1. The assessee is a private limited company. The assessment year in question is 1958-59, for which the corresponding accounting year ended on March 31, 1958 in February, 1958, a Income-tax. The assessee-company was making provision every year in respect of its contribution to the fund out of its profits, though the fund itself was not recognised till February, 1958. The total amount appropriated up to March 31, 1957, was Rs. 1,97,109. Such provision was however disallowed by the Department in the computation of the income of the assessee in the assessments up to the assessment year 1957-58. In the year ending March 31, 1958, the assessee debited sum of Rs. 15,079,50 to the P&L; a/c of that year although payment of Rs. 37,248 was made by way of gratuity in the year ending March 31, 1958. The amount standing to the credit of the gratuity fund on March 31, 1958, was Rs. 1,74,940. This amount was paid over to the trustees of the function March 31, 1958. Out of this amount of Rs. 1,74,940 Rs. 1,59,861 was by way of initial contribution and Rs. 15,079 was by way of contribution for the year ending March 31, 1958.
2. In the assessment proceedings for the assessment year 1958-59 the total income of the assessee was assessed at Rs. 3,50,342. The tax payable on this amount was Rs. 2,18,069. However, the assessee was given a rebate of the amount of Rs. 59,659 in the tax for the initial contribution to the fund in accordance with the circular of the CBR No. 70(XI-3) of 1951, dated November 3, 1951. The total amount of tax payable by the assessee for the year 1958-59, inclusive of wealth-tax, came to Rs. 1,61,401. After deducting this amount of tax from the total income assessed, the ITO found that the distributable surplus was Rs. 1,88,941 and 60% of this distributable surplus came to Rs. 1,13,365 which should have been the amount distributed by way of dividend. The actual dividend declared by the assessee was only Rs. 85,500. Thus, there being a shortfall of Rs. 27,865 the ITO issued notice under s. 23A of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act')
3. Before the ITO, the liability to assessment under s. 23A of the Act was denied on three grounds. Firstly, it was contended that if the initial contribution to the gratuity fund was deducted from the income assessed and if a further deduction is made for the amount of the tax of Rs. 1,61,960 the balance left was only Rs. 28,521, 60% of which was Rs. 17,113 and the dividend declared was much more than this amount. The second ground was that the proper amount of tax to be deducted for the purpose of s. 23A was the total tax payable on the total income of Rs. 3,50,342. If this amount of income-tax together which super-tax is deducted and further a deduction of wealth-tax under s. 23A(1)(b) of the Act is made, the balance would come to Rs. 1,28,722, 60% of which came to Rs. 77,233. According to the assessee an amount of Rs. 85,500 which is more than the amount distributable has already been distributed as dividend. Both these computations were rejected by the ITO who held that the amount of Rs. 1,59,861 was not paid out of the current year's profit and for the purpose of s. 23A, only the actual amount of tax payable would be taken into account for ascertaining rebate of tax. The third contention was that the borrowings of the assessee from the banks and other sources had increased from Rs. 4,27,501 on April 1, 1957, to Rs. 7,72,660 on March 31, 1958, and hence no prudent businessman would have distributed a larger sum than Rs. 85,500 as dividend. The ITO held that the borrowings were normal liabilities of the business concern like that of the assessee and that he was not satisfied of that the assessee was not in a position to declare the dividend statutorily required. The distributable income was worked out by the ITO at Rs. 1,88,942 and deducting the dividend of Rs. 85,500 declared, the balance was Rs. 1,03,442 on which super-tax levied at the rate of 37% came to Rs. 38,274.
4. The assessee challenged the order of the ITO by an appeal before the AAC and the argument of the assessee was that the sum of Rs. 1,59,861 being the initial contribution to the gratuity fund, should be deducted for arriving at the commercial profit and, alternatively, the taxes to be deducted from the assessed income should be Rs. 2,18,069, i.e., without taking into account the deduction of the rebate allowed in respect of initial payment to the trustees of the fund. This contention was rejected by the AAC who dismissed the appeal. The assessee took the matter further in appeal to the Appellate Tribunal. The Tribunal upheld the order of the AAC and rejected the contention that the gross amount of tax should be taken into account for the purposes of s. 23A of the Act. The Tribunal observed that the directors knew at the time the dividend was recommended that the company was entitled to certain rebate on account of the payment of the gratuity fund to the trustees. The Tribunal observed that even if the taxes were the taken at the gross figure, the surplus came to Rs. 1,28,722 as against which the assessee had distributed Rs. 85,500. The Tribunal recorded a finding that no circumstances existed or were pointed out which would suggest that it would be unreasonable to distribute more. The Tribunal further observed that it could not be said that for declaring a higher dividend, the company would have to fall back on its capital, because it was seen that the surplus was substantial even after all the appropriations were made. It appears that it was contended before the Tribunal that the directors had decided on a lower dividend because of the fall in the turnover and the Tribunal observed that there was no evidence to show at this fact was present before them because at no earlier stage this was put forth as an excuse for a lesser amount being declared as dividend. The Tribunal further observed that the profit in terms of rupees was more an the earlier year, even though the turnover had gone down.
5. The order of the Tribunal does not specifically deal with the contention that the total income should be reduced by the amount of initial contribution of Rs. 1,59,861. This shows that the finding recorded by the AAC, that the initial contribution was not to be made out of the current year's profits, but provision was already made out of the earlier year's profits and, therefore, it could not be said that the company was faced with a financial commitment which could be met only if, after providing for tax liabilities and declaring some dividend, some residue was left over from the current years income, was not challenged. The Tribunal having dismissed the appeal of the assessee, at the instance of the assessee the following questions have been referred under s. 669(1) of the Act :
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Income-tax Officer was right in passing an order under section 23A of the Indian Income-tax Act, 1922, against the applicant ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held 'that the amount of income-tax and super-tax payable by the company in respect of its total income' was the gross amount of Rs. 2,18,069 and not the net amount of Rs. 1,61,401 ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have that in arriving at the commercial profits of the company the entire initial contribution to the gratuity fund of Rs. 1,59,861 was deductible as the same had not been permitted as a deduction in arriving a the companies total income ?'
6. The arguments before us by the learned counsel for the assessee company proceeded on the questions in the reverse order from question No. (iii) which is first dealt with by Mr. Dastur. Mr. Dastur has contended that the amount Rs. 1,59,861 was fully deductible in the relevant assessment year as a liability had arisen in that year under the terms of the trust deed, with regard to the gratuity fund, and, therefore, notwithstanding the fact at the said amount was no deductible for the purposes of assessment of total income under s. 23, when the question as to whether assessee should be made liable to super-tax under s. 23A of the Act is to be considered, the said amount should be deducted from the total income determined at Rs. 3,50,342. The further contention is that if after such deduction, a further deduction is made in respect of taxes levied including the wealth-tax, the total amount of tax being Rs. 1,61,400 the dividend distributed by the assessee could be more than 60% of the balance. In other words, the calculations which were presented before the ITO, the AAC and the Tribunal was the working relied upon before us.
7. Heavy reliance has been placed on a decision of is court in India United Mills Ltd. v. CIT : 98ITR426(Bom) , in support of the contention that the initial contribution to the gratuity fund, if it is made in the assessment year in question, not withstanding the fact that the amounts were set apart in the earlier years, would be deductible business expenditure during the assessment year during which the amount has been handed over to the trustees.
8. Before we deal with this contention it is necessary to refer to the provisions of s. 23A. The said provision, in so far as is relevant, reads as follows :
'23A. Power to assess companies to super-tax on undistributed income in certain cases-(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;
(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income; and.....
the Income-tax Officer shall, unless he is satisfied -
(i) that, having regard to the 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 the declared would be unreasonable; or....
make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the are of fifty percent, in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven percent in the case of any other company 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.'
Now, it is not in dispute that the statutory percentage referred under s. 23A(1) is 60% of the total income as reduced by the amounts provided in that section. The liability under s. 23A will arise under terms of the section if in respect of any previous year the profit and gains distributed as dividends by any company is less than the statutory percentage of the total income of the previous year, less the deductions provided and such distribution must also be within twelve months immediately following the expiry of the relevant previous year. It is implicit in s. 23A(1) that the profits and gains of the relevant assessment year have to be distributed as dividends. The statutory percentage has to be ascertained on the basis of the 'total income'. Such total income of the company for the relevant year has to be reduced by the amount of income-tax and super-tax payable in respect of that total income. The further deduction in cl. (b) permissible is in respect of the amount of any other tax levied under any law for the time being in force on the company either by the Government or by a local authority in excess of the amount which has been allowed in computing the total income. This clause thus permits a deduction of the excess amount of tax which has not been allowed as a deduction while computing the excess amount of tax which has not been allowed as a deduction while computing the total income for the purposes of s. 23A. Under s. 23A (1), therefore, what has to be done is the determination of the total income in the manner laid down in the Act. The words 'total income' have been defined in s. 2(15) as meaning, 'total income of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act'.
9. Section 3 of the Act, which is the charging section, provides that income-tax shall be charged for the assessment year in accordance with and subject to the provisions of the Act in respect of the 'total income' of the previous year of every individual, HUF, company and local authority, etc., according to the rate or rates prescribed by the relevant Act for the said assessment year. Now, the computation of the total income of an assessee is done at the time of assessment under s. 23, which reads as follows :
'23. (3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, the Income-tax Officer, after hearing such evidence as such person may produce and such other evidence as the Income-tax Officer may require, on specified points, shall, by an order in writing, assess the total income of the assessee, and determine the sum payable by him on the basis of such assessment.'
10. Under s. 23, therefore, there is an assessment of total income and the provision in s. 23A(1)(i) clearly indicates that the total income for the purposes of s. 23A is the total income which has been assessed under s. 23. After the income of the assessee is assessed under s. 23(3), further deductions have to be made for the purposes of assessment super-tax on the undistributed income of the company. Thus, unless the total income of the company is assessed, it will be not be possible for the ITO for the purposes of s. 23A to ascertain whether the profits and gains distributed as dividend is less than the statutory percentage of the total income. There is clear indication in s. 23A(1) the it is the total income computed or assessed under s. 23(3) which may be taken into account for the purpose of company has to be ascertained with reference total income assessed. Similarly, when the operative part of s. 23A(1) provides that the ITO shall.... 'make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable pay super-tax....', it clearly indicates that the tax under s. 23A(1) is in addition to the tax determined as payable by the assessee on the basis of assessment under s. 23. These words clearly indicate that the assessment under s. 23(3) must precede the assessment under s. 23A. The words 'total income', therefore, have the same meaning in s. 23A(1) as they have in s. 23.
11. Once we come to the conclusion that the words 'total income' in s. 23A(1) have the same meaning as these words in s. 23A, then the total income determined under s. 23A must be the only starting point of the limited one. It can be exercised only when he finds that in respect of any previous year the profits and gains distributed as dividend by the company within the twelve months immediately following the expiry of the previous year are less than the statutory percentage of the total income as reduced by the deductions specified in s. 23A(1). What are the deductions permissible are also specified and it is not possible for us to computation of the total income when the total income has been assessed and determined under s. 23.
12. It has been vehemently contended on behalf of the assessee that in the India United Mills' case : 98ITR426(Bom) , the initial contribution, the liability for which had arisen in the earlier years, had been allowed as a deduction as a business expenditure in the year in which it can be paid to the trustees and, therefore, in the instant case also since the initial contribution of Rs. 1,59,861 has been paid in the assessment year in question, it should be allowed as a deduction. It has to be remembered that in India United Mills' case, the question as to whether total income of the assessee which had already been assessed under s. 23 could be reopened for the purposes of s. 23A, requiring fresh computation of total income after taking into account deductions which were never the subject case in India United Mills' case, this court has found that though the assessee company had provided or set apart during the year 1951, an amount of Rs. 19,11,658 on account of the initial contribution and Rs. 2,65,701 on account of annual contribution for the year 1951, and the amounts were, however, actually handed over to the trusses of the gratuity fund partly on February 28,1952, and on March 4, 1952, the said amount must be held to have irretrievably gone out of the coffers of the assessee company in the relevant assessment year 1953-54 and would have to be regarded as business expenditure incurred by the assessee-company wholly and exclusively for its business purpose and such deduction claimed by the assessee company would have to be allowed under s. 10(2)(xv) of the Indian I.T. Act, 1922. As already pointed out this decision did not deal with the question as whether the total income could again be independently determined for the purposes of s. 23A. The said decision can be an authority only for the proposition that where the amount is incurred by way of business expenditure to a deduction thereof, in the course of the assessment proceedings.
13. The second contention raised is that the proper amount of tax to be deducted under s. 23A(1)(a) should be the amount of Rs. 2,18,069, which is the gross tax on the amount of Rs. 3,50,342, which is the total income to which the assessee has been assessed. A reference was made to the order of the ITO in the main assessment proceedings for the assessment year 1958-59. In the assessment order the total income assessed is Rs. 3,49,202 and with regard tax on this amount, the following appears in para. 4 :
'The tax due will formally be demanded for payment by the end of February, 1960. However, if the particulars of gratuity contributions are furnished in time the assessee will not be called upon to pay up the demand till the computation of relief in respect of gratuity are finalised.'
14. What is contended by Mr. Dastur is that the ITO had demanded the entire tax of Rs. 2,18,069 which must be deducted from the total income of Rs. 3,50,342. Now the deduction permissible under cl. (a) of s. 23A(1) is the amount of income-tax and super tax payable by the company in respect of its total income. The reference is obviously to the tax which the assessee is liable to pay. The assessee was not liable to pay tax of Rs. 2,18,069. What the assessee was liable to pay was the total tax minus the rebate to which it was entitled under the circular of the CBDT. It is necessary to point out that in the relevant profit and loss account the provision made by the assessee-company for income tax and super-tax is Rs. 1,44,383. It is, therefore, obvious that the assessee, while making the accounts, had taken into account only the liability as it will be finally determined and obviously the persons responsible for making up the annual accounts were clear, therefore, that gross tax was not the liability for which they had to make provision but that provision had to be made for the gross amount of tax, less the rebate as per the circular the CBDT. We are, therefore, unable to accept the contention that the total income was liable to be reduced for the purpose of s. 23A(1) by the amount of gross tax on the total income computed.
15. It was then argued by Mr. Dastur that under cl. (i) in s. 23A(1) the ITO has to make an order under s. 23A after he was satisfied that having regard to the smallness of the profits made in the previous year, the payment of a dividend of a larger amount was not possible and, according to Mr. Dastur, if what the ITO has to consider is commercial profits of the company in order to ascertain whether the assessee-company can be made liable to pay super-tax, then, though the net profit in the P&L; a/c is disclosed at Rs. 3,72,999, the actual position was that after deducting the amount of Rs. 1,59,861, which admittedly has been transferred by the trustees to the assessee-company from the amount of Rs. 3,72,999, after the declaration of dividend of Rs. 85,500 the profits left in the hands of the company would be negligible amount and, therefore, considering the question commercially, the board of directors could not be said to have deliberately distributed a smaller amount by way of dividend. Now, the positive finding of the AAC, which does not seem to have been disturbed nor challenged before the Tribunal, is that the Initial contribution was not required to be made out of current year's profits but provision has already been made in the earlier years which would fully take care of that contribution. The AAC also held that the reserve in the sum of Rs. 1,97,109 was available because the company had been providing in the earlier years reserve for gratuity fund. Now, it is clear from s. 23A(1) that the undistributed income for the purposes of the section has to be determined after finding out whether the profits and gains of that year distributed as dividend was less then the statutory percentage of the total income there is no doubt that while s. 23A(1) deals with total income and cl. (i) what has to be ascertained is whether the profits and gains of the year in question has been distributed in accordance with the statutory percentage. The profits and gains of the assessee company shows the net profit of the relevant assessment year at Rs. 3,72,999. Now, the argument of Mr. Dastur is that it was not necessary for the assessee-company to show that the profit and that the mere fact that the payment has been made would be sufficient to reduce the profits for the purposes of ascertaining commercial profits of that year and it was open to the assessee to show for the purposes of s. 23A(1) that having regard to the smallness of the profits, larger amount could not have been declared as dividend. Now, in our view, the two questions, viz., whether for the purposes of determining the total income a particular payment should be allowed as permissible deduction and the question as to whether the commercial profits as contemplated by s. 23A(1) are such that it would have been imprudent for the board of directors to declare a larger amount by way of dividend, are determined on different considerations. If the basic requirements of s. 23A(1) is that a part of the profits of the relevant assessment year declared by way of dividend is less than the percentage, then even for the purposes of commercial profits it must be shown that there was an outgoing of those profits so as to reduce commercial profits. It is not known nor is there any evidence on which it may be ascertained as to out of what moneys the initial contribution was paid to the trustees. In any case, it is not in dispute that the P&L; a/c makes no reference to this payment. While it is no doubt true at in CIT v. Gangadhar Banerjee and Co. (Private) Ltd. : 57ITR176(SC) , the Supreme Court has held that the words 'smallness of profits' in s. 23A refer to actual accounting profits and not the assessable profits the ITO may disallow many expenses actually incurred by the assessee and in computing his income, he may include many items on notional basis, but the commercial or accounting profits are the actual profits earned by the assessee calculated on commercial principles. Even on the principles laid down by the Supreme Court, the commercial or accounting profits in the instant case must be taken at Rs. 3,72,999.49 as disclosed by the P&L; a/c. It is not the case of the assessee that this profit was so small that it would not have been possible to declare a larger dividend than what has been declared.
16. Having regard to the view which we have taken the questions referred are answered as follows :
Question No. (i) In the affirmative and against the assessee
Question No. (ii) In the negative and against the assessee.
Question No. (iii) In the negative and against the assessee.
Assessee to pay the costs of this reference.