JAGADISAN J. - The question that has been referred to us is, 'Whether, on the facts and in the circumstances of the case, the provision of section 23A was applicable to the assessee for the assessment year 1955-56 ?'
The question for decision lies in a very short compass. The assessee is a private limited company. Its profits available for distribution in the year of assessment amounted to Rs. 3,19,016. This sum is arrived at by taking the total assessed income of Rs. 5,53,630 and deducting therefrom the sum of Rs. 2,34,614, the taxes due thereon. The assessee filed a return for the assessment year 1955-56 showing an income of Rs. 4,01,676 after adjusting a business loss of Rs. 21,740. The assessee further claimed that during the year ended March 31, 1955, 'the previous year', a further loss of Rs. 15,29,455 had resulted, as a sum of Rs. 18, 93,133 was paid under the settlement with the Income-tax Investigation Commission.
The crucial words of section 23A which have to be considered and upon which the arguments in this case have turned are :
'... 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...'
Now this section means what it quite clearly states, that the Income-tax Officer can pass an order under section 23A unless he is satisfied that it would be unreasonable to direct the company to declare a dividend or a larger dividend than that declared if regard be had to the losses incurred by the company in the earlier years or to the smallness of the profits made in that year. Though the section as framed is mandatory in the sense that the officer should pass an order unless he is of opinion that the order would be unreasonable taking into account the two relevant criteria, namely, losses incurred by the company in the earlier years, or the smallness of the profits of that year, it is plain that the officer should take this circumstance into account before actually passing an order compelling declaration of a dividend.
Learned counsel for the assessee concedes very properly that if regard be had only to the profits of the year, whether it be 'the book profits' or 'the assessed profits' as computed by the department, it cannot be said that the amount is so small that no dividend could have been declared by the company in the relevant year. It is now fairly settled law that the actual profits of the company should alone afford : the basis for the decision of the department in an order under section 23A. The actual profits of a company as understood commercially would very often be less than the taxed or taxable income. What is assessed to tax by the department takes in notional income also besides the actual income derived by the assessee. This is because of certain provisions of the Indian Income-tax Act which need not be referred to here.
Learned counsel for the assessee, therefore, confined his objection to the validity of the order of the department and that of the Tribunal only on the ground that the losses of the prior years were not taken into account. It cannot now be disputed that as a fact during the year ended March 31, 1954, the assessee sustained a loss of Rs. 6,77,663. The details of this figure are set out in the statement of the case at page 4 of the printed book. The contention urged by learned counsel is that the department and the Tribunal were bound to take into account the losses of the previous year before an order under section 23A is passed. We must observe that the order of the Tribunal does not show that this essential and relevant factor was taken into account in dealing with the propriety of the order under section 23A made by the department.
The department was of the opinion that it would be reasonable to compel the assessee to declare dividend even in the face of the losses of the previous years inasmuch as the assessee itself had declared dividends in the past though it had sustained losses. In the accounting year 1951-52 the profits of the assessee were Rs. 4,47,290 and dividend of Rs. 2,00,000 had been declared. But even in that year there were losses brought forward from the prior years. Similarly, in the accounting year 1952-53, the assessee had declared dividends of Rs. 62,500 from out of the profits of Rs. 71,082. The previous conduct of the assessee is hardly relevant. The question for consideration is whether in view of the past losses of Rs. 6,77,663, and the present profit of Rs. 3,19,016, the department could say that it would be reasonable to compel the company to declare a dividend. The Tribunal had completely failed to take this circumstance into account in judging the propriety of the order under section 23A. The department should not be guided merely by the availability of some funds in the hands of the assessee company to enable it to pass an order under section 23A. Accumulated and brought forward losses of the previous years are very real and in any scheme of computation of profit the losses should not be disregarded. The statute having prescribed that past losses are relevant and should be borne in mind, in adjudging the reasonableness of an order under section 23A, the Tribunal erred in law in completely overlooking it.
Even on the findings recorded by the department and the Tribunal, in our opinion, the provisions of section 23A are clearly inapplicable.
The question is answered in favour of the assessee, which will get its costs from the department. Counsels fee Rs. 250.