1. The Income Tax Appellate Tribunal has referred the following question for the opinion of this Court:
'Whether on the facts and in the circumstances of the case, the provisions of Section 23A (1) were rightly applied?'
2. Before we come to the controversy itself, a few preliminary facts are necessary.
3. M/s Ramchand & Sons, a partnership firm, owned a sugar mill and carried on the business of manufacturing and selling sugar. During the previous year relevant to the assessment year 1953-54 the assessee was incorporated as a private limited company for the purpose of carrying on the same business, the assets of which it acquired from the firm. Although the written down value of the assets was entered in the books of the firm at Rs. 11,53,612/- they were purchased by the assessee at Rs. 41,69 681/-.
4. In the assessment proceeding for the assessment year 1953-54, the first year of assessment in respect of the assessee, the Income-tax Officer declined to accept the valuation of Rs. 41,69,681/- as the basis of allowing depreciation on the assets, and acting under the first proviso to section 10 (5) (a) of the Indian Income Tax Act, 1922 he determined the cost of the assets to the assessee at Rupees 24,08,110/- and allowed depreciation on that basis. The Appellate Assistant Commissioner set aside the assessment and directed the Income Tax Officer to re-determine the cost after recording the evidence of an expert.
5. For the assessment year 1954-55, the Income Tax Officer allowed depreciation by adopting the same value of the assets as in the preceding year as reduced by the depreciation allowed in that year. That basis was upheld upto the stage of appellate decision by the Income Tax Appellate Tribunal, with this modification only that the Income Tax Officer was required to adopt the cost of the assets as finally determined after remand in respect of the preceding year.
6. For the assessment year 1954-55, apart from this the Income Tax Officer also treated the profits of Rs. 2,49,809/-alleged to have been earned by Roshan Industries Limited and Kumar Medical Stores as profits belonging to the assessee. He found that the sales effected by those two concerns were in fact sales effected by the assessee. He did not accept the case that sugar had been sold by the assessee to those concerns and subsequently by those concerns into the market. Failing to obtain relief before the Appellate Assistant Commissioner, the assessee agitated the matter before the Tribunal but the Tribunal also held that the two concerns were merely dummies and upheld the addition of Rs. 2,49,809/-.
7. The assessee had disclosed a loss of Rs. 1,93,061/- in its profit and loss account for the previous year ended October 31, 1953, relevant to the assessment year 1954-55, and in the income tax return filed by it the adjusted loss was shown at Rs. 1,40,859/-. As a result of adding Rs. 2,49,809/- and disallowing the depreciation as claimed by the assessee and consequent upon certain other additions, the Income Tax Officer computed the income of the assessee at Rupees 4,77,512/-. In second appeal, the Tribunal reduced the assessable income to Rs. 3,30,866/-.
8. These are the preliminary facts. We shall now come to those out of which the question referred arises.
9. The Income Tax Officer initiated proceedings in respect of the assessee under section 23-A (1) of the Act for the assessment year 1954-55. He took into account the assessable income and held that even on taking into account the loss of Rs. 20,562/- suffered by the assessee in the preceding year the payment of dividend would not be unreasonable. Ac-cordingly, he made an order under section 23-A (1) to the effect that the undistributed portion of the assessable income for the previous year ended October 31, 1954 as computed for income tax purposes and reduced by the amount of income-tax and super-tax would be deemed to have been distributed as dividend amongst the share-holders. An appeal against the order was dismissed by the Appellate Assistant Commissioner and a further appeal has been dismissed by the Tribunal. And, now at the instance of the assessee, this reference has been made by the Tribunal.
10. In deciding whether Section 23-A is attracted the Tribunal proceeded on the basis that the total income of the assessee was Rs. 3,30,866/-. It held that the sum of Rs. 2,49,809/- was liable to be included in computing the commercial profits of the assessee. It further held that in the computation of the commercial profits the assessee was not entitled to have the entire claim for depreciation taken into account inasmuch as the actual cost to the assessee had been determined by the Income-tax Officer under the first proviso to section 10 (5) (a). It also found that even if the entire depreciation claimed by the assessee on its assets was allowed, the commercial profits would amount to Rs. 1,08,950/-and after taking into account the loss of Rs. 20,562/- suffered in the preceding year the Income-tax Officer was still justified in applying section 23-A.
11. Section 23-A (1) of the Act, as it stood at the relevant time, read as follows:
'Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company upto the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than 60% of the assessable income of the Company of that year, as reduced by the amount of income tax and super-tax payable by the company in respect thereof, he shall unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax or super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid.'
12. Now it is settled law that when applying the provisions of section 23-A (1) and determining what are the profits and gains of a company available for distribution as dividend what the Income Tax Officer must consider is not the assessable income but the commercial or accounting profits of the assessee. There is a long line of decisions to that effect, and the law laid down by the Supreme Court in Commr. of Income tax, Bombay City v. Bipin Chandra Maganlal & Co. Ltd. Bombay : 41ITR290(SC) and Commr. of Income-tax, West Bengal v. Gangadhar Banerjee & Co.: (P) Ltd. : 57ITR176(SC) has now placed the matter beyond dispute. In Bipin Chandra Maganlal's case : 41ITR290(SC) the Supreme Court observed:
'A company normally distributes divi-dends out of its business profits and not out of its assessable income. There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. . . . .Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do.'
In Gangadhar Banerjee's case : 57ITR176(SC) the Supreme Court indicated how the commercial or accounting profits should be determined. It explained:
'The Income-tax Officer, acting under this section, is not assessing any income to tax; that will be assessed in the hands of the share-holder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the stand-point of the tax collector but from that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the aval-lability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business.'
13. The assessee contends that In computing the commercial profits in the instant case no reference should be made to the sum of Rs. 2,49,809/- because that sum did not represent profits received by the assessee, the money having been diverted by the management before it reached the till of the assessee. Now, there is nothing in the facts before us to justify the assumption that the sum did not enter the till of the assessee. There Is nothing in the material before us to show why the profits earned from these transactions should not be treated as the profits of the assessee. As long ago as Commr. of Income-tax Madras v. K. R. M.T.T. Thiagaraja Chetty & Co. : 24ITR525(SC) the Supreme Court declared that a sum earned by a company as commission even though not brought into its profit and loss account was nevertheless income liable to be treated as part of the company's profits for the purpose of taxation. How the assessee dealt with It after the profits had arisen or accrued did not affect Its tax liability In respect of those profits. The rule was developed further when in Sree Meenakshi Mills Ltd. Madurai v. Commissioner of Income Tax, Madras : 31ITR28(SC) the Supreme Court pointed out that if a company sells its goods and receives the price there can be no question but that the profits have accrued to it both in the business and in the legal sense. The Court explained:
'If an individual were to sell goods and receive the price therefor, that would be income accrued or arisen, liable to tax in his hands even though he should have failed to enter it in his accounts. A party cannot avoid tax by adopting the simple expedient of not disclosing its receipts in his books. That will be a case of income accrued or arisen but concealed and not of income not accrued or arisen.'
The Court rejected the contention that a distinction could be drawn in that regard between an individual and a company. The assessee maintains that although this enunciation of the law might be true of an assessment proceeding, it cannot be invoked in a proceeding under section 23-A which, he urges, is a distinct proceeding. We are unable to hold that the circumstance that the proceeding is one under section 23-A makes a difference. What has to be considered under section 23-A Is the amount of commercial profits, and there is no ground for supposing that the concealed profits of a company do not form part of its commercial profits. Neither principle nor practice justifies that assumption. No businessman can with any show of reason be heard to say that only the profits disclosed in his account books form his commercial profits and those which he has earned but withheld from the account books are to be considered outside his commercial profits. A contention such as the one raised by the assessee was rejected by the Supreme Court in Gobald Motor Service (P) Ltd. v. Commr. of Income-tax : 60ITR417(SC) . It was a case under section 23-A (1). The Supreme Court observed:
'The commercial or accounting profits which have to be taken into consideration are the real commercial or account-Ing profits. If an item is deliberately omitted from the accounts it cannot be said that commercial principles prevent that amount being added to the profits In order to arrive at the real commercial or accounting profits.'
14. In our opinion, the amount of Rs. 2,49,809/- is liable to be included in the commercial profits of the assessee for the purpose of applying section 23-A (1).
15. The next contention of the assessee is that for the purpose of computing the depreciation the Income-tax Officer was not entitled to go behind the valuation of the assets disclosed at Rs. 41,19,681/-which was the price at which the assessee acquired those assets. We find it unnecessary to enter upon that question, because even assuming that the entire amount of depreciation claimed by the assessee is liable to be taken into consideration the Tribunal has recorded the finding that the commercial profits available after taking into account the concealed profits amount to Rs. 1,08,950/-. That figure is derived by setting off the amount of the concealed profits of Rupees 2,49,809/- against the loss shown by the assessee in its return at Rs. 1,40,859/-. The loss returned by the assessee is on the basis of the depreciation claimed by the assessee. The Tribunal has found that even if the entire amount of depreciation claimed by the assessee is taken into account the Income Tax Officer would still be justified in applying section 23-A. We are not satisfied that this conclusion of the Tribunal is incorrect.
16. In our judgment, the provisions of Section 23-A (1) of the Act are attracted in the instant case.
17. Accordingly we answer the question referred by the Tribunal in the affirmative. The Commissioner of Income-tax is entitled to his costs which we assess at Rs. 200/-. Counsel's fee is assessed at the same figure.