1. The assessee is a public limited company in which the public are not substantially interested. It carries on business in the purchase and sale of dental goods. On October 10, 1957, due to restriction in imports, the directors decided to start a dental industry and the managing agents were authorised to negotiate with the foreign manufacturers for the purchase of machinery and raw materials for the manufacture of plastic tooth, and to utilise the general reserve available with the company for the said purpose. It also decided to apply to the Director of Industries, Madras, for permission to import the requisite machinery and also for the allotment of a factory unit in the Government Industrial Estate.
2. The paid up capital of the company was Rs. 52,150 as on March 31, 1960. The accumulated profits and reserve including amounts capitalised from the earlier reserve amounted to Rs. 51,759 as on March 31, 1960. In the year ending on March 31, I960, it made a profit of Rs. 30,897. The Income-tax Officer, however, assessed the company on a total income of Rs. 31,261. The income-tax and super-tax, payable thereon amounted to Rs. 14,067. This left a balance of Rs. 17,194. The company declared a dividend of only Rs. 5,930, while under Section 23A of the Indian Income-tax Act, 1922, the company should have declared a dividend of Rs. 11,176. The Income-tax Officer, therefore, issued a notice proposing to invoke Section 23A. In reply, the company explained that due to smallness of profit, it could not declare a larger dividend. The Income-tax Officer was not satisfied with that explanation. He, therefore, levied an additional super tax of Rs. 4,167.68 by invoking Section 23A.
3. There was an appeal to the Appellate Assistant Commissioner. It was contended by the assessee that the profits were small, that the declaration of a larger dividend would not have resulted in any benefit to the department, and that it was contemplating some manufacturing activity for which purpose it had to build sufficient finance. It was also contended that the company is one in which the public are substantially interested. The Appellate Assistant Commissioner rejected all the above contentions and ultimately upheld the levy of additional super-tax under Section 23A.
4. There was a further appeal to the Tribunal. At that stage, the assessee, however, raised the only contention that as it was contemplating manufacturing of dental goods, it had to build up sufficient reserves to meet the future requirements arid in support of that contention relied upon the decision in Srinivas Banking Co. Ltd. v. Commissioner of Income-tax : 58ITR89(Cal) . But the Tribunal found that beyond saying that it had a development project, no concrete evidence as to the extent of such development and the financial requirement therefor was produced before it by the company and that the company had sufficient reserves almost equal to the capital at the time of the declaration of the dividends. Presumably the Tribunal felt that unless the existing reserve amounting to Rs. 51,759 is shown to be insufficient and the necessity for further financial requirement had been shown by the company, the declaration of a lesser dividend than the one contemplated by Section 23A cannot be said to be reasonable. At the instance of the assessee, the following question has been referred to this court for consideration :
'Whether, on the facts and in the circumstances of the case, the order under Section 23A on the assessee is justified with reference to the alleged smallness of profits ?'
5. The learned counsel for the assessee refers to the resolution of the board of directors dated October 10, 1957, to show that the board of directors had resolved to start a dental industry in Madras and to utilise the general reserves of the company for the purchase of machinery and raw materials for the manufacture of plastic tooth. The learned counsel referred to the fact that the company had in fact applied for allotment of a factory unit in the Industrial Estate either at Ambattur or Guindy for carrying on the said dental industry which the company proposed to start. It is true that the resolution of the board of directors as also the letter addressed by the company to the Director of Industries show that the company had proposedto start a dental industry in Madras and had taken initial steps for the said purpose.
6. But the question here is whether the non-declaration of higher dividend for the assessment year 1960-61 was for the purpose of increasing the general reserve and utilising it for the proposed industry. The learned counsel submits that an inference could be drawn from the said resolution of the board of directors dated October 10, 1957, that they decided to conserve as much as possible from and out of the profits in the succeeding years as well for the industry which they proposed to start. But the resolution does not refer as to what are the appropriations to be made from the profits earned by the company in future. It merely states that the general reserve as on the date of resolution will have to be utilised for the purchase of machinery and raw materials necessary for the proposed industry. Except producing the resolution of the board of directors, dated October 10, 1957, no material had been placed even before the Tribunal to show as to what is the extent of the development and the financial requirement for such development and as to whether the existing reserve was found to be quite inadequate or insufficient. If the board of directors or the general body of the company had considered that, having regard to the future financial requirements of the company, the declaration of a larger dividend was not possible, then it is possible to contend by the assessee-company that the Income-tax Officer cannot go behind the decision of the board of directors and find that the declaration of a larger dividend is possible in the circumstances. But, here, there is absolutely no material to show as to what are the circumstances that weighed with the board of directors or the general body when they declared a lesser dividend than the one contemplated under Section 23A. What the assessee has done is to refer to the resolution of the board of directors dated October 10, 1957. The relevant resolution of the board of directors or the general body declaring the dividends for the year ending March 31, 1960, had not been placed before us. The mere fact that there was a development activity proposed by the company will not show that the company wanted to build up reserves for such activity for all the future years and that it is for that reason it declared a lesser dividend. Unless there is positive material to show that the board of directors of the general body resolved to declare a lesser dividend with a view to build up sufficient reserve to be utilised for such developmental activity, it is not possible to assume that the declaration of a lesser dividend was for the reason that the board of directors or the general body required finance for the developmental activity. As pointed out by the Tribunal, no material has been placed by the assessee to support its stand that the non-declaration of larger dividend was for the purpose of future development of the company.
7. The learned counsel for the assessee referred to the decision in Alavai Industries Pvt. Ltd. v. Commissioner of Income-tax : 76ITR310(Mad) , to which one of us was a party. In that case, it was held that the declaration of dividends by a company is essentially a matter to be dealt with by the board of directors and ultimately by the general body and what percentage out of its profits should be made available to the shareholders and what portion thereof should be reserved for future enterprises, expansion and benefit of the company are exclusively matters for the consideration of the board of directors, and that Section 23A of the Indian Income-tax Act, 1922, being penal in nature, the jurisdiction of the Income-tax Officer under that section could be exercised only if the ingredients and the circumstances set out in that section are established. That decision will help the assessee only if it is shown that the board of directors or the general body decided to declare a lesser dividend with a view to create a reserve for the future development of the company. From the mere declaration of a lesser dividend, it cannot be automatically inferred that the directors wanted to create a reserve for the future expansion of the company. We are, therefor of the view that, on facts, the principle laid down in that decision cannot apply. In our view, the Tribunal has rightly held that Section 23A is applicable.
8. In the result, the question referred to us is answered in the affirmative and against the assessee. The revenue will have its costs. Counsel's fee Rs. 250.