H.N. Seth, J.
1. At the instance of the Commissioner of Income-tax the Income-tax Appellate Tribunal has made a consolidated reference in respect of three assessment years, viz., 1961-62, 1962-63 and 1963-64, under Section 66(1) of the Indian Income-tax Act, 1922.
2. Briefly stated the facts as they emerge from the statement of the case are that in the previous years relevant to the three assessment years in question, the assessee-company's distributable surplus under Section 23A of the Indian Income-tax Act, 1922, were found to be Rs. 24,378, Rs. 89,941 and Rs. 90,110, respectively. The company did not pay any dividend to its shareholders. Accordingly, the Income-tax Officer computed the super-tax payable by the assessee, as required by Section 23A of the Act. The assessee filed an appeal before the Appellate Assistant Commissioner and contended that under the provisions of the Working Journalists Act, 1955, the company had to make provision for payment of gratuity to its workmen which could not be done so far because of lack of funds. It had also to arrange for funds amounting to Rs. 10,00,000 for purchasing a rotary machine and for constructing a part of the factory building. If these requirements were kept in view, the distributable surplus would be very much less than the assessee's future requirements. Accordingly, having regard to the smallness of the profits made in the relevant previous years, payment of dividend would not have been reasonable, and as required by Section 23A(1) no order requiring the company to pay super-tax should have been made. The Appellate Assistant Commissioner of Income-tax rejected the submissions made on behalf of the assessee and dismissed the appeal.
3. In second appeal, the Income-tax Appellate Tribunal accepted the assessee's contentions and held that the company was justified in not declaring any dividend from out of its profits. In the opinion of the Tribunal, having regard to the smallness of the profits, viewed in the light of its future requirements, viz., the contemplated purchase of rotary machine and construction of factory building, etc., at a cost exceeding Rs. 7 lakhs, it would not have been reasonable for it to pay any dividend. In the result the Tribunal held that no super-tax as contemplated by Section 23A of the Indian Income-tax Act, 1922, was payable by the assessee in any of the three assessment years. At the instance of the department, the Appellate Tribunal has referred the following question for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, and on a true interpretation of the provisions of Section 23A/104 of the Income-tax Act, 1922/1961, the Appellate Tribunal was right in holding that the assessee-company was justified in not declaring any dividend out of the profits in respect of each of the relevant previous years ?'
4. Section 23A provides that 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 certain items mentioned in Clauses (a) to (c) therein, the Income-tax Officer shall, unless he is satisfied that having regard to the smallness of the profits made in the previous year, the payment of a dividend would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of assessment under Section 23, be liable to pay super-tax at the rate of 50 per cent. 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 37 per cent. 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), (b) or (c) and the dividends actually distributed, if any. In this case, there is no dispute that there was distributable surplus from which the dividend to the shareholders could be distributed and that the company did not pay any such dividend. It follows that the first part of Section 23A, namely, that from out of the profits and gains in the relevant previous year, the company did not distribute to its shareholders an amount equal to the statutory percentage of its total income as reduced by items mentioned in Clauses (a) to (c) within 12 months immediately following the expiry of the relevant previous year as dividend is fulfilled. The question that, however, remains to be considered is whether, having regard to the circumstances of the case, the profits earned by the company in the previous year were so small that declaration of dividend up to the statutory limits would have been unreasonable and the income-tax authorities erred in assessing the company to super-tax. This question, viz., whether the profits are so small that it would be unreasonable to distribute dividend is essentially a question of fact which depends upon the facts and circumstances of each case. One of the considerations for determining the smallness of profit will, in our opinion, be to take into account the circumstance that the amount of profit earned by the assessee is such that commercially it would not be reasonable for it to declare some dividend or dividend up to the statutory limit, from out of it. In this connection, consideration of the nature and purpose of the object for which the assessee proposes to utilize its profits would be very material. In this case the Tribunal pointed out that considering the fact that the company required a sum of Rs. 7 lakhs for purchasing a rotary machine and for constructing the factory building, the amount of distributable surplus in all the three years taken together was so small that it was unreasonable for it to declare any dividend in any of the three years. Apparently, it does not appear that this finding recorded by the Tribunal suffers from any infirmity.
5. Sri Deokinandan, learned counsel for the department, urged that in determining whether it was reasonable for the assessee to declare dividend from out of its distributable surplus, it was not open to the Tribunal to take into consideration capital expenses, which the assessee proposed to incur in future years. In this connection he relied upon the case of Birla Brothers (P.) Ltd. v. Commissioner of Income-tax : 54ITR344(Cal) , wherein the Calcutta High Court has observed that in considering the small-ness of profits for the purposes of Section 23A(1) of the Indian Income-tax Act, 1922, the Income-tax Officer must look to the business profits adjudged in the light of commercial principles. In other words, he has to look to the actual profits from the commercial point of view, that is, the accountable profits of the company actually at its disposal. A company cannot deduct capital expenditure from its profits as shown in the profit and Joss account and the department would be justified in adding to the profits shown in the profit and loss account the capital expenditure of the company during the relevant accounting year, for the purposes of determining its business profits or actual profits from out of which the dividend had to be declared. In our opinion the decision relied upon by the learned counsel merely lays down that while determining the amount of commercial profits, from out of which the company is required to pay dividend and for determining the distributable surplus, the Income-tax Officer is not to take into consideration expenses of capital nature. This case is no authority for the proposition that after the distributable surplus has been determined by applying correct criteria, the Income-tax Officer while considering the reasonableness of the assessee's action in not declaring dividend, cannot take into account its object in not distributing dividend, if it happens to be to appropriate the profits for expenses of capital nature. If a company legitimately requires funds for incurring expenses of capital nature its action in diverting its profits for meeting those expenses instead of declaring dividend to its shareholders cannot necessarily be said to be unreasonable.
6. In the case before us, we find that there is no dispute with regard to the quantum of distributable surplus as determined by the income-tax authorities for each of the three years. There is also no controversy that, in fact, the company needed a sum of over Rs. 7 lakhs for purposes of purchasing a rotary machine and for construction of a new building. There is absolutely no suggestion that there were circumstances which rendered the action of the assessee in diverting its profits either wholly or in part, for the purchase of rotary machine and for constructing factory building, instead of distributing the same to its shareholders, unreasonable. We do not see any reason why such expenses which have to be incurred by the company in the near future cannot be taken into account in considering whether it was reasonable for it to declare the dividends from out of its profits. In our opinion, while concluding that, considering the smallness of the profits earned by the assessee in the relevant years, it was not reasonable for it to declare any dividend, the Tribunal did not take any irrelevant material into consideration. The finding recorded by the Appellate Tribunal is not vitiated in any manner. It is apparent that on this finding the Income-tax Officer was not justified in making an order making the company liable to pay super-tax under Section 23A of the Income-tax Act.
7. We accordingly answer the question referred to us in the affirmative and in favour of the assessee. The assessee will be entitled to his costs which we assess at Rs. 200.