MITTER, J. - (1.) TWO questions have been referred to this Court, one under s. 66(1) and the other under s. 66(2) of the Act, in two separate references which are hereby consolidated. The questions are as follows : "(1) Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to rebate of one anna per rupee on the undistributed balance of the profits as provided in cl. (i) of the proviso to Item B of Part I of the Schedule to the Finance Act, 1955 ? (2) Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the provisions of proviso (b) to s. 23A(1) of the IT Act were not applicable to the assessee-company for 1955-56 ?"
(2.) THE facts are as follows : THE assessee is a limited company in which the public are not substantially interested. For the asst. yr. 1955-56, the relevant accounting year ending on 30th Nov., 1954, the assessee was assessed on a total income of Rs. 10,53,739. THE gross income-tax and corporation tax computed on the above was Rs. 4,57,711. THEre was thus a sum of Rs. 5,96,021 available for distribution to the shareholders. THE company declared a dividend to the extent of 62 per cent. of the distributable profit. In computing the taxes payable no rebate was allowed, under the Finance Act of 1955, on the undistributed profits of the company on the footing that although no order under s. 23A(1) had actually been passed the provisions of that section were applicable to the company. In denying this rebate, the ITO noted that the assessee was a company to which the provisions of s. 23A appeared to be applicable and the application of the section was under consideration. THE said officer further noted that if s. 23A was not eventually applied, the assessee would be entitled to the rebate and he stayed the collection of so much of the amount of tax as would be equal to the rebate in question. THE assessee preferred an appeal to the AAC. THEre it was contended that as the company had already declared more than 60 per cent. of the profits available for distribution, s. 23A(1) was not applicable and the rebate ought to be allowed. THE AAC felt that the contention ought to be accepted. He further held that if and when an order under s. 23A(1) was passed the rebate allowed could be recovered. THE Revenue then went in second appeal to the Tribunal. THEre it was argued that the granting of the rebate on undistributed profits in terms of the Finance Act of 1955 was independent of the pendency or otherwise of the proceedings under s. 23A of the Act and the assessee was not entitled to the rebate on the undistributed profits of the company if the circumstances were such that the said section could be made applicable. Being of the view that there was no definite finding as to whether the assessee's affairs attracted the operation of s. 23A, the Tribunal remanded back the case to the ITO for reporting the relevant facts and giving his finding on this point. On remand, the ITO found that the accumulation of past profits amounted to Rs. 36,97,985 and it had exceeded the paid-up capital of the assessee-company, Rs. 20,00,000. Further, the paid-up capital of the assessee, i.e., Rs. 20,00,000, exceeded the actual cost of the fixed assets as on 30th Nov., 1954, namely, Rs. 14,92,881 being the difference between the original cost, i.e., Rs. 50,99,335, and the depreciation written off, i.e., Rs. 36,06,454. At the final hearing before the Tribunal it was urged on behalf of the Revenue that the assessee was a company to which the provisions of proviso (b) to s. 23A(1) were applicable inasmuch as, the reserves representing accumulated profits of past years which had not been the subject of an order under s. 23A exceeded the aggregate of the paid up capital of the company. Sec. 23A(1) as it stood at the relevant time contained a proviso which ran as follows : "Provided that-- (a) in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments ; and (b) in the case of any other company where the accumulated profits and reserves (including the amounts capitalised from the earlier reserves) representing accumulations of past profits which have not been the subject of an order under this sub-section, exceed either the aggregate of-- (i) the paid-up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under this sub-section, and (ii) any loan capital which is the property of the shareholders or the actual cost of the fixed assets of the company, whichever of these is greater, this section shall apply as if for the words, ' sixty per cent. of the total income ', wherever they occur, the words ' the whole of the total income ' had been substituted." The question in this case is whether the accumulated profits and reserves of the company exceed the actual cost of the fixed assets of the company.
(3.) THE Tribunal noted from the report of the ITO that " the paid up capital of the assessee- company is Rs. 20,00,000. THE total reserves out of the accumulated profits as worked out by the ITO are Rs. 37,97,985. THE original cost of fixed assets was Rs. 50,99,335 and the amount of depreciation written off was Rs. 36,06,454. " According to the Tribunal, " it is necessary to find out whether the reserves representing the accumulations of past profits which have not been the subject of an order under s. 23A exceed either the aggregate of (1) the paid-up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under this sub-section and (ii) any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company, whichever is greater. It is apparent from the figures reported by the ITO and confirmed by the assessee, that the total reserves out of the accumulated profits exceed the share capital. It is, therefore, to be further seen whether the actual cost of the fixed assets exceeds the reserves. Although the original cost of the assets is reported by the ITO to be Rs. 50,99,335, he has computed the actual cost of the assets at Rs. 14,92,881 after deducting the depreciation of Rs. 36,06,454 written off in computing the assessee's profits in the past. It is on the basis of this figure of actual cost of the fixed assets which certainly is lower than the reserves that the ITO has reported that the assessee is a company to which the provisions of s. 23A can be made applicable. " Before the Tribunal it was contended on behalf of the assessee that the actual cost of the fixed assets corresponded to the original cost and could not be the figure arrived at by the deduction of depreciation written off in the accounts from the said original cost. THE contention to the contrary by the Revenue was turned down by the Tribunal holding that " if depreciation is deducted from the original cost to the assessee, what we get is the written down value. It is evident from the definition of written down value in s. 10(5) of the IT Act where the expression ' actual cost ' has been used, that save in certain circumstances, which do not apply in the assessee's case, the term ' actual cost ' means what the assessee pays for and is synonymous with the ' original cost ' to the assessee as mentioned in s. 10(2)(vi) of the Act. Secondly, depreciation written off cannot be considered as a reserve much less a reserve created out of the accumulated past profits. " Referring to the provisions of Schedule VI of Part III of the Indian Companies Act, 1956, the Tribunal concluded that reserves did not include provisions for depreciation. The Tribunal went on to consider the question whether for the purpose of denying the rebate it is was sufficient if the provisions of s. 23A were merely attracted but not applied. It followed the ruling of the Bombay High Court in CIT vs. Afco (P) Ltd. (1959) 35 ITR 177 (Bom) which was affirmed by the Supreme Court of India in CIT vs. Afco (P) Ltd. (1963) 48 ITR 76 (SC). There it was held that the expression " cannot be made applicable " meant that the applicability of s. 23A depended upon an order to be made by the ITO and not upon any exclusion by the provisions of the Act. It was observed that " satisfaction of the ITO as to the existence of several conditions prescribed thereby even if the company is one which does not fall within sub-s. (9) of s. 23A is a condition of making of the order. The language used by the legislature clearly indicates that it is only when an order under s. 23A will not, having regard to the circumstances, be justified that the right to obtain rebate under the Finance Act (15 of 1955) is claimable. ";