COMMISSIONER OF INCOME TAX KERALA, ERNAKULAM vs. V.DAMODARAN,TRIVANDRUM

CIVIL APPEAL No. 2099/1972Supreme Court[1980] 1 S.C.R. 94415 October 1979Bench: 2 JudgesAuthor: N.L. UNTWALIA, R.S. PATHAK A B COMMISSIONER OF9 pages
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What were the facts?

The assessee, Managing Director of a company, was assessed for AY 1959-60. The Income Tax Officer reopened the assessment, believing amounts withdrawn by the assessee were dividends under Section 2(6A)(e). The assessee argued accumulated profits were only Rs. 1,050, after adjusting Rs. 11,000 for tax and Rs. 6,900 for dividend from Rs. 18,950 in the Profit and Loss Account. The ITO rejected this. The Appellate Assistant Commissioner dismissed the assessee's appeal. The ITAT held that 'accumulated profits' did not include current profits but rejected the adjustment of Rs. 11,000 and Rs. 6,900, determining accumulated profits at Rs. 18,950. The Revenue obtained a reference on whether current profits are included in accumulated profits. The assessee also sought a reference on whether Rs. 18,950 constituted accumulated profits. The High Court ruled in favour of the assessee on both questions.

What did the Supreme Court hold?

The Supreme Court held that 'current profits', meaning profits earned in the year loans were advanced, cannot be regarded as included within 'accumulated profits' under Section 2(6A)(e). This followed the decision in Commissioner of Income-Tax, Madras v. M. V. Murugappan & Ors. (1970). Regarding the second question, the Court ruled that the Appellate Tribunal was not competent to refer it to the High Court. Section 256(1) of the Income Tax Act, 1961, contemplates an application for reference by a party desiring it, and only the applicant can specify the questions. The non-applicant can only ask for reference of questions arising on its submissions that were negatived by the Tribunal, provided the aggrieved party files a reference application. Since the second question involved separate and distinct relief not related to the first question, and the Tribunal's order was partly against the assessee, the Revenue, as the non-applicant for the second question, could not seek its reference. Therefore, the reference on the second question was void. The appeal was allowed to the extent that the High Court's judgment on the second question was set aside, and dismissed regarding the judgment on the first question.

What were the issues?

1. Whether the Appellate Tribunal was legally correct in holding that 'accumulated profits' under Section 2(6A)(e) of the Indian Income Tax Act, 1922, do not include 'current profits'? (Question of law) - Assessee's contention: 'Accumulated profits' do not include current profits. - Revenue's contention: Current profits are included within 'accumulated profits'. 2. Whether the Tribunal was right in holding that Rs. 18,950 constituted accumulated profits for the purpose of Section 2(6A)(e) of the Act? (Question of mixed law and fact) - Assessee's contention: Rs. 18,950, after adjustments for tax and dividend provisions, constituted accumulated profits. - Revenue's contention: The Tribunal erred in its calculation of accumulated profits. - The judgment also discusses the procedural aspect of whether the non-applicant (Revenue) could seek a reference on a question not directly arising from its own application, particularly when the Tribunal's order was partly against the applicant (assessee) and partly against the non-applicant (Revenue).

Which sections of the Income-tax Act were involved?

Section 2(6A)(e),Section 256(1),Section 147,Section 254,Section 261

AI-generated summary — verify with the full judgment below

944 A B COMMISSIONER OF INCOME TAX KERALA, ERNAKULAM v. V.DAMODARAN,TRIVANDRUM October 15, 1979 [N. L. UNTWALIA AND R, $. PATHAK, JJ.] •• ..

Indian Jncome ' Tax Act, 1922-Sections 2(6A) (e)-lnterpretation of h "accumulated profits" if include current profits-Section 256(i)-Scope of.

The assessee was the Managing Director of -a Company ~rigin~lly ass-essed C on a total income of Rs. 43407/- for the assessment year 1959-60. Thereafter the Income-Tax Officer came to know that th.e assessee had been withdrawing moneys from the Company and that those amounts were liable to be treated. as dividend under section 2(6A)(e) of the Act, hoe re-opened the assessment.

In the assessment proceedings that followed, the assessee claimed that the accumulated profits of the Company amounted to Rs. 1050 only and that amount alone could be considered as dividend und~ section 2 ( 6A )( e) of the D Act. The figure was worked out on the basi& that Rs. 11,000 as a provision. · for tax and Rs. 6,900 as a provision for dividend had to be adjusted against the balance of Rs. 18,950 in the Profit and Loss Account. The Income Tax Officer rejected the contention of the assessee. The Ap

The order continues below.

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