BAHARUL ISLAM J. - At the instance of the Commissioner of Income-tax, Assam, Nagaland, Manipur and Tripura, the Income-tax Appellate Tribunal, Calcutta Bench "B" (hereinafter merely "Tribunal"), has referred, under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called "the Act") the following question to us :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the provisions of section 23A of the Indian Income-tax Act, 1922, were not attracted in the instance case, after taking into account the capital expenditure incurred by the company and its tax liability as also the fact that the assessee had declared a dividend of Rs. 12,000 in September, 1958 (the period falling beyond 12 months from the end of the previous year) ?"
The facts related to the assessment years 1955-56, 1956-57 and 1957-58. The relevant and undisputed facts may be briefly stated :
The assessee is a private limited company in which the public are not substantially interested within the meaning of Explanation 1 to section 23A(9) of the Act. The assessee-company did not declare any dividend within the statutory period allowed by the Act although it had earned profit of Rs. 5,98,565 during the period of those three years.
For the assessment year 1955-56 the assessable income of the company was found to be Rs. 1,08,542 and the tax payable was Rs. 41,151 leaving a distributable balance of Rs. 60,390; for the assessment year 1956-57, the assessable income was found to be Rs. 64,522 and the tax payable was Rs. 30,412 leaving a distributable balance of Rs. 34,110; and for the assessment year 1957-58 the assessable income was found to be Rs. 1,09,630 and tax payable was Rs. 56,779 leaving a distributable balance of 52,851. The dividends declared for each of the aforesaid years was Rs. 12,000 which was at much below the prescribed percentage. The Income-tax Officer, therefore, passed an order in each case under section 23A of the Act levying penal super-tax at the rate of 4 annas per rupee aggregating to Rs. 13, 972.50, Rs. 4,611 and Rs. 12,087.75, respectively, for the above years.
On appeal by the assessee, the Appellate Assistant Commissioner of Income-tax affirmed the orders passed by the Income-tax Officer. On further appeal by the assessee, the Tribunal held that the provisions of section 23A were not attracted to the facts and circumstances of the cases.
The admitted facts the are that the assessee-company is not a company in which the public are substantially interested, that the profits distributed as dividends by the company are at much less than the statutory percentage of its income, that the dividends were declared not within, but beyond, the statutory period of six months; and that the company made a total profit of Rs. 5,98,565 during the aforesaid period of three years. The Income-tax Officer found, and his finding was upheld by the Appellate Assistant Commissioner, that the company had incurred no losses during the earlier years. But the Tribunal found that losses of Rs. 10,000 of earlier years had to be brought forward by the company. In a reference under sections 66(1) of the Act, a finding of fact of the Tribunal is binding on the High Court.
One of the arguments advanced on behalf of the company before the Tribunal was that in view of the huge capital expenditure incurred by the company during the years in question, the orders under section 23A levying penal super-tax were unjustified. The learned Tribunal has found that the capital expenditure incurred during the years in question was "over Rs. 2 lakhs" (in fact it was Rs. 2,46,828). The learned Tribunal has also found that the company had tax liabilities to the extent of Rs. 2,54,381 and that it had an unsecured loan of Rs. 2,73,174 from the managing director of the company. The Tribunal, on a consideration of the above facts and circumstances, has held that the order under section 23A passed by the Income-tax Officer was unjustified. The learned Tribunal has also found that even if the said loan of Rs. 2,73,174 from the managing director be not taken into consideration, the order under section 23A was not justified. The references has been made, it appears, only on second finding and the question of any loan from the managing director does not find place in the question referred to us. Similarly, the question of the losses of Rs. 10,000 of earlier years has not been referred. We are, therefore, not required to consider the question of the refund of the said loan and the losses of Rs. 10,000 aforesaid and give our opinion. We are required to give our opinion on the question whether, in coming to its conclusion, the Tribunal validly took into account : (i) the tax liability of the company, (ii) the fact that the dividends declared had been declared beyond twelve months from the expiry of the previous year, and (iii) the capital expenditure incurred by the company.
The material portion of section 23A of the Act is in the following terms :
"23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by -
(a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section.....
the Income-tax shall, unless is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis the assessment under section 23, be liable to pay super-tax at the rate of four annas in the rupee on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any."
Under section 23A of the Act 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 the company has not distributed 60% of its assessable income of the previous year reduced by the income-tax and super-tax payable but he will pass such order if he is satisfied that, 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, payment of a dividend, or a larger dividend will be unreasonable.
It is well-settled that profit within the meaning of section 23A of the Act means commercial profit and smallness or largeness of the profit is decided from the commercial point of view of a prudent businessman. In the case of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. : 57ITR176(SC) , their Lordships of the Supreme Court have observed :
"The section (section 23A) is in three parts : the first part defines the scope of the jurisdiction of the Income-tax Officer to act under section 23A of the Act; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder; and the third part provides for the assessment of the statutory dividends in the hands of the shareholders. This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To Act under this section the Income- tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But, before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be reasonable."
Their Lordships then posed question whether for the purpose of his satisfaction the Income-tax Officer had to consider only two circumstances, namely, losses and smallness of profit, or he could take into consideration other relevant circumstances other relevant circumstances also. Their Lordships then proceeded to answer the question :
"What does the expression profit mean Does it mean only the assessable or does it mean commercial or accounting profits If the scope of the section is properly appreciated the answer to the said question would be apparent. The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that if a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the pervious losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case."
The Lordships held, rejecting the arguments advanced on behalf of the department in the case, Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. : 57ITR176(SC) , that the Income-tax Officer can also take into consideration any circumstances other than losses and smallness of profits.
In the instant case of balance-sheets and the profits and loss accounts for the years in question show the balances of profit and loss accounts and cash and bank balances as follows :
Balance of profit & loss accounts
Cash and bank balance
2,65,708Taxes are payable out of income and their payment affects profits which in turn affects dividend which is payable out of profit. In order to determine, therefore, the smallness or otherwise, of commercial profits, tax liabilities have to be taken into consideration. If, in the case in hand, the amounts of tax liability of Rs. 2,54,381 is deducted from the total profit of Rs. 5,98,565, there still remains a distributable balance of profit of Rs. 3,44,184. The divided at 60 per cent. comes to Rs. 1,69,616. The dividends have to be declared and paid within three months (at the relevant time) and the default is punishable under section 207 of the Companies Act. In the case in hand dividends were found to have been paid not within, but beyond, 12 months. Payment of the dividends beyond 12 months is all the more reason justifying an order under section 23A unless the relaxing clause of the section is attracted.
The capital expenditure has been found to be Rs. 2,46,829. The dividend is payable from profit, but capital expenditure is not necessarily met from profit; it may be met from the capital reserve or other sources. Capital expenditure adds to the soundness of the company and also adds to its profit earning capacity. It does not adversely affect profits or the financial condition of the company. The profit and loss accounts of the company for the question clearly show that the company is in a sound financial condition and is capable of declaring dividend at the statutorily prescribed rate. The consideration of capital expenditure, therefore, is irrelevant for the purpose of determining the smallness or otherwise of the profits made by a company.
In the result, we answer the question referred to us in the negative and against the assessee. The assessee shall pay costs of the reference.
Send a copy of this judgment under the seal of the court and with the signature of the Registrar to the Appellate Tribunal. Hearing fee is fixed at Rs. 100.
B. N. SHARMA J. - I agree.