1. The assessee in this case is a company engaged in the business of road transport. For the accounting period relevant to the assessment year 1959-60, the paid-up share capital of the company was Rs. 30,000 and the profit as per the profit and loss account was Rs. 1,27,653. The company did not distribute any dividend in respect of that year. The income of the assessee-company had been determined at the following figures :
As determined by the Income-tax OfficerAs reduced in appeal by the A.A.C.As ultimately determined by the Tribunal
Rs.Rs.Rs.Total income2,88,5362,41,1512,29,229Tax thereon1,56,5761,32,1731,26,032
2. One of the items of expenses disallowed for assessment purposes and added back to the book profit, namely, Rs. 56,350, related to the claim for expenses relating to spare parts and maintenance. The Income-tax Officer applied the provisions of Section 23A(1) of the Indian Income-tax Act, 1922, and levied an additional super-tax of Rs. 40,088. According to him, the company had distributable surplus of Rs. 1,08,346 (Rs. 2,41,151 minus the tax liability of Rs. 1,32,805) and as the assessee had not declared any dividend for the year in question, it is liable to be proceeded against under Section 23A(1). The assessment made under Section 23A(1) was challenged before the Appellate Assistant Commissioner. He took the view that for the purpose of Section 23A(1), the book profits alone should be taken into account and not the assessed profits. In that view he took the book profits as Rs. 1,27,653 and deducting therefrom the amount of Rs. 1,26,032 determined as tax payable by the assessee in the assessment proceedings, found the balance of profit remaining as Rs. 1,621. He, therefore, considered that having regard to the smallness of the profit the payment of any dividend would be unreasonable.
3. The revenue took the matter in appeal to the Tribunal. It was contended before the Tribunal that the Appellate Assistant Commissioner was in error in proceeding on the basis of book profits, that the feasibilityof declaring a dividend has to be considered with reference to the real commercial profits and that in any case the sum of Rs. 56,350 disallowed and added back in the assessment by way of excess claim for expenses relating to spare parts and maintenance should have been taken into account in determining the quantum of profits available for the purpose of Section 23A of the Indian Income-tax Act, 1922. In effect the case of the revenue was that the disallowed expenditure of Rs. 56,350 was part of the commercial profits available with the assessee, that the balance thus available for distribution came to Rs. 57,239 (Rs. 1,621 plus Rs. 56,350) against the paid-up capital of Rs. 30,000 and that as no dividend was declared the provisions of Section 23A(1) were rightly applied by the Income-tax Officer. In support of this contention, the revenue cited the decision of the Supreme Court in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, : 60ITR417(SC) . The Tribunal distinguished that case on the ground that the facts of this case were different. The Tribunal ultimately held that this disallowance of the expenditure of Rs. 56,350 as 'excessive consumption ' in spare parts was in no sense a commercial profit available for distribution as dividend and that, in the absence of any positive finding that the said amount was available in the coffers of the company, the same could not be treated as commercial profits available for distribution as dividend for purpose of Section 23A. The Tribunal, therefore deleted the sum of Rs. 56,350 and proceeded to take the book profits alone as the basis for finding out the feasibility of declaring a dividend, and came to the conclusion that if the tax liability is deducted from the book profits, the balance would be less than Rs. 1,000 and it is so small a balance for the purpose of distribution as dividend. It, therefore, dismissed the appeal.
4. At the instance of the revenue, the following question has been referred to us :
'Whether, on the facts and in the circumstances of the ease, the Tribunal was right in law in holding that the provisions of Section 23A of the Indian Income-tax Act, 1922, were not attracted for the assessment year 1959-60?'
5. It is common ground that the assessee is a Section 23A-company.Therefore, the only question is whether the assessee had sufficient distributable profits in the year in question for the purpose of application of Section 23-A(1) of the Income-tax Act. It is well-established that for theapplication of Section 23A(1), neither the book profits nor the assessedprofits can be taken to be conclusive, and that it is the true and realcommercial profits that should be taken into account for considering thesmallness of the profits or otherwise for the application of Section 23A. InCommissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd., : 57ITR176(SC) , theSupreme Court pointed out that ' the words ' smallness of profit' in Section 23A refer to actual accounting profits and not the assessable profits of the year, that in arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred by the assessee and include many items on notional basis and that, therefore, the commercial or accounting profits actually earned by the assessee has to be calculated on commercial principles and not on the basis of the assessed profits.'
6. In Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax the Supreme Court pointed out that the book profits or profits shown in the profit and loss account of an assessee cannot straightaway be taken as the basis for the application of Section 23A and that the Income-tax Officer would be justified in adding to the book profits amounts deliberately found to have been omitted from the accounts or amounts of expenditure disallowed as inflated and that the commercial principles cannot be taken to prevent additions being made to the book profits in order to arrive at the real commercial or accounting profits.
7. This court in T.C. No. 171 of 1967 (Victory Motor Transport (Nilgiris 1956) Private Ltd. v. Commissioner of Income-tax, : 98ITR646(Mad) held that wherever it is found that the book results do not represent the real commercial or accounting losses of the earlier years, then the additions made to the book profits at the stage of the assessment have to be taken into account. But it is not all the additions that have been made to the total income in the course of the assessment that can be treated as really commercial or accounting profits and that it is only those additions which have been made on the basis that the assessee has suppressed the income or inflated the expenditure, that have to be taken into account.
8. The question is whether on the facts of this case the addition of Rs. 56,350 being the amount disallowed out of the expenditure claimed for spare parts and maintenance could, be added to the book profits. As already stated, the Appellate Assistant Commissioner proceeded on the basis that it is only the book profits that is to be taken into account for the application of Section 23A(1). The Tribunal has proceeded on the basis that though an addition of the book profits can be justified in cases where the assessee is found to be guilty of deliberate omission or concealment of income or of deliberate inflation of the expenditure, the addition of Rs. 56,350 made in this case cannot be justified as there was no finding at the assessment stage that the assessee had suppressed the receipts or was guilty of deliberate omission or concealment of income or that he deliberately inflated the expenditure. The reasoning of the Tribunal is this :
'On the facts of the present case where one authority has considered a certain amount of consumption of spare parts as reasonable, and anotherauthority has adopted another estimate as being reasonable, it cannot be said that disallowance of expenditure of Rs. 56,350 added back in the assessment was in any sense commercially available to the assessee-company for distribution as dividend.'
9. In that view the Tribunal held that the addition was not justified and that if the addition is set aside, the balance is so small as no dividends could reasonably be declared.
10. We are not inclined to agree with the Tribunal that on the facts of the present case the addition of Rs. 56,350 was not justified. Nor can we agree with the Tribunal that the facts of the present case are in any way distinguishable from the facts of the case in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, In the case in Gobald Motor Service (P.) Ltd. one of the items of expenses disallowed in the income-tax assessment was a sum of Rs. 25,000 and it related to spare parts, tyres and tubes, etc. It had been found that spares, etc., of the value of Rs. 25,000 had not actually been consumed and, therefore, the said sum of Rs. 25,000 was added to the book profits along with other items for finding out the commercial or accounting profits for the purpose of application of Section 23A. Before the Supreme Court it was contended that the addition in respect of the disallowed portion of the expenses of spare parts, tyres and tubes, etc., to the book profits was not justified because it represented only the notional income. Rejecting that contention, the Supreme Court expressed that the profits which have to be taken into consideration while considering the application of Section 23A are the real commercial or accounting profits, that 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.
11. In this case also the disallowance of the sum of Rs. 56,350 related to a portion of the expenditure shown in the assessee's books as having been expended for spare parts and maintenance. The assessing officer at the stage of the assessment finds specifically that the assessee has not maintained any stock account for the spare parts, that there was no receipt or issue register in relation thereto, that in the absence of such accounts it is not possible to verify the quantum of materials actually consumed and that even if the buses have become old there is no possibility of the consumption of such a large amount of spare parts as is claimed by the assessee. The assessing officer also found that the total expenditure towards spare parts claimed by the assessee during the assessment year was Rs. 3,99,393 as against Rs. 2,87,513 claimed in the previous year under the same head. Thus, the purport of the finding of the assessing officer is that the assessee has made an excess claim of Rs. 56,350 as regardsexpenses relating to the spare parts than what has actually been spent under that head. This disallowance of the said amount and its inclusion in the assessable profits in the original assessment has been confirmed by the Appellate Assistant Commissioner as well as by the Tribunal. Therefore, its inclusion in the assessable profits was only on the basis that it did not represent the amount actually spent by the assessee for the spare parts, but represent the inflated value of the spare parts actually consumed by the assessee. In view of that position, the addition of Rs. 56,350 to the book profits for finding out the commercial profits with reference to Section 23A(1) could be justified, in view of the decision of the Supreme Court in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax which has been followed by this court in T. C. No. 171 of 1967 (Victory Motor Transport (Nilgiris 1956) Private Ltd. v. Commissioner of Income-tax).
12. The result is, the question referred to us is answered in the negative and in favour of the revenue. In view of the fact that the respondent has not appeared either by himself or by counsel, we are not making any order as to costs.