1. The assessee is a private limited company doing business in the manufacture and sale of mosaic tiles, etc. The share capital of the company consists of 55 shares of Rs. 1,000 each. The commercial profits for the year ended March 31, 1959, as per audited accounts was Rs. 19,645. A sum of Rs. 3,109 was paid towards arrears of tax and the tax for the year was Rs. 13,308. In the general body meeting held on October 12, 1959, it was resolved that no dividend shall be declared for the year ending March 31, 1959. For the year ending March 31, 1960, the company returned a loss of Rs. 18,805 and ultimately the High Court determined the loss when the amount was disputed by the department at Rs. 16,696. Since the assessee had not distributed any dividend the Income-tax Officer called upon the assessee to show cause why additional super-tax should not be levied under Section 23A(1) of the Indian Income-tax Act, 1922 (hereinafter called 'the Act'). The assessee submitted that after the arrears of tax and the tax due for the year was deducted from the commercial profits only a sum of Rs. 3,228 was available and that the company suffered a loss in the subsequent year. The Income-tax Officer took the view that the assessable profit was Rs. 25,841 and after deducting the tax of Rs. 13,808 there was a balance of Rs. 12,533 which could have been declared as dividend. He was also of the view that the losses of the earlier years alone could be taken into account under Section 23A(I) of the Act and the losses of the subsequent year have no relevance. In that view, he held that the assessee was liable for penal super-tax under Section 23A(1). The assessee preferred an appeal.
2. The Appellate Assistant Commissioner accepted the contention of the assessee that only the commercial profits could be taken into account while applying the provisions of Section 23A(1). After noting the arguments of the assessee, he held that the surplus profit left after deducting the taxes was very small and, therefore, no action could be taken under Section 23A(1) and accordingly set aside the order of the Income-tax Officer. Revenue filed an appeal to the Tribunal and pointed out that as per the balance-sheet of the company as on March 31, 1959, there was a sum of Rs. 12,000 under the dividend equalisation reserve and that if the accounts were properly worked out there would be sufficient' profit for distribution as dividend. It was also contended that the losses incurred in the subsequent year could not be taken into account in considering the question as to whether the provisions of Section 23A(1) are attracted or not. The Tribunal observed that the general body meeting was held on October 12, 1959, that the balance-sheet was drawn up on September 14, 1959, and that therefore the assessee could have anticipated the loss for the accounting year 1959-60 and in fact the assessee returned a net loss of Rs. 18,805 for that year. The Tribunal found that by the time the general body meeting was held the assessee's apprehended loss should have amounted at least to Rs. 9,000 with a prospect of further loss being incurred in the remaining months of the financial year 1959-60, while the distributable profit after deducting the tax for the year and the arrears of tax from the commercial profits amounted to only Rs. 6,337 and that the company could not be said to have acted unreasonably in deciding that no dividend should be declared. In that view, the appeal was dismissed.
3. At the instance of the revenue the following question has been referred:
'Whether, on the facts and in the circumstances of the case, the provisions of Section 23A(1) were not attracted for the assessment year 1959-60?'
4. The relevant portion of Section 23A(1) reads as follows:
'23A. (1) 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 the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year ....
the Income-tax. Officer shall, unless he is satisfied-
(i) 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 unreasonable. .... make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 23, be liable to pay super-tax. . . .'
5. It is now well-settled that the losses incurred in the earlier years and the smallness of the profits made in the previous year are not the only factors which the Income-tax Officer should take into account in considering the question whether the payment of a dividend or a larger dividend than that declared would be unreasonable. The section requires all matters relevant to the question of unreasonableness to be considered by the Income-tax Officer while passing an order under Section 23A(1). Thus in Commissioner of Income-tax v. Gangadkar Banerjee & Co., : 57ITR176(SC) the Supreme Court observed:
'The reasonableness or 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. 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.'
6. It was also held in that case that the provision must be worked not from the standpoint of the tax collector but from that of a businessman and 'profits' in the section means 'commercial or accountable profits and not assessable profits'. In Commissioner of Income-tax v. Bipinchandra Maganlal & Co., : 41ITR290(SC) , the Supreme Court had held :
'Whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question.'
7. It is, therefore, not open to the Income-tax Officer to take the dividend equalisation reserve and add it to the .profits earned during the year and hold that not distributing the larger dividend was unreasonable. In this connection we may also refer to the decision of the Bombay High Court in Bombay Cycle Stores Co. (P.) Ltd. v. Commissioner of Income-tax, : 51ITR460(Bom) . In that case the balance-sheet showed a general fund created out of the taxed profits of the earlier years. The argument on behalf of the revenue which was accepted by the Tribunal was that the losses in the earlier years need not be taken into account in determining the available commercial profits of the year because there was the accumulated reserve which exceeded the amount of the loss. In considering this argument, the court said :
'In our opinion, that approach was not a proper approach as is required by law. Section 23A requires the losses incurred in the previous year to be taken into consideration in considering the question of reasonableness or otherwise of the distribution of dividend by the company. Whether the losses of the previous year should be adjusted against the profits of the current year or should be adjusted against the reserve is for the businessman to consider. In our opinion, it could not be for the Income-tax Officer to direct a businessman the manner in which he should conduct his business. If the businessman chooses to adjust the losses in the previous year against the profits of the current year he is within his right to do so and that has to be taken into consideration in deciding whether an order under Section 23A of the Income-tax Act should be made or not.'
8. This court in Indian Commerce and Industries Co. Ltd. v. Commissioner of Income-tax, : 60ITR229(Mad) , after considering the earlier cases, observed that the approach to the question should be on business considerations in the light of particular facts. Again in Alavai Industries P. Ltd, v. Commissioner of Income-tax, : 76ITR310(Mad) , this court held that considerations which applied to an established firm could not be blindly applied to a nascent company which is in the second year of its operation. In a recent decision in Commissioner of Income-tax v. Asiatic Textiles Ltd., : 82ITR816(SC) , the Supreme Court again considered the question and observed :
'Whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. The Income-tax Officer can step in under Section 23A(1) only if the directors unjustifiably refrain from declaring dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-director.'
9. It is seen from the ratio of these cases that no uniform standard or yardstick could be applied. Section 23A is one of those series of sections which are directed against avoidance of tax. The Income-tax Officer will have to decide the question with reference to the facts and circumstances in each case. The touch stone in all such cases is whether the non-declaration or declaring the dividend less than the statutory percentage of the total income is an attempt at evasion of tax or a prudent action of the directors dictated by the business exigencies of the particular concern.
10. Having regard to these principles, let us go into the facts of this case. As seen above, the commercial profits for the year ended March 31, 1959, was Rs. 19,645. Provision for the taxes for the earlier year and the taxes for the current year amounted to Rs. 3,109 and Rs. 13,308, respectively. The company has suffered a loss in the subsequent year and the loss amounted to Rs. 18,805. The general body meeting itself was held on October 12, 1959, and, as observed by the Tribunal, the assessee must have known by that time that the company is heading for a heavy loss during that year. After deducting the taxes from the commercial profits only a sum of Rs. 8,228 was available. The statutory rate applicable to the assessee is 60 per cent. of the surplus that could have been declared as dividends and that comes to Rs. 6,894. If that percentage were to be taken, the sum of Rs. 3,228 would be very low and taking into account the share capital it could not be said that the non-declaration of the dividend was in any way unreasonable. We are also of the view that not drawing any money from the dividend equalisation reserve for declaring dividend in view of the probable loss in the next year cannot be said to be not a prudent act of the directors or would make the non-declaration of dividend unreasonable. Therefore, having regard to the facts and circumstances of this case, we are of the view that the provisions of Section 23A(1) of the Indian Income-tax Act, 1922, were not attracted. The reference is accordingly answered in the affirmative and against the revenue. The respondent will be entitled to costs. Counsel's fee Rs. 250.