1. The assessee, a private limited company in which the public are not substantially interested, was incorporated on January 1, 1957, and its business is that of plying buses.
2. In the previous year ending December 31, 1957, it plied four buses, one of which was new. It filed a return for that year showing a loss of Rs. 25,342. The Income-tax Officer found that the assessee had not maintained an abstract of ticket books issued to the conductors, the counterfoil of the ticket books and stock register for spare parts. In the absence of the said details, he felt that the loss disclosed by the assessee could not be accepted. He also felt that the actual collections of Rs. 88,583 shown in the account books which works out to 41 per cent. of the optimum collection of Rs. 2,14,803 are somewhat low, that the diesel consumption of 9,570 gallons showed that the total mileage done should have been 1,43,550 miles at the rate of 15 miles per gallon. He, therefore, estimated the income at Rs. 6,500 per bus for three old buses and allowing the normal depreciation he took the income at Rs. 6,932 for all the three buses. In respect of the new bus, after allowing an additional depreciation, the Income-tax Officer estimated the loss at Rs. 637. The estimate of income at Rs. 6,500 per bus was also agreed to by the assessee's representative. Ultimately, the assessment was completed as 'no income no loss.'
3. In the previous year ending December 31, 1958, the assessee filed a return showing a loss of Rs. 15,020. The account books showed the actual collections at Rs. 97,566 against the optimum collection of Rs. 2,17,801. In view of the factors referred to above, the Income-tax Officer did not accept the loss returned by the assessee in this year as well, and he, therefore, disallowed the loss but did not estimate any income.
4. In the previous year ending December 31, 1959, relevant for the assessment year 1960-61, the assessee returned an income of Rs. 30,739. After disallowing a sum of Rs. 1,665 under 'miscellaneous expenses', the assessment was completed on an income of Rs. 32,404. In the previous year ending December 31, 1960, relevant for the assessment year 1961-62, the assessee returned an income of Rs. 45,161 and his return was accepted by the Income-tax Officer. The net income after deducting the tax came to Rs. 17,822 and Rs. 24,839 in the assessment years 1960-61 and 1961-62, respectively. But the assessee had not declared any dividend in these two years. The Income-tax Officer, therefore, issued notices under Section 23A of the Indian Income-tax Act, 1922, to show cause why additional supertax should not be levied. The assessee submitted that the losses of the earlier years 1958-59 and 1959-60 completely wiped out the profits earned in the assessment years 1960-61 and 1961-62, that any declaration of dividend would be contrary to the provisions of the Companies Act and that according to the books, there were no profits warranting the declaration of any dividend. The Income-tax Officer rejected the assessee's contention observing that the losses claimed in the first two years had not been accepted by the department and that in both the years the loss had been taken to be 'nil'. He, therefore, held that the assessee was liable to super-tax under Section 23 A.
5. The assessee appealed to the Appellate Assistant Commissioner reiterating the same contention that if the book losses for the assessment years 1958-59 and 1959-60 are set off against the profits of the years 1960-61 and 1961-62, there was no amount available for distribution of dividend. The Appellate Assistant Commissioner held that, as the assessee's books have been found not to reflect the correct profits, the book losses cannot be taken to be commercial loss and that, therefore, the orders of the Income-tax Officer under Section 23A had been validly passed.
6. The assessee took the matter in further appeal to the Tribunal. The Tribunal also held that the losses in the first two years were illusory and not real, that, therefore, they could not be brought forward and set off against the profits of the subsequent years, that the books of account have been rejected and additions had been made by the Income-tax Officer for valid reasons at the stage of the relevant assessments, and those additions had been accepted by the assessee, and that, therefore, the estimate of income made by the Income-tax Officer for the first two years would alone be relevant and not the book losses. In that view it upheld the order of the Income-tax Officer passed under Section 23A.
7. At the instance of the assessee, the following question has been referred to this court under Section 66(1) of the Indian Income-tax Act, 1922:
'Whether, on the facts and in the circumstances of the case, the levy of super-tax on the assessee-company for the assessment years 1960-61 and1961-62 under Section 23A of the Income-tax Act is justified?'
8. Section 23A(1) provides that where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the 12 months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company in that previous year as reduced by income-tax and super-tax payable by the company on its total income, he shall, unless he is satisfied that having regard to the losses incurred by the company in the earlier years or to the smallness of the profits made in theprevious year, the payment of a dividend or a, larger dividend than that declared would be unreasonable, make an order in writing that the company shall be liable to pay super-tax at the varying rates having regard to the nature of the company. Therefore, the question to be considered in this case is whether the book losses in the earlier years can be taken to be the losses actually incurred by the company in these years. If they are so taken, the non-declaration of dividend by the company cannot be said to be unreasonable. But, if the book losses are ignored, the non-declaration of the dividend for the two years 1960-61 and 1961-62 would be unreasonable.
9. As already stated, the net income of the assessee as per the assessments for the various years as distinguished from the income shown in the books of account is as follows :
Assessment YearIncome as assessedIncome as per booksRs.Rs.
1958-59Nil25,342.00 (loss)1959-60Nil15,020.00 (loss)1960-6117,822.0017,822.00 (profit)1961-6224,838.0024,838.00 (profit)
10. The question is whether there were in fact losses in the earlier two years as shown in the assessee's. books of account. According to the assessee for the purpose of Section 23A(1) it is only the book results of the earlier years that must be taken into account and not the estimates made by the Income-tax Officer. According to the revenue, once the book results have not been accepted by the Income-tax Officer, the income assessed by the Income-tax Officer alone should form the basis and the book results should be completely eschewed from consideration. The Tribunal has taken the view that the losses in the earlier two years were only illusory and not real which could be brought forward and considered in the subsequent years for the purposes of Section 23A, that when the books of account have been rejected for valid reasons by the Income-tax Officer and the assessments made on an estimated basis had been accepted by the assessee, it has to be taken that the book results did not represent the real state of affairs, and that, therefore, the losses disclosed in the books of account for the earlier two years have to be ignored as not being real, and the position as emerging from the assessments in relation to these years should alone be considered. If so considered, it should be taken that there were no losses in the earlier two years so as to wipe out the profits earned in the subsequent years.
11. In Commissioner of Income-tax v. Bipinchandra Manganlal & Co., : 41ITR290(SC) their lordships of the Supreme Court, while considering the scope of thewords 'smallness of the profits' occurring in Section 23A(1) of the Act expressed:
'A company normally distributes dividends 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 the business concern in a commercial sense. Compulation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividend would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account.'
12. The above passage is relied on by the assessee in support of its contention that the assessed income of the first two years cannot come into the picture and it is the actual losses shown in the books of account for those years that have to be taken into account. But we are of the view that the above observations came to be made in an entirely different context. In that case the difference between the written down value of an asset and the price realised by the sale thereof was included in the assessable income of the assessee-company by virtue of the fiction in the second proviso to Section 10(2)(vii) of the Income-tax Act read with Section 2(6C). The revenue took the entire assessable income as a commercial profit for the purpose of application of Section 23A. This was resisted by the assessee on the ground that the balancing charge should be excluded for the purpose of ascertaining the quantum of profits available for distribution as dividend. The court agreed with the assessee's contention and held that the expression 'smallness of the profit' in Section 23A had to be adjudged in the light of commercial principles and not on the basis of computation of the assessable income, and that, even though the assessable income of the company may be large, the commercial profits may be so small that, compelling distribution of the difference between 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 rsserves or upon its capital which in law it cannot do.
13. In Commissioner of Income-tax v. Gangadhar Banerjee & Co., : 57ITR176(SC) the Supreme Court again considered the scope of the words ' smallness of profits' in Section 23A and expressed the view that assessable profits cannot be equated to actual profits, for, in arriving at the assessable profits, the Income-tax Officer may not allow many expenses actually incurred by the assessee but may include many items on notional basis, and that the word 'profits made' are the actual profits earned by the assessee calculated on commercial principles, and that Section 23A(1) concerns itself with accounting profits and not the assessable profits of the year. It was also held in that case that Section 23A is in the nature of a penal provision and that, therefore, the revenue has strictly to prove that the conditions laid down thereunder were satisfied before an order could be made under the said section. In that case the scope of the authority of the Income-tax Officer to act under Section 23A has been' set out as under :
'The Income-tax Officer, acting under this section, is not assessing any income to tax that will be assessed in the hands of the shareholder. 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 standpoint of the tax collector but from that of a business man. The yard-stick is that of a prudent business man. 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 availability 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. It is neither possible nor advisable to lay down any decisive test for the guidance of the Income-tax Officer. It depends upon the facts of each case.'
14. Commissioner of Income-tax v. Jubilee Mills Ltd., : 68ITR630(SC) was a case in which the expression 'losses incurred by the company in earlier years' occurring in Section 23A(1) came to be construed by the Supreme Court. There the company adjusted some of the losses of the earlier years by reducing the paid-up capital. The assessse wanted the revenue to take into account those losses as well for purpose of computing the 'losses incurred in ear-Her years' for purpose of Section 23A. The court held that there was nothing in the language or context of Section 23A(1) of the Act to suggest that the said expression should be construed so as to exclude losses incurred prior to the reconstruction and to include only unadjusted or carried forward losses still outstanding in the books of the company, that the losses which had been adjusted in the books of the company at the time of reconstruction did rot cease to be 'losses incurred by the company in earlier years' within the meaning of Section 23A(1), and that the consideration of losses in the earlier years should be made in the setting and context of the enquiry whether the company could be regarded as acting reasonably in declaring a smaller dividend. In Commissioner of Income-tax v. Asiatic Textiles Ltd., : 82ITR816(SC) an assesses had a distributable balance of Rs. 91,116 and Rs 60,761., respectively, in the years 1955-56 and 1956-57, but it did not declare any dividend because it had suffered a loss of 12 lakhs of rupees on account of depreciation in the value of certain shares it held inanother concern. The question was whether the Income-tax Officer could invoke the provisions of Section 23A(1) to levy an additional super-tax on the distributable surplus for those years. Their Lordships of the Supreme Court held that the depreciation in the value of shares though a capital loss has to be taken into account, that the payment of any dividend during the relevant years could not have been considered reasonable by a body of directors, that, therefore, any payment of dividend during the years would have been unreasonable and that the Income tax Officer was not, therefore, justified in invoking Section 23A(1). The court took support for that view from the decision of the Judicial Committee in Commissioner of Income-tax v. Williamson Diamonds Ltd.,  AC 41;  35 ITR 290 and expressed :
'Whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. The Income-tax Officer can step in under Section 23A(1) only if the directors unjustifiably refrain from declaring a dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-director.'
15. Though the above cases have been relied on by the assessee, we are of the view that they do not help us to deal with the question before us. All these cases deal with the scope of Section 23A in general and the scope of the words 'losses incurred in the earlier years' and 'smallness of the profit' occurring in the section in particular. We are here concerned with the question as to whether it is the book losses or the losses as determined by the income-tax authorities that are to be taken up into account. The fact that the book results have not been accepted by the Income tax Officer as correct in the earlier years cannot be altogether overlooked. When the assessee's book results showing losses in the earlier two years have not been accepted by the Income-tax Officer, it cannot be said that the Income-tax Officer is bound to accept the said book results in proceedings under Section 23A for finding out the available surplus in the subsequent years. As already stated, the Income-tax Officer ignored the book results and made an estimate on certain basis to which the assessee also agreed. It did not challenge the assessments passed on estimates in the earlier two years. Having regard to this fact that the assessee had not challenged the rejection of his books of account and the book results by the Income-tax Officer in the earlier two years, he cannot fall back entirely upon the book results in these proceedings under Section 23A. It is the contention of the assessee that without reference to the findings given by the Income-tax Officer in relation to the book results in the earlier years, the Income-tax Officer has to investigate afresh as to the losses in those years in the present proceedings under Section 23A, and that it is not open to the revenue to merely proceed on the basis of the assessments in the earlier years. The learned counsel may be right if he says that the assessment of the earlier years could not be taken as a conclusive basis for holding that there were no losses in the earlier years, and that the Income-tax Officer has to determine the quantum of losses of the earlier years independent of the earlier years' assessments, which were not in accordance with the book results. But the revenue while proceeding under Section 23A cannot altogether ignore the findings rendered by the Income-tax Officer in the earlier assessment proceedings, for they con-stitute prima facie evidence that the book results were not accepted. If the assessee adduced satisfactory evidence to show that the revenue was not justified in ignoring the book results earlier, then it may be open to the Income-tax Officer in these proceedings to go behind the findings rendered in the earlier years and take the assessee's losses in the earlier years as shown in the books of account. Having regard to the object of Section 23A which is to levy an additional tax and not to levy penalty for any concealment, it is not possible to say that the Income-tax Officer has to ignore altogether his findings in the earlier years,
16. In Gobald Motor Service Ltd. v. Commissioner of Income-tax : 60ITR417(SC) an assessee ran a fleet of buses and lorries, and its total income as finally determined by the Income-tax Officer was Rs. 2,04,222 as against Rs. 1,01,902 the book profits returned, and balance available for distribution after deduction of taxes was determined at Rs. 1,22,693. A sum of Rs. 45,000 had been declared as dividend by the assessee. Such dividend declared was found to be less than 60 per cent. of the profits available for distribution and the Income-tax Officer invoked Section 23A. The assessee contended that the book profits available for distribution was only Rs. 20,373 and the estimate of profits made by the Income-tax Officer which resulted in the profits available for distribution at Rs. 1,22,693 should not form the proper basis. In that case though the assessee returned an income of Rs. 1,01,902 the Income-tax Officer did not accept the return but had made certain additions towards spare parts, tyres and tubes, suppression of luggage collection, and the difference between depreciation allowed and claimed, As a result of these additions there was difference between the assessable income and the book profits. In answering the assessee's contention that it is the actual book profits and not the assessable income as determined by the Income-tax Officer that should be taken as the ' profits made 'for the purpose of Section 23A, their Lordships of the Supreme Court expressed the view that the profits which are to be taken into consideration under Section 23A are the real commercial or accounting profits and that, if an item is deliberately omitted from the accounts, it cannot besaid that commercial principles prevant that amount being added to the profits in order to arrive at the rest commercial or accounting profits and that the two items relating to spare parts, tyres amounting to Rs. 25,000 and the suppression of luggage collection amounting to Rs. 15,000 had to be added to the book profits in order to arrive at the true commercial or accounting profits of the assessee.
17. The principle in Gobald Motor's case is that whenever it is found that the book results do not represent the real commercial or accounting profits in the assessment year or of the real commercial or accounting losses of the earlier years, then the additions made to the total income 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. For instance, if certain expenditure incurred is claimed as a deduction and the Income-tax Officer disallows sucb expenditure, the disallowance will result in an addition to the total income returned. But such an addition cannot be taken into account, for the amount disallowed is not an amount available with the assessee for distribution as dividend. In Rayalaseema Passengers and Goods Transport v. Commissioner of Income-tax : 72ITR783(Mad) the Income-tax Officer, for determining the available profits under Section 23A, took into account over a lakh of rupees that had been added in the assessments for earlier years on account of defects in the accounts, since the assessee-company was not able to show that the expenses claimed for deduction had really been incurred. The order of the Income-tax Officer was affirmed by the Tribunal. This court, on reference, expressed the view thus:
'Availability of profits in the year in question out of which dividends could be declared, is an important consideration that should be investigated and ought to weigh with the revenue as well as the Tribunal in applying Section 23A. While on that consideration it would be permissible for the Income-tax Officer to take the assessment result of the accounting year in question and view the additions to the returned profits as a result of disallowance of claims for deduction on the ground that the outgoings had not been proved, as part of the profits of the accounting year. That much is clear from Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax.'
18. But, if an outgoing had been proved but the Income-tax Officer disallows it on the ground that is not allowable, then the question arises as to whether the disallowed amount will be a profit available in the hands of the assessee. In Commissioner of Income-tax v. Anamalai Bus Transport (P.) Ltd. : 72ITR811(Mad) this court felt that as the levy of penal super-tax under section 23A is not an assessment of the total income to tax in the normal sense of the Income-tax Act, the considerations which may govern assessment of total income to income-tax, particularly in the matter of deductions and allowances, may not in their full vigour and scheme apply to a determination of the total income for purpose of Section 23A and that, therefore, even if the claim of an assessee-company for deduction of a sum donated by it as charity is disallowed, that will not be taken into account for the purpose of determining the availability of profits with reference to Section 23A.
19. We are, therefore, of the view that the decision of the Supreme Court in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, supports the stand taken by the revenue that as a result of the additions made to the income returned by the assessee in the earlier two years, there are no losses to be wiped out from and out of the profits earned in the subsequent two years and that, therefore, Section 23A has rightly been invoked by the Income-tax Officer. As already stated, the additions to the income made by the Income-tax Officer in the earlier two years have not been questioned by the assessee. Therefore, it has to bs taken that the book results in respect of those years did not reflect the true position, and the additions made by the Income-tax Officer towards suppressions of income have to be taken into account for finding out whether there were in fact losses in the earlier years. Therefore, it is only by taking into account the additions made, the true income for the earlier two years could be ascertained. If that were the true and correct position, the assessed income for the earlier two years has to form the basis and not the book results, for determination of the 'losses incurred in the earlier years'. We are of the view, therefore, that the determination by the Income-tax Officer of the available profits in the case of the assessee is correct.
20. In this case the question of reasonableness was not raised at any stage before and no attempt was made to question the finding or the estimate made by the assessing authority before the Appellate Assistant Commissioner or before the Tribunal. Therefore, we are not called upon to go into the reasonableness or otherwise of the view taken by the Income-tax Officer while acting under Section 2 3A.
21. The question referred is answered in the affirmative and against, the assessee. The revenue will have its costs. Counsel's fee Rs. 250.