Order Shri I.S. Nigam, Accountant Member - These two appeals, one relating to assessment year 1974-75 and another relating to assessment year 1975-76, filed by revenue against consolidated order of Commissioner (Appeals), deal with same issue and are, therefore, for sake of convenience, disposed of by common order. 2. assessee is private limited company. ITO in course of assessment proceedings found that dividends distributed by company within 12 months immediately following expiry of previous year were Rs. 6,500 for assessment year 1974-75 and Rs. 3,07,800 for assessment year 1975-76. ITO held that considering capital gains, on sale of land, which amounted to Rs. 12,90,988 for assessment year and Rs. 38,40,479 for assessment year 1975-76, dividends distributed by company fell short of statutory percentage. ITO did not accept claim of assessee-company that capital gains should not be included in commercial profits. He, therefore, subjected assessee-company to additional income-tax on undistributed income for both assessment years 1974-75 and 1975-76. When matter went up in appeal, Commissioner (Appeals) held that capital gains cannot be included in commercial profits for purposes of section 104 of Income-tax Act, 1961 (' Act ') and, therefore, levy of additional income-tax on undistributed income for both assessment years was unjustified. Commissioner (Appeals), therefore, cancelled orders of ITO under section 104(1) and allowed assessee's appeals. revenue is aggrieved by order of Commissioner (Appeals) and has, therefore, come up in present appeals before us. 3. learned departmental representative, Shri Mahadeshwar, cited before us ruling of Hon'ble Madras High Court in case of Factors (P.) Ltd. v. CIT [1975] 98 ITR 105 wherein their Lordships laid down that unless there is express or implied prohibition under constitution of company, either under memorandum or articles of association, capital gains are distributable income, i.e., in other words, dividends can be distributed out of capital gains also. Proceeding further, Shri Mahadeshwar pointed out that capital gains, as is obvious from balance sheets of both assessment years, was utilised for purchase of gems and jewellery, i.e., in other words, it was not required for replacement of capital assets and, in these circumstances, there was no reason why dividends could not have been declared or distributed out of capital gains also. According to Shri Mahadeshwar, assessee is investment company which had plot of land acquired some time in 1955 which was being sold year after year resulting in capital gains and since no other land was purchased to replace land already sold, capital gains on sale of land were not required for replacement of capital assets. This was according to Shri Mahadeshwar, exceptional case where capital gain should be treated s forming part of profits of assessee-company for purpose of determining whether distribution of dividends out of profits was, considering totality of facts and circumstances, adequate or not. It was also brought to our notice that Hon'ble Supreme Court in case of CIT v. Sumani (P.) Ltd. [1983] 142 ITR (St.) 8 had granted special leave to department against order dated 29-8-1980 of Hon'ble Bombay High Court on question whether capital gains realised could be included in computing assessee-company's distributable income for determining applicability of section 104. In these circumstances, according to Shri Mahadeshwar, ruling of Hon'ble Bombay High Court in case of CIT v. Gannon Dunkerley & Co. Ltd. [1971] 79 ITR 637, was in first place on different facts and was distinguishable and in any case required reconsideration. Summing up, Shri Mahadeshwar vehemently argued before us that orders under section 104 for both assessment years were justified and were wrongly cancelled in appeal by Commissioner (Appeals). 4. On other hand, assessee's learned counsel Shri Dastur, at outset, pointed out that assessee-company was investment company which acquired large tract of land for Rs. 3,500 in 1955, part of which was leased out to earn income of Rs. 3,300 per month and in subsequent years assessee-company was able to sell parts of land resulting in profits which were offered for assessment and were assessed as capital gains. Proceeding further, Shri Dastur submitted that assessee-company had paid up capital of Rs. 5,000 only and since it was investment company, there would have been nothing left for assessee-company to carry on if 90 per cent of capital gains on sale of land was distributed by way of dividends. Even otherwise, according to Shri Dastur, when land was sold assessee-company made other investments in gems and jewellery, part of which was sold in subsequent years at profit and this itself indicated that assessee-company had to replace capital asset sold with other capital assets in order to carry on as investment company. Our attention was invited to assessment order for assessment year 1973-74, i.e., immediately preceding to two assessment years under appeal before us, where also even though assessee-company had earned capital gains of Rs. 15,70,987, ITO had given specific finding in assessment order that no action under section 104 was being taken in view of commercial profits being very low. Referring to decision of Hon'ble Supreme Court in case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176, Shri Dastur submitted that reasonableness or otherwise of amount distributed as dividends has to be judged taking overall picture of financial condition of company by putting oneself in position of prudent businessman or director of company and problem should be dealt with sympathetically and objectively. Shri Dastur submitted that where company earned capital gains on sale of capital assets, it was for directors to decide whether capital gains were required for replacement of capital assets sold or were to be treated as part of commercial profits of company. guidelines, issued by Institute of Chartered Accountants, were cited in support of contention that capital profits made on sale of fixed asset for amount in excess of its cost, may not be distributed unless articles of company permit such distribution and other conditions, in this connection, are satisfied. He, therefore, submitted that if directors choose to treat profits on sale of capital assets less tax on capital gains arising therefrom as capital reserve, action of directors cannot be said to be wrong or unreasonable. In this connection, he pointed out that as is obvious from audited accounts of company, profit on sale of land has not been shown in profit and loss account but has been credited to profit and loss appropriation account and after deducting tax on capital gains arising from sale of capital assets, balance has been transferred to capital reserve or utilised for acquisition of other capital assets, e.g., gems and jewellery, which in subsequent years were sold in part at profit. Proceeding further, Shri Dastur submitted that in case of Factors (P.) Ltd., company treated capital gains arising on sale of capital assets as part of commercial profits by crediting them to profit and loss account unlike in present case where profit on sale of land was not treated as part of commercial profits and was not credited in profit and loss account but was instead shown in profit and loss appropriation account and was utilised partly for creation of capital reserve and partly for acquisition of gems and jewellery to replace capital asset which had already been sold and which was intended to be sold in future at profit. Our attention was then invited to ruling of Hon'ble Bombay High Court in case of Gannon Dunkerley & Co. Ltd., wherein their Lordships laid down that except in exceptional circumstances, capital return or capital gains arising on sale of capital assets do not form part of commercial profits of company for purposes of determining whether distribution of dividends out of commercial profits was reasonable or not. Finally, Shri Dastur referred to another ruling of Hon'ble Calcutta High Court in case of CIT v. N. Guin & Co. (P.) Ltd. [1979] 116 ITR 475, where their Lordships laid down that capital gains cannot be equated with commercial profits and, therefore do not form part of distributable income unless directors choose to treat it as such. Summing up, Shri Dastur vehemently argued before us that ruling of Hon'ble Madras High Court in case of Factors (P.) Ltd., will not be applicable here since, unlike in that case, directors have not treated capital gains arising on sale of capital assets as part of commercial profits but had instead treated them s capital returns or capital receipts to be utilised for replacement of capital assets sold and for creation of reserve for this purpose and in any case we should follow ruling of Hon'ble Bombay High Court in case of Gannon Dunkerley & Co. Ltd., which is binding for us, and ruling of Hon'ble Calcutta High Court in case of N. Guin & Co. (P.) Ltd., which is latest decision on subject. 5. We have carefully considered rival submissions. It is admitted position of both sides that applicability of sub-section (1) of section 104, on facts and in circumstances of present case will depend solely on whether capital gains arising on sale of land can be included in commercial profits and, consequently, distributable income of assessee-company. Commissioner (Appeals) in his order has given finding that directors of assessee-company have put entire amount of capital gains in reserves and no part thereof has been brought back in profit and loss account. According to audited balance sheets and profit and loss accounts of company, copies of which were filed before us and are not under dispute, profit on sale of land for each of two assessment years was not credited to profit and loss account but to profit and loss appropriation account. learned departmental representative, Shri Mahadeshwar, has not been able to point out to us any material to controvert claim made by assessee's learned counsel, Shri Dastur, that after deducting tax on capital gains arising from sale of land, balance has been transferred to capital reserves or utilised for acquisition of other capital assets, e.g., gems and jewellery, part of which in subsequent years were sold at profit. in case of Factors (P.) Ltd., relied upon by learned departmental representative, Shri Mahadeshwar, directors of company had themselves transferred profit on sale of capital assets to profit and loss account, i.e., they had treated capital gains as forming part of commercial profits of company unlike in present case where profit on sale of land was not transferred to profit and loss account but was instead shown in profit and loss appropriation account and was utilised after deduction of capital gains tax arising therefrom either for creation of reserves or for acquisition of other capital assets, e.g., gems and jewellery. facts of case of Factors (P.) Ltd. were, therefore, different from facts of present case and ruling of Hon'ble Madras High Court in that case will, therefore, not be applicable here. Besides, Hon'ble Bombay High Court in case of Gannon Dunkerley & Co. Ltd. has laid down that in ordinary circumstances, directors of business experience would never distribute amounts received by way of capital gains and instead these amounts would ordinarily be reserved for purpose of replacement of assets sold so as to carry on company in normal manner. Their Lordships further laid down that ITO while dealing with matter should sit in position of director and if he does so, he would always find it impossible to hold that capital gains acquired by sale of old assets are not necessary for re-employment for purposes of normal activities of company. latest decision on subject is ruling of Hon'ble Calcutta High Court in case of N. Guin & Co. (P.) Ltd. wherein their Lordships laid down that choice is left to company concerned either to transfer capital gains to profit and loss account and thereafter deal with amount as profits or to transfer amount to reserve account and treat it as reserve and where entire surplus is channeled into reserves, it is not for ITO to lay down that it should be treated as profits. Considering all this and looking to totality of facts and circumstances, we are of view that capital gains arising from sale of land could not be treated as forming part of commercial profits of assessee-company for purpose of determining whether distribution of dividends was reasonable or not. basis of ITO, therefore, that capital gains arising from sale of land formed part of commercial profits of assessee-company for coming to conclusion that t h e dividends distributed by assessee-company were not adequate or reasonable and, hence, assessee-company was liable to additional income-tax as laid down under sub-section (1) of section 104 was not correct. orders of ITO under section 104(1) for both assessment years, therefore, in our view, were not justified and were rightly cancelled in appeal by Commissioner (Appeals). 6. appeals filed by revenue fail and are hereby dismissed. *** Income-tax Officer v. Jim Rusdin (P) Ltd