1. The facts leading up to this reference are, inter alia, as follows : In the assessment year 1963-64, Jugantar Private Ltd., the assessee, was assessed to income-tax on a total income of Rs. 7,21,322, the tax levied being Rs. 3,51,661. In the said year, the assessee distributed as dividend a sum of only Rs. 5,470 which was less than the statutory percentage of the distributable income. The ITO, therefore, held that Section 104 were applicable and accordingly levied additional income-tax at the prescribed rate of 37% on the distributable income of Rs. 3,69,661 as reduced by Rs. 5,470 distributed as dividend.
2. Being aggrieved by the said order, the assessee preferred an appeal to the AAC. It was, inter alia, contended in the appeal that in the computa-tion of the distributable surplus an amount of Rs. 3,63,633, being a reserve for gratuity, should have been excluded. The AAC found that the gratuity payable was only Rs. 37,323. Rejecting the contentions of the assessee, he dismissed the appeal.
3. The assessee preferred a further appeal before the Income-tax Appellate Tribunal. The Tribunal held that in computing the distributable surplus, inter alia, the gross total income should have been reduced by the following amounts.
(a) Bad debt ... 5,003
(b) Provision for gratuity ... 32,517
(c) Capital profit on the sale of a car... 4,700
4. The Tribunal found that the provision for gratuity had to be allowed as this was a statutory liability under the Working Journalists (Conditions of Service) and Miscellaneous Provisions Act, 1955. The book profit resulting from the sale of the car was held to be an expenditure within the meaning of Section 104 of the Act as it stood at the relevant time inasmuch as in computing the profits and gains of the assessee for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold was to be deemed to be profit in the relevant year of account. This was a fiction as the amount came to the hands of the assessee not as its profit but as part of the capital invested. The bad debt of Rs. 5,003 was held to be an expenditure under Section 37 of the Act laid out or expended wholly and exclusively for the purpose of the business of the assessee and was, therefore, an expenditure within the meaning of Section 104(b)(ii) of the Act. Accordingly, the Tribunal allowed the appeal of the assessee in part.
5. On an application of the Commissioner of Income-tax, West Bengal-II, Calcutta, under Section 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and referred the following question for the opinion of this court as a question of law arising from the order of the Tribunal :
' Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 104(1) of the Income-tax Act, 1961, the Tribunal misdirected itself in law in holding that for purposes of levying super-tax under the said section, the distributable income should be reduced by the provision for gratuity amounting to Rs. 32,517, the profit of Rs. 4,700 charged to tax under Section 41(2) of the Income-tax Act, 1961, and the sum of Rs. 5,003 claimed by the assessee as bad debt '
6. At the hearing no one appeared on behalf of the assessee. It appeared to us that some of the points involved were of some importance and, therefore, we invited Mr. R. N. Bajoria, learned advocate of this court, to act as amicus curiae in the matter.
7. Mr. R. B. Bagchi, learned advocate appearing on behalf of the revenue, drew our attention to Section 104 of the I.T. Act, 1961, as it stood at the relevant time as follows :
' Subject to the provisions of this section and of Sections 105, 106, 107 and 107A, 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 twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay super-tax at the rate of--
(a) fifty per cent., in the case of an investment company, and
(b) thirty-seven per cent., in the case of any other company, on the distributable income as reduced by--
(i) the amount of dividends actually distributed, and (ii) any expenditure actually incurred bona fide for the purposes of the business, but not deducted in computing the income chargeable under the head ' Profits and gains of business or profession ' being--
(a) a bonus or gratuity paid to an employee,
(b) legal charges,
(c) any such expenditure as is referred to in Clause (c) of Section 40,
(d) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or enhancement in the value of an existing asset..... .'
7. Mr. Bagchi contended that the section clearly indicated how the distributable income would be reduced and the Tribunal had erred in reducing such income by items which were not provided in the section. Mr. Bagchi submitted that the amount deducted on account of gratuity was only a provision and was not an amount paid. There was also no finding that the amount had been kept in an approved gratuity fund. The amount was in fact an asset in the hands of the assessee and was in the nature of a reserve.
8. In respect of the item of bad debt, Mr. Bagchi contended that the Tribunal did not find that it had been already allowed in the assessment. If the debt had all the characteristics of a bad debt then it should have been allowed in the assessment and there was no question of the distributable income being reduced again by this amount. The reduction of the distributable income by the amount of capital profit arising from the sale of the car was also not provided for in the said section.
9. Mr. Bajoria, as amicus curiae, has drawn our attention to Section 43(2) of the I.T. Act, 1961, which defines the word ' paid '. The said section is as follows :
' ' Paid ' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ' Profits and gains of business or profession '.'
10. He also drew our attention to the fact that the assessee was a limited company and that the narration in respect of the item concerned, viz., provision for gratuity, indicated that the assessee's accounts were on a mercantile basis. Mr. Bajoria submitted that, therefore, it was immaterial whether gratuity was actually paid or provided for. The liability was a statutory liability and had been duly incurred by the assessee. He also drew our attention to the finding of the AAC that, apart from the gratuity payable, a large amount had been kept as reserve for gratuity.
11. On the item of bad debt Mr. Bajoria invited us to consider that before the Tribunal it was not the contention of the revenue that the amount claimed as bad debt had already been allowed in the assessment. This was, in any event, a factual dispute and cannot be raised at this stage. The Tribunal also appears to have found that this was a bad debt and this finding is also not challenged.
12. The profits resulting from the sale of the car, according to Mr. Bajoria, was not deductible under Section 104. This item was no doubt a fictional or notional profit and would have to be considered to determine the reasonableness of the dividend declared. But that was not the question in the present reference. In the present reference, the only question before the court is whether this amount was deductible in the computation of the distributable income.
13. In our view, Rs. 32,517 was a provision for a statutory liability duly incurred and would come within the expression 'gratuity paid'. Whether the same was kept in an approved fund or not cannot be gone into at this stage. Similarly, Rs. 5,003, found to be a bad debt, must be deducted from the distributable income. There cannot be any further investigation, if the item is a bad debt or not or if it has been allowed in the assessment or not, here.
15. For the reasons as aforesaid, the question is answered partly in favour of the revenue and partly in favour of the assessee. For the deduction of profits' arising out of the sale of the car the question is answered in the affirmative and in favour of the revenue but as to the deductions of the gratuity payable and the bad debt, the question is answered in the negative and in favour of the assessee. In the facts and circumstances, there will be no order as to costs.
16. We conclude by recording our appreciation of the able assistance rendered by Mr. Bajoria as amicus curiae.
17. I agree.