THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY, BOMBAY vs. BIPINCHANDRA MAGANLAL AND CO. LTD., BOMBAY

CIVIL APPEAL No. 761/1957Supreme Court[1961] 2 S.C.R. 49317 November 1960Bench: 3 JudgesAuthor: S.K. DAS, M. HIDAYATULLAH, J.C. SHAH8 pages
AI SummaryDismissed

What were the facts?

The assessee, Bipinchandra Maganlal & Co. Ltd., purchased machinery for Rs. 89,000 and sold it for the same amount. However, the written down value in the company's books for the year 1946-47 was Rs. 73,392. The Income Tax Officer added the difference of Rs. 15,608 (sale price minus written down value) to the company's disclosed profit of Rs. 33,245, arriving at an assessable income of Rs. 48,761 for the assessment year 1947-48. The Income Tax Officer also invoked Section 23A of the Income Tax Act, 1922, deeming the undistributed portion of the assessable income as distributed dividend. Appeals to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal were unsuccessful. The Tribunal referred a question to the High Court under Section 66(1). The High Court answered in the negative, and the Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the High Court's decision was correct. The Court reasoned that the difference of Rs. 15,608, while treated as assessable income by a fiction in Section 10(2)(vii) second proviso read with Section 2(6C), does not alter its character from a capital return to commercial profit. Therefore, it should not be taken into account when assessing whether a larger dividend would be unreasonable due to "smallness of profit" under Section 23A. The "smallness of profit" must be determined according to commercial principles, not by equating it with "smallness of assessable income." The Court noted that the Legislature deliberately used the expression "smallness of profit" and not "smallness of assessable income." The appeal was dismissed. No issue was expressly left undecided.

What were the issues?

1. Whether the sum of Rs. 15,608, representing the difference between the sale price and the written down value of machinery, should have been included in the assessee company's "profit" for the purpose of determining whether the payment of a larger dividend than that declared would be unreasonable, under Section 23A of the Indian Income Tax Act, 1922? (Question of law). Assessee's contention (as per High Court's answer and Supreme Court's affirmation): The sum of Rs. 15,608, though treated as assessable income due to a fiction in Section 10(2)(vii) second proviso, is not commercial profit and therefore should not be considered for determining the "smallness of profit" under Section 23A. The determination of reasonableness of dividend distribution should be based on commercial principles and actual profits, not assessable income. Revenue's contention (implied by their appeal against the High Court's decision): The sum of Rs. 15,608, being part of the assessable income, should be included in the calculation for determining the "smallness of profit" under Section 23A, as it forms part of the company's income for tax purposes.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 2(6C),Section 23A,Section 66(1)

AI-generated summary — verify with the full judgment below

2 S.C.R. SUPREME COURT REPORTS 493 the High Court in the first instance, on a statement of r96o the case by the Tribunal. 5 1 b . Civil Appeal No. 143 of 1958, will, therefore, be dis- Suga: ~1~~1; 1 Ltd. missed, but without any order as to costs. v. The Commissioner

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A. No. 144 of 1958 allowed. O. A. No. 143 of 1958 dismissed. of Income-tax, Central, Calrntta. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY, BOMBAY . v. BIPINCHANDRA MAGANLAL AND CO. LTD., BOMBAY S. K. DAS, M. HIDAYATULI,AH and J. C. SHAH, JJ. Income-tax-Profit and assessable income-Diff crcnce between -Smallness of profit-How determined-Indian Income-tax Act, z922 (II of I9zz), ss. IO (z) (vii) second proviso, 66(I). The respondent company purchased certain machinery for Rs. 89,000 and sold it for the same value, but in the books of account the written down value of the machinery was shown in the year of account as Rs. 73,392. The Income Tax Officer in computing the assessable income of the company added the difference, i.e. Rs. i5,608, between the actual value and the written down value to the profit of the company. The Income Tax Officer also passed an order under s. 23A of the Incom

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