COMMISSIONER OF INCOME TAX Vs. SMIDTH F L AND CO BOMBAY LIMITED

JUDGEMENT

(1.) THE assessee is a private company and the assessment year is 1949 -50 and the accounting year is the current year 1948. Now, the total assessable income of this company was Rs. 1,20,566, and at the general meeting held on the 23rd of December, 1949, no dividend was declared. Thereupon, the Income -tax Officer passed an order under section 23A and it is this order which was challenged by the assessee company and successfully challenged as far as the Tribunal was concerned. Now, in arriving at the assessable income of the assessee, the Income -tax Officer took into consideration a sum of Rs. 1,63,377, which were profits, according to the Department, earned by the assessee under section 42 (2) of the Income -tax Act and the contention of the assessee is that in deciding whether section 23A is applicable to this case and whether the Income -tax Officer has rightly exercised his power, this sum of Rs. 1,63,377 should be excluded in determining whether the profits of the company were such so as to attract the application of section 23A.

(2.) NOW , let us first look at the scheme of section 23A. The first condition for the exercise of the power of the Income -tax Officer is the distribution of dividend by the company of less than the statutory percentage, which, at the relevant time, was 60 per cent. and in this case it is not disputed that looking to the total income of the assessee, which, as already pointed out, is Rs. 1,20,566, the company has not only not distributed the statutory percentage of dividend but has not distributed any dividend at all. It must be borne in mind that section 23A (1) deals with total income and the total income for the purpose of this section is not merely the actual income of the assessee but also any notional income which is assessable to tax and, therefore, although the income under section 42 (2) is notional income, it would form part of the total income of the assessee and it would be liable to tax. This notional income would also form part of the total income of the assessee for the purpose of determining whether there has been a distribution of the statutory percentage of dividend. That this income under section 42 (2) is notional income cannot be disputed because turning to that section, it deals with notional income both under sub -section (1) and sub -section (2). In the case of sub -section (1) the income actually exists. The legal fiction introduced is with regard to the place where the income accrues and by reason of the legal fiction the income which may accrue elsewhere is made to accrue within the taxable territories and becomes a notional income of the assessee. In the case of sub -section (2) the fiction introduced is very different. The fiction introduced there is with regard to the income itself. In fact there is no income, but sub -section (2) introduces a legal fiction and makes a non -existent income, income of the assessee from the purpose of tax if the circumstances laid down in that sub -section are satisfied. We are here concerned with section 42 (2) and there can be no doubt that, although the assessee company was liable to pay tax on this income, this income is a notional income and not actual income. In other words, from a commercial point of view, it could never be said that the assessee earned this income or this income constituted the profits of the assessee from its business. The taxing authorities may look upon this income as profits of the assessee and may bring it to tax but from the point of view of businessmen, from a practical point of view, it would be ridiculous to suggest that an income which the assessee never earned was part of its actual profits.

(3.) MR . Joshi has relied on sub -section (5) of section 23A which is now repealed. That sub -section far from helping Mr. Joshi, in our opinion, supports the contention of the assessee.