1. The assessee-company, Messrs. Indian Express News-papers (Bombay) Ltd., Bombay, though it was incorporated on 20th October, 1949, and it was formed mainly with the object of taking over the publication of daily and weekly newspapers, did not have any transactions till 30th April, 1959, and its accounts were closed for the first time on 30th April, 1960. The relevant assessment year for the purposes of this reference is 1961-62 and the corresponding previous year was from 1st May, 1959, to 30th April, 1960. In respect of the assessment year 1961-62, the profit and loss account of the assessee disclosed a net profit of Rs. 2,32,802.95 after making allowance for Rs. 1,95,000 by way of provision for taxation. The ITO, however, assessed the total income of the assessee at Rs. 5,79,569. The tax payable thereon came to Rs. 2,53,407. In respect of the year in question, the assessee-company had declared a total dividend of Rs. 67,200. The ITO took the view that the amount declared as dividend being less than the statutory percentage of 65% of the distributable surplus which, according to the ITO, came to Rs. 3,26,172, and according to the assessee, came to Rs. 1,74,396, made an order under S. 23A(1) of the Indian I.T. Act, 1922, levying additional super-tax on the undistributed balance of Rs. 2,21,963. This order was confirmed by the AAC of Income-tax while dismissing the appeal filed by the assessee-company. The assessee-company, therefore, preferred an appeal before the Income-tax Appellate Tribunal.
2. The Tribunal first directed its attention to the question as to whether the primary condition for taking action under S. 23A was satisfied, the condition being that the assessee should have declared as dividend an amount less than the prescribed percentage of the amount of difference between the total income assessed and the tax payable thereon. The Tribunal then directed its attention to the question as to whether it would be unreasonable for the company to declare the balance of Rs. 1,07,000 as the dividend, this amount being the difference between the net commercial profits of Rs. 1,74,396 taken on the basis of the profit and loss account and Rs. 67,200, being the dividend declared by the company. It was positively urged before the Tribunal that the assessee-company had an expansion programme and machinery worth Rs. 5 lakhs was already under orders of purchase and the company's liability to the outsides had increased by about Rs. 10 lakhs round about the date of the general meeting. The annual general meeting was held on 24th August, 1960. The Tribunal, however, took the view that these were normal development expenses which would not justify the withholding of any dividend. The Tribunal, therefore, took the view that the super-tax under S. 23A(1) was properly charged and dismissed the appeal. A reference has, therefore, now been made to this court at the instance of the assessee and the question referred is as follows :
'Whether, on the facts and in the circumstances of the case, the provisions of section 23A(1) could be invoked against the company for the assessment year 1961-62 ?'
3. Mr. Colah appearing on behalf of the assessee-company has urged that the entire approach not only of the income-tax authorities but of the tribunal also is contrary to the decision of the Supreme Court in CIT v. Gangadhar Banerjee and Co. Pvt. Ltd. : 57ITR176(SC) . According to the learned counsel, even the Tribunal was in error in ignoring the fact that the assessee-company had undertaken an expansion programme and that it had certain liabilities to meet which were to the tune of about Rs. 10 lakhs. These circumstances, according to the learned counsel, were very relevant for determining as to whether it would be unreasonable to declare a dividend larger than the one declared by the company.
4. Now, there can be no doubt that one of the pre-conditions that is to be satisfied before the ITO decides to assess a company to super-tax is that the profits and gains distributed as dividends by the company within the 12 months immediately following the expiry of the previous year should be less than the statutory percentage of the total income of the company of the previous year as reduced by the amount of income-tax and super-tax payable by the company in respect of its total income and the amount of any other tax levied on the company under any law for the time being in force by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income. But it must be remembered that this is not the only condition which is required to be satisfied and merely because an amount lesser than the statutory percentage as contemplated by S. 23A(1) of the Indian I.T. Act, 1922, has been declared as dividend, the ITO cannot as a matter of course proceed to assess the company to super-tax. The ITO has to be further satisfied as provided in clause (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 that declared would be unreasonable. We are not concerned with cls. (ii) and (iii) in S. 23A(1). The provisions of S. 23A(1), are therefore, clear that before the ITO proceeds to assess a company to super-tax, he must apply his mind to the question as to whether the payment of a dividend larger than that declared would be unreasonable having regard to the smallness of the profits made in the previous year. When the ITO decides to take action under S. 23A(1), it is for the revenue to show that it would not be unreasonable if a dividend larger than the one declared by the company would be paid. This has to be decided on the basis of the smallness of the profits made by the company in the relevant previous year. When S. 23A(1) refers to smallness of the profits, the profits to be considered are not on the basis of the assessed income, but they are the commercial profits which have to be considered as disclosed in the profit and loss account. When the section refers to the smallness of the profits, the smallness is not to be determined merely by the quantum of the profits but it has to be determined after taking into account several circumstances which a businessman would take into account. When the ITO proceeds to determine the smallness of the profits or the question as to whether a larger dividend should be declared or not, it has now been held that he is doing what is normally done by the directors of the company. Future requirements of a company, which has an expansion programme, would clearly be a circumstance which would be relevant in determining whether the profits in the relevant year are small or high having regard to the financial implications of the expansion of the company. What should be the approach in a proceeding under S. 23A(1) of the Indian I.T. Act, 1922, is now well settled by the decision of the Supreme Court in CIT v. Gangadhar Banerjee & Co. Pvt. Ltd. : 57ITR176(SC) . It is rather surprising that the Tribunal did not find it necessary even to notice the approach which is now an accepted and well-settled principle in respect of a case dealing with S. 23A(1) of the Act. The following observations of the Supreme Court are instructive (p. 181) :
'Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or 'the smallness of the profit made' the payment of a dividend or a larger dividend than that declared would be reasonable. The argument mainly centred on this part of the section. Would the satisfaction of the Income-tax Officer depend only on the two circumstances, namely, losses and smallness of profit Can he take into consideration other relevant circumstances What does the expression 'profit' mean Does it mean only the assessable income or does it mean commercial or accounting profits It the scope of the section is properly appreciated the answer to the said question would be apparent. The Income-tax Officer, acting under this section, is not assessing any income to tax; that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. 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 yardstick is that of a prudent businessman. The reasonableness or the 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. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case.'
5. If these observations are borne in mind, it is clear that while proceeding to assess the company to super-tax, the ITO must take into account all the relevant circumstances which a prudent businessman or the directors of a company would take into account when they have to take a decision as to the extent of the profits which should be paid by way of dividend. In the case of a company like this, which was virtually in the first year of its proper functioning, there is bound to be an expansion programme and while determining as to what amount out of the commercial profits should be distributed by way of dividend, any prudent businessman or the directors of a company are bound to have an eye on future financial requirements. It does not seem to have been disputed at any stage in the assessment proceedings and even before the Tribunal that machinery worth Rs. 5 lakhs was already under orders of purchase and the company's liabilities to outsiders had increased by about Rs. 10 lakhs round about the date of the general meeting. If such was the requirement and such were the liabilities which were imminent and which the company would have to meet immediately in the financial year next following, it is obvious that no prudent businessman or directors of a company would permit distribution of a large amount of the commercial profits by way of dividend. Indeed, the part of the commercial profits, which was left after declaring the dividend, was wholly insufficient to meet the necessary expenses of expansion of the business of the company.
6. That the financial position of the company at about the time when the annual general meeting of the shareholders was held could properly be considered for the purposes of deciding the amount of dividend to be distributed is clear from the decision of this court in New Star Industries Pvt. Ltd. v. CIT : 68ITR470(Bom) . That was a case in which a company had made a profit of Rs. 1,94,116 on forward hedging contracts in 1950 and though there was a balance of profit of Rs. 93,703, only a sum of Rs. 8,000 was distributed as dividend for the year on the ground that hedging contracts were entered into only to safeguard against future loss and there was loss of more than that amount in the exports in the next year, before the date of declaration of dividend. The income-tax authorities, taking the view that only two matters had to be considered in making an order under S. 23A, namely, losses of previous years and smallness of profits of the current year, had made an order under section 23A. On a reference, it was held by this court that the reasonableness and unreasonableness has to be judged on taking an overall picture of the financial position of the business and although a profit on hedging transactions had been made to the extent of Rs. 1,94,116, the company was threatened with an imminent loss in the subsequent year and by the time it came to consider the question of the declaration of the dividend, the threat had materialised into an actuality and it could not be said that the company could be reasonably expected to declare a larger dividend and this court, therefore, held that the orders under S. 23A were not justified.
7. The Tribunal while dealing with the expected requirements in the matter of purchase of machinery and meeting the liability of outsiders to the tune of Rs. 10 lakhs merely held : 'But these are normal developments of business and they would not justify the withholding of any dividend.' this view was probably taken by the Tribunal as it seemed to take a very restricted view of the nature of the enquiry which the income-tax authorities are required to make with regard to the reasonableness of the dividend declared as contemplated by clause (i) of S. 23A(1). Though the Tribunal has not in so many words dealt with the scope of clause (i) in S. 23A(1), it appears that it was of the opinion that the enquiry was to be restricted only with regard to the losses or the smallness of the profits. Even after making an observation that the matter has to be examined from the point of view of a prudent businessman, the Tribunal further laid down a criterion stating : 'The criterion, therefore, should be that there should be a compelling, urgent or unavoidable business requirement which puts the director in such a position that in order to avoid any embarrassment the company would expect its shareholders to forgo dividend so that the compelling requirement may be met.' We are unable to find any justification for the test of compelling requirement formulated by the Tribunal. The decision of the directors to distribute a particular amount by way of dividend as for the purposes of S. 23A(1) has to be tested on the touchstone of smallness of profits and, as observed by the Supreme Court in Gangadhar Banerjee's case : 57ITR176(SC) , the smallness of the profits has to be determined after taking into account several circumstances which a prudent businessman will take into account.
8. We may with advantage refer to the decision of the Calcutta High Court in Reform Flour Mills (P.) Ltd. v. CIT : 111ITR852(Cal) , where the court has pointed out that smallness of profits is a relative or a comparative concept and the smallness may be with reference to numerous tests or standards such as, for instance, the assessee's capital structure, his projects of development, actual payment of taxes to be provided for and anticipated against and many other business and commercial considerations. Indeed, it is impossible to lay down a comprehensive test for the determination of the question as to whether the profits of a company were small as contemplated by S. 23A(1). Each case will have to be considered on its own merits and the circumstances as they appear in each case will have to be separately considered in order to find out their relevance for deciding whether the profits were so small that it would become unreasonable to declare a larger dividend.
9. Mr. Colah had also referred to a decision of the Allahabad High Court in CIT v. Jananamandal Ltd. : 106ITR976(All) . The Allahabad High Court has in that case taken the view that a consideration of the nature and purpose of the object for which the assessee proposes to utilise its profits would be very material and there was no reason why such expenses as had to be incurred by the company in the near future could not be taken into account in considering whether it was reasonable for it to declare a dividend from out of its profits.
10. Such being the legal position, it is apparent that the income-tax authorities and the Tribunal have failed to take into account the immediate requirements of the company and it is obvious to us that having regard to the liabilities which the assessee would be required to meet almost immediately in the following year, the declaration of a dividend at a lesser figure than statutorily prescribed could not be said to be unreasonable.
11. In this view of the matter, the question referred to us must be answered in the negative and in favour of the assessee. The assessee to get the costs of this reference from the revenue.