1. These two appeals filed by the assessee ate consolidated and disposed of by a common order. The order appealed against for the assessment year 1961-62 is under Section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act') whereas the order for the assessment year 1962-63 is under Section 104 of the Income-tax Act, 1961 ('the 1961 Act'). The assessment year 1961-62 is the first year of assessment of the company. The accounting period of the company is financial year.
Right from the beginning it appears that the company was under ill stars. In the very first year of its existence serious disputes cropped up between the directors which ultimately led to an application for liquidation in August 1962 and the liquidator was appointed in December 1962 by Shri S.B. Kapoor, a judge of the Punjab High Court. The learned judge observed while disposing of the revision petition No. 21 of 1962 'soon after incorporation disputes started between the brothers and it is common ground that the business of the company was almost at a deadlock in December 1962. The company did not declare dividends for the assessment years 1961-62 and 1962-63. Ex parte assessment was framed against the company which was reopened later on a request to the ITO by the additional District Judge who was dealing with the company in liquidation. This is what he observed while making the request in his letter : Re. : Assessment of Ammonia Supplies Corpn. (P.) Ltd. (In Liquidation) In the above noted winding-up case the official liquidator brought to the notice of this Court that you have decided the assessment to the best of your judgment for the year 1961-62 and further, assessment for the year 1962-63 are also pending ; And whereas the official liquidator has stated the facts that since the accounts are under audit with C.S. Bhatnagar & Co. who are going through the accounts and they may require at least three months to submit their report ; And upon the report of the official liquidator this Court has allowed the chartered accountants time ; I, therefore, hereby request you to kindly reopen the assessment proceedings for the year 1961-62 and also postpone the case for the year 1962-63 along with the assessment proceedings for the year 1961-62 for at least three months to enable the official liquidator to get the final balance sheet and account books from chartered accountants and produce them before you.
2. No accounts were prepared and the ITO passed order under Section 23A of the 1922 Act for the first year and Section 104 of the 1961 Act for the second year. He levied additional income-tax of Rs. 69,095 in the first year and Rs. 56,773 in the second year. The premises on which the ITO raised additional income-tax was that the distributable surplus being available for the declaration of the devidends, the non-declaration of the dividends attracted the provisions of Section 23A of the 1922 Act for the first year and under Section 104 of the 1961 Act for the second year. These two orders were confirmed by the Commissioner (Appeals). The assessee is in appeal.
3. It is contended by the learned Counsel for the assessee that as the company started under unlucky stars, serious disputes arose between the directors which ended in deadlock. Ultimately a petition for voluntary liquidation was filed in August 1962 and the learned judge of the High Court decided the same in December 1962. It was further submitted that in view of the disputes the accounts could not be prepared and, therefore, the question of declaring the dividends did not arise even when there were profits. It was further submitted that the position crystallised in the year 1978 and at that time the assessee could not put back the hands of the clock. Reliance was placed on the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd.  57 ITR 176 a judgment of their Lordships of the Supreme Court. It was further brought to our notice that the Commissioner (Appeals) for the assessment years 1974-75 and 1976-77 cancelled the orders of the ITO under Section 104. This is what he observed while doing so : 1.3. I am of the opinion that the appellant's preliminary objection is well founded. The company having gone into liquidation, the directors of the company could not call any general body meeting or transact any business or declare any dividend after the appointment of official liquidator by the Court. The official liquidator also cannot declare or distribute any dividend as such. On the liquidation of the company undistributed profits can no longer be distinguished from capital. The current and accumulated profits become merely the surplus assets in the hands of liquidator and what he distributes among the shareholders is the capital being their share in the property and assets of the company. The liquidator has to distribute the surplus with the necessary sanction of the liquidation Court. In the circumstances, the company, being legally incapable of declaring dividend, I am of the opinion that the ITO was not justified in invoking the provisions of Section 104 in the facts and circumstances of the instant case. In this view of the matter, it is unnecessary for me to adjudicate upon the other objections raised by the appellant. In the result, the impugned orders under Section 104 for the assessment years 1974-75 and 1976-77 are cancelled.
4. The departmental representative, on the other hand, submitted that when the profits were available, the dividend should have been declared within 12 months of the close of the accounting period for the assessment year 1961-62 as provided for in the law and the failure to do so rightly attracted the provisions of Section 23A. As far as the assessment year 1962-63 was concerned, it was contended that the non-declaration of dividends was not justified on facts.
5. After hearing both the parties, we are of the considered view that the circumstances in which the company came to be placed right from the beginning rendered it incapable of declaring dividends. Soon after the formation of the company, serious disputes arose between the directors which ended in a deadlock. It is one of those cases where the company started under bad stars. The disputes became so serious that in August 1962 the company asked for voluntary liquidation which was allowed by the learned judge of the Punjab High Court by his order referred to above. So far as the first year is concerned, while technically the objection of the departmental representative is correct, the same cannot be cropped up for the second year because before the expiry of the 12 months, the company had asked for voluntary liquidation. What is to be seen in such matters is whether the non-declaration of the dividends was purposeful, motivated by consideration other than legal or the non-declaration of the dividend was occasioned by circumstances beyond the control of the company. It is common ground that the serious disputes resulting in a deadlock arose from the very beginning, even when profits were available, no meeting could be held, no accounts could be compiled which could determine the distributable surplus. When they came to be compiled in the year 1978, the assessee-company could not physically put back the hands of the clock and, therefore, the non-declaration of the dividends was not because of the fact that the company did not want to declare the dividends but because it could not.
It would be useful to refer to the judgment of their Lordships of the Supreme Court in Gangadhar Banerjee & Co. (P.) Ltd.'s case (supra) wherein they observed that "The ITO must take an overall picture of the financial 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 a sympathetic and objective approach." They further went on to observe that 'smallness of profit' and brought forward losses were not only two criteria which will determine the applicability of Section 23A of the 1922 Act or Section 104 of the 1961 Act. But such other circumstances as may be covered in view of the language used in the section. The judgment of their Lordships of the Supreme Court, which we need not quote in extensive, has simply humanised the provisions of Section 23A of the 1922 Act or Section 104 of the 1961 Act, inasmuch as it has emphasized the scope of Section 23A of the 1922 Act and Section 104 of the 1961 Act to mean that the revenue authorities cannot be too technical in applying the provisions of Section 23A or Section 104 but should have the approach of reasonably prudent businessman more so in view of the fact that the provisions of Section 23A of the 1922 Act and Section 104 of the 1961 Act are penal provisions. As we find that the judgment of their Lordships of the Supreme Court fully cover the issue in favour of the assessee and against the revenue in view of the circumstances in which the company came to be placed, we have no hesitation in holding that the provisions of Section 23A of the 1922 Act for the firstyear and Section 104 of the 1961 Act for the second year, were not applicable on the facts obtaining in the instant cases. The orders of the authorities below are cancelled and the appeals are allowed.
1. The narrow issue for our consideration is whether the non-declaration of the dividends was purposeful, motivated by consideration other than legal or the non-declaration of the dividend was occasioned by circumstances beyond the control of the company.
2. After looking into the facts of the case as brought on record and considering the fact that serious disputes resulting in a deadlock arose from the very beginning, that even when profits were available, no meeting could be held, no accounts could be compiled which could determine the distributable surplus and even when the accounts came to be compiled in the year 1978, the assessee-company could not physically put back the hands of the clock, my learned brother was of the view that the non-declaration of the dividend was not because the company did not want to declare dividends but because it could not. Relying on the decisions of their Lordships of the Supreme Court in Gangadhar Banerjee & Co. (P.) Ltd.'s case (supra), it was held that the case was fully covered in favour of the assessee in view of the circumstances in which the company came to be placed and the provisions of Section 23A of the 1922 Act for the first year and Section 104 of the 1961 Act for the second year were not applicable on the facts obtaining in the instant case.
3. Their Lordships of the Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra) had an occasion to consider the implications of business consideration for the purpose of determining the reasonableness or ureasonableness of the amount distributed as dividends under Section 23A. According to the balance sheet of the assessee, a private company in that case, the net profit for the accounting year 13-4-1948 was Rs. 1,28,112, out of which a sum of Rs. 56,000 was allocated as reserve for taxation. At the general meeting held on 6-12-1948, a sum of Rs. 44,000 was distributed by way of dividend. The ITO assessed the total income of the company at Rs. 2,66,766 and passed an order under Section 23A directing that the sum of Rs. 1,07,902 shall be deemed to have been distributed as dividend.
By the time the matter was before the AAC, the assessable income was reduced by Rs. 80,926 but the AAC maintained the order under Section 23A. On appeal, the Tribunal held that the dividend to the extent of Rs. 64,000 should be deemed to be distributed. The tax actually assessed on the income was Rs. 79,400.
4. The matter came up before their Lordships of the Supreme Court and it was held that as the company was actually assessed to tax in the sum of Rs. 79,400 and the company had already distributed by way of dividends the sum of Rs. 44,000, there was only an amount of about Rs. 4,000 left which was available for distribution. The order under Section 23A to the effect that an additional sum should have been distributed was not justifiable.
5. In coming to this conclusion, their Lordships had an occasion to consider the circumstances which the ITO should have taken into account while considering the reasonableness or unreasonableness of the amount distributed as dividends. And it was held that the ITO should put himself in the place of the director and he must work from the point of view of a businessman. The reasonableness or unreasonableness of the amount distributed as dividend should be 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 ITO must take an overall picture of the financial 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 a sympathetic and an objective approach. In deciding whether the payment of a dividend or a larger dividend than that declared by the company would be reasonable, the ITO can take into consideration the circumstances other than losses and smallness of profits.
6. The fact of the above case and the context in which the above guidelines were laid down appear to be not applicable to the facts of the present case. It is an admitted fact that disputes arose between the directors right from the beginning. As per the copy of the winding up petition filed by Shri Guljari Lal, one of the directors at pages 2 to 9 of the paper book, it is seen that the two brothers were already in difficulties and in friction even before the incorporation of the company. In 1956 their relations became very much strained and matters came to a dead lock. At the intervention of common friends, the two brothers, in order to eliminate unhealthy competition and trade rivalry, decided and agreed to run the business on proper legal footing by entering into partnership or by forming a private limited company.
In pursuance of this policy, the company was promoted and incorporated, the certificate of incorporation being dated 12-7-1960. The first meeting of the company was held on 22-7-1960 and the minutes of the said meeting were placed at pages 13 to 16 of the paper book submitted before us. By this meeting the board of directors unanimously resolved that Shyam K. Gupta & Co., chartered accountants, be and hereby appointed as the first auditors of the company on a remuneration of Rs. 500 per annum for the present. It was further resolved that an appointment letter in favour of the auditors may be sent to them.
7. From the assessment orders of the assessee for the relevant assessment years under consideration, it is seen that the business of the company was normally carried on resulting in profits. This fact appears to have not been denied by the parties before us.
8. With regard to the petition for winding up of the company as submitted by Shri Guljari Lal Bhargava, one of the directors, the reasons were detailed at para 14 of the winding up petition as follows : 14. The petitioner alleges that the other shareholder failed to carry out his part, inter alia, in the following matter-- (a) He refused to divide the profits of the business conducted under the joint sale system during the months of February and March 1960 according to the understanding between them. The arbitrators found the other shareholder liable to pay the petitioner a sum of Rs. 25,000 on account of his share of the profits for the business of this period but this amount has remained unpaid.
(b) Instead of taking steps to demarcate the cylinders belonging to the individual shareholders, Shri M.L. Bhargava exchanged them with those of third parties making their identification rather difficult with the result that the demarcation was never carried out nor any rent was paid to the petitioner whose contribution in the number of cylinders far exceeded the other shareholder's.
(c) Instead of handing over and closing his separate business, the other shareholder started a separate business of his own in the names of Pagoda Industries and Asco Chemicals at Bombay in partnership with others. According to their agreement dated 2-4-1960 these partners were his former managers at Bombay and Calcutta.
Similarly, he started a parallel business in partnership with Shri Prem Prakash Bhargava, Vasudev Kukul and Shri Pishori Lal at Bombay, in the same premises which were occupied by him on 1-4-1960. At Calcutta he got started similarly a parallel business in the name of Indian Refrigeration Stores in the name of Vasudev Kukul's wife. He invested his own capital in the first two above mentioned businesses.
(d) As provided in an agreement dated 2-3-1960, entered into between the petitioner and the other shareholder, as a necessary part of the formation of the company, a charitable trust was to be created for the benefit of the public to which shares of the value of Rs. 1,00,000 were to be allotted to be held by the trustees of the charitable trust. Some lands, belonging to them joint, were also to be transferred to the trust. The other shareholder failed to comply with this term of the agreement.
It it also seen that many attempts were made to resolve the differences for that purpose. Two agreements were made on 9-9-1961 and 23-1-1962 but they were stated to have not been acted upon.
9. On these facts it is for us to decide whether the non-declaration of the dividend during the relevant period was occasioned by circumstances beyond the control of the assessee-company and whether the judgment of their Lordships of the Supreme Court is applicable to the facts of the case.
10. As it is stated earlier, the relation between the two directors was never cordial even before the inception of the company itself. It is also a fact that in spite of the strained relations, the two directors could come into an agreement to promote a company so as to eliminate an unhealthy competition and rivalry between the two brothers. From the first meeting of the board of directors, it is seen that all the preliminary requirements of the company were complied with including the appointment of auditors. The business was conducted normally resulting in profit for each of the above years. The directors of the company or for that matter the assessee nowhere stated that the auditing of the accounts of the company could not be taken up due to any specific reasons. There appears to be no attempt at all to close the accounts and determine the profit as required under the Companies Act, 1956, as well as the 1961 Act. The learned Counsel for the assessee before us contended that no meeting could be held and no accounts could be compiled which could determine the distributable surplus. The facts on record, however, reveal that no attempt was made by the assessee-company to get its accounts closed and determine the distributable profit as required under law.
11. As seen from the winding up petition extracted in the earlier paragraph, the dispute between the directors and the reason for winding up of the company was due to reasons other than the normal transaction of the business. As seen from the extract of para 14 of the winding up petition, the first dispute relates to profit of the business conducted under the joint sale system during the months of February and March 1960 not relevant for the years under consideration. The second reason was stated to be regarding the demarcation of the cylinders which also does not directly affect the day-to-day transaction of the business nor the distribution of the profits. The third reason was regarding the non-closing of the personal business by one of the directors which has got no direct bearing on the business of the assessee as such.
12. The last ground was regarding creation of a charitable trust which has no direct bearing on the day-to-day running of the business of the assessee-company.
13. Since the normal business of the assessee was conducted during the years under consideration, it was for the assessee to carry out its normal statutory obligations under the various Acts, namely, the Companies Act and the Income-tax Act, etc. If the assessee fails to comply with the statutory obligations and do not even attempt to do so on the pretext of personal rivalry and dispute between the directors, it cannot be said that the assessee-company was prevented by circumstances beyond their control. From the evidence placed on our record it is seen that no attempt was made by the assessee-company to close its accounts or hold the meetings of the shareholders at any time during this period. Therefore it would not be fair and justified on the part of the assessee to come up now and say that the accounts could not be prepared and even if the annual general meeting was held, it could not declare the dividends. Since this is a case of complete disregard of a statutory obligation, the decision of the Supreme Court relied upon by the learned Counsel of the assessee does not cover the same.
The decision of their Lordships of the Supreme Court is to be read in the context in which it was given and to give it the exact meaning as was intended. It would be unjustified if the same is taken out of context and given a wider import than what was intended in the context.
The same decision was given on a limited context and is relevant only in cases where the ITO considers the reasonableness or unreasonbleness of the amount distributed as dividends.
14. In this view of the matter, I am of the considered view that the case is not covered by the said decision of the Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra). Since the present case is more of disregard of statutory obligations, it cannot be said to be a case in which the assessee is prevented by circumstances beyond its control.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 - As there is difference of opinion between both of us in the case of Ammonia Supplies Corpn. (P.) Ltd., New Delhi, we refer the matter to the President on the following two points : Whether, on the facts and in the circumstances of the case, the provisions of Section 23A of the Indian Income-tax Act, 1922, were applicable Whether, on the facts and in the circumstances of the case, the provisions of Section 104 of the Income-tax Act, 1961, were applicable 1. The learned members, who heard these appeals originally have differed and have stated the points of difference as under : Whether, on the facts and in the circumstances of the case, the provisions of Section 23A of the Indian Income-tax Act, 1922, were applicable Whether, on the facts and in the circumstances of the case, the provisions of Section 104 of the Income-tax Act, 1961, were applicable Both these appeals have come up before me for disposal as per the provisions of Section 255(4) of the 1961 Act. The assessee is a private limited company. The proceedings relate to its assessments for the assessment years 1961-62 and 1962-63. It is common ground that during the two previous years, the assessee earned considerable income, that there was sufficient surplus income out of which dividend could have been declared and distributed and that the provisions of Section 23A of the 1922 Act for the assessment year 1961-62 and the provisions of Section 104 of the 1961 Act for the assessment year 1962-63 are, on the face of it, applicable.
2. The assessee's case is that on account of differences and disputes between the shareholders, the assessee-company was helpless in holding general meeting in the absence of which dividend could not be declared and distributed and as such, the provisions of Section 23A of the 1922 Act and Section 104 of the 1961 Act do not apply. The department's case, on the other hand, is that the assessee-company was not helpless as claimed and that if it was really serious, the dividend could have been distributed. According to the department, even assuming for the sake of argument that there was no motive behind the assessee-company's not declaring and distributing the dividend and the company was really helpless, the ground was not sufficient to take the assessee's case out of the purview of Section 23A of the 1922 Act and Section 104 of the 1961 Act. While the learned Judicial Member has accepted the assessee's claim, the learned Accountant Member has rejected it by taking a contrary view stated above.
3. The parties have mainly relied on the respective orders of the learned members and have taken me through the facts relating to the differences . and disputes amongst the shareholders and the Supreme Court decision in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra). They have also made reference to the other decisions cited by the learned Members at the time of original hearing.
4. I have carefully gone through the material on record. The assessee-company was incorporated in July 1960. It observes financial year as previous year. The accounts for the two years under reference were closed on 31-3-1961 and 31-3-1962, respectively. However, because of the differences between the shareholders, the general meeting could not be held and the accounts could not be passed. Eventually, one of the directors sought liquidation of the company in August 1962. Thus, only one general meeting could be held in the life of the company, which was on 22-7-1960, i.e., just a day after the incorporation. The company being a juristic person is separate from the directors. I agree with the learned Judicial Member that irrespective of the reasons for their (directors) mutual differences, so far as the assessee-company was concerned, non-declaration and non-distribution of dividend was not motivated and was an act of sheer helplessness.
5. The next question that arises for consideration is when evidently the provisions of Section 23A of the 1922 Act and Section 104 of the 1961 Act are applicable, the fact that the assessee-company was helpless for the circumstances given above takes the assessee's case out of the purview of those sections. In this context, reference may usefully be made to Sub-section (2) of Section 104, which provides for the conditions necessary for taking a case out of the purview of Section 104. It is common ground that the assessee's case will fall, if at all, under Clause (i) of Sub-section (2) of Section 104, which is as under : (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 within the period of twelve months referred to in Sub-section (1) would be unreasonable ; or No doubt, it has been held in a number of cases that the losses incurred by the company in the earlier years and the smallness of the profits earned in the previous year are not the only two factors which the ITO will take into account for the purpose of deciding whether or not the payment of dividend or a larger dividend than declared would be reasonable. The ITO has to judge the reasonableness or unreasonableness of the declaration of the dividend upon all the facts and circumstances before him and placing himself in the position of a prudents businessman or a prudent director of a company and that the two requirements expressly mentioned in the clause are not the only requirements upon which he has to judge the reasonableness. In other words, the reasonableness and the unreasonableness has to be judged on taking an overall picture of the financial and other positions of the business. The question arises whether non-declaration or non-distribution of dividend due to disputes between the shareholders would fall within the clause so as to take it out of the purview of Section 104. In this connection, reference may be usefully made to a Madras High Court decision, in the case of Murlimal Santram & Co.
(Madras) (P.) Ltd. v. CIT  49 ITR 858, where it was held as follows : The fact that there were disputes between rival groups of shareholders of the company and a prohibitory order was issued by the Court restraining the company from holding a meeting for passing a resolution regarding the remuneration of directors and the company could not therefore draw up a correct balance sheet and profit and loss account and declare dividends is not a ground for not passing an order under Section 23A of the Indian Income-tax Act in respect of a company which falls within the purview of the section. The section contemplates only the two grounds mentioned there for not passing an order under Section 23A, viz., losses incurred in earlier years or the smallness of profits in the previous year.
It may not be out of place to mention that the Bombay High Court had taken a contrary view, of course in a different set of circumstances, in the case of Godavari Sugar Mills Ltd. v. CIT  49 ITR 206. In that case, the restriction was imposed by law on the company in respect of declaration of dividends at a particular point of time. It was held that Section 23A would not apply in such a case. The Bombay High Court decision, it may be stated, has been affirmed by the Supreme Court in CIT v. Godavari Sugar Mills Ltd.  63 ITR 310. However, the Madras High Court decision in Murlimal Santram & Co. (Madras) (P.) Ltd.'s case (supra) has not been noticed by the Supreme Court and the said decision has also not been noticed by the Supreme Court in its decision in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra). On the other hand, I find that the view that the losses of the earlier years and the profits for the previous year are not the only requirements upon which the ITO has to judge the reasonableness or unreasonableness of the dividends distributed has been taken by the Bombay High Court in a number of cases, viz.--CIT v. Suleman & Co. Ltd.  68 ITR 94 and New Star Industries (P.) Ltd. v. CIT  68 ITR 470 ; and also by the Patna High Court in Universal Bank of India Ltd. v. CIT  65 ITR 536, Having regard to the above discussion, I am inclined to agree with the learned Judicial Member that the conscientious of the judicial opinion can be stated to be that when the company is helpless in holding a general meeting irrespective of reasons and without a general meeting dividends cannot be declared, such a reason should be treated as a good reason for the application of Clause (i) of Sub-section (2) of Section 104. Accordingly, I agree with the learned Judicial Member on both the points of difference.
6. The order will now go to the regular Bench for deciding the appeals according to the majority view.