Case: Commissioner of Income Tax Kerala, Ernakulam Vs. V. Damodaran, Trivandrum

This is an appeal by certificate under section 261 ofthe Income Tax Act, 1961 against the judgment of the High Court of Kerala interpreting the words "accumulated profits" in section 2(6A)(e) of the Indian Income Tax Act,assessee is the Managing Director of a private limited company called R. K. V. Motors &Timber (P) Limited. The company maintains an accounts pertaining to him in its books. The accounts showed that as on March 31, 1958 a sum of Rs. 36, 546.17 np. was due t o him by the company. In January, 1959 for the first time he became indebted to the company in the sum of Rs. 3, 757.04 np. His drawings increased, and as on March 31, 1959 the total amount due by him stood at Rs. 25, 107.22np. It is also relevant to state that the Balance Sheet of the company as on March 31, 1958 showed a net profit of Rs. 18, 950.98assessee was originally assessed for the assessment year 1959-60 (the relevant previous year being the year ended March 31, 1959) on a total income of Rs. 43, 407. Thereafter, the Income Tax Officer came to know that the assessee had been withdrawing moneys from the company, and in the belief that those amounts were liable to be treated as "dividend" under section 2(6A) (e) of the Indian Income Tax Act, 1922, he reopened the assessment by virtue of section 147 ofthe Income Tax Act, 1961. In the assessment proceedings which followed, the assessee claimed that the accumulated profits of the company amounted to Rs. 1, 050 only, and that amount alone could be considered as "dividend" under section 2(6A)(e). The figure was worked out on the basis that a sum of Rs. 11, 000 as a provision for tax and of Rs. 6, 900 as a provision for dividend had to be adjusted against the balance of Rs. 18, 950 in the Profit &Loss Account. The Income Tax Officer rejected the contention of the assessee and determined a sum of Rs. 25, 107 as dividend under section 2(6A) (e). He arrived at this figure by including the current profits of the company for the account year ending March 31, 1959. The Appellate Assistant Commissioner dismissed an appeal filed by the assessee. The Income Tax Appellate Tribunal, in second appeal, upheld the claim of t he assessee that the words "accumulated profits" in section 2(6A)(e) could not be construed as including current profits, but it rejected the contention that the two sums of Rs. 11, 000 and Rs. 6, 900 had to be taken into account in determining the figure of the accumulated profits. Accordingly, it determined the accumulated profits at Rs. 18, 950.The Revenue applied for a reference to the High Court of Kerala, and at its instance the Tribunal referred the following question t o the Highon the facts and in the circumstances of this case, the Appellate Tribunal was legally correct in holding that the accumulated profit will not include current profits for the purpose of section 2(6A) o f the Indian Income Tax Act, 1922assessee also requested the inclusion of a question, and therefore the second question referred to the High Courton the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 18, 950 constituted accumulated profits for the purpose of section 2(6A) of the Indian Income Tax Act, 1922High Court, by its judgment dated January 18, 1972 has answered the first question in the affirmative and the second question in the negative, both questions being answered in favour of the assessee. And now, the present appeal by the Revenue.

Reasoning:
We are in agreement with that view, being persuaded in that behalf by the reasoning which has prevailed in the aforementioned cases. The distinction between "accumulated profits" and "current profits" has long held the field, and as the learned judges of the High Court of Australia observed in Hooper &Harrison Ltd. (I n Liquidation) (supra), it has been well known in judicial decision and in the mercantile world for well over a century. Moreover, this Court in M. V. Murugappan (supra) has also taken the view that current profits cannot be included i n accumulated profits. It appears to be now the established law of the land.An attractive submission was raised on behalf of the Revenue that in the Twelfth Report of the Law Commission of India, the authors of the Report consider that the intention of the Legislature was to include current profits in the expression "accumulated profits" in section 2(6A) and that the present definition of "accumulated profits" by Explanation 2 to section 2(22) of the Income Tax Act. 1961 only clarifies what the true intent was allalong. In the view which has found favour with us, we are not persuaded by thatwe hold that the High Court was right in answering the first question in favour of the assessee and against theare of opinion that the Revenue is right. The objection was taken by the Revenue before the Appellate Tribunal when the statement of case was being prepared, but the Appellate Tribunal overruled the objection, relying on Girdhardas &Co. Ltd. v. Commissioner of Income Tax, Ahmedabad. It does not appear that the Revenue contended before the High Court that the reference made to it by the Appellate Tribunal was incompetent insofar as the second question was concerned. Since, however, the objection pertains to the competence of the reference to the extent that it covers the second question and, therefore, relates to the jurisdiction of the High Court to consider and decide that question, we are of opinion that the Revenue is entitled to raise that question before us.Section 256(1) ofthe Income Tax Act, 1961 entitles the assessee or the Commissioner, as the case may be, to apply to the Appellate. Tribunal to refer to the High Court any question of law arising out of the order made by the Appellate Tribunal under section 254. A period of limitation for making such application is prescribed. If the application is rejected by the Appellate Tribunal the applicant is entitled to apply to the High Court, again within a prescribed period of limitation, and the High Court may, if it is not satisfied of the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and refer it. It is clear that the statute expressly contemplates an application in that behalf by a party desiring a reference to the High Court. The application has to be filed within a prescribed period of limitation. If the Application is rejected by the Appellate Tribunal, it is the applicant thus refused who is entitled to apply to the High Court. If the Appellate Tribunal allows the application made to it, s. 256(1) requires it to draw up the statement of the case and refer it to the High Court.the present case, the question whether the provision of Rs. 11, 000 for tax and Rs. 6, 900 for dividend can be taken into account when determining the accumulated profits as on March 31, 1958 is not relate to the question whether accumulated profits can take in current profits. The two questions involve the grant of separate and distinct reliefs and the decision on one question does not affect the decision on thewe hold that the Appellate Tribunal was not competent to refer the second question, and the reference to that extent must be considered void. In the circumstances, it is not necessary to examine the second question on its merits. The judgment of the High Court must be set aside so far as it incorporates its opinion on the second question.