Case: Gobald Motor Service Private Limited Vs. Commissioner of Income Tax, Madras

2. The relevant facts and circumstances are as follows: TheOfficer, in his order dated February 13, 1957, passed under section 23A, found that the appellant, Gobald Motor Service, hereinafter referred to as the assessee, was a private limited company which ran a fleet of buses and lorries from Mettupalayam in the accounting year relevant to the assessment yearHe arrived at the following figures in respect of the total income, taxes paid, dividend,income as finally determined ... 2, 04, 222Taxes paid ... 81, 529Balances available for distribution ... 1, 22, 69360 per cent. thereof ... 73, 617Dividends declared ... 45,the scrutiny of these figures he came to the conclusion that section 23A of the Act was applicable because the dividend declared was less than 60% of the profits available for distribution. He then considered the point whether having regard to the profits made, i.e., profits as distinct from assessable income, the assessee could or could not have reasonably declared a larger dividend. For this purpose, he extracted the following relevantprofit before appropriation ofetc. ... 1, 01, 902Less : Taxes actually payable on total incomeas finally determined on appeal ... 81, 529Profits available for distribution ... 20, 373Dividends declared by the company ... 45,felt that these figures showed that the assessee could not reasonably have declared dividend of more than Rs. 20, 373, but heIn the case of banking companies or companies with income from property, the computation of income for purposes of theAct may in some cases be different from that adopted by the companies themselves. Hence, there may be variation between the  assessable income and profits made . In such cases, if the companies are asked to declare dividends on the basis of  assessable income , the companies may be forced to declare dividends out of capital which is prohibited under the Companies Act. In this case the difference between the assessable income and profits made is not due to any such variation on the basis of any different statutory computation, but due to the addition of Rs. 20, 000 made on account of luggage collections and to the addition of Rs. 25, 000 on account of spare parts, etc. These additions have been sustained by the Appellate Assistant Commissioner. This clearly shows that the books are not so properly maintained as to deduce the distributable income from the assessee companys book profits3. Moreover if the additions of Rs. 45, 000 are made to the profits of Rs. 20, 373 available for distribution, the company could very well have declared a larger dividend than what has been actually declared by it. I, therefore, apply the provisions of sectionhe held that " the company is deemed to have declared the dividend of Rs. 38, 840 to each of the two shareholders asincome as determined finally on appeal ... 2, 04, 222Less: Taxes paid ... 81, 530Balance available for distribution ... 1, 22, 692Dividends declared ... 45, 000Balance deemed to have been declared under this order ... 77, 692Share of dividends deemed to have been distributed undersection 23A(1) N. Veerasami Chettiar ... 38, 846(2) N. Shanmugam Chettiar ... 38, 846order was modified by him as he found that there were six shareholders during the relevant period, and he accordingly revised the allocations amongst the six shareholders

Court's reasoning:
It is true that theOfficer does not appear to have borne these considerations in mind, but it may be that the assessee did not bring this aspect to the notice of theOfficer. Be that as it may, we find that the assessee did not take this point before the Appellate Assistant Commissioner and theWe are unable to agree to this contention. The commercial or accounting profits which have to be taken into consideration are the real commercial or accounting profits. If an item is deliberately omitted from the accounts, it cannot be said that commercial principles prevent that amount being added to the profits in order to arrive at the real commercial or accounting profits. In our opinion, the High Court was right in holding that these two items had to be added to the book profits in order to arrive at the true commercial or accounting profits of themay be so; but once ther is satisfied that in respect of any previous year the profits and gains distributed as dividend by any company are less than 60% of the assessable income of the previous year, as reduced by the amount ofax payable by the assessee in respect thereof, and that it would not be unreasonable to distribute a larger dividend than that declared, he has no option but to pass an order that the undistributed portion of the assessable income of the assessee of the previous year, as computed fors and reduced by the amount ofax payable by the company, shall be deemed to have been distributed as dividend amongst theagree with him that ther did not consider the question like a prudent businessman.But, as we have already said, the assessee did not raise this point either before the Appellate Assistant Commissioner or the Appellate Tribunal. If this point had been raised, the facts relating to the considerations mentioned in the observations of Subba Rao J. would have been brought on the record. We feel that it is now too late to permit him to raise this point. Further, it appears from the judgment of the High Court that the assessees contention before it was that the expression " profits made " in section 23A refers to profits disclosed by the accounts and further to the profits that were made only during that year, disregarding any profits of the previous year that might have been carried forward as such. The fact that this argument was raised before the High Court further shows that the assessee never urged at any previous stage that in view of previous losses and other facts, it would not be reasonable to require the assessee to distribute a larger dividendWe may mention that the High Court proceeded on the assumption that concealed profits amounted to Rs. 40, 000. Mr. Srinivasan said that the correct figure is Rs. 37, 000, but nothing turns on the difference of Rs. 3, 000