Pyne, J. - (1.) In this reference, which relates to the assessment year 1962-63, we are concerned with the validity of the order made under Section 104(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act "), on the assesee in respect of the aforesaid year.
(2.) The relevant facts are: The assessee, which is a private limited company has been carrying on business of the execution of contracts. The total income of the assessee for the assessment year 1962-63 was computed at Rs. 6,380. The computation was made under Section 145 of the Act. We have already stated in our judgment in (I.T. Reference No. 69 of 1970)--Mehar Singh and Co. Pvt. Ltd. v. Commissioner of Income-tax ) the circumstances under 'which assessments of the income of the assessee in respect of the earlier years were made on the basis of the estimate. For the same reasons in respect of the assessment year under consideration assessment was made on estimate by the Income-tax Officer acting under Section 145 of the Act. After deducting from the total income of Rs. 6,380 the tax of Rs. 3,190 the distributable surplus was worked out at Rs. 3,190. Therefore, the assessee ought to have declared a dividend of Rs. 1,914, being 60% (statutory percentage applicable in the case of the assessee) of the said amount of distributable surplus of Rs. 3,190. According to the Income-tax Officer, the gross profit of the year has been determined by application of Section 145 of the Act and there was no other addition in determining the assessable income and as such the point of commercial profits had no relevance. There was an appeal to the Appellate Assistant Commissioner from the said order of the Income-tax Officer. It was contended that according to the accounts maintained by the assessee there was no profit earned and there was no justification for levy of additional supertax under Section 104. It was also contended that the assessee-company was engaged in constructional work and had been maintaining accounts on the basis of completed contracts and that in the year under consideration no contracts were completed and that on the basis of the regular system of accounting followed by the assessee no profit or loss was ascertained. Accepting the said contentions of the assessee the Appellate Assistant Commissioner held that there was no commercial profit for distribution as dividend and, therefore, he cancelled the Income-tax Officer's order under Section 104 of the Act. Thereafter, an appeal was preferred by the revenue to the Tribunal against the said order of the Appellate Assistant Commissioner. It was contended on behalf of the revenue before the Tribunal that, even if in the manner in which the assessee maintained accounts there was no profit shown as earned for the year, yet it must be held that profits did accrue to the assessee from year to year on so much of the work that was completed and that such profits were real profits and the non-distribution of dividends in such circumstances could not be said to be on reasonable grounds. It was also brought to the notice of the Tribunal that, under similar circumstances, for the assessment year 1960-61, the Tribunal had upheld the order passed against the assessee under Section 23A of the Indian Income-tax Act, 1922. The Tribunal, however, held that the application of Section 104 of the Act was not justified in the facts and circumstances of the case. According to the Tribunal the maintenance of accounts on the completed contract basis could not be challenged as being under defective or wrong system of accounts. The Tribunal further observed that if the directors of the company chose not to bring into account the estimated profit of the completed part of the contract and decided to await the final completion of the job before bringing into account the actual profit from the job, it could not to be said that the directors had taken an unreasonable approach to the problem or that the commercial profits of the company should include an estimate of profits even though the estimate might prove to be totally wrong. The Tribunal was of the view that the assessee-company had maintained its accounts in proper manner and accounts had been audited by the company's auditors and passed by the general body of the shareholders and reflected the correct state of affairs so far as the shareholders were concerned. According to the Tribunal, the distribution of dividend in that background would not have been proper. The Tribunal, in the circumstances, upheld the order of the Appellate Assistant Commissioner. Thereafter, on the application of the revenue, the following questions of law said to arise out of the Tribunal's order have been referred for consideration of this court. The questions of law are: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in determining the commercial profits of the assessee-company for the year for the purpose of Section 104 of the Income-tax Act, 1961, no estimated profit was to be taken into account in respect of the contracts that were partly executed by the end of the year when the accounts were maintained on the basis of completed contracts ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of dividend by the assessee-company would be unreasonable within the meaning of Section 104 of the Income-tax Act, 1961 ?"
(3.) With regard to question No. 1 it was contended on behalf of the revenue that this question really involves the question whether assessment order for the assessment year 1962-63 was correctly made or not. The question, according to counsel, whether the method of maintaining of the assessee's accounts was correct or not or whether the profit of the assessment year 1962-63 was correctly and properly calculated on the basis of the estimate under Section 145 or not, is a question which relates to assessment proceeding and its correctness can be determined only in appeal or reference, arising out of the assessment order for the said year and not in appeal or reference arising out of an order made under Section 104 of the Act.;