1. The assessee-company is admittedly a section 23A-company. In this reference, we are concerned with the assessment year 1956-57, the relevant accounting year being the year ended March 31, 1956. The assessed profits of the assessee-company after deducting the profit under s. 10(2)(vii) came to Rs. 7,23,630. The tax on this amount was worked out at Rs. 3,08,755 and when the amount of tax so worked out was deducted from the amount of profit earlier indicated, the ITO worked out the distributable balance at Rs. 4,14,875. Against this, the company had declared dividends on preference shares of only Rs. 1,29,062. Before the ITO, the assessee-company had pleaded that in the preceding year the Commissioner had not insisted upon full distribution in view of the requirements of the company for rehabilitation. The rehabilitation programme had continued during the year under consideration before the ITO and it was urged that for the same reason the distribution of dividends actually made should be considered to be sufficient and reasonable. It appeared that even for this year the company had made an application to the Commissioner under s. 23A(3) but the same had been rejected by the Commissioner as being belated. The ITQ was of the opinion that since for the material year the assessee's application under s. 23A(3) had been rejected, the question whether funds were required for rehabilitation could not be taken into consideration. The ITO, accordingly, passed the order under section 23A(1) levying additional super-tax in the amount of Rs. 1,07,764.
2. The company thereafter appealed to the AAC, but was unsuccessful. The matter was thereafter carried in appeal to the Tribunal. Before the Tribunal, it was urged that the order under s. 23A(1) was ab initio void since it was not passed within the time prescribed in s. 34(3). This contention was decided against the assessee as the Tribunal followed the decision of the Supreme Court in M. M. Parikh, ITO v. Navanagar Transport and Industries Ltd. : 63ITR663(SC) . The Tribunal, however, held that, on merits, the company was entitled to succeed. The company had a big rehabilitation programme and had acquired new machinery in the material year as well as in the year following, out of borrowings. It was in view of this rehabilitation programme that the Commissioner had allowed the assessee's application under s. 23A(3) for the preceding assessment year. For the material year also, the company had applied for a similar order, but the application was time-barred and there was no provision for condonation of delay in s. 23A(3). The Tribunal accepted the company's contention that the requirements for rehabilitation should be considered before applying s. 23A(1) and it was not only under s. 23A(3) that such requirements should be taken into account. The Tribunal accepted the submissions made on behalf of the assessee applying the Supreme Court decision in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) and the decision of the Madras High Court in Indian Commerce and Industries Co. Ltd. v. CIT : 60ITR229(Mad) . The Tribunal observed that in the case, which it was deciding, the funds were actually required for immediate expenditure on rehabilitation. It also emphasised the fact that in the past the company had not taken any loans, but had in the year under consideration to take a cash credit loan from the Bank of India of Rs. 15 lakhs for business requirements. It also considered the cash balance available to the company. Ultimately, it expressed satisfaction that the company had not acted unreasonably in declaring only the amount of dividends which it actually did. The following two questions are referred to us :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the order under section 23A(1) levying additional super-tax for the assessment year 1956-57 (2) Whether an order under section 23A of the Indian Income-tax Act, 1922, after its amendment by the Finance Act, 1955, is an order of assessment to which the period of limitation prescribed by section 34(3) applies ?'
3. As far as question No. 2 is concerned, Mr. Palkhivala, on behalf of the assessee, has stated that this question is concluded against him as a result of the decision of the Supreme Court in M. M. Parikh v. Navanagar Transport and Industries Ltd. : 63ITR663(SC) , and that, accordingly, the question will be required to be answered in the negative and against the assessee.
4. As far as question No.1 is concerned, it' becomes necessary to turn to the decision of the Supreme Court on which the Tribunal has relied to elicit the proper principles as ought to be applied to such cases. In CIT v. Gangadhar Banerjee and Co. P. Ltd. : 57ITR176(SC) , it has been held as follows (headnote) :
'The Income-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of section 23A of the Indian Income-tax Act, 1922, does not assess any income to tax. He only does what the directors should have done putting himself in their place. 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 reasonableness or unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. The Income-tax Officer 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 deciding whether the payment of a dividend or a larger dividend than that declared by the company would be unreasonable, the Income-tax Officer can take into consideration circumstances other than losses and smallness of profit. The statute, by the words used, while making sure that 'losses and smallness of profits' are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered. Capital losses, if established, would be one of them.'
5. It is clear from this passage that the proper approach, according to the Supreme Court, is that of a prudent businessman or a director of a company and the ITO is required to take an overall picture of the financial position of the business and not act as a mere tax collector. The reasonableness or unreasonableness of the amount distributed as dividends has to be judged by business considerations.
6. It becomes necessary to apply these principles to the facts found by the Tribunal. It has been found that the company had a big rehabilitation programme and it acquired new machinery, in the material year as well as in the year following, out of borrowings. The balance-sheets of the material year as well as the year following have been annexed and it is found that for the year ending March 31, 1956, with which we are principally concerned, additions to plant and machinery are in the aggregate amount of Rs. 30,89,139. (See schedule of fixed assets in the balance-sheet of the assessee-company as on March 31, 1956, annex. 'E'). The figure for the next year under this item is Rs. 9,14,083. In addition to this, in the following year electric installations have cost the company Rs. 1,07,231. It may be stated that a copy of the order of the Commissioner under s. 23A(3) dated July 13, 1957, for the preceding year is annexed as annex. 'E'. There is a reference in the order to the very big development and rehabilitation programme of the company and reference is made to an order placed for such machinery of the value of Rs. 50 lakhs. A statement of the new machinery purchased by the company for replacement from April 1, 1955, to March 31, 1956, is to be found as annex. 'F' to the statement of case. There is a further finding of the Tribunal that this company which had no overdraft from any bank during any of the earlier years since 1952, had borrowed Rs. 15,00,000 on cash credit from the Bank of India Ltd. for the first time in the year under consideration. If with this background the order of the ITO is perused and the figures of total assessed income, s. 10(2)(vii), profits and proper tax on the total income are taken into account, can it be said that the dividend declared is, in the circumstances, unreasonable In our opinion, applying the test propounded by the Supreme Court in Gangadhar Banerjee and Co.'s case : 57ITR176(SC) , it will be possible to say that from the businessman's standpoint it was necessary to conserve the profits earned by the company and not to distribute a larger amount by way of dividends.
7. Mr. Joshi, on behalf of the revenue, drew our attention to a decision of the Madras High Court in Indo-Ceylon Dental and Surgical Co. Ltd. v. CIT : 98ITR536(Mad) . It was observed in the said decision that there ought to be positive material to show that the board of directors or the general body resolved to declare a lesser dividend with a view to build up sufficient reserves to be utilised for future developmental activity. It was further stated that in the absence of such positive material it must not be lightly assumed that the declaration of a lesser dividend was for the reason which may be subsequently set up when the ITO proceeds to invoke the provisions of s. 23A.
8. The case before us is totally different from the facts being considered by the Madras High Court. Even in the previous year, the assessee-company had set up a case of large scale expenditure for the purchase of new plant and machinery. It was this rehabilitation programme on the basis of which the Commissioner had granted permission under s. 23A(3). Such permission had also been sought for the assessment year under consideration before us, but as the application was belated, the Commissioner could not grant the necessary permission as it was felt that there was no power of condonation of delay. It was on this very basis that before the ITO it was contended that the company's decision of paying dividends on preference shares only was fully justified and could not be regarded as unreasonable. On the material before it, the Tribunal could not have come to any other conclusion than the one it did and it would not be proper to characterise its conclusions or order as erroneous in any way.
9. In the result. question No. 1 is answered in the affirmative and in favour of the assessee. Question No. 2 is answered in the negative and against the assessee.
10. The parties will bear their own costs of the reference.