R.N. Pyne, J.
1. This reference under Section 66(1) of the Indian Income-tax Act, 1922, relates to the assessment year 1960-61 in respect of which the previous year ended on June 30, 1959. In this reference the following question of law has been referred by the Tribunal for consideration of this court:
'Whether, on the facts and in the circumstances of the case, Section 23A of the Indian Income-tax Act, 1922, was rightly applied?'
2. The relevant facts relating to this reference may briefly be stated.The assessee is a private limited company carrying on business of execution of contracts. For the assessment year 1960-61, the total income of the assessee, as revised by the Appellate Assistant Commissioner, was Rs. 63,436. The facts regarding the assessee's accounts and the assessments made on it as stated in the Tribunal's order in I.T.A. No. 14561 of 1963-64 (for assessment year 1957-58), which was followed and applied in I.T.A. No. 14564 of 1963-64 in relation to the assessment year 1960-61 may conveniently be stated at this stage. The assessee commenced business in January, 1956, and closed its books on June 30, 1956, and on the same date in the succeeding years. The work undertaken by the assessee took a period of nearly 5 years to complete but it had not worked out its profits every year. No separate job work account had been prepared and the value of the work-in-progress had not been taken into account. The annual expenses were shown on the balance-sheet and the overhead expenses werecharged to the profit and loss account. At the end of the contract period a consolidated revenue account was struck and on the total receipt of Rs. 42.23 lakhs for all the contracts, a gross profit of 10'1% and a net profit of 2.8% were shown by the assessee in its books. The Income-tax Officer required the assessee to furnish the evidence regarding the total receipts of each year and the details of the relevant expenses in respect of each contract. The expenses, however, were neither fully verifiable nor allowable properly against the receipts from any individual contracts. The Income-tax Officer had, therefore, to resort to estimate under the proviso to Section 13 of the Indian Income-tax Act, 1922 (hereafter referred to as 'the Act'), and applied a flat rate of 15% on the receipts of each year and allowed some expenses thereagainst. In appeal, the Appellate Assistant Commissioner reduced the net rate of profit to 9% in respect of one contract and 12 1/2% in respect of others before deduction of certain items of expenses and allowances. On further appeal, the Appellate Tribunal reduced the rate to 5% in respect of one contract and aflirmed the Appellate Assistant Commissioner's estimates in respect of others. From the said total income of Rs. 63,436 as determined under the proviso to Section 13 of the Act for the assessment year 1960-61 after deducting the amount of tax payable, the distributable surplus worked out to Rs. 34,890. As, according to the Income-tax Officer, the assessee should have declared 65% of the distributable surplus, i.e., Rs. 22,679, as dividends during the 12 months following the expiry of the previous year and as no dividend was declared during that period, the Income-tax Officer initiated proceeding under Section 23A of the Act. In those proceedings the assessee contended that for the purpose of Section 23A the commercial profits were to be considered and not the assessed profits. Reliance was placed on the decision of the Supreme Court in the case of Bipin Chandra Maganlal & Co. : 41ITR290(SC) . The Income-tax Officer, however, held that the ratio laid down in that case had no bearing to the facts and circumstances of the case of the assessee. He further held that the book profits of the assessee were not accepted and the proviso to Section 13 was applied which meant that the company had not disclosed the correct profits. In those circumstances, the Income-tax Officer concluded that on the basis of the estimated profits, the application of Section 23A was quite tenable and, relying upon the case of Rasipuram Union Motor Service Private Ltd. : 53ITR702(Mad) , the Income-tax Officer applied the provisions of Section 23A after obtaining the necessary approval of the Inspecting Assistant Commissioner and levied a super-tax of Rs. 12,909 on the assessee. From the decision of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the said appeal and quashed the said order of the Income-tax Officer. The Appellate Assistant Commissioner relied on the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) . According to the Appellate Assistant Commissioner the facts of the instant case were on all fours with the facts of the said Supreme Court case.
3. The revenue, thereafter, appealed to the Tribunal against the said order of the Appellate Assistant Commissioner. The Tribunal found that there was material before the Income-tax Officer to come to the conclusion that the real income was not disclosed. The Tribunal held as follows :
'The Income-tax Officer has pointed out defects in the books and arrived at the assessee's profits on materials available. There is no reason to hold that such a determination is entirely unrelated to reality. In fact, decisions have held that such additions represent real income and that the assessee, in a subsequent order, can take advantage of the Income-tax Officer's determination, if necessary (See Kuppuswami Mudaliar v. Commis~ sioner of Income-tax : 51ITR757(Mad) . Moreover, the present case seems to us to be covered fully by the decision of the Supreme Court in Gobald Motor's case : 60ITR417(SC) .'
4. Before the Tribunal it was also contended that as the assessee was a contractor, the profits in a contract business would arise only on the conclusion of the contract, and would be accounted for only at that point of time. The Tribunal, however, relying on the decision of the Patna High Court in the case of Sukdeodas falan v. Commissioner of Income-tax : 26ITR617(Patna) negatived that contention of the assessee. With regard to another contention of the assessee that there were some past losses which should have been considered before the application of Section 23A of the Act, the Tribunal found that in the past years there were really no losses but there were only profits. For reasons mentioned in the Tribunal's order, the Tribunal came to the conclusion that the order of the Appellate Assistant Commissioner quashing the order of the Income-tax Officer under Section 23A was wrong and it allowed the appeal of the revenue. Thereafter, upon the application of the assessee, the question of law set out earlier was referred by the Tribunal to this court.
5. Before us it was contended on behalf of the assessee that Section 23A was improperly applied in the instant case. It was further contended that an order under Section 23A could not be passed as there was no profit in the year of account according to the assessee's books and, therefore, it could not distribute any dividends. According to the learned counsel, the assessee's books of account was maintained on the basis of the completed contract and there was nothing wrong about the method of accounting maintained by the assessee. Counsel relied on the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) .
6. It has to be noted that in this reference we are not at all concerned with the question as to whether the proviso to Section 13 of the Act was properly applied for the assessment year 1960-61. This is not an appeal or a reference arising out of the assessment order for the said year. Therefore, we cannot in this reference embark upon an enquiry as to whether the method of maintaining of the assessee's accounts was correct or not or whether the income for the said year was properly calculated or not. Here, we are really concerned with the limited aspect of the application of Section 23A of the Act. The question to be considered is whether, in the facts and circumstances of this case, the assessed income for the assessment year 1960-61 could be considered as the commercial profit for the purpose of distribution of the dividend. It is true that in the case of Commissioner of Income-tax v. Bipinchandra Maganlal & Co. : 41ITR290(SC) it was stated that in considering whether a larger distribution of dividend would be unreasonable the assessable income should not be taken into account. But that case is clearly distinguishable from the facts of the instant case. In that case the court refused to take the assessable income of the assessee into account because of the fact that some addition was made on account of notional or deemed profit under Section 10 of the Act. That is not the case here. In that case it was, however, said that the sources of income from which dividend was to be distributed should be taken into account.
7. The principles governing the application of Section 23A of the Act are now well-settled by the decisions of the Supreme Court in Gangadhar Banerjee's case : 57ITR176(SC) and the case of Commissioner of Income-tax v. Asiatic Textiles Ltd. : 82ITR816(SC) . In this case, as already stated earlier, the book profits of the relevant assessment year were not accepted and the proviso to Section 13 was applied for the purpose of calculation of the estimated profits. This was done as the company had not disclosed the correct profits. If it can be shown that any artificial and notional or fictional income was included in the calculation for any reason or failure on the part of the assessee then certainly there would have been some force in the contention of the assessee and the assessed income or the estimated profits could not be said to be the commercial or real profits of the business for the purpose of making an order under Section 23A of the Act. But where such artificial and notional or fictional income does not enter into the calculation and on that ground the estimates cannot be challenged, such estimates can be taken to be commercial or real profits of the assessee for making an order under Section 23A of the Indian Income-tax Act, 1922. In this case due to defects in the assessee's books and for reasons stated earlier the Income-tax Officer determined the assessee's profits on materials available. Nothing has been shown to us that such determination is entirely unrelated to reality or that any artificial and notional or fictional income has entered in the calculation and, therefore, the assessed income cannot be taken into account for determining the distributable surplus for the purpose of Section 23A. It has been held that where additions are made for the purpose of arriving at the estimates, such additions represent the real income and the assessee in a subsequent order can take advantage of the Income-tax Officer's determination, if necessary. In this connection reference may be made to the cases of Rasipuram Union Motor Service Pvt. Ltd. v. Commissioner of Income-tax : 53ITR702(Mad) and Gobald Motor Service P. Ltd. v. Commissioner of Income-tax : 60ITR417(SC) . The view we are taking is also supported by the unreported Bench decision in Banga Luxmi Hosiery Mills Private Ltd. v. Commissioner of Income-tax : 106ITR644(Cal) . The other contention of the assessee that profit accrued only upon completion of the contract and, therefore, no order under Section 23A could be made in respect of the assessment year 1960-61 does not appear to us to be of any substance. This contention relates to the question regarding the correctness of the method of the assessee's accounting and that question can be determined in the appeal or reference arising from the assessment order and not in the appeal or reference from an order made under Section 23A of the Act.
8. In the aforesaid view of the matter we hold that Section 23A of the Indian Income-tax Act, 1922, was correctly applied in this case and we answer the question referred in the affirmative, in favour of the revenue and against the assessee. In the facts and circumstances of this case, we do not propose to make any order as to costs.
Sabyasachi Mukharji, J.
9. I agree.