5,658 from the assessee.
2. The assessee is a limited company in which the public are not substantially interested. The ITO found that the distributable income for the assessment year 1976-77 worked out to Rs. 22,632. According to the statutory percentage applicable to a manufacturer like the assessee-company the assessee should have declared 45 per cent of Rs. 22,632 which amounted to Rs. 10,184 as dividend. As the assessee did not declare any dividend, the ITO passed the aforesaid order.
3. The assessee appealed to the Commissioner (Appeals), who, however, confirmed the order of the ITO.
4. Shri S. L. Jain, the learned representative for the assessee, urged before us that the order passed by the ITO was not justified. He stated that the profit earned was quite small and that as a prudent businessman, the assessee should provide for depreciation in such a way that the amount provided would be adequate for the replacement of the plant and machinery at the prevailing market price. If this is done, then there will be no amount left which could be distributed as dividend. Shri Roy Alphonso, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals).
5. We have considered the contentions of both the parties as well as the facts on record. The assessee is a wholly owned subsidiary of Madhsudan Ltd. It took over certain plants and machineries from its holding company at the market value of Rs. 5,70,000, whereas the written down value of those plants and machineries in the books of the holding company was only Rs. 2,14,563. The directors of the subsidiary company. Which is the assessee before us, provided depreciation on the cost of the plant to them, i.e., on the higher amount. The ITO, however, allowed depreciation only on the written down value of the assets as appearing in the books of the holding company because of the provisions of section 43(6), Explanation 2 of the Act. It is only because the ITO allowed a lower depreciation that he arrived at a higher distributable income. In our opinion, a prudent businessman must provide for depreciation in such when it becomes unserviceable. That replacement cost would naturally be the prevalent market price in the year in which the assets become unworkable. The price paid by the previous owner several yeas back would no longer be sufficient to replace the asset because of the inflationary trend of our economy which is a well-known fact. Hence, we hold that the directors of the assessee-company acted like a prudent business-man when they provided for depreciation on the assets according to the prevailing market price and not according to the book value of the asset as appearing in the books of the previous owner. Consequently, the commercial profits should be reduced to that extent for the purpose of section 104 and if that is done, there would be no distributable profit. Even otherwise, we find that the paid up capital of the assessee-company is more than Rs. 7 lakhs and even if the whole of the distributable income as determined by the ITO were declared as dividend, it would come to less than 3 per cent of the paid up capital. A dividend of 3 per cent is certainly very small and is not heard of in the Commercial world. Hence, the assessee should have been exempted from the operation of section 104 on the ground of smallness of Commercial profit also. We find support for the above conclusion of ours in the decision of the Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) .
6. For the above reasons, we cancel the order under section 104 passed by the ITO and allow the assessees appeal.