1. The assessee, which is a limited company, has made a net profit of Rs. 4,78,836-9-1 for the previous year ending on 30th September, 1954. The report of the directors submitted to the shareholders on 7th June, 1955, proposed an apportion of Rs. 4,00,000 as provision for taxation and other contingency and Rs. 75,000 as divided at 7 1/2% free of income-tax. The balance of the profit of Rs. 18,274-13-0 was proposed to be carried to the next year.
2. The assessee-company was however, assessed on the total income of Rs. 6,58,390 for the assessment year 1955-56, for which the relevant previous year was the one ending on 30th September, 1954. After adjusting the tax payable on the is amount the ITO worked out the distributable profit at Rs. 3,94,701. AS the amount of Rs. 75,000 declared by way of divided was less than 60% of the distributable profit the ITO called upon the assessee to show cause whys the provision of s. 23A of the Indian I. T. ACt, m 1922, should be be invoked,. It appears that it was contended before the ITO that for the purpose of s. 23A the commercial profits of the company should be taken at Rs. 5,76,933 in place of Rs. 6, . 58,390. The ITO took would be the tax on that amount, a surplus of Rs. 3,13,244 would be left and even the divided declared would be inadequete. The ITO levied penal super-tax on the distributable profit less Rs. 75,000. The penal super-tax came to Rs., 79,925.
3. In appeal, filed before the AAC it was argued on behalf of the assessee that having regard to the tax a liability and the financial commitments of the assessee-company in connection with the purchase of a cane farm from which a major part of the supply of sugarcane came to the factory of the assessee-company it would have been unreasonable for the direction to have declared dividend high than Rs. 75,000. The AAC found that for March, 1955 there was an additional demand to tax to extent of Rs,. 4,48,577 out to which Rs. 2,50,000 has already been paid and that the balance of demand outstanding was only Rs. 1,98,577, while s against this the provision for taxation amounted to Rs. 17,76,023 according to the balance-sheet as on 30th September, 1954. He recorded a positive finding that '....... In spite of my specified query, the representative could not show that this provision was not enough to meet these taxation liabilities... ' In regard to the other contention in respect of the intended purchases of cane farm the took the view that the proceedings of the meeting in which the accounts for the year ending 30th September, 1954, were considered did not disclose that the proposed purchase of the farm was one of the considerations for rusticating the divided to RS. 75,000.
4. The assessee than appealed to the Tribunal, before whom both these contention were reiterated. The Tribunal observed that as regards tax liability they were entirely in agreement with the finding of the AAC. With regard to the intended purchase of the cane farm the Tribunal observed that '........ The bogey of purchases of the cane farm and its standing in the way of a higher declaration of dividend has been put forward for the first time in the appeal proceedings...... ' the Tribunal took the vie that even though in the meeting held on 4th May, 1955, there was a reference to these transaction there was no reference to it in the board meeting held on 7th June, 1955, when the accounts were considered and divided declared at 7 1/2%. the Tribunal found that the transaction involved a large amount and it if was the intention of the directors to met it by plugging back the profit one would have expected it to be refers to tin the board meeting held subsequently on 7th June, 1955. The Tribunal also took the view that th office record showed that over a long period of years the company had declared divided at 7 1/2% and it had merely repeated in in the year in question. The finding recorded by the Tribunal wa that there wa neither casual liability nor any contingency which would necessitate the provision in the manner urged by the counsel for the assessee. The appeal filed by the assessee thus cane to be dismissed.
5. The following questions has now been referred at the instance of the assessee u/s. 66(1) of the Indian I. T. ACt, 1922 :
'Whether, on the facts and in the circumstance of the case, the order under section 23A of the Indian Income-tax Act, 1922, was justified?'
6. The learned counsel Mr. Dewrkands appearing on behalf of the assessee has vehemently contended that the assessee was entitled to make provision for an anticipated tx a liability because assessment proceedings for th earlier years were landing and that the note in the balance-sheet showed that the balance of determined tax a liabilities amounted to Rs. 1,98,577. That note also further showed that further liabilities in respect of taxation for the assessments responded u/s. 34 has not year been determined and the exact amount of liabilities could not be ascertained. The learned counsel pointed out that the figure of Rs. 17,76,0233-11-3 included a provision of Rs. 4,00,000 out of the profits of the relevant assessment year and if this amount of Rs. 4,00,000 together with the tax liability of Rs. 1,91,776 estimated on the footing that the income of the assessee was Rs. 4,78,836 as indicated in th profits and loss account is excluded then the declaration of Rs. 75,000 as voided could not be said to be unreasonable.
7. Mr. Dewrkands has vehemently criticized the view taken by the AAC, with which the Tribunal has agreed that the provision for taxation amounted to Rs. 17,76,023 and that it wa not shown that this was not enough to met the tax liabilites. The learned counsel has contended that the only taxation provisions which could be considered was RS. 13,75,023-11-3 and the AAC has failed to notice the fact that advance payments for taxation as indicated in the balance-sheet were made to the extent of Rs. 8,33,540 with the result that a sum of Rs. 5,40,000 or so was only available for meeting the past demand which was likely to be raised and, therefore, according to the learned counsel the directors were justified in making an additional provision of Rs. 4,00,000 in the relevant assessment year. It is no doubt true that the AAC have taken Rs. 17,76,023 into account when he observed that the representative of the assessee could not show that this provision was not enough to meet the tax liability. A provision of Rs. 4,00,000 for tax liability wa made out of the current year's profit and, therefore, the argument that additional provision for expected tax liability has to be made consequently, m reducing the amount available for declaring as divided has to be consider with reference to the provision of Rs. 13,76,023-11-3. Even if that be the correct position and taking into account the advance payment of Rs. 8,33,540, we fail to see why the tax authorities were not entitled to take the assessee as to why the balance which was in the had of the assessee by provision of taxation was insufficient to meet the outstanding demands. Obviously the demand outstanding in March, 1955, was Rs. 1,98,577. This could have been clearly met out of the provision already made in the previous years. Nothing is disclosed on record as to what were the anticipated to expected demands for which a further provision was required to be made. Unless the assessee was able to show that any particular demands were likely to the made and they has to be met out of the profits of the relevant assessment year. clearly the apportion of profits by way of provision for taxation would not be justified. That amount would, therefore have to be treated as being available as part of distributable profits for the purpose of determining whether liability under s. 23A of the Indian I. T. ACt, 1922, was attracted or not.
8. The other contention advanced by Mr. Dewrkands that larger amount was not declared by way of divided was due to the contemplated purchase of the sugarcane farm is also without any substance. It is not doubt true that the extract of the minutes dates 7th May, 1955, of the meeting of the board of directors refers to the fact that the chairman wa requests by the directors to wait for some time so as to enable the directors to consider and decide the question of purchasing the Harinagar Cane Farm from him and the Chairman, Narayanala Bansilal, agreed to dose. these minutes how that Narayanala Bansilal has disclosed to the directors that he has received an offer of Rs. 42,00,000 for the cane farm and he asked the directors to let him know what he should do in the matter. This refer to the earlier meeting held on 4th May, 1955, when Narayanala Bansilal disclosed his intention to seed the farm and the directors wanted to consider the question of acquiring the said sugarcane farm with a view to acquire permanently that source of supply of sugarcane for the company; s factory. The argument is that the disclosure by Narayanala Bansilal that he intended to sell the farm and the time which the directors has taken to decide what was to be done in that matter wa one of the circumstances which weighed with the directors in deciding that larger amount should not be declared by way of divided. Non of the two minutes on record disclose that the company has t any time intended to purchases the farm or that any decision was taken that the farm should be purchased by the company. As a matter of fact, there is nothing on record to indicate that this circumstance wa considered by the board of directors when they decided to declare divided only to the extent of Rs. 75,000. That this intended purchase of alleged intended purchase has no relevance nor connection with the declaration of divided is clear from the fact that this was no one of the reason divided to the ITO for which a larger amount was not declared by way of divided. As a matter of fact, having made a positive appropriation of the profits by making a provision for taxation of Rs. 4,00,000, there could hardly be any occasion to consider whether any amount should be retained out of the profits for the intended purchase of the cane far, because after providing for Rs. 75,000 for proposed divided, only a small amount of Rs. 18,274-13-0 was left, m which was carried to the balance-sheet. Both the contentious were, therefore, rightly rejected by the tax authorities as well as the Tribunal.
9. In the view that we have taken, the question referee to use must be answered in the affirmative and against the assessee. The question is accordingly answered in the affirmative and against the assessee. The assessee to pay the costs of this reference.