Per Shri K. T. Thakore, Accountant Member - This appeal which is filed by the assessee relates to the assessment year 1976-77 and is directed against the order of the Commissioner (Appeals) upholding the action of the ITO to impose additional tax under the provisions of section 104 of the Income-tax Act, 1961 (the Act). The assessee is a private limited company in which the public are not substantially interested. On the basis of the gross total income of Rs. 4,43,181 as determined by the ITO, the distributable income of the company was determined at Rs. 1,44,299. The assessee-company was required to distribute 45 per cent of its income as dividend which would amount to Rs. 64,938. As against the said amount of dividend which the assessee was required to distribute, it actually declared dividend of Rs. 30,000 only. In view of the shortfall in regard to distribution of dividend, the ITO called upon the assessee to show cause why additional tax should not be levied in accordance with the provisions of section 104. The assessees contention in this regard was that it was required to make a provision for excise liability amounting to Rs. 1,64,150 and if this liability was excluded, then the assessees case would be out of mischief of section 104. The ITO considered this explanation in detail and came to conclusion that the assessees claim about the aforesaid provision was not tenable inasmuch as the excise authorities had initially given a show cause notice for levy of excise duty and withdrawn their claim before the annual general meeting of the company was held. Therefore, according to the ITO, the exclusion of Rs. 1,65,000 in regard to provision for excise duty was not justified. That apart, even on the basis of commercial profits the assessee had not declared requisite amount of dividend and, therefore, the assessees case squarely fell within the mischief of section 104. In this view of the matter, therefore, he imposed an additional tax of Rs. 28,575.
2. Being aggrieved the assessee carried the matter in appeal before the Commissioner, who rightly observed that the question for levy of additional tax would substantially depend upon the question whether the liability to excise duty amounting to Rs. 1,64,500 was allowable in computing the distributable income or not In this regard he observed that though the show cause notice was issued by the Superintendent of Central Excise, the said liability was withdrawn on 3-5-1976. The assessee, however, contended that it was advised to keep this liability alive as the order of the Assistant Collector of Central Excise was liable to revision under the provisions of the Central Excise Act within the period of one year. It was pointed out that if this liability was excluded, then the shortfall in distribution of dividend will be covered by section 105(1) (ii) of the Act. It was also emphasised that in order to determine commercial profits the assessee was bound to take into consideration the aforesaid excise liability as also other items like doubtful debts and the tax liability for earlier years. The Commissioner (Appeals), for the reasons stated in detail in his order, held firstly, that the liability to pay Central excise duty was a contingent liability and secondly, the said liability did not exist on the date of the general body meeting and there was no reason, therefore, to consider the said liability as a factor in determining the commercial profits. The Commissioner (Appeals) thereafter addressed himself to the question of allowance of other items like doubtful debts and tax liabilities and held that the assessees claim in this regard was not tenable. He also rejected the claim of the assessee founded on the ground that future expansion of the assessees business would not have permitted the assessee-company to declare an amount of dividend larger than what was declared by it. In this connection he pointed out that the company ought to have proceeded under section 107A of the Act if it desired to restrict the distribution of dividend to less than the statutory percentage of its distributable income. He, accordingly, upheld the decision of the ITO. Hence, this appeal. Now Shri J. P.Shah, the learned counsel for the assessee, submitted that the authorities below have approached the question of distribution of dividend from the stand point of allowability or otherwise of the excise duty liability. In this connection he pointed out that the assessee-company was served with a show cause notice requiring it to pay excise duty on copper complex, in accordance with the provisions of the Central Excise Rules. Thereafter the assessee went in appeal before the Assistant Collector who directed the withdrawal of demand raised by the Superintendent. The assessee, however, sought legal advice on the order of withdrawal of duty made by the Assistant Collector and was advised to keep the amount of duty in reserve up to a period of one year as the order of the Assistant Collector was subject to revision.
Now Shri Shah submits that in the light of this advice it would not have been prudent on the part of the assessee to distribute dividend out of any portion of the said amount which was earmarked for probable liability to excise duty. In other words, Shri Shahs contention was that whether the amount in question was allowable as a deduction in computing the distributable income or not, the question would still remain as to whether it would have been prudent on the part of the assessee-company to have declared any portion of dividend out of the said amount. If this factor was duly taken note by the director, then it would have been unreasonable to declare any dividend out of the said profits and, therefore, the provisions of section 104 would not have been applicable in the instant case. He, however, clarified that so far as the balance amount was concerned, the declaration of the dividend was within the 10 per cent limit laid down in aforesaid section 105.
3. The learned departmental representative, on the other hand, pointed out that the liability to pay excise duty was a contingent liability.
He next pointed out that by merely issuing of show cause notice the liability did not crystalise. In any case on the date of the annual general meeting the liability had ceased to exist and, therefore, the assessees claim for taking into consideration the said liability for determining the reasonableness or otherwise of dividend was clearly misplaced. He next pointed out that even in excluding the said amount, the assessee had not distributed adequate dividend as required under section 104 and, therefore, the ITO was justified in levying additional tax as he did.
4. Shri Shah in reply pointed out that the assessees fear about likely revision of the order of the Assistant Collector withdrawing the duty was not misplaced. He pointed out that subsequently, i.e., for the period subsequent to 9-7-1975 the period up the which the exemption was allowed under the withdrawal order of the Assistant Collector, a fresh demand was levied towards excise duty on copper complex, i.e., the item which the assessee was manufacturing. The order of the Superintendent in the subsequent period was upheld by the Assistant Collector in appeal. Therefore, the question whether the item in question was an excisable item or not was a matter of serious dispute. Therefore, the assessee sought legal advice as stated earlier and decided to keep the amount in abeyance and did not distribute dividend out of it.
5. We have carefully considered the rival submissions. It is true that on the basis of the distributable income as determined by the ITO the assessees case, prima facie, falls within the mischief of section 104.
The crux of the matter is whether the assessee was justified in not considering the amount of excise duty liability which in effect was extinguished by the order of the Assistant Collector in determining the reasonableness or otherwise of dividend which it was required to distribute. As pointed out earlier, the authorities below have approached the question from the standpoint of allowability of said items as deduction from its distributable income. Even assuming for the sake of arguments that the liability to excise duty did not exist on the date of the general body meeting and the said liability was in the nature of contingent liability, yet in the light of the legal advice which the assessee-company had received, whether it could have been prudent on its part to distribute dividend out of the aforesaid amount Now to consider this aspect of the matter we may usefully refer to the test laid down by the Supreme Court in the case of CIT v. Asiatic Textiles Ltd.  82 ITR 816.
"Whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. The Income-tax Officer can step in under section 23A (1) only if the directors unjustifiably refrain from declaring a dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-director. The Income-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of section 23A of the Act, does not assess any income to tax. He only does what the directors should have done putting himself in their place. Though the object of the section is to prevent evasion of tax, provision must be worked not from the standpoint of the tax collector but from that of a businessman. The reasonableness or 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. The Income-tax Officer must take an overall picture of the financier of position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with sympathetic and objective approach." (p. 816) It is, inter alia, laid down in the above decision that reasonableness or unreasonableness of the amount distributed as dividend is judged by business consideration such as previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. Now in the light of this test the liability to excise duty has to be considered. It is true that the Assistant Collector had withdrawn the show cause notice issued to the assessee for levy of excise duty has to be considered. It is true that the Assistant Collector had withdrawn the show cause notice issued to the assessee for levy of excise duty on copper complex. The assessee obtained the legal advice and was told that the order in question was liable to revision and as such it was advised to keep the amount in abeyance for a period of one year, i.e., till such time the limitation to revise the said order expired. Now if the directors acting on the legal advice thought fit not to consider the amount in question as part of its profits available for distribution as dividend, it could not be said that they had acted in an unreasonable manner. In fact the subsequent events have shown that in the immediately succeeding period the excise authorities had imposed an excise duty on the same item and the order of the lower authority was upheld in first appeal. It was, therefore, just and proper that the directors should have refrained from including the amount in question as a part of its profits available for distribution as dividend.
6. If the aforesaid amount of excise duty liability is excluded, for the reasons aforesaid then the shortfall based on 45 per cent of distributable income vis-a-vis the amount actually distributed would work out to Rs. 4,151, i.e., less than 10 per cent of its distributable income. In which case the ITO would be required to follow the procedure laid down in section 105(1) (ii).
7. In the light of the above discussion, therefore, the only point which now survives for consideration is declaration of dividend in regard to the shortfall of Rs. 4,151 which is determined on the basis of the distributable income exclusive of excise liability and the dividends actually declared. So far as shortfall is concerned, in our opinion the provisions of section 105(1) (ii) would come into play and the ITO is directed to proceed in accordance with the said provisions so as to give opportunity to the assessee to distribute the shortfall as dividend so that the total distribution is not less than the statutory percentage of the distributable income.