- (1.) The only question referred to us in this case is " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in excluding Rs. 46,200 from the sum computed by the Income-tax Officer as available for distribution to the shareholders by Dutt Estates Limited?" The facts are as follows: The assessee was one of the three sons of Raghunath Dutt, deceased. The company, Dutt Estates Limited, was formed in 1930 to take over the properties of the said deceased. The assessee with his wife held 1/3rd of the issued share capital of 210 shares. There were some disputes and dissensions among the brothers in the year 1944, which were referred to the arbitration of Das J. (as he then was) and an award was made by him with the consent of the three brothers. In pursuance of the said award various. immoveable properties belonging to the company, Dutt Estates Ltd., were allotted to the shareholders including the assessee in this case. Three lots of properties were allotted to the three brothers and the valuation of each lot of property to be transferred from the company to the assessee and his brothers was fixed at Rs. 2,34,473-5-4. The balance-sheet of the company as at 31st March, 1948, showed that the total valuation of the properties exceeded Rs. 22,00,000 so that the loss on distribution of assets amounted to Rs. 15,46,688-7-3 and this was shown in the balance-sheet under the heading "Property and Assets". According to the Income-tax Officer "this transaction resulted in the distribution of the assets within the meaning of section 2(6A) of the Indian Income-tax Act and as such the dividend paid out of the undistributed profit by way of distribution of assets must be brought to tax in the hands of each of the shareholders". Under the relevant portion of section 2(6A) dividend includes: "(a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company."
(2.) As on the 31st March, 1947, the company's profit and loss account disclosed a credit of Rs. 2,52,939-6-3. The said amount was shown in the Profit and Loss Appropriation Account for the year ending 31st March, 1948, to which were added the net profit from house property and investment raising the total to Rs. 2,55,232-5-6. This last mentioned amount was shown in the balance-sheet of the company for the year ended March 31, 1948, under the heading "capital and liabilities" and deducting from it the amount of income-tax, i.e., Rs. 64,995, paid up to 31st March, 1947, the figure of undistributed profit came to Rs. 1,87,944-6-3. The Income-tax Officer not only took this figure into consideration for finding out the profits of the company which were held to be distributed among the shareholders as a result of the transfer of assets but he also added two other items under the heading "capital liabilities", namely, depreciation fund, Rs. 46,200 and "reserve for bad debts", Rs. 8,652. The company ultimately went into liquidation in the year 1956. The Tribunal held that the "reserve for bad debts" was profits in the hands of the company which could be treated as dividend for the purpose of section 2(6A) but not the sum of Rs. 46,200. The transfer of the assets took place on the 19th April, 1947, that is to say, very soon after the preparation of the balance-sheet as at 31st March, 1947, disclosing a profit balance of Rs. 2,52,939. The Tribunal observed: "If there was a distribution of assets, the first thing to distribute would be the surplus of profit remaining in the hands of the company. As such we must hold that the balance at the credit of the profit and loss account was distributed to the shareholders in the process of transfer of these assets. We, however, find that the quantum of the surplus profits has to be adjusted and we do not agree with the computation made by the Income-tax Officer. We do not find any reason why the Income-tax Officer added the depreciation reserve amounting to Rs. 46,200 and we also do not find any reason for the addition of the refund of income-tax of Rs. 2,187-8-0. The reserve for depreciation fund was no doubt created out of the profits but this was a reserve created as against the depreciation of the properties in the normal way. In the alternative the company could have written off the reserve from the cost of the properties in which case the Income-tax Officer could not find any reason to add this sum. In fact depreciation reserve is not a reserve on which dividend could be paid. It was merely a reserve created against the depreciation of the property."
(3.) This reference does not concern the figure of Rs. 2,187-8-0 and the only question before us is whether the Tribunal was right in knocking off the sum of Rs. 46,200 from the quantification of the profits as was done by the Income-tax Officer. There is no question before us as to the applicability of section 2(6A) to the assessment and the parties agreed and proceeded on the basis that there was distribution by the company entailing release of its assets within the meaning of section 2(6A) of the Indian Income-tax Act. Mr. Meyer, learned counsel for the revenue, urged that the order of the Income-tax Officer went to show that it was a property-holding company and as such the computation of profits could only be under section 9 of the Act in which case the question of depreciation would not come in at all. On the other hand, it was argued for the assessee that there was nothing on the record to show whether the computation was done under section 9 or section 10. However that may be, the balance-sheet prepared by the company shows that a depreciation fund was created which stood at the figure of Rs. 46,200 as on 31st March, 1948.;