1. In this reference, which relates to the assessment year 1962-63, we are concerned with the validity of the order made under Section 104(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act '), on the assesee in respect of the aforesaid year.
2. The relevant facts are: The assessee, which is a private limitedcompany has been carrying on business of the execution of contracts. Thetotal income of the assessee for the assessment year 1962-63 was computedat Rs. 6,380. The computation was made under Section 145 of the Act. Wehave already stated in our judgment in (I.T. Reference No. 69 of 1970)--MeharSingh and Co. Pvt. Ltd. v. Commissioner of Income-tax : 108ITR607(Cal) )the circumstances under 'which assessments of the income of the assessee inrespect of the earlier years were made on the basis of the estimate. For thesame reasons in respect of the assessment year under consideration assessmentwas made on estimate by the Income-tax Officer acting under Section 145 of the Act. After deducting from the total income of Rs. 6,380 the tax of Rs. 3,190 the distributable surplus was worked out at Rs. 3,190. Therefore, the assessee ought to have declared a dividend of Rs. 1,914, being 60% (statutory percentage applicable in the case of the assessee) of the said amount of distributable surplus of Rs. 3,190. According to the Income-tax Officer, the gross profit of the year has been determined by application of Section 145 of the Act and there was no other addition in determining the assessable income and as such the point of commercial profits had no relevance. There was an appeal to the Appellate Assistant Commissioner from the said order of the Income-tax Officer. It was contended that according to the accounts maintained by the assessee there was no profit earned and there was no justification for levy of additional supertax under Section 104. It was also contended that the assessee-company was engaged in constructional work and had been maintaining accounts on the basis of completed contracts and that in the year under consideration no contracts were completed and that on the basis of the regular system of accounting followed by the assessee no profit or loss was ascertained. Accepting the said contentions of the assessee the Appellate Assistant Commissioner held that there was no commercial profit for distribution as dividend and, therefore, he cancelled the Income-tax Officer's order under Section 104 of the Act. Thereafter, an appeal was preferred by the revenue to the Tribunal against the said order of the Appellate Assistant Commissioner. It was contended on behalf of the revenue before the Tribunal that, even if in the manner in which the assessee maintained accounts there was no profit shown as earned for the year, yet it must be held that profits did accrue to the assessee from year to year on so much of the work that was completed and that such profits were real profits and the non-distribution of dividends in such circumstances could not be said to be on reasonable grounds. It was also brought to the notice of the Tribunal that, under similar circumstances, for the assessment year 1960-61, the Tribunal had upheld the order passed against the assessee under Section 23A of the Indian Income-tax Act, 1922. The Tribunal, however, held that the application of Section 104 of the Act was not justified in the facts and circumstances of the case. According to the Tribunal the maintenance of accounts on the completed contract basis could not be challenged as being under defective or wrong system of accounts. The Tribunal further observed that if the directors of the company chose not to bring into account the estimated profit of the completed part of the contract and decided to await the final completion of the job before bringing into account the actual profit from the job, it could not to be said that the directors had taken an unreasonable approach tothe problem or that the commercial profits of the company should include an estimate of profits even though the estimate might prove to be totally wrong. The Tribunal was of the view that the assessee-company had maintained its accounts in proper manner and accounts had been audited by the company's auditors and passed by the general body of the shareholders and reflected the correct state of affairs so far as the shareholders were concerned. According to the Tribunal, the distribution of dividend in that background would not have been proper. The Tribunal, in the circumstances, upheld the order of the Appellate Assistant Commissioner. Thereafter, on the application of the revenue, the following questions of law said to arise out of the Tribunal's order have been referred for consideration of this court. The questions of law are:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in determining the commercial profits of the assessee-company for the year for the purpose of Section 104 of the Income-tax Act, 1961, no estimated profit was to be taken into account in respect of the contracts that were partly executed by the end of the year when the accounts were maintained on the basis of completed contracts ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of dividend by the assessee-company would be unreasonable within the meaning of Section 104 of the Income-tax Act, 1961 ?'
3. With regard to question No. 1 it was contended on behalf of the revenue that this question really involves the question whether assessment order for the assessment year 1962-63 was correctly made or not. The question, according to counsel, whether the method of maintaining of the assessee's accounts was correct or not or whether the profit of the assessment year 1962-63 was correctly and properly calculated on the basis of the estimate under Section 145 or not, is a question which relates to assessment proceeding and its correctness can be determined only in appeal or reference, arising out of the assessment order for the said year and not in appeal or reference arising out of an order made under Section 104 of the Act.
4. We think there is good deal of force in the above contentions of the learned counsel. In an appeal or reference arising out of an order under Section 104 we are not concerned with the question whether profits of the year Were correctly determined or not or whether the assessee's method of maintaining accounts was correct or not or whether Section 145 of the Act was properly invoked or not. These questions are not germane in a proceeding under Section 104 of the Act. These questions, in our opinion, really fall within the domain of the assessment proceedings or the appeal or reference arising out of the assessment order. Where profit is assessed on the basis of estimate under Section 145 and on the basis of such profitan order under Section 104 is made then in judging the correctness of that order the only relevant question which requires consideration is whether that profit is the real or commercial profit. In deciding the validity of an order under Section 104 of the Act, in our opinion, the questions whether profits of the year were correctly determined and whether proper method of accounting was followed are not open for consideration. These questions are not at all relevant or material for considering the correctness of an order made under Section 104 of the Act. In this connection reference may be made to the unreported Bench decision in the case of Banga Luxmi Hosiery Mills Pvt. Ltd. v. Commissioner of Income-tax (I.T. Reference No. 212 of 1970) : 106ITR644(Cal) . Therefore, in considering the validity of the order made under Section 104, in our view, it was not open to the Tribunal to go into the question as to whether the assessee's method of maintaining accounts was correct or not. The validity of the finding about profit in the assessment cannot and should not be re-examined in the proceedings under Section 194 of the Income-tax Act, 1961, except to find out if any notional, artificial or fictional income was included in the said computation of profit in the assessment so as to be left out of consideration of the amounts available for distribution of dividend. In our opinion, the Tribunal went wrong in going into the question as to the validity of the assessee's method of maintaining accounts for the purpose of judging the correctness of the order under Section 104 of the Act. In the aforesaid view of the matter, the Tribunal's decision cannot be upheld and, therefore, this question should be answered in the negative and in favour of the revenue.
5. With regard to question No. 2 we may mention that this aspect of the matter is fully covered by our judgment delivered today in Income-tax Reference No. 69 of 1970 [Mehar Singh & Co. Pvt. Ltd. v. Commissioner of Income-tax : 108ITR607(Cal) ], where we have dealt with the identical question under Section 23A of the Indian Income-tax Act, 1922, with regard to the applicant in respect of the assessment year 1960-61. For the reasons fully stated in our said judgment we answer this question also in the negative and in favour of the revenue.
6. In the aforesaid view of the matter our answers to the questions referred are :
Question No. 1.--No. Question No. 2.--No.
7. In the facts and circumstances of this case, we do not propose to make any order as to costs.
Sabyasachi Mukharji, J.
8. I agree.