(1) The assessee is a private limited company. For the year of account 1949-50 accordin g to the balancesheet of a net profit of Rs . 3,367/- resulted in the busiess of the assessee. The assessee distributed Rs. 12,800/- as dividend to the shareholders. In the assessment proceeding the In ome-tax officer diallowed in the assessee Rs. 55,459/- included for excess provision for bonus for the year under reference, Rs. 33,000/- for under-valuation of stock and Rs. 20433/- for excess provision for bonus for 1947-48 and 1948-49. He also diallowed Rs. 45,020/- on charity account and Rs. 1,053/- on Diwali account and made a slight adjustment in respect opf the claim for depreciation. Finding that the assessee had not distributed as dividend sity per cent of the assessable income less the amount of income-tax and super tax payable by the assessee, the income Tax Officer passed an order under S. 23A of the Income Tax Act. Against that order an appeal was preferred to the Appellate Assistant Commissioner, and the matter was ultimately brougbht before the Tribunal. The Tribunal observed that in considerating whether an order under S. 23A may be passed against the assessee the Income-tax officer ought to have regard to the commercial profits and not the assessable profits. The Tribunal assessed the commercial rofits of the assessee as at the datwe on which the amount of dividend was resolved to be distributed at Rs. 56, 800/-. Computing on that amopunt a tax liablity of Rs. 19325/-, the tribunal held that Rs. 37475/- were the net commrcial profits of the assessee for the year under reference and sixty percent of that amount being Rs. 22,485/- and as the assessee had distributed as dividend only Rs. 12,800/- an order S. 23A of the Income-tax Act was properly passed by the income tax authorities.
(2) In this reference, Mr. Palkhivala for the assessee has contended firstly that the Tribunal was in error in estimating the tax liability of the assessee, while assessing the net commercial profits, at Rs. 19,325/- and secondly, that the Tribunal was in error in adding the amount of Rs. 20,433/- standing to the credit of the bonus provsion account to the et profit of Rs. 3,367/- in ascertaining the profit available for declation of dividend.
(3) Section 23 A of the Income Tax Act, as it stood before its amendent by the Finance Act, 1955, in so far as it is material, provided by the first sub-section:
'Where the Income -tax Officer is satisfied that in respect of any previous year the pforists and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previsous year are laid before the company in general meeting as less than sixty per cent of the assessable income of the company of that previsou year, as reduced by the amount of income tax and super tax payab;le by the company in respect thereof, he shal, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the p0ayment of a dividend or a larger dividend that that declared would be unreasonable, male ...... an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income tax and super tax payable by the company in respect of thereof shall e deemed to have been distributed as dividends amonst the shareholders as at the date of the general meeting aforesaid.........................'
The object of the section is to prevent the avoidance of liability to pay super-tax by the shareholders of companies in which the public are not substantially interested. Income-tax paid by the company on its profits is by S. 49B of the Act deemed to be paid on behalf of the shareholders, but the shareholders have to pay super-tax on dividends received by them even if the company has paid super-tax out of its profits. The rates of super-tax applicable to companies are substantially lower than the rates applicable to other assesses. Lest by the expedient of not distributing the dividends and converting theaccumulated profits with the company into capital and distributing the same as bonus shares, the higher rate of super-tax may be avoided, the Legislature enacted this section. The provisions of the section are in terms (subject to an exception to be presently noticed) mandatory, if te condition that the profits and gain distributed as dividends are less than sixty per cent of the assessable income reduced by the income-tax and super-tax payable by the company is fulfilled. The Income-tax Officer has however, a discretion not to make an order if he is satisfied that, having regard tothe losses incurred by the company in the earlier years, or to the smallness of the profits made, the payment of a larger dividend would be unreasonable.
(4) It is undisputed tht the Income-tax Officer assessed the total profits of the assessee at Rs. 1,37,693/-, and the tax payable in respect thereof was Rs. 49,689/-. Sixty per cent of the balance considerably exceeded the total dividend declared by the assessee, and Mr. Palkhivala for the assessee has not contended that the case is one is which the primary or income as dividends was not satisfied. But he contends that even if the primary condition is fufile, the Income-tax Officer had to consider whether, having regard to the smallness of the profits made, payment of larger dividend that the one declared would be unreasonable. Mr. Palkhivala says that having regard to the smallness of the profits made by the aseessee it would, in the circumstances of the present case, be unreasonable to declare a larger dividend.
(5) It is now well settled that the expression 'profit made' in S. 23A, sub-section (1) meas commerical profits. In Commissioner of Income-tax, Bombay City 1 V. F. L. Smidth and Co. (Bombay) Ltd. : 35ITR183(Bom) , a Division Bench of this Court (to which my learned brother was a party) held that in considering the smallness of the profits made by a company the profits that the Income-tax Officer had to consider were not the total income referred to in S. 23A(1) but the actual profits of the assessee at Rs. 56,800/-. But that was evidently the gross commercial profits of the assessee as at the date on which the general meeting for resolving upon the distribution of dividend was held. Out of this amount the Tribunal purported to deduct Rs. 19,325/-, which wasthe appropriate tax payable in respect of an income of Rs 56,800/-. In our view, in making a deduction of Rs. 19,325/- only for tax liability the Tribunal was in error. The income-tax payable by an assessee does not bear any definite relation to his commerical profits. Even if the assessee has made payments which he is not entitled to deduct in ascertaining the assessable income, the commercial profits are to that extent depleted. It would, therefore,in our judgment, be an error to reduce merely the amount of tax computed on the commerical profits to ascertain the profits made. Before the Tribunal it was contended that out of the commerical profits the total amount of tax payable by the assessee should be deducted. The Tribunal was of the view that the assessee must adopt one of two methods, viz. (i) to deduct fromt he assesable income the amount of tax paid and thereafter to ask the Income-tax Officer to ascertain whether the profits were so small that an oder under S. 23A (1) need not be passed, or (ii) to confine itself tot he circumstances existing as at the dare on which the general meeting was held and to take the commerical profits as the basis and to deduct therfrom the appropriate tax payable on the profits so ascertained. But the question is, in our judgment, not of any option vested in the assessee. The Income-tax Officer has to exercise his powers subject to the limitations prescribed by S. 23A. The first condition of which he must be satisfied is that the profits andgains distributed by the assessee as dividend amongst the shareholders is less than sixty per cent of the assessable income as reduced by the amount of income-tax and super-tax payable in respect thereof. Even if this condition is satisfied, if, having regard tothelosses sustained in the priveous years or to the smallness of the profits made, it would be unreasonable to distribute a dividend larger than the one declared, the Income-tax Officer will not pass he order that the undistributed portion f the asessable income shall be deemed to be distributed as dividends. It was therefore for the Income-tax Officer to ascertain, having regard to the commercial profits, the anticipated amount of tax which would have to be deducted to find out the net commerical profits, in the light of all the circumstances then present to its mind, and thereafter to relate the same to the amount of dividend declared. If, having regard to the net commercial profits so ascertained, it appeared tot he Income-tax Officer that it would not be unreasonable to adistribute sixty percent of such income as dividend amongst the shareholders, an order under S. 23A of the Income-tax Act may properly be passed. In the present case, the Tribunal having proceeded to deduct only an amount of Rs. 19,325/-, which was the amount of tax payable on an income of Rs. 56,800/-, in our view, an error has been committed in confirming the order passed by the Income-tax Officer under S. 23A of the Act.
(6) Mr. Palkhivala contends that even the commerical profits ascertained by the Tribunal were erroneously ascertained. According to him, the commercial profits o the assessee amounted to Rs. 36,367/- and no more, and the amount of Rs. 20,433/- under the head ''bonus excess provision credited to the profit and loss account'' was wrongly included in the commerical profits. This argument of Mr. Palkhivala we are unable to accept. In order to appreciate this argument, ist may be necessary to state a few facts. The assessee had year after setting apart certain amounts towards liability likely to arise for payment of bonus to the labourers employed in its factory. Normally the assessee used to set apart every year an amount approximately equivalent to three months' salary payabl to the employees. It appears, however that in 1947-48 the provision made ont his account exceeded the amount actually paid bonus by Rs. 218/5/6; in the year 1949-50 the provision made on this account exceeded the actual liability by Rs. 16,241/12/3. At the commencement of the year 1950-51 the assessee had an accumulated amont of Rs. 20,432/14/3 in the bonus provision account and it set apart an amount of Rs. 1,00,000/- towards the contingent liability for payument of bonust claimed an amount equivalent to four months salary to the Industrial Court and ultimately by order dated 28-2-1951, an award was made whereby the liability of the assessee to pay bonus to its employer for the year was restriced approximately to half the amount set apart. But in assessing its commercial profits the assessee sought to deduct the entire amount of Rs. 1,00,000/-. The Income-tax Appellate Tribunal held having regard tot he claim made by the employees that the assessee did not act unreasonably in setting apast Rs. 1,00,000/- towards the contingent liability for bonus, but it was of the view that the assessee should have taken into consideration the accumulated amount of Rs. 20,432/14/3to the profits for the year under account the computed the commercial profits on the footing. In our view, the Tribunal was right in so doing. If thee was am undisbursed residue of Rs. 20,432143 in the bonus provision account, and te assessee was face with a claim for bonus which was not defined but the extent whereof wa estimate at Rs. 1,00,000/-, the assessee was bound to take into account the amount lying accumulated and to make a provision during the year under account only for the balance. Mr. Palkhivala contends that the amount of Rs. 20,432/14/3 did not represent the accumalted amounts f excess int he bonus provision account out of the sums set apart during the previous years, but that it represented amounts which were due and payable as bonus to the employees but which were for certain reasons not received by them. No such argument however, appears to have been raised before the Tribunal, and we do not think we will be justified in allowing Mr. Palkhivala to raise this new plea for the first time before us.
(7) Mr. Joshi for the Department contends in the first instance that the expresson 'profits made' occuring in S. 23A(1) of the Income-tax Act means the gross profits realised by the assessee without deducting the amount of tax payable by it. But evidently S. 23A is enacted with a view to preven accumulation of large amounts of profits without distribution of adequate dividends; and dividends can only be distributed after deducting the amount of tax payable only after the tax payable by the assessee is deducted from the assessable income of the assessee. It is onl after the tax payable by the assessee is deducted from the assessable income that there will be a net dividend amongst the shareholders. If the view contended for by Mr. Joshiwere to be accepted, the assessee may have to pay dividend out of its reserve. W are, therefore, unable to accept the argument that the expression 'profits made' occurring in S. 23A (1) is the gross commercial profit without deducting the amount of tax payable.
(8) Mr. Joshi has then contended that the amount of tax deductible out of the commercial profits must b appropriate to its quantum. That argument also we are unable to accept. As we have already observed, the commercial profits bear no real relation to the assessable profits bear no real relation to the assessable profits, and the tax is payable on the assessable profits and not on the commercial profits.
(9) Mr. Joshi has finally contended that in any event the assessee may be entitled to deduct from the gross commercial profits only such amount as tax as he could, having regard to its transactions, have anticipated as likely to be imposed by the income-tax authorities and not the total amount of tax which may ultimately be assessed. That argument, in our judgment, has substance. If, with a view to provid for contingent liabilities, the assessee has appropriated a certain amount, evidently the tax posed on him wil have to be computed after excluding from its gross profits the amount so set apart. The assessee cannot contend that in assessing the net commercial profits the whole of the amount so set apart for meeting contingent liabilities should be deducted whereas in assessing the tax which he must have reasonably expected as payable by him the total amount of tax assessed by the income-tax authorities should be deducted.
(10) The Tribunal has held that the net commercial profits made by the assessee during the year under account amounted to Rs. 37,475/-. That , for reasons set out earlier, is erroneous. We are unable, on the materialsbefore us, toascertain the amount of tax which may have been reasonably anticipated by the assessee as likely to be assessed having regard to its transactions at the date on which the dividend was declared at the general meeting, viz, 25-7-1950. In that view of the case, we are unable to answer the question which has beenframed byt he Tribunal. We, therefore, remand the case to the Tribunal wiht a direction that the Tribunal do submiit a supplementary statement of the case setting out the appropriate amount of income-tax which would be deductible out of the amount of Rs. 56,800/- and which the assessee may have reasonably anticipated as likely to be assessed after taking into consideration the profit made by it and the contingent liability for payment of bonus to the employees of its factory. The supplementary statement to be submitted before 31-12-1959.
(11) Case remanded for supplementary statement.