S.K. Desai, J.
1. Three questions are referred to us at the instance of the assessee by the Income-tax Appellate Tribunal, Bombay Bench 'C'. They are as follow :
'(1) Whether, on the facts and in the circumstances of the case, the assessee-company was one in which the public are not substantially interested within the meaning of Explanation 1 to section 23A(1) of the Indian Income-tax Act, 1922, as it then stood ?
(2) If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, and considering the profits available for distribution, the provisions of section 23A(1) of the Indian Income-tax Act, 1922, were rightly applied in the assessee's case ?
(3) Whether the order under section 23A(1) of the Indian Income-tax Act 1922, is vitiated by the fact that it was passed after completing the regular assessment on the assessee-company without issue of notice under section 34 of the said Act ?'
2. The point in controversy relates to the application of s. 23A of the Indian I.T. Act, 1922, to the assessee-company. The ITO passed orders under s. 23A(1) in the assessee-company's case for the four assessment years 1956-57, 1957-58, 1959-60 and 1960-61. The matter ultimately came before the Tribunal, and in its consolidated order in I.T.A. Nos. 15452 to 15455 of 1963-64, the Tribunal did not uphold the application of s. 23A(1) for the first three years but upheld it for the last year 1960-61. It is this decision which is impugned in the question.
3. A few facts may be stated. The assessee-company is registered as a public company and it publishes a newspaper in the Sindhi language called Hindustan. The paper was published in Karachi by a trust prior to the partition of India. After partition, the persons who were publishing the paper migrated to India and established the assessee-company in the year 1951. According to the ITO, although the assessee-company would be a public company under the Companies Act, 1956, s. 23A of the Indian I.T. Act, 1922, was applicable, since more than 50 per cent. of the voting power was held by less than six persons and the promoters' shares had not been offered to the public unconditionally for sale. For the assessment year 1960-61, the ITO worked out the distributable profits at Rs. 19,360. On further calculation, according to him, the net profit available for distribution was about Rs. 15,000. In his opinion, this could not be called a small amount, and with the previous approval of the IAC, he levied super-tax at 37 per cent. The amount came to Rs. 7,163.20.
4. The assessee took the matter before the AAC. It was contended in the first place that s. 23A of the Indian I.T. Act, 1922, was not applicable. The AAC, however, rejected the submissions of the assessee and upheld the conclusion of the ITO, namely, that the assessee was a company to which the provisions of s. 23A are technically applicable. In discussion the merits, the AAC upheld the application of the provisions contained in s. 23A, although he was satisfied that by not declaring dividend the assessee-company was not seeking to avoid tax. In his view, the circumstances clearly indicated that the shareholders concerned had formed the assessee-company was not with a view to earn profits. He concluded further that there was no attempt at avoidance of super-tax liability. Nevertheless, according to him, these aspects were irrelevant and the only criterion was whether the assessee-company had commercial profits for declaring dividends. As stated earlier, the matter was carried to the Tribunal, which found in favour of the assessee for the earlier three years but upheld the order of the IT for the last year with which we are concerned in this reference.
5. Learned counsel for the assessee has urged that if the court finds in favour of the assessee on question No. 2, it would be unnecessary to go into questions Nos. 1 and 3 which involve mainly technical considerations.
6. The Tribunal has found that the commercial profits for the four years (after deducting tax) stand as under :
Rs.1956-57 6,3251957-58 4,6431959-60 1,5271960-61 14,508
7. We are concerned with the last of the assessment years, namely, 1960-61. In that year, the assessee-company wrote off from the distributable surplus a goodwill of Rs. 5,000 and transferred Rs. 7,000 to general reserve. It was submitted before the Tribunal that the allocation to general reserve was required for machinery rehabilitation, and it has been observed by the Tribunal that the press used by the assessee-company was old and a new press was required to be purchased, and indeed in 1964 a new press had been acquired for Rs. 60,000.
8. The considerations which are to weigh in applying the provisions of s. 23A of the Indian I.T. Act, 1922, and now of s. 104 of the I.T. Act, 1961, are well settled. The authority or the Tribunal or the court is required to consider the position from the point of view of a prudent businessman. In this particular case, we have also to consider the object of this company, and the object was clearly not to earn profits but to run the newspaper which was being run prior to the partition. It was also to furnish an avenue of employment to displaced persons. It has been observed by the Tribunal-and this finding is binding on us-that the press was old and there was necessity to purchase a new press. Indeed, the machinery for the new press was purchased in 1964 at a cost of Rs. 60,000. In these circumstances, the allocation to general reserve must be regarded as properly done and is required to be upheld if prudent business considerations are applied.
9. Even the set-off of Rs. 5,000 against goodwill would appear to be in order. Goodwill, after all, is only a theoretical or intangible asset, not represented by any concrete item such a machinery or building or land or other immovable property. Again, the value of goodwill is a matter of some speculation. A prudent businessman must attempt to write off his asset at the earliest so that the financial position of the company reflects the concrete tangible assets and not intangible assets which may or may not have a realisable value. Once the amount of Rs. 12,000 could be regarded as having been properly provided for out of the disposable surplus of about Rs. 14,000, the balance then left is not of that magnitude which will require the application of s. 23A of the Indian I.T. Act, 1922. Applying the principles laid down by the Supreme Court in CIT v. Gangadhar Banerjee & Co. (Private) Ltd. : 57ITR176(SC) as well as by this court in several cases, in our opinion, the Tribunal was in error in upholding the application of s. 23A even for the fourth assessment year under consideration.
10. In the result, the questions referred to us are answered as unde :
Question No. : The provisions of s. 23A(1) of the Indian I.T. Act, 1922, were not rightly applied in the assessee's case. The answer is thus in favour of the assessee.
Question No. 1 and : In view of the answer given to question No. 2, it is not necessary to answer these questions.
11. The Commissioner to pay costs of this reference to the assessee.