Ramaprasada Rao, J.
1. The assessee is a private limited company carrying on business in the manufacture and sale of bricks. For the assessment year 1961-62, the assessee declared a dividend of Rs. 12,000 at the general body meeting held for the purpose on May 4, 1961. The Income-tax Officer, in exercise of his jurisdiction under Section 23A, while scrutinising the return of the assessee, found that the dividend was not properly declared and that such a declaration was not in accordance with law, and he therefore called upon the assessee to show cause why additional super-tax under Section 23A should not be levied. It is not necessary for us to scrutinise the quantum of the profits as alleged by the assessee and as noticed by the Income-tax Officer, in view of the ultimate opinion which we are going to render in the instant case. The assessee explained that the distribution of the dividend was reasonable and was a matter which was considered by the general body of the company in question, and, in any event, such a dividend was declared by the company after it made certain reserves for the benefit and for the strengthening of the resources of the company. The revenue rejected the submissions made by the assessee and levied the additional super-tax as prescribed. The appeal by the company to the Appellate Assistant Commissioner was not successful. Even before the Appellate Tribunal, on second appeal, the company failed. Before the Tribunal, the company expressly took up the position that the business of the company was in a nascent stage as the year of assessment was its second year of operation and that any further declaration of dividend as demanded by the revenue would be to disturb the capital structure of the company and its prospects. Other question regarding the sufficiency of the notice contemplated in Section 23A(2) were raised, but they are not pressed before us. The Tribunal, after hearing the counsel, came to the conclusion that the company failed in its statutory duty in the matter of declaration of the dividends. It observed as follows :
'The Income-tax Officer has only to consider the past losses and whether the profit made in the previous year was so small that the payment of higher dividend would be unreasonable. In this case there are no prior losses. The profit made by the assessee-company in the previous year is Rs. 48,203. The profit has to be understood in the commercial sense and we cannot say that it is so small that a declaration of higher dividend would be unreasonable. As rightly pointed out by the Appellate Assistant Commissioner, thecreation of reserves are appropriation and have no relevance in finding out whether the provisions of Section 23A apply or not.'
2. On an application by the assessee to refer a question of law arising out of its order, the following question has been referred to us to render our answer thereon:
'Whether, on the facts and in the circumstances of the case, the levy of additional super-tax under Section 23A(1) of the Income-tax Act for the assessment year 1961-62 was valid ?'
3. Mr. Srinivasan, learned counsel for the assessee, while repeating the contentions earlier made by him before the revenue and the Tribunal, contends that the order of the Tribunal in that they limited the exercise of jurisdiction by the Income-tax Officer only in cases where the profit is arithmetically small and if the assessee incurred past losses and that such limitation imposed by the Tribunal, as is seen from the excerpt above, are unsustainable in view of the interpretation of the said section by this court and the Supreme Court. He would also urge that in the instant case dividends were declared at the general body meeting held by the company for the purpose, amongst others, and the declaration of dividend being essentially a matter which is domestic, the company acted exclusively within its province and unless it could be clearly said that it has exceeded its obligations and has declared a dividend one way or the other unreasonably, then only the jurisdiction of the Income-tax Officer, if at all, can be invoked under Section 23A. In our view, this contention is well founded.
4. It is by now well settled that Section 23A of the Indian Income-tax Act, 1922, being penal in nature the jurisdiction which the revenue could exercise under that section is exercisable only and only if the ingredients and the circumstances set out in the section are clearly brought out and established. Inter alia, one of the mandates provided for in the section is that a larger dividend than that declared would be unreasonable. The declaration of a dividend by a company is essentially a matter to be dealt with by the board of directors and ultimately by the general body. It is one amongst many events which are inter-related or laced with domestic or indoor management of a company. It may be expected that when a company declares a dividend at a meeting of its general body, then the body of shareholders are conscious and aware as to what funds are available for such dividends and what percentage out of it should be made available to the shareholders and what portion of such profits should be reserved for future enterprises, expansion and benefits of the company. This, as we stated earlier, is a matter pertaining to the internal management of the company, and therefore it is that 'the arm-chair principle' has been invoked to find whether the decision or act of the company is unreasonable from the commercial point of view and whether such a decision would not satisfy the acid test of reasonableness.
5. Yet again, there is another limb in Section 23A which, in the context, throws some light upon the jurisdiction of the revenue to act under it. It is the smallness of the profits made in the previous year. What is small to the revenue may not be so small to the company and vice versa. Whether it is small at all, is once again to be decided by the company itself, having regard to its various trading activities in the past, present and future. In the instant case, this is a nascent company working in the second year of its operation. It could easily be conceived that such a company should make some reserves for its future preservation and for its future good. If such profits, therefore, are diverted for that purpose, it is essentially for commercial reasons. Then, notwithstanding the fact that a portion of such profits--viewed by the revenue as large--has been diverted for such projects connected with the company in future, that it cannot be said by the mere arithmetical largeness of the total profit, that the dividend declared was not proper. It is not necessary for us to fully delve deep into the scope and meaning of Section 23A in view of the decided cases. In Commissioner of Income-tax v. Gangadhar Banerjee and Co., : 57ITR176(SC) , Subba Rao J-, as he then was, speaking for the Bench, said at page 181 as follows:
'The section is in three parts : the first part defines the scope of the jurisdiction of the Income-tax Officer to act under Section 23A of the Act; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder; and the third part provides for the assessment of the statutory dividends in the hands of the shareholders.'
6. If, in a given case, the Income-tax Officer makes an order declaring that the undistributed portion of the assessable income less taxes to be paid -shall be deemed to have been distributed as dividends among the shareholders, a duty is equally cast on him to find out whether there were earlier losses or the profit is small. In that connection, said the Supreme Court:
'What does the expression 'profit' mean? Does it mean only the assessable income or does it mean commercial or accounting profits ?......
Though the object of the section is to prevent evasion of tax, the provision must be worked not from the. standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. 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.'
7. In Indian Commerce and Industries Co. Ltd. v. Commissioner of Income-tax, : 60ITR229(Mad) , 233 this court, after reviewing the decision, reiterated that Section 23A is ofa penal nature and the burden is on the revenue to show that the conditionsfor making an order are satisfied. Veeraswami J., as he then was, observed ;
'In determining the effect of withheld profits, the Income-tax Officer should consider matters from the point of view of the board of directors. He must arrive at a finding that a further or larger dividend than that declared would not be unreasonable, with reference not only to the losses incurred by the company in earlier years and the smallness of the profits made during the relevant year but also to all other relevant circumstances.'
8. In the end the learned judge said: 'The approach to the question should be on business considerations in the light of particular facts.'
9. To a similar effect is the decision of this court in Commissioner of Income-tax v. Sundaram Industries Private Ltd., : 71ITR380(Mad) , After noting the three limbs of Section 23A, the court observed that one such part of Section 23A concerns itself with the jurisdiction and the second with the exercise of such jurisdiction. Regarding the third part, namely, the propriety of the quantum of dividend, the court said :
'Notwithstanding the statutory prescription by reason of the amendments noted (in that case 100 per cent. was the prescription)...the Income-tax Officer should find that the act of the company in not having declared the statutory percentage of dividend is unreasonable. We are of the view that Section 23A of the Indian Income-tax Act, 1922, is susceptible to the test of reasonableness envisaged in the section.'
10. Again, in Rayalaseema Passengers and Goods Transport v. Commissioner of Income-tax, : 72ITR783(Mad) where a similar question arose, this court, while disagreeing with the reasoning of the Tribunal, had to remit the appeal to the Tribunal for a reconsideration in the light of the observations made therein. In this case also it was made clear that for determining the available profits for purposes of Section 23A, the revenue should act strictly in accordance with the rules of guidance embedded in the section itself and should also be prompted to exercise their jurisdiction in the context of commercial expediency as well.
11. Viewed in the light of the dicta as noticed above, the Tribunal went wrong in observing that the Income-tax Officer is only to consider the past losses and whether the profit made in the previous year was so small that the payment of a higher dividend would be unreasonable. Their understanding of the section that the creation of reserves or of appropriation for the same have no relevance to the investigation under Section 23A is obviously running contra to the ratio of the decision of the Supreme Court and our court referred to above.
12. In these circumstances, while answering the question in favour of the assessee, we remit the matter to the Tribunal to re-hear the appeal and decide the same in the light of the observations made herein. There will be no order as to costs.