1. This is a reference under s. 256(1) of the I.T. Act, 1961, whereby the following questions are referred :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that section 104 of the Income-tax Act, 1961, was applicable for assessment year 1972-73
2. Whether, on the facts and in the circumstances of the case, in arriving at the distributable income under section 109 of the Income-tax Act, the Tribunal was right in holding that no deduction should be made of the two items of Rs. 6,610 and Rs. 8,074 ?'
2. The assessee is a private limited company to which the provisions of s. 104 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), are applicable. For the assessment year 1972-73, the total income of the assessee was finally determined at Rs. 71,830. Since the assessee had not distributed any dividend during the year, the ITO made an order determining the distributable income at Rs. 23,639 and directed the company to pay additional tax of Rs. 8,746 while rejecting the contention of the company that because of smallness of the profits as disclosed in its books, it could not distribute any dividends.
3. The assessee appealed to the AAC against the said order. The AAC held that certain amounts totalling up to Rs. 21,422 should also be deducted from the assessed income in arriving at the distributable income; with the result, the distributable income will be only Rs. 2,551. The AAC, therefore, held that the additional tax under s. 104 of the Act was leviable only on the said amount of Rs. 2,551.
4. Against the order of the AAC, the Department went up in appeal to the Income-tax Appellate Tribunal. The Tribunal determined the distributable income at Rs. 19,235. In arriving at this figure, the Tribunal held that bad debts of Rs. 2,000, arrears of tax for earlier years of Rs. 6,610 and interest of Rs. 8,074 on borrowings by the assessee company which was diverted for non-business purposes, should not be deducted while computing the distributable income for purposes of invoking the provisions of s. 104 of the Act.
5. The law in this regard is well established. While considering the ambit and scope of s. 23A of the Indian I.T. Act 1922 (before its amendment by the Finance Act, 1955), which was similar to s. 104 of the Act, the Supreme Court in CIT v. Gangadhar Banerjee & Co. (Pvt.) Ltd. : 57ITR176(SC) , observed (P. 181) :
'This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section, the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. 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.'
6. It was further observed :
'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.'
7. This view has been reiterated by the Supreme Court in CIT v. Asiatic Textiles Ltd. : 82ITR816(SC) .
8. The case of the assessee is that a sum of Rs. 6,610 being the tax liability for the earlier years ought to be taken into account. Mr. Srinivasan for the Revenue submitted that it cannot fall for deduction under s. 109 of the Act.
9. Mr. Sarangan for the assessee, on the other hand, strongly relied upon the decision of the Madras High Court in Gobald Motor Service Ltd. v. CIT : 47ITR734(Mad) and of the Calcutta High Court in Reform Flour Mills (P.) Ltd. v. CIT : 111ITR852(Cal) , in support of his contention that the tax liability of the past years is one of the considerations to ascertain the commercial profits of the year in question.
10. In our opinion, there cannot be any hard and fast rule on this aspect of the matter. The ITO has to take into account all the relevant factors depending upon the facts and circumstances of each case. As held by the Supreme Court in the case of Gangadhar Banerjee : 57ITR176(SC) , the ITO must take an overall picture of the financial position of the business.
11. It seems to us that in this case having regard to the substantial reserves accumulated by the assessee, it would be unreasonable to deduct the tax liability of the past years. There is no good reason to shift the tax burden of a particular year to another year's profit when the assessee had suffered no losses in any earlier years.
12. In the instant case, by adjusting in the books, the tax arrears of past years against the profits assessable in the assessment year 1972-73, the assessee cannot contend that by declaring a dividend out of those years' income, it would be jeopardising the interest of the company, as it has adequate reserves built out of past profits to which past arrears could be adjusted and in fact should have been adjusted.
13. With regard to the sum of Rs. 8,074 which the Tribunal held to be not deductible under s. 109 of the Act, it may be stated that this sum represents the interest on moneys borrowed by the assessee and diverted to sister concerns. Those moneys were not utilised by the assessee for its own business requirements. As such, this does not come under any of the clauses (b) to (h) of s. 109(1) of the Act. It is not an expenditure wholly and exclusively incurred for the purpose of making or earning any income chargeable under the head 'Profits and gains of business or profession' included in the gross total income.
14. In so far as the sum of Rs. 2,000 claimed as bad debts by the assessee, it is not covered by the question referred by the Tribunal.
15. If the amount of Rs. 6,610 towards the past tax liability and Rs. 8,074 towards the interest on the borrowings in respect of non-business purposes are not deductible from the gross total income, then having regard to the overall picture of the financial position of the assessee, the quantum of distributable income is large enough to attract the provisions of s. 104 of the Act and the plea of smallness of profits for non-distribution of dividend is wholly untenable.
16. We, therefore, answer both the questions in the affirmative and against the assessee.