1. This reference is concerned with the propriety of the super-tax levied on the profits withheld by the assessee in excess of the permissible limits under Section 23A of the Income-tax Act, 1922. The question will turn on whether a sum of Rs. 1,03,445 donated by the assessee during the assessment year 1959-60, to Nachimuthu Industrial Association would form part of the total income, and if so, whether distribution of a larger dividend than that declared -would be unreasonable.
2. The assessee, a private limited company, was charged to tax on a total income of Rs, 7,15,366, the tax payable thereon being Rs. 3,97,562. After deducting profession tax of Rs. 1,689 the balance of the total income amounted to Rs. 3,16,115 of which 60 per cent. should have been declared as dividend. That will come to Rs. 1,89,669, but actually only Rs. 1,52,400 was distributed as dividend. The profit and loss account of the assessee exhibited a profit of Rs. 5,49,927. But this was arrived at after deducting the amount donated as charity to the industrial association. On the view that the donation was not an outgoing for the purpose of earning the profits, the revenue held that it could not be allowed as a deduction and, invoked Section 23A(1). The Tribunal disagreed with that view and allowed the assessee's appeal on the ground that the amount covered by the donation was not actually available for distribution as dividend and as further payments of dividend would only have to come out of the assessee's reserves, the levy of super-tax was not justified. The Tribunal also adverted to Section 15B and the policy underlying it, as being in support of its view.
3. In our opinion, the Tribunal's conclusion is correct, though we may not entirely agree with the reasoning on which it has been rested. The revenue's point of view, urged by Mr. Balasubramanyan, is that the donation has been made out of the profits made by the assessee and such an appropriation being not for a commercial purpose, it is not entitled to deduction, from the total income for purposes of applying Section 23A. He relies on Commissioner of Income-tax v. Gangadkar Banerjee and Co. (Private) Ltd., : 57ITR176(SC) . and Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax, : 60ITR417(SC) .in both of which it has been held that determination of profits for purposes of Section 23A should be on commercial principles. Actually, those cases were concerned with, among other things, the scope of the expression 'smallness of profits' in that section, and it was said that such profit should be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional. We do not think that the two cases were so much directly concerned with the question of what would constitute total income for purposes of the first part of Section 23A. But we are prepared to acceptthe view for the revenue that in determining the total income for such purposes, commercial principles should necessarily be kept in view. It may be noted that the levy of penal-super-tax under Section 23A is not an assessment of the total income to tax in the normal sense of the Income-tax Act. It follows, therefore, that considerations which may govern assessment of total income to income-tax, particularly in the matter of deductions and allowances, may not in their full vigour and scheme apply to a determination of the total income for purposes of Section 23A. But we are not in this case expressing any opinion on the general question what deductions will be permissible and what not in making such a determination, apart from the items Section 23A has specifically mentioned. Mr. Swaminathan, for the assessee, pointed out that profits are those arrived at the end of the accounting year, and so, they should necessarily exclude expenditure including that in the nature of a donation as in this case. We do not think that it is a correct proposition. It is obvious that profits are ascertained at the end of the accounting year, but in the computation, the outgoings may or may not, on proper consideration, be allowed, and those not allowed, not withstanding that the expenditure has been incurred, would form part of the profits. We are unable, therefore, to accept the argument that because the donation has been paid out during the assessment year, therefore, it did not form part of the total income. It is, of course, another matter if the donation is allowed as a deduction in the computation of the total income. But, on this matter we are inclined to accept the revenue's view that a donation of this kind for a charitable purpose by the assessee, which is a commercial company, cannot be regarded as a proper outgoing eligible for deduction ; nor has it been claimed as a deduction in this case from the computation of the total income. We reach, therefore, the position that the revenue rightly invoked the jurisdiction under the first part of Section 23 A.
4. But, the question still remains whether, notwithstanding that fact, distribution of a larger dividend than that declared by the assessee will not be unreasonable. Unlike under the first part of Section 23A, no question of deduction of any particular outgoing can arise. In considering the question of reasonableness, however, the section itself requires regard being had to two specific matters, losses incurred by the company in earlier years or the smallness of the profits made in the previous years. It has been held by the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd., which has been followed by that court in Gobald Motor Service (P.) Ltd. v. Commissioner of Income-tax that the two specified items do riot exhaust the type or category of considerations which should go into a determination of reasonableness in particular circumstances. It was observed in that case :
'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 (the Income-tax Officer) 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. This argument ignores the expression having regard to that precedes the said words. '
5. We think that, in determining the question of reasonableness, one of the tests to be applied may well be the policy or the object of Section 23A itself. It is devised to prevent exploitation of the corporate or juristic personality of a private limited company by its members with a view to evade higher taxation. If this test is satisfied on the facts, there should be no difficulty whatever in coming to a conclusion that it would not be unreasonable to distribute a larger dividend than that declared. Subject to this test, there may be other circumstances which may point to a bona fide expenditure, though not incurred in or in the course of earning a profit or making a gain. The directors in this case, in the course of carrying on the business, thought fit or prudent or desirable to make the donation. We do not see why, on the arm-chair test, such an expenditure ought not to be taken into account and particularly the fact that to the extent of the expenditure, the amount is not actually available for distribution as further dividend.
6. Mr. Balasubrahmanyan referred us to Commissioner of Income-tax v. Thakar Das Bhargava, : 40ITR301(SC) and contended that the principle of that case should enable the' revenue to sustain the super-tax levied in this case. That was a case of a lawyer who agreed to defend certain accused in a criminal trial on condition that he would be provided with the sum of Rs. 40,000 for a public charitable trust which he would create. Actually, where the trial was over, a trust was created but for a lesser sum. That sum was brought to charge as professional income in the hands of the lawyer and this view was eventually accepted by the Supreme Court as correct. We fail to see how the ratio of this case bears in judging reasonableness for purposes of Section 23A. The charge in that case related to professional income brought to assessment and all the considerations which enter into a computation of the total income under the provisions of the Income-tax Actoperated. But that is not the case in proceedings tinder Section 23A. For one thing, what is done under Section 23A is not a regular assessment. Further, the computation of the total income for purposes of that section is not, so to speak, controlled or limited by the specific provisions of the Income-tax Act relating to assessment of profits and gains. Furthermore, ' reasonableness ' has to be judged with reference to all relevant circumstances and business considerations, not the least of which is the actual availability of funds for distribution as dividend, or further dividend. A case of theft of cash in the chest of a private limited company may be visualised. What happens in that case Can it be said that the revenue can ignore the loss and insist in judging reasonableness that, notwithstanding the fact of the loss, the assessee should have distributed further dividends than what was justified by the actual profits available, We have no doubt that in a case of that kind, we cannot regard that distribution of a further dividend would not be unreasonable. That may be an extreme case. But there may be other outgoings which have been made, not out of pure business considerations, but considerations connected therewith or somewhat related thereto or which a prudent businessman may reasonably take into account. We suppose that the approach to the problem should be on the same lines in such cases.
7. In the instant case, the Tribunal, which had an opportunity to look into the records, has found that the memorandum of the association of the assessee itself provided for distribution of such a donation to charitable purposes. There is also no trace of any evidence or suggestion that the donation had been made with a view to evade tax. Nor has it been suggested at any stage that the donation has not been actually paid out and to that extent the profits of the company have not been reduced. We are of the view, in such circumstances, that non-distribution of further dividend than that declared cannot be considered to be unreasonable. The question framed by the Tribunal in the reference is:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of Section 23A were not attracted for the assessment year 1959-60?' The frame of the question in that manner discloses that the Tribunal did not properly appreciate the scope and effect of Section 23A. It is one thing that Section 23A is or is not attracted; and it is quite another that even when it is attracted a larger dividend than that declared may or may not be regarded as unreasonable in particular circumstances. The question really ought to be ' whether, on the facts and in the circumstances of the case, the super-tax levied under Section 23A on the assessee for the assessment year 1959-60 is in accordance with law '
8. We answer this question against the revenue with costs. Counsel's fee Rs. 250.