# Sir Kasturchand Ltd v. Commissioner of Income-tax, Bombay

- **Citation:** [1961] 2 S.C.R. 493
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeal No. 143 of 1958
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sir-kasturchand-ltd-v-commissioner-of-income-tax-bombay-1968
- **Pages:** 8

## Headnote

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
0. 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 Income Tax
Act, and directed that the undistributed portion of the assessable income, shall be deemed to have been distributed amongst
the shareholders as dividend. Appeals against the order of the
Income-tax Officer proved unsuccessful and the Appellate Tribunal referred the following question to the High Court under
s. 66(1):-
"Whether the sum of Rs. I 5,608 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 by it would be unreasonable."
The High Court answered the question in the negative. On
appeal by special leave,
Held, that the view takrn by the High Court was correct.
H idayatullah ].
November r7 •
494
SUPREME COURT REPORTS
[1961)
r960
By the fiction in s. 10{2}(vii) second proviso, read with
-
s. 2{6C), what is really not income is, for the purpose of comThe Commissioner putation of assessable income, made taxable income: but on that
of Income~tax, account, it does not become commercial profit, and if it is not
Bombay City,
commercial profit, it is not liable to be taken into account in
Bombay
assessing whether in view of the smallness of profits a larger
v.
dividend would be unreasonable.
· Bipinchandra
"Smallness of profit" should not be equated with "smallMaganlol &
Co .. ness of assessable income" but should be determined in accorLtd., Bombay
dance with commercial principles.
Shah .f.
Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay
City, (r949) XVII I.T.R. 493, Ezra Proprietary Estates Ltd. v.
Commissioner of Income-tax, West Bengal, (r950) XVIII I.T.R.
762 and Commissioner of Income-tax, Bombay City v. F. L. Smith
& Co. (Bombay) Ltd., (r959) XXXV I.T.R. r83, referred to.

## Text

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
0. 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 Income Tax
Act, and directed that the undistributed portion of the assessable income, shall be deemed to have been distributed amongst
the shareholders as dividend. Appeals against the order of the
Income-tax Officer proved unsuccessful and the Appellate Tribunal referred the following question to the High Court under
s. 66(1):-
"Whether the sum of Rs. I 5,608 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 by it would be unreasonable."
The High Court answered the question in the negative. On
appeal by special leave,
Held, that the view takrn by the High Court was correct.
H idayatullah ].
November r7 •
494
SUPREME COURT REPORTS
[1961)
r960
By the fiction in s. 10{2}(vii) second proviso, read with
-
s. 2{6C), what is really not income is, for the purpose of comThe Commissioner putation of assessable income, made taxable income: but on that
of Income~tax, account, it does not become commercial profit, and if it is not
Bombay City,
commercial profit, it is not liable to be taken into account in
Bombay
assessing whether in view of the smallness of profits a larger
v.
dividend would be unreasonable.
· Bipinchandra
"Smallness of profit" should not be equated with "smallMaganlol &
Co .. ness of assessable income" but should be determined in accorLtd., Bombay
dance with commercial principles.
Shah .f.
Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay
City, (r949) XVII I.T.R. 493, Ezra Proprietary Estates Ltd. v.
Commissioner of Income-tax, West Bengal, (r950) XVIII I.T.R.
762 and Commissioner of Income-tax, Bombay City v. F. L. Smith
& Co. (Bombay) Ltd., (r959) XXXV I.T.R. r83, referred to.
CIVIL APPELLATE JURISDICTION:
Civil Appeal No.
761of1957.
Appeal by special leave from the judgment and
order dated February 24, 1955, of the former Bombay High Court in I.T.R. 48/X of 1954.
Hardayal Hardy and D. Gupta, for the appellant.
N. A. Palkhivala and I. N. Shroff, for the respondent.
1960. November 17. The Judgment of the Court
was delivered by
SHAH, J.-The Income Tax Appellate Tribunal,
Bombay Bench "A", referred under s. 66(1) of the
Indian Income Tax Act, 1922-hereinafter referred
to as the Act-the following question :
"Whether the sum of Rs. 15,608 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 by it would be unreasonable ?"
The High Court answered the question in the negative. Against the ,prder of the High ~ou:t, wit!i
special leave under Art. 136 of the Constitution, this
appeal is preferred.
.
M/s. Bipinchandra Maganlal & Co., Ltd.-heremafter referred to as the Company-is registered under
the Indian Companies Act. The Company is one in
2 S.C.R. SUPREME COURT REPORTS
495
which the public are not substantially interested withx960
in the meaning of s. 23A Explanation of the Act. Its Th c -. :
Paid-up capital at the material time was Rs. 20,800
0
•11 omm1Ss1•
0neF
ncome- ax,
made up as follows :
Bombay City
20 shares of Rs. 50 each fully paid up and 1980
Bombay
'
shares of Rs. 50 each, Rs. 10 being paid up per share.
v.
In December 1945, the Company purchased' certain
BipinchandFa
machinery for Rs. 89,000 and sold it sometime in Maganlal & Co.,
March, 1947, for the price for which it was originally Ud., Bombay
purchased. In the books of account of the Company,
Shah J.
the written down value of the machinery in the year
of account 1946-47 (April 1, 1946 to March 31, 1947)
was Rs. 73,392. The trading profits of the Company
as disclosed by its books of account for the year 194647 were Rs. 33,245. At the General Meeting held on
October 21, 1947, the Company declared a dividend of
Rs. 12,000 for the year of account. In assessing tax
for the year of assessment 1947-48, the Income Tax
Officer computed the assessable income of the Company fo~ the year of ,account 1946-47 at Rs. 48,761
after addmg back to the profit of Rs. 33,245 returned
by the Company, Rs. 15,608 realised in excess of the
written down value of the machinery sold in March,
1947. The Income Tax Officer passed an order under
\
s. 23A of the Act that Rs. 15,429 (being the undistributed portion of the assessable income of the Company as reduced by taxes payable) shall be deemed
to have been distributed as dividend amongst the
shareholders as at the date of the General Meeting,
'
and the proportionate share of each shareholder shall
be included in his total income. Appeals preferred
against his order to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal proved unsuccessful, but the Appellate Tribunal at the
instance of the Company referred the question set out
hereinbefore to the High Court at Bombay under
s. 66(1) of the Act.
Section 23A(l) of the Act as it stood at the relevant
time (in so far as it is material) was as follows :-
"Where the Income Tax Officer is satisfied that in
respect of any previous year the profits and gains distributed as dividends by any company upto the end
496
SUPREME COURT REPORTS
(1961]
1960
of the sixth month after its accounts for that previous
Th • c-· .
year are laid before the company in general meeting
'
omm<ssion"
l
th
60°1
f th
bl
'
f th
of Income-tax
are ess
an
, 0 o
. e assessa e mcome o
e
Bombay City.' company of that previous year, as reduced by the
Bombay
amount of income-tax and super-tax payable by the
v.
company in respect thereof, he shall, unless he is satisBipinchandra
fied that having regard to losses incurred by the
Maganlal &
Co., company in earlier years or to the smallness of the
Ltd., Bombay
fit
d
ti
t f
d' 'd d
l
pro
ma e,
ie paymen o a 1v1 en
or a arger
Shah;.
dividend than that declared would be unreasonable,
make with the previous approval of the Inspecting
Assistant Commissioner an order in writing that the
undistributed portion of the assessable income of the
company of that previous year as computed for income-tax purposes and reduced by the amount of income-t::ix and super-tax payable by the company in
respect thereof shall be deemed to have been distributed as dividends amongst the share-holders as at
the date of the general meeting aforesaid, ........... .
,,
Clearly, by s. 23A, the Income Tax Officer is required to pass an order directing that the undistributed
portion of the assessable income of any company (in
which the public are not substantially interested) shall
be deemed to have been distributed as dividends
amongst the shareholders if he is satisfied that (i) the
company has not distributed 60% of its assessable
income of the previous year reduced by the incometax and super-tax payable, (ii) unless payment of a
dividend, or a larger dividend than that declared,
having regard to (a) losses incurred by the company
in the earlier years or (b) the smallness of the profits
made in the previous year, be unreasonable. The
total assessable income of the Company for the year
of account was Rs. 48,761 and the tax payable thereon was Rs. 21,332: ti0% of Rs. 27 ,249 (assessable income reduced by the income tax and super-tax due)
exceeded the dividend declared by Rs. 4,458. The
first condition to the exercise of jurisdiction by the
Income Tax Officer under s. 23A was therefore indisputably fulfilled.
But the Income Tax Officer had
2 S.C.R. SUPREME COURT REPORTS
497
still to be satisfied whether having regard to the small1960
ness of the profit (there is no evidence in this case that
-
l
'
d b th C
·
l'
) 't The Commissioner
oss was mcurre
y
e ompany m ear ier years , 1
1 1
1
would be unreasonable to distribute· dividend larger
~om~:~me~i~;·
than the dividend actually declared. The Income Tax
Bombay
'
Officer did not expressly consider this question : he
v.
rested his decision on the rejection of the contention
Bipinchandra
raised by the Company that the difference between M~;;nla~ &b Co.,
the price of the machinery realised by sale and the
..
om ay
written down value in the year of account could not
Shah J.
be taken into account in passing an order under
s. 23A. He, it seems, assumed·that if that difference
be taken into account, distribution of larger dividend
was not unreasonable, and the Tribunal proceeded upon the footing that the assumption was correctly
made.
Counsel for the Revenue submits in support of the
appeal that the expression "smallness of profit"
means no more than smallness of the assessable income, and that in any event, in the computation of
profits, the amount realised by sale of the machinery
in the year of account in excess of its written down
value was liable to be included_ in considering whether the condition relating to "smallness of profit"
was fulfilled.
At the material time, s. 2(6C) of the Act defined
"income" as inclusive amongst others of any sum
deemed to be profits under the second proviso to cl. (vii)
of sub-s. (2) of s. 10. By s. 10, in thf:l computation of
profits or gains of an assessee under the head "Profits
and gains of business, profession or vocation" carried
on by him, the amount by which the written down
value of any building, machinery or plant which has
been sold, discarded or demolished or destroyed exceeds the amount for which the building, machinery
or plant is actually sold or its scrap value is to be
allowed as a deduction. This allowance is however
subject to an exception prescribed by the second proviso to cl. (vii) sub-s. (2) of s. 10 that where the a.mount for which any building, machinery or plant is
sold exceeds the written down value, so much of the
63
498
SUPREME COURT REPORTS
[1961]
r96o
excess as docs not exceed the difference between the
Th
C -. .
original cost and the written down value shall be
e
ommissro1ier d
d
b
f h
.
,
,
of Income-tax,
eeme to e profit o t e pre!10us year m whwh the
Bombay City, sale took place. In computmg the profits and gains
Bo.,bay
of the Company under s. 10 of the Act, for the pur-
. . v.
pose of assessing the taxable income, the difference
8•Pinchandra
between the written down value of the machinery in
M£;~=
1~0!.~
0
• the yea.r of acco1;1nt '.l'nd the price at w!1i?h it was sold
·
(the pnce not bemg m excess of the ongmal cost) was
Shah J.
to be deemed to be profit in the year of account, and
being such profit, it was liable to be included in the
assessable income in the year of assessment. But this
is the result of a fiction introduced by the Act. What
in truth is a capital return is by a fiction regarded for
the purposes of the Act as income. Because this difference between the price.realized and the written down
value is made chargeable to income tax, its character
is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee
as his profits: it reaches him as part of the capital invested by him, );he fiction created by s. 10(2)(vii) second proviso notwithstanding. The reason for introducing this fiction appears to be this. Where in the previous years, by the depreciation allowance, the taxable
income is reduced for those years and ultimately the
asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the Revenue is justified in taking
back what it had allowed in recoupment against wear
and tear, because in fact the depreciation did not
result. But the reason of the rule does not alter the
real character of the receipt. Again, it is the accumulated depreciation over a number of years which is
regarded as income of the year in which the asset is
sold. The difference between the written down value
of an asset and the price realized by sale thereof
though not profit earned in the conduct of the business
of the assessee is notionally regarded as profit in the
year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years.
A company normally distributes dividends out of its
business profits and not out of its assessable income.
2 S.C.R. SUPREME COURT REPORTS
499
There is no definable relation between the assessable
I960
income and the profits of a business concern in a com- Fh c
. .
.
.
.
e
ommisssontr
merc1al sense. C?mputat10n. of mcome for purposes of 1"come-ta.e,
of assessment of mcome tax is based on a variety of Bombay City,
artificial rules and takes into account several fiptional
Bombay
receipts, deductions and allowances. In considering
.. v.
whether a larger distribution of dividend would
Bspinchandra
b
bl
th
f
h. h l d' 'd ·dMaganla/ &- Co.,
e unreasona e,
e .source rom w IC t 10 iv1 en
Ltd. Bombay
is to be distributed and not the assessable income
'
has to be taken into account.
The Legislature has
Shah J.
not provided in s. 23A that in considering whether
an order directing that the undistributed profits shall
be deemed to be distributed, the smallness of the
assessable income shall be taken into account. The
test whether it would be unreasonable to distribute
a larger dividend has to be adjudged in the light
of the profit of the year in question. Even though
the assessable income of a company may be large,.
the commercial profits may be so small that compelling distribution of the difference between the
balance of the assessable income reduced by the taxes
payable and the amount distributed as dividend would
require the company to fall back either upon its reserves or upon its capital which in law it cannot do. For
instance, in the case of companies receiving income
from property, even though tax is levied under s. 9 of
the Act on the bona fide annual vall,le of the property,
the actual receipts may be considerably less than the
annual value and if the test of reasonableness is the
extent of the assessable income and not the commercial profit, there may frequently arise cases in which
companies may have to sell off their income producing
assets. The Legislature has deliberately used the expression "smallness of profit" and not "smallness of
assessable income" and there is nothing in the context
in which the expression "smallness of profit" occurs
which justifies equation of the expression "profit" with
"assessable income". Smallness of the profit ins. 23A
has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or
fictional.
This view appears to have been taken by
the High Courts in India without any dissentient
500
SUPREME COURT REPORTS
[1961)
r960
opm10n, see Sir Kasturchand Ltd. v. Commissioner of
T!
-. .
Income Tax, Bombay City (1), Ezra Proprietary EstatP,s
" Comnussion" L d
C
· ·
,f I
T
W
B
l (')
of Income-tax
t . V.
ommissioner OJ
ncome ax,
est
enga
Bombav Citv.' and Commissioner of Income Tax, Bombay City Iv.
Bo.;bay ·
F. L. Smidth & Co., (Bombay) Ltd.(').
'
.. v.
By the fiction in s. 10(2)(vii) second proviso, read
Bopinchand.a
with s. 2(6C), what is really not income is, for the purMaganlal £. Co.,
f
t t'
f
bl '
d
t
Ltd., Bombay pose o cornpuba ion o assessa. e ~codme, ma. e
axable income : ut on that account, it oes not become
Shah J.
commercial profit, and if it is not commercial profit,
it is not liable to be taken into account in assessing
whether in view of the smallness of profits a larger
dividend would be unreasonable. In our judgment,
the High Court was right in holding that the amount
of Rs. 15,608 was not liable to be taken into account
in considering whether having regard to the smallness
of the profit made by the Company, it would be unreasonable to declare a larger dividend.
The appeal therefore fails and is dismissed with
costs.
Appeal dismissed .
. ---
(1) (1949) XVII l.T.R. 493.
(2) (1950) XVIII l.T.R. 762.
(3) (1959) XXXV l.T.R. 183.