P.N. Khanna, J.
(1) The following question has been referred by the Income-tax Appellate Tribunal, Delhi Bench 'A', herein called 'the Tribunal', in compliance with the directions of this court in I.T. Case No. 9-D of 1962, at the instance of the Revenue.
'WHETHER on the facts and in the circumstances of the case the Tribunal was right in holding that the provisions of section 23A(1) of the Income-tax Act, 1922 were not applicable to the case of Messrs Uttam Singh Duggal & Co. Private Limited, New Delhi, for the assessment year 1955-56.'
(2) The respondent company, Messrs Uttam Singh Duggal & Company Private Limited, New Delhi, herein called 'the assessed', is a private limited company carrying on business as a contractor. It maintains its accounts on mercantile basis. The assessment year concerned is 1955-56 and the relevant accounting year is the calendar year ending on December 31, 1954.
(3) The assessed filed a return showing an income of Rs. 4,65,756.00, later on revised to Rs. 3,85,225.00 and finally revised to Rs. 6,62,072.00, thereby admitting practically, as stated by the Tribunal, that certain amounts had been kept outside the books. The total income, however, was assessed at Rs. 11,51,332.00, but was revised twice under section 33, the last revision being on February 25, 1958, when it was computed at Rs. 10,90,552.00. The Income-tax and Super-tax, payable worked out to Rs. 4,73,708.00, leaving a balance of Rs. 6,15,844.00. The distributable surplus at the statutory percentage of 60 per cent of the said balance, worked out to Rs. 3,70,106.00. The assessed company declared a dividend amounting in all to Rs. 1,86,300.00 only. On this, the Income-tax Officer, held that section 23A of the Income-tax Act, 1922, herein called 'the Act', was applicable to the case. He accordingly imposed super-tax on the undistributed balance, which he worked at Rs. 4,30,544.00. The assessed, in appeal before the Appellate Assistant Commissioner, contended that declaration of a larger dividend would not be justified, because not only the total income computed by the Income-tax Officer had to be reduced, as done by the Appellate Assistant Commissioner, to Rs. 10,64,004.00, but further reduced by amounts disallowed, including expenses which have been proved and a sum of Rs. 3,50,000.00 paid to certain Americans but which remained unproved, as being not available with the company for the purposes of distribution by way of dividend. The Appellate Assistant Commissioner found that Rs. 3,50,000.00 could not be said to have definitely gone out of the assessed's hands and as such was available for distribution; although expenses proved, but not allowed as business expenses, could be considered as not available for distribution while considering smallness of profits. Regarding Rs. 3,50,000.00 the Appellate Assistant Commissioner further said, that if it were allowed as expenses the assessed still had sufficient funds to distribute higher dividend, which, in fact, had not been distributed because some funds had been kept out of the books and not because they were not available. The Income-tax Officer was directed to recalculate the tax payable under section 23A on the basis of the total income as reduced on appeal. The assessed's claim was accordingly rejected.
(4) Before the Tribunal, it was contended on behalf of the assessed that only commercial profit and not the assessable profit could be taken into account in ascertaining the smallness of profit; that expenses, although disallowed in the computation of income, could not be considered to be in the hands of the assessed available for distribution; Americans, having actually been spent away, also could not be taken Americans, having actually been spent away, also could not be taken into account as being available for distribution by way of dividend, merely because the assessed did not possess clinching evidence to establish the payment.
(5) The Tribunal agreed that the expenses actually incurred, though disallowed could be taken to have gone out of the assessed's hands and not available for distribution by way of dividend. But the payment of Rs. 3,50,000.00 not having been established, there was no question of its having gone out of the assessed's coffers. Adverting to another argument of the assessed's counsel, the Tribunal observed that although the assessed maintained its accounts on mercantile basis, only realised, and not the realisable profits, could be taken into consideration for the purpose of computing the distributable surplus. Though for assessment purposes the system of accounting employed enabled the department to compute the profits in a particular way, yet coming to the facts with reference to the availability of the funds in the hands of the assessed for distribution of profits by way of dividend, notice had necessarily to be taken of the amounts not realised, though realisable during the year of account. The method of accounting was a guide to assess the profits of the assessed, but on the question of distribution of dividend, according to the Tribunal different considerations had to prevail. The actualities were required to be taken into consideration, by knowing as to what was the exact amount that was in the hands of the ilssessee, which would enable him to distribute the dividends. Looking to the facts of the instant case, the Tribunal came to the conclusion that taking 'into account the amounts disallowed and the amounts that remained to be collected, there was not enough of profit left in the hands of the assessed, which would 'enable it to pay a higher dividend'. Action under section 23A, according to the Tribunal, was, thereforee, not called for.
(6) Mr. B. H. Kirpal, the learned counsel appearing before us for the Revenue, contended that the figures disclosed in the balance sheet of the company were final and could not be ignored merely because some of the items were found to have not been recovered. For, if they were ignored, then unspent sums for expenses may have to be included. According to him, the balance sheet figures were the only and the correct basis on which the Income-tax Officer was required to act under section 23-A. Amounts credited in the books as realisable, though not realised during the year of account could not be kept out of consideration. The said accounts, he further contended, had to be added in the instant case, to the sum of Rs. 3,50,000.00, which was not proved to have been paid to the Americans as alleged. All these amounts' according to him, were available with the assessed and had to be taken into account in order to determine the reasonableness of the profits available with it for distributing a dividend larger than declared.
(7) Mr. K. R. Bajaj, the learned counsel for the assessed, on the other hand, submitted that in order to ascertain the smallness of profits referred to in section 23A of the Act, the commercial profits and not the assessable profits have to be considered. For this purpose, available surplus money in the hands of the assessed would alone determine the quantum of dividend that could be distributed. The expenditure which had been disallowed as inadmissible, according to him, consisted of two categories, viz., one in respect of which cogent proof was available and about the exclusion of which from consideration there was no dispute; and the other about which, in view of the secrecy involved in its payment, such proof was not forthcoming. The assessed had actually parted with the said sum, but clinching evidence of the payment was not available. In any case, said the counsel, the Tribunal after going into all the material before it had come to a definite finding of the fact that there was not enough amount left in the hands of the assessed (which meant that not even out of Rs. 3,50,000.00 if that sum was considered to have not gone out of the assessed's coffers,) which could enable it to pay a higher dividend. He also contended that amounts shown as realisable, but not actually realised in the year of account could not be considered for the purpose of section 23-A. Both counsel cited a number of authorities in support of their respective contentions.
(8) In order to appreciate the points involved in the controversy, it is necessary to examine the relevant part of section 23A of the Act, as amended by section 15 of the Finance Act, 1955. The material part of the section reads thus:
'23A(1) Subject to the provisions of sub-sections (3) and (4), 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 sixty per cent of the total income of the company of that previous year as reduced by- (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section; (b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount if any, which has been allowed in computing the total income; and (c) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 (X of 1949); the Income-tax Officer shall, unless he is satisfied that having regard to 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, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of eight annas in the rupee 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 four annas in the rupee 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 reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any;'
(9) The 1955 amendment has not introduced any material change in the phraseology of the relevant part of the section with which we arc concerned for our present purposes. It is obvious that the Income-tax Officer is required to act under this section, only when he is satisfied that the profits and gains in respect of any previous year, which have been distributed by the company by way of dividends are less than sixty per cent of the assessable income of the said previous year as reduced by the amount of income-tax and super-tax payable. Not only that. He has further to satisfy himself that having regard to (a) the losses in earlier years, or (b) to 'the smallness of the profit' made, the payment of a dividend or a larger dividend than that declared was not unreasonable. In other words, if he is satisfied that because of losses in the earlier years or of the smallness of profit in the previous year, it was unreasonable to pay the dividend or a larger dividend than that declared, then he would not make an order under section 23-A of the Act. The question of any losses in the earlier years does not arise in this case. The only question to be considered is about the 'smallness of profit' and the proper connotation of this expression. This expression came up for consideration before various High Courts and the Supreme Court in a number of cases. In Sir Kasturchand Ltd. V. Commissioner of Income-tax, Bombay City, (1949) 17 Isr 493, the Bombay High Court was of the view. that the Income-tax Officer had to consider not the assessable income of the company but the actual profits made by the company. Assessable income was to be distinguished from actual accounting profits. The question of smallness of profits, it was held, was one entirely for the satisfaction of the Income-tax Officer and was a question of fact. According to Mr. Kirpal, the accounting profits referred to in this judgment are such profits as are disclosed in the accounts of the company, though reduced by such expenditure, which, even if disallowed, is proved to have been actually incurred. According to him, nothing further is required to be taken into consideration. This contention of the learned counsel, however, cannot be accepted, more especially in view of the interpretation put on those expressions in the later judgments which we will presently read.
(10) In Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Company Limited. : 41ITR290(SC) the Supreme Court observed that 'in considering whether a larger distribution of dividend by a company would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account......Even though the assessable income of the company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do.' In Greaves Cotton & Crompton Parkinson Ltd. v. Commissioner of Income-tax, Bombay City-I, (1963) Itr 20 the Bombay High Court took note of the company's imminent liability for payment of unspent amounts set apart towards gratuity and bonus and held the same to be allowable deductions in determining the distributable profits in a commercial sense.
(11) The most important case decided by the Supreme Court on the subject, referred to by the counsel on both sides is, Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Limited : 57ITR176(SC) . The Supreme Court, while considering the significance of the expression 'profit', was of the view that the Income-tax Officer, acting under this section does what the directors should have done. He puts himself in their place. The provisions of the section were to be worked not from the standpoint of the tax collector but from that of a businessman'. 'The yardstick', it was observed, 'is that of a prudent businesssman. 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. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits'. The Supreme Court further observed that there was no provision in the Income-tax Act which makes the balance sheet final for the purpose of section 23A of the Act or even for the assessment, although it afforded a prima fade proof of the financial position of the company on the date when the dividend was declared. The Supreme Court had occasion to consider this section against in J. P. Shrivastava and Sons (Bhopal) Private Ltd. V Commissioner of Incometax, Madhya Pradesh : 57ITR624(SC) when it observed that 'it is difficult to appreciate why a finding in the assessment order that a particular income is assessable income or profits necessarily mean that that assessable income must form part of the accounting profits'. And again in Gobald Motor Service (P) Limited v. Commissioner of Income-tax, Madras, (1965) 60 Itr 417, the Supreme Court reiterated its earlier views that the Income-tax Officer only does what the directors should have done by putting himself in place of the directors. The 'availability of surplus money', was considered to be one of the relevant factors to determine the reasonableness or the unreasonableness of the amount distributed as dividend.
(12) In Commissioner of Income-tax, West Bengal v. Bangodava Cotton Mills Limited, : 69ITR812(Cal) the Calcutta High Court following the Supreme Court judgment in Gangadhar Banerjee's case (supra), held that the availability of surplus money and the reasonable requirements of the future could not be ignored. In Central Calcutta Investment Private Limited v. Commissioner of Income-tax, West Bengal : 82ITR480(Cal) the availability of surplus money for purpose of declaring dividends was considered to be one of the considerations relevant for determining the reasonableness or otherwise of the dividend declared.
(13) It is, thus, clear from the aforesaid judgments that the income-tax Officer, while considering the applicability of section 23A, is required to put himself into the position of a director of the company and take an over-all picture of its financial position. Apart from other considerations, he has to look to the availability of 'surplus money', for the company cannot be compelled to fall back 'either upon its reserves or upon its capital' in order to distribute something by way of dividend. The reasonable requirements of the future is another factor which cannot be ignored. The reasonableness or otherwise of the dividend already declared by the company has thus to be judged in the light of such like considerations. Keeping these tests in view, let us examine the facts found by the Tribunal on the basis of which our opinion has been asked on the questions first above mentioned.
(14) Mr. Kirpal contended that according to the finding of the Tribunal, Rs. 3,50,000.00 which the assessed claimed to have paid to the Americans, was still available with the assessed. Apart from that another sum of Rs. 7 lakhs and odd was admitted to have been kept out of the books. This made about Rs. 11 lakhs available with the assessed for distribution. But these contentions are without any basis. The finding of the Tribunal regarding Rs. 3,50,000.00 was that there was no question of this amount having gone out of the assessed's coffers as its payment, as claimed, had not been established; and not that this was still available with the assessed at the time of declaration of dividend. Likewise, there is no finding that Rs. 7 lakhs and odd said to have been admitted by the assessed to have been kept out of his books, was still available for distribution at the time of the declaration of devidend. Mr. Kirpal referred to the assessment order, a copy of which is annexed as part of the statement of the case and contended that out of Rs. 7,33,406.00 admitted by the assessed to have been kept out of the books of account, a sum of Rs. 4,40,000.00 was actually deposited with the Hindustan Merchantile Bank Limited, in the names of Shri Prem Singh Puri, one of the Directors of the assessed company and other members of his family. The details of these fixed deposits are given in the assessment order. We, however, find that all these deposits had been withdrawn by October 18, 1964, i.e. some months before the close of the accounting year. According to Mr. K. R. Bajaj, these amounts might have been found to have been disbursed on account of admissible expenses. In any case, the appellate order of the Tribunal or the statement of case do not give any indication as to where these amounts were at the close of the accounting year or at the time of declaration of dividend. On the other hand, the clear finding is that 'if we take into account the. amounts disallowed and the amounts that remained to be collected, there is not enough, amount of profit left in the hands of the assessed which will enable to pay a higher dividend.'
(15) According to Mr. Kirpal, the assessed's accounts were maintained on mercantile basis and, thereforee, the amounts that remained to be collected could not be ignored as they had been duly credited in his books. Ignoring such amounts, according to him would virtually result in accounts being rewritten on cash basis. But, this is far from what we are saying. Although dividends may not be paid out of. capital, yet nothing would prevent a prudent businessman from paying it not only out of the profits of the relevant year, but also out of the profits of the previous financial years, which is allowed under the law. The criterion, as laid down by the Supreme Court, is the availability of surplus money. The question has to be examined on the merits of each case and there is no question of rewriting the accounts. The only relevant fact in the instant case before us is that not enough amount of profit is left in the hands of the assessed to pay a higher dividend. There is nothing to indicate if any profit was available from any other previous year. The available surplus money actually in the company's hands and not the uncollected amounts, which its account books may show standing to its credit, would be taken into account by the prudent businessman for determining the amount of dividend to be distributed. It is the source from which the devidend has to be distributed that has to be considered. From where will the dividend be paid, if surplus money is really and genuinely not available?
(16) Mr. Kirpal contended that the findings of the Tribunal could not be taken to be correct, as, while ignoring 'the amounts which had not been recovered, the unspent amounts, which may still be lying with the company in respect of expenditure duly debited in the books for which liability had been incurred had not been taken into account by the Tribunal. But, this argument is unsustainable. For, apart from the need for keeping in view 'the reasonable requirements of the future, which was considered by the Supreme Court in Gangadhar Banerjee's case, to be one of the business considerations, required to be kept in view for determining the reasonableness or unreasonableness of dividend, there is no finding that such amounts were there, but were not considered. No attempt was made before the Tribunal to challenge the correctness of facts, on which its aforesaid findings were based. We cannot look behind the finding that there is not enough amount available for further distribution nor would we be justified to ignore it, on the basis of which alone we have been asked to give our answer to the question posed. As the Supreme Court observed in Gangadhar Banerjee's case the burden lies on the Revenue to prove the conditions laid down in section 23A of the Act were satisfied before the order could be made. The Revenue failed to discharge this burden, by proving facts which could be brought out in the judgment and which then could show that the Tribunal's conclusion was incorrect. Even at the time, when the statement of the case was placed on the table by the Tribunal, certain suggestions were made on behalf of the revenue, as appears from the statement itself. No suggestion was made that unspent funds, though earmarked for expenses, were still available with the company. The contention of Mr. Kirpal, thereforee, cannot be accepted. The determination of the reasonableness or unreasonableness of the dividend declared in the light of 'smallness of profit' is a matter entirely for the satisfaction of the Income-tax Officer. Unless there are facts found by the Tribunal itself which could show that its judgment was perverse or unreasonable or such which a reasonable person could not form, we are afraid we would not be justified to interfere. In this view of the matter, the answer to the question referred to us is in the affirmative, viz. in favor of the assessed and against the Revenue. In the peculiar circumstances of the case, however, there shall be no order as to costs.