1. The assessee, a private limited company, is carrying on business of operating a fleet of buses. It submitted a return of income for the previous year ending on 31st March, 1960, relevant to the assessment year 1960-61, showing an income of Rs. 6,08,534. The net profit as per the profit and loss account was Rs. 5,21,951 and the return was filed after adding back to the net profit shown in the profit and loss account certain donations made by the assessee during the relevant previous year, which would not be eligible for deduction in computing the total income. The Income-tax Officer assessed the company on a total income of Rs. 6,43,390 and determined the tax payable thereon at Rs. 2,89,205 leaving distributable income of Rs. 3,54,185. The company had declared a dividend of Rs. 1,63,520.
2. The Income-tax Officer considered this declaration of dividend in the light of Section 23A of the Income-tax Act of 1922, which was in force during the relevant year. He examined the question as to whether the assessee-company had declared the statutory percentage of the distributable profits and he found that there was a shortfall in the declaration by making calculation as follows:
RsTotal income assessed 6,43,390Less : Income-tax and corporation tax due thereon2,89,205
Balance of distributable income3,54,185
Dividends to be declared at 65% thereof 2,30,220 Dividends declared1,63,520
3. In view of the deficiency in the declaration of dividends, he issued a notice to the company asking it to show cause why the provisions of Section 23A should not be invoked. The company pointed out that it had dis-tributed more than 65% of the distributable income taking the net profit in the profit and loss account as the basis. The Income-tax Officer did not accept this explanation and he was of the view that Section 23A was attracted. He levied additional super-tax at 37% on Rs. 1,90,665 which was arrived at as follows :
Rs.Distributable income as above3,54,185 Less : Dividends declared1,63,520
Undistributable balance of the total income liable to tax at 37%1,90,665
The tax so levied worked out to Rs. 70,546.05.
4. The company appealed to the Appellate Assistant Commissioner, who held that the donations and other contributions made by the company were outgoings and could be deducted in arriving at the commercial profits and that, therefore, there was reasonable distribution. The department appealed to the Appellate Tribunal against the order of the Appellate Assistint Commissioner cancelling the order under Section 23A of the Act. In the view of the Tribunal there was no attempt at evasion and since the assessee was operating a fleet of buses under threat of nationalisation with the profitable routes being taken away, it would be unreasonable and opposed to prudent business considerations to have declared the profits to its hilt. It, therefore, confirmed the order of the Appellate Assistant Commissioner and held that the provisions of Section 23A were not attracted and dismissed the appeal.
5. At the instance of the Commissioner of Income-tax, the following ques-tion has been referred for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of Section 23A of the Indian Income-tax Act, 1922, were not attracted for the assessment yerr 1960-61 ?'
6. For the department the learned counsel submitted that the Appellate Asistant Commissioner and the Tribunal were wrong in proceeding as if the provisions of Section 23A were not applicable and that the payment of a larger dividend than that declared would be unreasonable. It was pointed our that the assessee had made appropriations of the profits to the general resrve and dividend equalisation reserve to the extent of Rs. 77,117 and that there were plenty of resources available with the company to declare the dividends required by the statute so as not to attract the levy of addtional super-tax. For the assessee the submission was that transfer to the reserve had been found to be reasonable by the Tribunal and that to the extent of certain donations made by the company, the amounts werenot available with the company. It was, therefore, submitted that this is a case where it should be held that the payment of a larger dividend than that declared would be unreasonable.
7. As pointed out in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) the section is in three parts. The first part defines the scope of the jurisdiction of the Income-tax Officer to act under it, the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder and the third part provides for the assessment in the manner contemplated by the statute. The Supreme Court dealt with the provisions of Section 23A before it was amended in 1955. Prior to 1955 Section 23A contemplated merely an order being made in the hands of the company deeming the undistributed total of the balance of the income to be distributed. The amount so deemed to have been distributed was assessed in the hands of the shareholders by taking appropriate proceedings against them to levy tax on such income. The amendment of 1955 was to enable taxation of the company itself at a certain percentage of the undistributed balance of the total income. Except for a change in the mechanism of realising the tax from the shareholders prior to 1955 and from the company after 1955, there is no material distinction between the provision as it was before 1955 and the one afterwards, as far as the problem before us is concerned. As further pointed out by the Supreme Court in the aforesaid case, the provision was introduced to prevent exploitation of the juristic personality of a private company by the members thereof for the purpose of evading higher taxation. In order to apply this provision, the Income-tax Officer had to be satisfied that the dividends declared by the company within a period of 12 months from the end of the period was less than the statutory percentage. This statutory percentage has been varied from time to tine by the Finance Acts and the percentage also has varied with reference to ihe class of companies, like investment companies, trading companies, etc. In the relevant year, the statutory percentage was 65 as regards a company like this. In other words, the assessee-company had to distribute 65% of the balance of the total income after deducting the tax due therefrom. 7he total income minus the tax was Rs. 3,54,185 and 65% thereof vas Rs. 2,30,220. If the company had declared this amount, it would hive been out of the operation of Section 23A. As the company had not declared this amount as dividend, the Income-tax Officer acquired jurisdiction to proceed under this provision.
8. In applying this provision the Income-tax Officer was to be satisfied that having regard to the losses' incurred by the company in the earlier year or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared is unreasonable. If he wasso satisfied, then the provision could not be applied. The question in the present case turns on the point as to whether the payment of a larger dividend than that declared would be unreasonable taking into account all commercial aspects.
9. It has been held by the Supreme Court that the Income-tax Officer can, in deciding whether the payment of a dividend larger than that declared by the company would be unreasonable, take into consideration circumstances other than losses and smallness of profit. It was pointed out that the statute, while making sure that losses and smallness of profits were never lost sight of, required all matters relevant to the question of unreasonableness to be considered. At page 182, Subba Rao J., as he then was, speaking for the Supreme Court, observed as follows:
'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 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.'
10. In the case of this very assessee reported in Commissioner of Income-tax v. Anamalai Bus Transport (P.) Ltd. : 72ITR811(Mad) while agreeing with the department that a donation for a charitable purpose could not be regarded as a proper outgoing eligible for deduction in arriving at the assessable income, held that still the amount to the extent of the donation was not actually available for distribution as dividend. It was, in that context, held that the non-distribution of a larger dividend than that declared could not be considered to be unreasonable. Therefore, to the extent of the donation in this case which comes to Rs. 66,055 it could be said that the amount was not available for distribution.
11. As regards the resources available out of the profits, unfortunately the balance-sheet of the company is not before us. We have no manner of verifying as to how strong the company's reserves were and as to whether any further augmentation of the reserve was actually required applying the tests of commercial considerations. The actual transfer to the reserve in this year consisted of appropriation of a sum of Rs. 50,000 to the general reserve and Rs. 27,177.25 to the dividend equalisation reserve. The Tribunal in its order has not said a word about the transfer to the dividend equalisation reserve. There is no material to show as to how a transfer to such a reserve was called for on the facts. The Tribunal has pointed out that the assessee was operating a fleet of buses always under threat of nationalisation and that the profitable routes being taken away so that itwould be unreasonable and opposed to prudent business considerations to have declared profits to its hilt. If really there was threat of nationalisation, one would not expect the company to keep in reserve further funds. It does not follow from the threat of nationalisation, assuming it to have existed in the relevant year, about which there are no material available in the record, that further augmentation of the reserve would be needed to ward off any such threat. We do not see any rational relationship between the building of the reserve and the threat of nationalisation.
12. Mr. Ram Gopal appearing for the assessee-company submitted, on the basis of annexure 'C', that further capital expenditure had been incurred during the year to the extent of Rs. 8,54,533.28. If really the threat of nationalisation was anticipated as a live one, one would not expect such a large-scale incurring of capital expenditure. The Tribunal has not considered that incurring such capital expenditure was in any manner responsible for the declaration of the dividends having to be only Rs. 1,63,520 as against what was required by the company as per the provisions of the statute. It has been pointed out that the relevant material for this purpose has to be placed by the assessee before the Income-tax Officer. See Commissioner of Income-tax v. R.N. Bagchi and Brothers : 72ITR645(Patna) . The relevant passage runs as follows :
' ......it is for the assessee to place facts before the revenue authorityto assist it to find out whether in spite of the fulfilment of the primary andthe first condition that the requisite percentage of dividend has not beendeclared, what has been done by the company is reasonable either becauseof the losses incurred by it in the earlier years, or because of the smallnessof the profit in the commercial sense or because of any other relevant factor circumstance which would justify the action taken by the company indeclaring a dividend or declaring a small percentage of dividend. '
13. In Indo-Ceylon Denial & Surgical Co. Ltd. v. Commissioner of Income-tax, : 98ITR536(Mad) to which one of us is a party, it was pointed out that unless there waspositive material to show that the board of directors or the general bodyresolved to declare a lesser dividend with a view to build up sufficientreserves to be utilised for such developmental activity, it was not possible toassume that the declaration of the particular amount of dividend was forthe reason that the board of directors or general body required finance forthe developmental activity. It does not follow from the mere declarationof a particular amount as dividend that the directors wanted to create areserve for the future expansion of the company. In the absence of anything to show by way of directors' report or any other material that thecompany did not declare larger dividends because of this consideration, wearc of the view that the assessee's claim was not properly accepted by the Appellate Assistant Commissioner and the Tribunal.
14. Having considered all the facts, we are unable to hold that the Tribunal came to the right conclusion when it held that the provisions of Section 23A were not attracted on the facts herein. We answer the question referred in the negative and against the assessee. The Commissioner will have his costs. Counsel's fee Rs. 250.