1. The following questions are involved in this reference under Section 256(1) of the I. T. Act, 1961 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additions sustained to the income or loss disclosed in the statement of account represented the actual commercial profits for the purpose of Section 23A of the Indian Income-tax Act, 1922 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Appellate Assistant Commissioner of Income-tax, Range 'D', Calcutta, was not justified in vacating the order under s, 23A in this case ?'
2. The assessee is a private limited company to which Section 23A of the Indian I.T. Act, 1922, applies. In the assessment year 1961-62, with which we are concerned, the ITO rejected the loss claimed at Rs. 66,737 by the assessee arising out of constructional work of bridges and estimated the positive income of Rs. 65,182 at 20% gross profit on receipts. There was thus an addition of Rs. 1,31,919 in the computation of the total income of the assessee.
3. The assessee preferred an appeal against the said assessment order and the AAC granted reduction in the total income. The total income, as sustained by the AAC, was Rs 2,04,440. On further appeal before the Tribunal, there was a further reduction in the total income. The Tribunal also deleted the addition of profits but sustained the disallowance of loss in the following terms :
'The learned counsel next submitted that in the case of a continuing contract an overall picture should be taken after the completion of the contract and the reasonableness of the gross profit shown this year should be tested in the background of the overall result. It was submitted that the assessee-company was mainly engaged in two contracts of bridge construction. One was the construction of Singharan Bridge started in the assessment year 1961-62. The total receipts for the three years amounted to Rs. 20,93,949 and the overall gross profit amounted to, Rs. 3,75,316, whereas in the earlier two years the gross profit offered for assessment amounted to Rs. 3,79,146 on receipts amounting to Rs. 18,95,764. It was submitted that the overall profit of Rs. 3,75,316 on total receipts of Rs. 20.93 lakhs amounted to 18%. The other contract was the construction of flyover bridge at Ondal. The contract commenced in the assessment year 1960-61 and was completed in the assessment year 1963-64, the aggregate receipts amounting to Rs. 1,46,073 with gross loss of Rs. 18,115 as determined in that year..... so far as Singharan Bridge contract is concerned, the overall gross profit of Rs. 3,75,916 which works out to about 18% prima facie does not warrant any estimate of profit in respect of the receipts of the previous year. According to the assessee, there would be a loss of Rs. 3,400 this year having regard to the profit returned in the earlier two years amounting to Rs. 3,79,146. For the defects mentioned, we would hold that the assessee's claim of loss from this contract this year is not proved but at the same time there is no need to estimate any profit with reference to the receipts of this year in isolation.
As regards the flyover bridge construction at Ondal, the assessee's expenditure amounted to Rs. 1,05,313 in the assessment year 1960-61 but there were no receipts in that year. In the year 1961-62, the expenditure amounted to Rs. 41,835. The receipts accounted for this year at Rs. 11,27,728 were evidently in respect of the work done in the assessment years 1960-61 and 1961-62. According to the profit and loss account, the work-in-progress was valued at Rs. 8,400. If the value of the work-in-progress were correct there would be a loss of Rs. 11,020. It appears, however, that the estimate of work-in-progress is not quite correct. If it were correct there would be some receipts accounted for in the assessment year 1962-63, and in that year no expenditure also has been booked. We are not able to see whether there was any real loss in this contract so far as this year is concerned. Accordingly, we would disallow the claim of loss this year but refrain from making any estimate of profit on the receipts arising from this contract. It would be open to the assessee to establish in due course in the year of completion of the contract the actual position in respect of the contract. If there was in fact an overall loss of Rs. 18,115 in the year of completion, there would be no objection to its being so determined if the assessee is able to explain what the adverse factors were which gave rise to this loss. In the result, we would maintain the disallowance of loss of Rs. 66,737 as reflected by the Account books but delete the further estimate of profit of Rs. 65,182.'
4. Thereafter, in the proceedings under Section 23A of the Indian I. T. Act, 1922, the ITO was of the opinion that loss of Rs. 66,737 having been rejected it was a commercial profit for the purpose of calculating the distributable surplus. The AAC has allowed the appeal filed by the assessee. The Appellate Tribunal has, however, allowed the appeal filed by the department under Section 23A of the Act in the following terms :
'In our opinion, the Appellate Assistant Commissioner was not correct in the view that only in cases where it is shown that the assessee had deliberately understated its income or suppressed its income that the book results could be said not to represent the commercial profit. Even in a case where there is no deliberate attempt at suppression of profit or understatement thereof, the method of accounting adopted may be such as not to bring out the true profits made. The proviso to Section 13 (corresponding provision under the I, T. Act, 1961, being Section 145) clearly contemplates adjustment to the accounted profits to arrive at actual profit. Any addition made to the book profit by way of any such adjustment cannot, in our view, be considered to be notional or intangible and not real. The addition would also represent actual commercial profit. The question of deliberate suppression or understatement would involve additionally consideration of application of the provisions for imposition of penalty as well. Coming to the facts of this case, it is clear from the finding of the Tribunal in the corresponding quantum appeal that the accounts did not reflect the correct profit or loss as the work-in-progress was not correctly stated. The Tribunal, therefore, came to the conclusion that there was no loss as claimed by theassessee though it did not estimate any income or the receipts from the contract. It would, therefore, follow that the income of the assessee had been understated, though not deliberately, to the extent of such loss claimed. The amount to the extent of such understatement cannot, in our opinion, be considered to be notional or fictional, but would equally represent actual commercial profit. In this view of the matter, we do not think the Appellate Assistant Commissioner was justified in vacating the order under Section 23A in this case on the ground that addition to the book profit or income represented purely notional addition.'
5. Mr. Kalyan Ray, the learned counsel for the assessee, has contended before us that, since Section 23A is a penal provision, the revenue must prove that the said loss disallowed in the assessment proceedings and added in the computation of the total income of the assessee was a, commercial profit for the purposes of Section 23A of the Act. It is also his submission that though the claim for loss was rejected in the assessment proceedings, it cannot be said as matter of course that the disallowed amount was the actual commercial profit of the assessee. He finally contended that the ITO did not proceed under the proviso to Section 13 of the Indian I. T. Act, 1922, in the assessment proceedings and, therefore, the reasons given by the Tribunal are not only wholly erroneous but also its decision, being based upon the misreading of its earlier order in quantum appeal, should not be sustained.
6. The contention, on the other hand, of Mr. B. L. Pal, the learned counsel for the revenue, is that irrespective of the question as to whether the ITO has acted under the proviso to Section 13 of the Indian I. T. Act, 1922, in the assessment proceedings, it must be held that, since the claim for loss of Rs. 66,737 was disallowed in the assessment proceedings, this amount was a commercial profit, for, according to him, in the assessment proceedings, the ITO must proceed, firstly, on the book profits as shown by the assessee and thereafter would add and make adjustments to it on the basis of disallowances made by him and, therefore, the amount disallowed must be held to be the commercial profit of the assessee for the purpose of Section 23A of the Act. In this connection, Mr. Pal has relied on an unreported judgment of this High Court dated September 24, 1974, in Income-tax Reference No. 69 of 1970 intituled Mehar Singh & Co (P.) Ltd. v. CIT (since reported in : 108ITR607(Cal) . He has also cited the decision of the Supreme Court in the case of Gobald Motor Service (P.) Ltd. v. CIT : 60ITR417(SC) and the decision of the Madras High Court in the case of CIT v. Mettupala-yam Coonoor Service (P.) Ltd. : 99ITR49(Mad) .
7. To meet the contentions of Mr. Pal, Mr. Ray cited the decision of this court in the case of CIT v. Jalan Investment (P.) Ltd. : 103ITR198(Cal) , the decision of the Gujarat High Court in the case of CIT v. S. P. Bhatt : 97ITR440(Guj) and the decision of the Bombay High Court in the case of Agri Orient Industries (P.) Ltd. v. CIT : 101ITR605(Bom) .
8. Now, in Mehar Singh's case (IT Ref. No, 69 of 1970, dated September 24, 1974) : 108ITR607(Cal) the income was assessed on the 'best judgment assessment' after rejecting the books of the assessee and in those circumstances it was held that the additions made in the assessment proceedings were the concealed income of the assessee and accordingly profits arising out of the concealed income were the commercial profits of the assessee for the purposes of Section 23A of the Act. In Gobald Motor's case : 60ITR417(SC) , the facts were briefly as follows: the assessee deliberately omitted certain receipts from the account; it also inflated certain expenditure ; the ITO added the concealed income and disallowed the inflated expenditure; and, thereafter, action was taken under Section 23A of the Act. It was held by the Supreme Court that since the real income was deliberately suppressed by the assessee, no commercial principles prevented those sums being added to the profits in order to arrive at the real commercial or accounting profits and that those two sums were liable to be added to the book profits in order to determine the true commercial or accounting profits of the assessee. In CIT v. Mettupalayam Coonoor Service (P.) Ltd. : 99ITR49(Mad) , their Lordships of the Madras High Court followed the above decision of the Supreme Court in view of the sameness of facts.
9. In the case before us, the books of the assessee were not rejected in assessment proceedings or in the quantum appeals. All that was found was that the stock register of the assessee did not show the use of cement and for that reason it was not possible to verify the consumption of cement. Further, there is nothing in the record to show that the ITO had acted under the proviso to Section 13 of the Indian I.T. Act, 1922, or has made the assessment under Section 23(4) of the Act. Hence, the cases cited by Mr. Pal do not apply to the present case.
10. In our opinion, the law on the subject has been correctly laid down by their Lordships of the Madras High Court in the case of CIT v. Mettu-palayam Coonoor Service (P.) Ltd. : 99ITR49(Mad) in the following terms (p. 52):
'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.'
11. Further, the opinion expressed by their Lordships of the Gujarat High Court and Bombay High Court in the cases cited by Mr, Ray substantially conform with the views we have taken in this matter. The law is well settled by the decisions of this court on Section 23A of the Act in the case of CIT v. Jalan Investment (P.) Ltd. : 103ITR198(Cal) . It is the settled law that the ITO must determine the actual commercial profits of the company on the date of declaration of dividend while acting under Section 23A of the Act; the commercial profit for the purpose of Section 23A must be determined from a broad commercial point of view ; 'accounting profits' and 'assessable profits' are two different concepts under the I.T. Act; the commercial accounting profits are the actual profits earned by the assessee calculated on commercial principles ; and while acting under Section 23A of the Act, the ITO must not act as a tax collector but must act as a prudent director of the company.
12. There is much force in the contention of Mr. Ray that no prudent director will take into account the loss which the company has sustained in calculating the distributable surplus though such loss may not ultimately be allowed in the assessment proceedings. Further, merely because a loss has been disallowed in the assessment proceedings it cannot be said as a matter of course that the amount representing the disallowed loss is a commercial profit for the purposes of Section 23A of the Act, because while computing the total income of the assessee for the purposes of assessment the ITO may disallow certain claims in view of the statutory provisions, but the total income so computed may not be the actual commercial profits on commercial principles for the purposes of Section 23A of the Act.
13. Accordingly, we are unable to accept the contentions of Mr. Pal. Before proceeding further on the merits, we would like to add here that the Tribunal in the appeal under Section 23A of the Act has unfortunately misread its appellate order made in the quantum appeal. It was held in the quantum appeal that the loss in respect of Singharan Bridge contract was not proved because it was not possible to verify the quality of cement used in the construction work because it was not shown in the stock register of the assessee, and the Appellate Tribunal was unable to determine the actual loss suffered by the assessee with regard to the construction of flyover bridge at Ondal. But the Tribunal read this order in the appeal under Section 23A of the Act as follows
'It is clear from the finding of the Tribunal in the corresponding quantum appeal that the accounts did not reflect the correct profit and loss as the work-in-progress was not correctly stated.'
14. In our opinion this reading is not a correct reading nor the correct appreciation of the earlier order. Now, adverting to the merits, the major claim on loss related to the construction of Singharan Bridge and it washeld that it was not proved in the quantum appeal on the ground already stated. The submission of Mr. Ray is that the actual use of cement or any material is never entered in the stock register. Though there is some force in this contention, it being a pure question of fact, we do not express any opinion on it.
15. As already stated, the income-tax authorities, while acting under Section 23A of the Act, must determine the commercial profit of the companyby applying the commercial principles. And it has not been done in thepresent case. In other words, the Tribunal has not applied the commercialprinciples nor has ascertained the basic facts in order to determine whetherthese losses were really the commercial profits or business losses for thepurposes of Section 23A of the Act. Since the Tribunal has not found norstated the primary facts on question No. 1, we are unable to answer it.Therefore, it must go back to the Tribunal for its determination in thelight of this judgment The Tribunal shall ascertain the primary factsand in order to do so shall give opportunity to both parties to adduceevidence and counter-evidence and also give them an opportunity of beingheard.
16. The answer to question No. 2 depends upon the primary facts on question No. 1 and, therefore, we are unable to answer it for the reasons already given. This reference is accordingly disposed of and there will be no order as to costs.
Dipak Kumar Sen, J.
17. I agree.