1. The question referred to us at the instance of the Commissioner by the Income-tax Appellate Tribunal (Bombay Bench 'C') is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the action under section 104 of the Income-tax Act, 1961, was not justified ?'
2. The assessee is a private limited company and the assessment years involved are 1962-63, 1963-64 and 1964-65. The question concerns the application of s. 104 of the I.T. Act, 1961. It was found by the Tribunal that for all the three assessment years under consideration there was a net distributable surplus of Rs. 3,31,565, Rs. 1,92,164 and Rs. 2,85,158, respectively. No dividend was declared by the assessee-company for all the three years. Accordingly, the ITO, with the approval of the IAC, levied penal super-tax at 37% for the assessment year 1962-63. For the other two years also penal super-tax at the same rate was levied.
3. The assessee carried the matter in appeal to the AAC. He (the AAC) agreed with the approach and the ultimate order of the ITO, and confirmed the orders of the ITO levying additional super-tax.
4. The assessee thereafter carried the matter for all the years to the Income-tax Appellate Tribunal. After surveying the position of the assessee, the Tribunal observed as under :
'In our opinion, the directors would have acted irresponsibly if they had declared dividends in the present years. First of all, we may mention that the company had lost Rs. 21 lakhs of its circulating capital invested in the money-lending business, which the Department accepts was being carried on. According to the department, the loss pertained to the accounting years for assessment years 1959-60 and 1960-61. Against this background the company would have every justification to conserve its resources. We may also mention here that when we look at the assessee's balance-sheets for the present years, we find that there were large loans outstanding and there were sizeable amounts shown as doubtful of recovery. In the above context the company's board would have been justified in not declaring dividends. Besides, there was the proposed action under sec. 23A which the assessee could not take lightly. It is no use contending, as the Department did, that since sec. 23A action was a controversial matter, the assessee could have ignored the potential liability for additional super-tax. As mentioned earlier, for two years sec. 23A orders were actually passed, resulting in a demand of Rs. 2,50,000 and it was in 1968 that the Appellate Asst. Commissioner cancelled the orders. It was also as late as 1966 that the Income-tax Officer dropped the proceedings for other years. The directors had, in the reports to the shareholders, specifically pointed out that the financial position of the company as shown by the account is none too good, and, therefore, no dividends could be recommended. We are in agreement that a prudent businessman would not have taken the risk of declaring dividends in the position in which the company found itself in the material years.'
5. It appears to us that once the above conclusions are reached, it would have to be held that the ITO was not justified in initiating action under s. 104 of the I.T. Act, 1961. The correct approach to be followed in such cases has now been laid down by the Supreme Court in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) . It has been held therein that the reasonableness or the unreasonableness of the amount distributed as dividend is to be judged by business considerations, such as the previous losses, the present profits, the availability of surplus money, the reasonable requirements of the future and similar other factors. It has been observed further that the ITO must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective approach. In CIT v. Gannon Dunkerley & Co. Ltd. : 79ITR637(Bom) , a Division Bench of this court has observed that the ITO ought not to proceed on the footing of assessable profits or notional profits but must base his order upon a proper calculation and computation of the commercial and/or accounting profits. Therefore, it was opined, further, that the ITO would not be justified in considering amounts received by way of capital return and capital gains as forming part of the profits of the assessee-company while exercising its powers under s. 23A of the Indian I.T. Act, 1922. The same principles must apply whilst considering a case of exercising the powers under s. 104.
6. In the result, it cannot be said that action under s. 104 of the I.T. Act, 1961, was justified. In the result, the Tribunal was right in allowing the assessee's appeal for all the three assessment years. Accordingly, we answer the question referred to us as follows :
In our view, the Tribunal was right in holding that action under section 104 of the Income-tax Act, 1961, was not justified.
7. Parties to bear their own costs of the reference.