1. The petitioner in these petitions is a certain private limited company incorporated under the Indian Companies Act. It is called Murlimal Santram and Co. (Madras) Private Ltd. It consists of eleven shareholders, and, these shareholders fall into two groups. One group consists of the members of the family of one Srikishandas Murlimal' and the other group consists of the members of the family of one D. B. Futanani. There are five directors of the company three of whom belong to Futanani group and the other two belong to Srikishandas group. It appears that there is no love lost between the two groups and they have been quarrelling over the affairs of the company. The directors of the Futanani group resolved at a meeting of the Board of Directors held on 14-5-1953 to convene an extraordinary general meeting of the company on 16th July 1953 to pass a resolution enabling the directors of the company to draw a remuneration of Rs. 1000 per mensem commencing on and from 1st of January 1951. The rival group, Srikishandas group, apprehended that the resolution would be passed at the proposed general meeting with the help of the casting vote of the Chairman D. B. Futnani, and, moved the High Court of Madras to restrain the company by an injunction from holding the extraordinary meeting or from passing any resolution in regard to the payment of remuneration of the directors. By an order dated 15th July, 1953, the High Court issued an interim injunction restraining the directors of the company from holding the general meeting of the company on 16th July 1953 and from considering or passing at the said meeting or any other meeting the resolution sought to be passed, and restraining D. B. Futnan from assuming chairmanship of the extraordinary meeting. Thus, the attempt of the Futnani group to have a resolution passed providing for the remuneration of the directors was successfully foiled. Consequent upon this, the disputes between the two rival groups grew and reached a climax leading to a reference of the disputes to certain named arbitrators. The arbitration proceedings dragged on till April 1959. In this state of affairs of the company it is not surprising that the company could not draw up a proper balance sheet or a profit and loss account in accordance with the provisions of the Companies Act. The Income-tax Department could not of course wait to assess the company under the provisions of the Act till the settlement of disputes between the rival groups of shareholders.
2. A notice Under Section 22(2) of the Income-tax Act was issued and the company filed a return of income with the balance sheet as on 31st March 1955, and a profit and loss account signed by the secretary of the company. . The directors did not sign the balance sheet or the profit and loss account because no provision was made in the company's accounts for the remuneration of the directors and other revenue expense due to the litigations involving the company. The assessments were, however, completed on the materials placed before the authorities for the years 1955-56 to 1958-59. The Income-tax Officer took the view that the income of the company for the relevant years was enough and sufficient to declare a dividend in respect of those years and he accordingly initiated proceedings Under Section 23-A of the Act. The undistributed profit chargeable to super tax was determined as Rs. 68,252, Rs. 1,30,424, Rs. 68,126 and Rs. 87,675 for the assessment years 1955-56, 1956-57, 1957-58 and 1958-59, respectively. Accordingly a super tax of Rs. 17,063, Rs. 32,606, Rs. 25,206 and Rs. 32,439 was levied. The company filed appeals against the said orders to the Appellant, Assistant Commissioner, but was unsuccessful. Further appeals by the company to the Tribunal met with no success. Applications for reference of questions of law Under Section 66(1) of the Act were filed before the Tribunal, but these applications were also rejected. The present applications have been preferred by the company Under Section 66(2) of the Act, it is prayed that the Tribunal may be directed to refer the following questions of law for decision to this Court -
'1. Whether on the; facts and in the circumstances of the case, the provisions of Section 23-A of the Indian Income-tax Act, were properly invoked?
2. Whether Section 23-A authorises assessment when the assessee is legally disabled from distributing the profits?
3. Whether Section 23-A as construed by the Tribunal is violative of the assessee's fundamental rights to hold property and to carry on business, and is unconstitutional and void?'
3. We may observe even at the outset that there is no substance in the contention raised challenging the vires of Section 23-A of the Act. There are at least two decisions of this Court in which it has been held that this provision is not ultra vires the Constitution, and they are, Pioneer Motor Ltd. v. Commissioner of Income-tax and C. W. Spencer v. Income-tax Officer, Madras : 31ITR107(Mad) . Learned counsel for the assessee, very properly, refrained from urging this point before us.
4. The real question to be considered is whether on the facts and circumstances of the case, the Income-Tax-Officer acted rightly in passing an order Under Section 23-A of the Act. The company is a private limited company falling within the scope of the section. Admittedly the company did not declare any dividend in respect of the assessment years 1955-56 to 1958-59. It is not disputed that the company had earned profits during these years. The ingredients necessary for the operation of Section 23-A are undoubtedly present. 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 twelve months immediately following the expiry of that previous year and less than the statutory percentage of the total income of the company of that year as reduced by the amount of income-tax and super tax payable by the company, 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, the Income-tax Officer shall make an order in writing that the company shall be liable to pay super tax at a particular rate mentioned in the section. But, if the Income-tax Officer is satisfied 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 would be unreason able, he need not pass an order levying supertax. In the matter of ascertaining the quantum of undistributed profits available by way of surplus for the levy of super tax under the section regard should be had not to the! assessable income under the Income-tax Act, or what may be called the accounting income, but, only to true commercial profits. The provisions of the Income-tax Act contemplate and provide for assessment of notional income and for certain artificial and statutory rules for deduction by way of depreciation and other allowances. The assessed income may not truly reflect the actual commercial profits realised by the company. If a company were to be mulcted under S.. 23-A on the basis of an assessed' income, it might result in forcing the company to declare a dividend even at the expense and cost of capital assets. This is certainly not permissible under the provisions of the Indian Companies Act. In fact, this position has been made clear by the decision of the Supreme Court In Commissioner of Income-tax v. Bipinchandra Maganlal and Co., Ltd., Bombay : 41ITR290(SC) , The following observations of Shah, J. may be usefully referred to :
A company normally distributes dividends out of its business profits and not out of its assessable income. There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. Computation of income for purposes of assessment of income-tax is based on' a variety of. artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividend would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account.'
As stated already, it is not the case of the company in the instant case that the order Under Section 23-A is bad because the Income-tax Officer took into account not the true profits, but only the assessed income which did not truly reflect the available surplus which may be subjected to the levy of super tax.
5. The contention of the assessee, both before the Department and before the Income-tax Appellate Tribunal, was that the affairs of the company were in such a pellmell and in a chaotic state that it could not devote its attention to ascertain the profits earned and to declare a dividend. It was pointed out that the interim injunction granted by this Court prevented the company from convening any meeting for the purpose of sanctioning remuneration to the directors, and, that Unless and until a provision was made for remuneration there could be no proper calculation of the real profits earned by the company. It was said that the company could not be blamed for not declaring the dividend for the years in question and though the granting of the injunction by this Court was not the immediate cause of the non-declaration of the dividend, it was at least a proximate reason. In other words, the company contended that it acted bona fide in the matter after due legal advice from members of the legal profession and that therefore the Income-tax Officer should have held that it would be unreasonable to expect the company to have declared dividends. This contention was repelled by the Appellate Assistant Commissioner in the following words:
'While applying the provisions of Section 23-A the Income-tax Officer cannot take any cognizance of the internal disputes between the member-directors of the appellant company. The company law requires the holding of an annual general body meeting. It is not the case of the appellant that the annual general body meeting had not been held owing to any third party interference or by any other statutory disabilities. The simple reason for the failure to hold a general body meeting and declare a dividend is that there were internal disputes between the sharer holders. If the shareholders were so minded they could easily have convened a general body meeting with the limited object of declaring a dividend so as to escape the application of the provisions of Section 23-A.'
6. Dealing with the question as to how far there was any legal impediment against the company preventing it from declaring a dividend, the Tribunal observes as follows:
'This injunction (the injunction issued by this court) has nothing to do with holding the general body meeting or declaration of dividend at all. There is also nothing to prevent the directors from declaring interim dividends if they were so keen, in which case, there is no need to go to the general body meeting but they can do so under their own powers. _
The next argument is that so long as the resolution fixing the directors' remuneration as intended to be put by the general body meeting was not finalised, it being the subject-matter of the High Court injunction, no accounts could be prepared and submitted to the general meeting for the purpose of declaring a dividend. This argument is easily met. The accounts can easily be prepared by making suitable provision therefore or by noting a contingent liability therefore in the balance sheet if at all there was such a liability as apprehended.'
7. It seems to be quite clear that the company was not in any way handicapped in the matter of declaring a dividend by reason of the injunction order issued by this Court. We are unable to understand why the preparation of the balance sheet or the casting of the profit and loss account should be postponed by reason of the dispute between the rival groups of shareholders over the proposed remuneration of the directors. The substance of the matter seems to be that the shareholders quarreled and failed to look after the company's affairs properly in accordance with the provisions of the Indian Companies Act. The argument that the shareholders or the directors thought it prudent not to declare dividends till after their disputes are given the quietus cannot certainly avail to resist the action of the Income-tax department in applying the provisions of Section 23-A,of the Act.
8. Mr. Swaminathan, the learned counsel for the assessee, contends that the Income-tax Officer is no! specifically confined to the specific grounds mentioned in the section, viz., the loss incurred by the company in earlier years or the smallness of the profits made in the accounting year, to satisfy himself regarding the reasonableness of payment of any dividend or a larger dividend. than that declared, and that, the officer is not compelled to pass an order if he could say that it would be unreasonable to charge the company for not having declared a dividend upto the statutory percentage of the total income of the company, taking into account the affairs of the company in general. The phraseology of the section does not lend support to his contention. The section is mandatory. The officer should pass an order unless he is satisfied that having regard to the losses incurred by the company in the earlier years, or the smallness of the profit made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable. The words 'having regard to' should be understood in the context as limiting the officer's power to bear in mind only the losses of the earlier years or the smallness of the profit made in the previous year. The same words may connote a different meaning in another context. A statute may say that in granting or refusing a licence or a permit the competent authority shall have regard to certain circumstances. An argument that the specific circumstances are not exhaustive of the discretion of the authority may not conflict with the presence and use of the words 'having regard to'. Reference may be made to the provisions of Section 47 of the Motor Vehicles Act, and, that reads,
'A Regional Transport authority shall, in considering an application for a stage carriage permit, have regard to the following matters, namely: -.....'and shall also take into consideration any representations made by persons; .......'
This provision would not prevent the Transport authority from taking into account other relevant and germane considerations in granting or refusing the stags carriage permit. Clauses (a) to (f) mentioned in Section 47 (1) do hot exhaust the powers of the discretion of the authority. That section only means that the authority should have regard to the enumerated circumstances. But, there is no prohibition, express or implied, against the authority keeping in view other considerations provided they are not extraneous to the subject-matter of the grant. The only safe guide to ascertain whether such words operate as a curb on the power of the authority or as a mere reference to something to be taken note of, is the context in which they occur and the object and purpose of the particular provision. We are unable to say that in the particular context in which the words 'having regard to' occur in Section 23-A of the Indian Income-tax Act would permit the officer taking into account other associated circumstances besides the losses in earlier years and the smallness of the profit made in the previous year.
9. This is the view taken by the Bombay High Court in Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay : AIR1950Bom1 . Delivering the judgment of the Bench, Chagla, C. J. observes as follows:
'Mr. Kolah's contention is that in determining whether an order should be made Under Section 23-A it is not enough for the Income-tax Officer merely to consider the losses incurred by the company in earlier years or the smallness of the profit, but he must also take into consideration the paid up capital of the company, for how many years the company has been doing business, and various other factors. In my opinion, to put that construction upon the section would be to import into it words which the legislature, did not think fit to insert in that section and1 it would be to expand the ambit of the discretion to be exercised by the Income-tax Officer in determining whether the payment of a dividend or a larger dividend than that declared would or would not be unreasonable. It is left to the income-tax Officer entirely to decide whether such a payment of a dividend or a larger dividend would or would not be unreasonable, but such satisfaction must be arrived at by the Income-tax Officer, only after consideration of these two factors which the legislature thought fit he should consider before arriving at his decision.'
10. We find ourselves in respectful agreement with the above observations of the learned Chief Justice. The test of unreasonableness is indicated by the section itself and that Income-tax Officer cannot take into account the whole range of the activities of the company, if that were to be permitted it would introduce uncertainties and would give scope to the abuse of powers. We do not think, nor does the language of the section indicate, that the legislature intended to entrust the officer with a power of indefinite scope and unlimited amplitude. The Income-tax Officer is called upon by the strict terms of the statute to determine the question of reasonableness in the matter of declaration of dividend based only an the two grounds, viz.., the losses incurred by the company in earlier years or the smallness of the profits m3de in the previous year.
11. The difficulties of the company in the matter of declaring a dividend, whether because of faction between the shareholders or because of other circumstances, cannot certainly be a factor which should weigh with the officer in declining to pass and order Under Section 23-A. Has the company Undistributed available profits capable of being distributed as dividend, and, has the company failed to declare dividends upto the limit of the statutory percentage of the total income of the company as prescribed by the section, are the only two relevant criteria which should engage the attention of the officer. Of course, if he is satisfied that the company's finances were very much depleted by previous losses or that the profit earned by the company in the previous year is so negligible and small that an order under the section would be harsh, unjust or unreasonable, he need not pass an order.
12. The question may well be, posed as to what would be the position if actually the company is prevented from declaring a dividend by any statute or order of a competent Court. In such a case, the non-declaration of the dividend by the company could not be said to be a voluntary one on its part, but would be something which it could not resist or prevent. The very basis of the section is that the company failed to do something which it could have done. Cases where the assessee company is legally disabled from discharging its normal functions by reason of an overriding order of court or provisions of a statute fall altogether outside the scope of Section 23-A as it is implicit in that section that the penalty of super tax would be attracted only where it failed to declare a dividend in the manner required by and as contemplated Under Section 23-A, though it had every opportunity to do so.
13. Mr. Swaminathan contends that by an order of the Bombay High Court dated 31st day of October 1355, the company was actually restrained from convening a, general body meeting and that being an impediment action Under Section 23-A was not proper. He referred to the order in I. C. No. 194 of 1952 in App. No. 69 of 1953 in the High Court of Judicature at Bombay. But that was an order against a company called Murlimal Santram and Co. (Bombay) Ltd., which was the first respondent in that appeal. As stated already, the company which is the petitioner in these petitions is only Murlimal Santram and Co. (Madras) Private Ltd. We do not know whether the shareholders and directors of both these companies are the same individuals. But, even so, it cannot be, disputed that in law the Bombay company is a different entity from the present petitioner. When this was pointed out to the learned counsel, he frankly conceded that he could: not sustain the contention urged on the basis of the restraint order issued by the Bombay High Court. There is of course no substance in this argument.
14. We are not satisfied that the mere existence of, disputes between the shareholders of the petitioner company would serve as an excuse for the failure to declare. dividends, and, we have no doubt that, in any event, an action Under Section 23-A cannot be resisted on that ground alone. In our opinion, the order of the Tribunal is correct and the questions of law raised before us by the petitioner do not arise on the admitted facts and circumstances of the case.
15. These petitions fail and are accordingly dismissed with costs in T. C. No. 18 of 1962. Counsel's fee Rs. 150 in T. C. No. 18 of 1962. There will be no order as to costs in the other petitions.