Horace Owen Compton Beasley, Kt., C.J.
1. The question under reference is:
Whether Section 23-A could be legally applied to this case, there being no finding that failure to distribute Rs. 36,180 was with a view to prevent the imposition of tax on any of the share-holders.
2. Sub-Section 2 of Section 23A which is the one in question reads as follows:
Whether the Income-tax Officer is satisfied that a Company is under the control of not more than five of its members and that its profits and gains are allowed to accumulate beyond its reasonable needs, existing and contingent, having regard to the maintenance and development of its business, without being distributed to the members, or that a reasonable part of its profits and gains having regard to the said needs, has not been distributed to its members in such manner as to render the amount distributed liable to be included in their total income, and that such accumulation or failure to distribute is for the purpose of preventing the imposition of tax upon any of the members in respect of their shares in the profits and gains so accumulated or not distributed, the Income-tax Officer, may, with the previous approval of the Assistant Commissioner, pass an order that the sum payable as income-tax by the company shall not be determined, and thereupon the proportionate share of each member in the profits and gains of the company, whether such profits and gains of the company have been distributed to the members or not, shall be included in the total income of such member for the purpose of his assessment thereon.
3. The facts of the case are that the assessees in the three cases before us, which have been ordered to be consolidated, are the three share-holders of the Comorin Investment and Trading Co., Ltd., Tuticorin. This company is a private limited company registered on the 9th January, 1926, under the Indian Companies Act, its principal object being to acquire and hold stocks and shares in companies and other public bodies and distribute the income therefrom among its share-holders. The greater part of the income of the company is derived by way of dividends from its large share-holding in the Madura Mills Co., Ltd. Year after year since 1926 the company earned large profits. These profits were not distributed as dividends to its share-holders but were carried to the reserve fund. During the year 1929 - 1930 the profit so derived was Rs. 1,33,222 according to the profit and loss account. This with the balance in the profit and loss account brought forward from the previous year amounted to Rs. 2,98,680-12-11. No part of it was distributed as vididends but the whole of it was disposed of as below:
Amount transferred to General Rs. A. P.Reserve ... 1,02,500 0 0Amount transferred to InsuranceReserve ... 60,000 0 0Balance ... 1,36,180 12 11
4. At the fifth ordinary General meeting of the share-holders held on the 30th May, 1930, this balance of Rs. 1,36,180-12-11 was distributed as follows:
Rs. A. P.Transferred to General Reserve ... 1,00,000 0 0Transferred to Insurance Reserve ... 35,705 13 10Balance ... 474 15 1_______________Total 1,36,180 12 11_______________
5. The Income-tax Officer, Tuticorin Circle, the assessing Officer held (1) that the company was under the control of two of its members Mr. A. Harvey and Mr. J.C. Harvey (2) that its profits were allowed to accumulate beyond its reasonable needs without being distributed among its members and (3) that the conditions laid down in Section 23-A(2) of the Act were fulfilled. He, therefore, proposed to take action under that section and accordingly referred the matter to the Assistant Commissioner of Income-tax for his approval as required by that sub-section. The company objected and contended before the Assistant Commissioner that as it owed large sums of money to its creditors and would be improper to pay dividends to the share-holders until its current liabilities were reduced to a reasonable figure and that, its entire capital having been invested in fixed assets, it had no fluid resources from which dividends could be paid. Both the objections were overruled by the Assistant Commissioner. He accordingly approved the proposal of the Income-tax Officer to apply the provisions of Section 23-A of the Act to the assessment of the company; and therefore, the Income-tax Officer passed an order under Section 23-A(2) on the 14th September, 1931. The assesses lodged appeals with the Commissioner under Sub-section (1) of Section 33-A of the Act putting forward the same objections as those raised by the company before the Assistant Commissioner and the Income-tax Officer.
6. The Commissioner concurred with the findings arrived at by the two latter and referred the appeals to a Board of References for decision under Section 33-A(3) of the Act. After the submission of the petitions of appeal, however, the petitioners offered in a letter dated 4th November, 1931, a new explanation for the company's failure to distribute the profits alleging that the company's large holding in the Madura Mills Co., Ltd. had fallen in value, that the depreciation in value on the 31st March, 1930, was Rs. 21/2 lakhs, that they had to provide for this and that this was why the company had carried its profits to the Reserve account without distributing dividends to its share-holders. The Income-tax Commissioner was of the opinion that this point should not be allowed to be considered before the Board of Referees as it was an entirely new case and, even so, the explanation did not furnish a valid ground for disturbing the order of the lower authorities. The Board of Referees overruled the Income-tax Commissioner's objections that an entirely new case could not be considered and after taking into consideration the evidence produced by the assessees arrived at the conclusion that the company was justified in not distributing Rs. 1,00,000-0-0 out of the Rs. 1,36,180 amongst the share-holders but that the Rs. 36,180 ought to have been so distributed. In the order of the Board of Referees the latter amount is dealt with as follows:
In the same meeting it has also been resolved to place Rs. 35,705-13-10, the remaining amount of the profits of the year towards the Insurance Reserve account. We have not been shown what this Reserve account is. Nor have we been convinced that the company is entitled to set apart such an amount towards the insurance account without distributing the same among the share-holders.
7. Accordingly the Income-tax Officer held that the result of the decision of the Board of Referees with reference to the Rs. 35,705-13-10 was that his order under Section 23-A(2) was confirmed. He, therefore, did not determine the income-tax payable by the company but added the proportionate share of each share-holder in the profits and gains of the company to his individual income and assessed the share-holders accordingly. The Income-tax Commissioner declined to state a case to the High Court; and accordingly the matter came up to the High Court; and the order was made directing him to state a case raising the question propounded here. Hence this reference.
8. The assessees' contention here is that what is required by Sub-section (2) of Section 23-A is a finding that the failure to distribute the profits is for the purpose of preventing the imposition of tax upon any of the members and that the Board of Referees did not so find when they held that the sum in question ought to have been distributed. On the other hand, the Income-tax Commissioner contends that it follows from the finding of the Board of Referees that they agreed with the Income-tax authorities that the failure to distribute the sum in question was with a view to evade tax on that sum. Our attention was drawn during the course of the argument to a number of English decisions upon the similar section in the English Act - Section 21 of the Finance Act of 1922 - but a distinction between the Indian section and the English section has been pointed out quite properly by the assessees' learned Counsel. In the English section the purpose of preventing the avoidance of tax is set out in the form of a preamble to the section as follows:
With a view to preventing the avoidance of the payment of super-tax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted as followse
9. And it has been held in David Carlaw & Sons, Ltd. v. The Commissioners of Inland Revenue (1926) 11 T.C. 96 that this being so, it is not necessary that the Special Commissioners have to be satisfied that there has been an intention to evade tax before a direction can be made under Section 21 of the Finance Act because the preamble of Section 21 cannot either restrict or extend the enacting provisions in the section and that condition does not appear there.
10. Lord Sands on page 120 says:
It is quite open to the share-holders of company to satisfy the Special Commissioners that they had a reasonable cause for withholding from distribution a considerable part of their profits. If they fail to do so, if they cannot show the Special Commissioners that they were influenced by that purpose, and that it was a reasonable purpose, then, in the view of the legislature, there is a presumption of law that avoidance of super-tax is the object of the retention of the undistributed profits, and it is unnecessary in a particular case that the Commissioner should so find.
11. In the Indian Act the condition as to intention to evade payment of tax appears in the section itself. Under the English section companies are as it were classed under two heads; - those that reasonably distribute and those that do not - and, where a company is proved to be in the latter class, the consequences of the section follow and the whole of the undistributed profits become liable to be taxed as if distributed to the share-holders. Glazed Kid, Ltd. v. The Commissioners of Inland Revenue (1930) 15 T.C. 445 Colville Estate, Ltd. v. The Commissioners of Inland Revenue (1930) 15 T.C. 485 and London and Northern Estates Co., Ltd. v. The Commissioners of Inland Revenue (1931) 16 T.C. 128. I do not think it necessary to refer to any of the other decisions cited under the English Act. Relying on the express words of the section the assessees contend that the Income-tax authorities have not proved any such intention, that the Board of Referees have not recorded any verdict upon this point and that there is no presumption of law that there was any unreasonable withholding from distribution of the profits, with that object in view. Mr. Patanjali Sastri, on the other hand, points out that the assessees started the company in 1926 and that they held all the shares and have distributed none of the profits during any of the years up to 1930. He contends that the assessees formed themselves into a company for the purpose of withholding the profits from distribution in order to evade income-tax, that the depreciation in the Madura Mills was only in 1929 - 1930 and that nevertheless these large earnings were withheld from distribution in previous years. He argues that that was their intention then and that in the year in question they did not change their intention and emphasises the very important fact that the explanation which was put before the Board of Referees was one which was put before them for the first time and was not the explanation given to the Income-tax authorities originally. The Income-tax authorities had expressly found that the assessees had allowed Rs. 1,36,180-9-4 to accumulate beyond the company's reasonable needs and done so in order to evade the tax. The Board of Referees have found against the income-tax authorities with regard to Rs. 1,00,000-0-0 but agree with them that Rs. 36,180-9-4 had been allowed to accumulate beyond the reasonable needs of the company. What is the effect of that finding? The issue as between the Income-tax authorities and the assessees was whether the sum of money had been withheld from distribution with the object named. The assessees contended that it was not with that object at all but with another object, namely, as regards the particular sum, viz., Rs. 35,705-13-10of keeping it in the Insurance Reserve account. The Board of Referees have found that the company was not entitled to do this and, therefore, the only reason put forward against the contention of the Income-tax authorities was negatived. No other explanation was put forward before the Board of Referees and consequently there was failure on the part of the assessees to furnish any reasonable answer to the Income-tax authorities' contention. After all, what is it that the Income-tax authorities have to do before they can apply Section 23-A(2)? They have to be satisfied that the failure to distribute is for the purpose of preventing the imposition of tax upon any of the members of the company. How is this purpose to be proved? Human motives are obscure difficult of ascertainment and sometimes conjectural; and it seems to me that this must be a matter largely of inference. Are the facts here sufficiently strong to warrant such an inference? The failure to distribute any part of the profits of the company which were very large in any year after its inception and the failure of the assessees to explain the very large accumulation of profits withheld from distribution in the year in question seem to me to lead to only one conclusion, namely, an intention to prevent the imposition of tax; and I am unable to agree with the contention of the assessees that the finding of the Board of Referees can have any other implication put upon it except that it is in agreement with the view of the Income-tax authorities. The result is that, in my view, the question propounded should be answered in the affirmative.
12. Costs Rs. 400 to the Commissioner of Income-tax.
Pandrang Row, J.
13. I agree with my Lord the Chief Justice.
14. I am of the same opinion. Before an Income-tax Officer can assess the share-holders of a company under Section 23-A(2) of the Income-tax Act on accumulated or undistributed profits of the company he has to be satisfied on two heads.
15. Firstly, that the profits of the company have been allowed to accumulate beyond the existing and contingent needs of the company, having regard to the maintenance and development of the company, or that a reasonable part of the profits, having regard to the said needs, have not been distributed to its members. Secondly, he must be satisfied that such accumulation or failure to distribute is for the purpose of preventing the imposition of tax upon any of the members in respect of their shares in the profits so accumulated or not distributed. Unless both these conditions are satisfied, and in each case it is a question of fact, the members of the company do not become liable to assessment on their shares in the accumulated or undistributed profits. The Income-tax Officer in the present instance has found that the profits of the Appellant Company have been allowed to accumulate beyond the reasonable needs of the Company. He does not exactly say that the accumulation was made for the purpose of evading taxation. It would have been better if he had been explicit. But the finding is to be implied from his statement that he was satisfied that the conditions laid down in the section had been fulfilled. Therefore, there must be taken to be a finding of fact that profits to the extent of 1,36,180 of Rupees had been accumulated beyond the reasonable needs of the Company, and that the accumulation was designed to screen these profits from taxation. These findings of fact were confirmed by the Commissioner. The effect of the order of the Board of Referees, to whom a further appeal was carried, was to allow the Company's appeal with regard to the sum of one lakh, which the Referees held was reasonably appropriated to meet depreciation in the Company's assets. But with respect to the remaining Rs. 36,180 the appeal failed, and pro tanto the Commissioner's order stood. The Referees do not say that they find that the sum of Rs. 36,180 was accumulated for the purpose of escaping taxation. But it is clear that the appellants chose to stand or fall by their contention that the whole of the accumulation represented a genuine and reasonable need of the Company, and when their claim failed to be substantiated in respect of the sum of Rs. 36,180 the finding of the Income-tax authorities that this part of the accumulation was for the purpose of evading taxation remained unaffected. The appellants might, I suppose, have contended before the Referees that even if the appropriation of this sum and the Company's needs was not justified there was not sufficient proof that it was done with the intent to escape taxation. But there is no trace of such contention being put before the Referees. No question of law, therefore, arises in regard to it.