1. The following questions are involved in this reference under the Income-tax Act, 1922 :
'(I) Whether, on the facts and in the circumstances of the case, the Tribunal should have held that the payment of a larger dividend than that declared by the assessee would have been unreasonable
(2) If the answer to the first question is in the negative, whether the Tribunal was justified in holding that in determining the distributbale surpuls, only the net tax payable by the assessee should be taken into consideration without any regard to the credit given under Section 18(5) of the Indian Income-tax Act, 1922 ?'
2. The assessee is a private limited company to which Section 23A of the Act applies. The assessment year is 1954-55. The previous, year ends on December 31, 1953. The total income was determined at Rs. 2,15,825. The tax payable thereon, after deducting the amount treated as tax paid under Section 18(5), was found to be Rs. 45,297. In the general meeting held on March 31, 1955, the assessee declared a dividend of Rs. 60,000 which was short of 60% of the distributable surplus and, therefore, the tax officer was invested with jurisdiction to take action under Section 23A of the Act.
3. In the proceedings under Section 23A of the Act the contention of the assessee before the tax officer was that no action should be taken against the assessee, because it would have been unreasonable for the assessee to declare a larger dividend in view of the anticipated tax liability as a resultof the reopening of the assessment under Section 34(1)(a) of the Act for the assessment year 1946-47. The tax officer found that the estimated additional tax liability might be about Rs. 90,000 and as the assessee had transferred Rs. 35,000 to the general reserve of Rs. 5 lakhs such estimated tax liability arising out of the reassessment proceedings could be paid out of the general reserve. In that view of the matter the tax officer passed an order to the effect that the balance of distributable surplus, namely, Rs. 1,10,528, should be deemed to have been distributed as dividend amongst the shareholders as on the date of the said general meeting. The appeals filed by the assessee were dismissed by the appellate authorities and, thereafter, the above questions were referred by the Appellate Tribunal.
4. The reference came up for hearing before a Division Bench of this court and in its judgment dated September 3, 1965, the Division Bench after considering the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. : 41ITR290(SC) and Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) , observed as follows :
'The opinion of the Supreme Court appears to be that an order under Section 23A should not be passed if that has the effect of compelling the company to fall back upon its reserve or upon its capital. Therefore, in the instant case, it is important to ascertain the nature of the reserve mentioned by the Income-tax Officer.
The Tribunal also failed to consider by reason of its mistaken view of the law whether the apprehension of additional tax liability as a result of reassessment under Section 34(1)(a) was genuine or not at the date of the general meeting at which the dividend was declared. It is to be seen whether there is any trace of this apprehension either in the directors' report or in the balance-sheet placed before the general meeting. It has no doubt been found as a fact that the proceedings under Section 34 culminated in a levy of further tax of Rs. 1,28,000 for 1946-47, but it is not known whether this heavy amount was really anticipated by the directors and how far this anticipation influenced the declaration of dividend.'
5. In that view of the matter the Division Bench referred back the matter to the Tribunal under Section 66(4) of the Act with the direction to send a supplementary statement of the case with the following directions ;
'The Tribunal is directed to gather further facts from the materials already on record as to the nature of the reserve mentioned by the Income-tax Officer, as to whether the possibility of further tax liability on account of reassessment under Section 34(1)(a) of the Income-tax Act actually influenced the decision of the directors and of the general meeting with regard to the declaration of dividend at the general meeting held on 31st March, 1955.'
6. Thereafter, the Appellate Tribunal looked into, the balance-sheet of the assessee and found that there was a carryforward of Rs. 5 lakhs under the head 'General Reserve' and in the assessment year there was a further transfer of Rs. 35,000 in that reserve. In addition to Rs. 5,35,000 in the 'general reserve ', there is also another reserve account which is named as 'tax reserve' and in which there was Rs. 7,080 in the earlier year and a further sum of Rs. 60,000 was added to it in the accounting year. It has also been found by the Tribunal that the general reserve of Rs. 5,35,000 was not a taxation reserve. In the supplementary statement of fact, the Tribunal has also stated as follows :
'We do not find any evidence on the basis of which it can be stated that for the purpose of declaration of dividend the directors were influenced by an apprehension of additional tax liability as a result of the assessment under Section 34(l)(a) of the Indian Income-tax Act, 1922. The directors' report or the balance-sheet placed before the general meeting does not make a mention of this apprehension, and, therefore, it cannot be said that on the date when they approved the declaration of dividend they had actually anticipated the additional tax liability.'
7. The submission of Mr. Bajoria, the learned counsel for the assessee before us, is that the additional tax burden of Rs. 1,28,000 should be taken into account for the purpose of determining the availability of surplus money for distribution in the assessment year 1954-55 in view of the decisions of our court subsequent to the aforesaid order of the Division Bench.
8. The submission of Mr. Sengupta, the learned counsel for the revenue, however, is that Rs. 1,28,000 should be adjusted with the commercial profit of the assessment year 1946-47 and, therefore, the arrears of tax liability cannot be taken into account under Section 23A of the Act. In support of this contention he has relied on the decision of the Patna High Court in the case of Commissioner of Income-tax v. R. N. Bagchi & Brothers : 72ITR645(Patna) .
9. The next submission of Mr. Sengupta is that the directors did not anticipate this additional tax liability as found by the Tribunal and, therefore, this amount should not be taken into consideration in view of the decision of the Madras High Court in the case of Indo-Ceylon Dental and Surgical Co. Ltd. v. Commissioner of Income-tax : 98ITR536(Mad) of the report. In this behalf he has also cited the decision of the Patna High Court in the case of Jamshedpur Engineering & Machine , v. Commissioner of Income-tax : 98ITR33(Patna) of the report. His last submission is that the assessee has made provision for all contingencies in the balance-sheet other than this additional tax liability and, therefore, it should not be taken into account underSection 23A of the Act. For this proposition he cited the case of Srinivas Banking Company Ltd. v. Commissioner of Income-tax : 58ITR89(Cal) of the report.
10. So far as this court is concerned it is well established by the decision of the Division Bench of this court in the case of Central Calcutta Investment (P.) Ltd. v. Commissioner of Income-tax : 82ITR480(Cal) of the report, that the arrears of tax liability of the earlier years 'must be taken into account in determining the availability of surplus money for the purpose of declaring a dividend which is one of the facts which the Income-tax Officer is required to take into consideration under the direction given by the Supreme Court in Gangadhar Banerjee's case : 57ITR176(SC) . We have also followed this decision of our court in many cases in preference to R. N. Bagchi's case : 72ITR645(Patna) and, therefore, Rs. 1,28,000 must be taken into consideration before any penal action can be taken under Section 23A of the Act.
11. Further, the commercial profit of the assessment year 1946-47 is not the commercial profit of the assessment year 1954-55. The decision of the Supreme Court in Bipinchandra Maganlal's case : 41ITR290(SC) is that the matter has to be adjudged in the light of the commercial profit of the year in question. Therefore, the contention of Mr. Sengupta must fail, because no such adjudgment is possible, for, to do so, is to increase the commercial profit of the assessment year 1946-47 which is against the law laid down in the above two decisions of the Supreme Court already cited.
12. Before leaving this topic we wish to add here that there is no substance in the contention of the tax officer that the tax liability of the earlier years can be paid out of the general reserve in view of the judgment dated June 1, 1973, of the Division Banch of this court in I. T. Reference No. 102 of 1969 (Gwalior Webbing Co. Ltd. v. Commissioner of Income-tax).
13. In Indo-Ceylon Dental and Surgical Co.'s case : 98ITR536(Mad) of the report, it was held that the assessee has failed to substantiate its contention that the lesser dividend was declared on the ground that the assessee wanted to build up a resource for its development activities. In Jamshedpur Engineering & Machine Manufacturing Co.'s case : 98ITR33(Patna) , at page 38 of the report, it was observed that the intention of the directors to replace new machinery was for the first time taken at the stage of reference and, therefore, it was rightly rejected by the Tribunal. In Srinivas Banking Company's case : 58ITR89(Cal) , all contingencies were taken into consideration by the assesee and, therefore, the court accepted the conclusion reached by the Tribunal, but not its reasonings. We do not find anything in these cases which may in any way lend support to the above contentions of Mr. Sengupta.
14. It has been held by the Supreme Court in Bipinchandra Maganlal's case : 41ITR290(SC) , that the test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the commercial profit of the year in question. And in Gangadhar Banerjee's case : 57ITR176(SC) of the report, the Supreme Court says thus :
'The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. 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 o hers He must take an overall picture of the financial position of the business.' (Underlining is for emphasis).
15. This law has been reiterated by the Supreme Court in the case of Commissioner of Income-tax v. Asiatic Textiles Ltd. : 82ITR816(SC) of the report, the Supreme Court says this :
'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.....The directors of acompany will be justified in taking things as they stand and not befool themselves in the wild hope that the value of the shares may come up again.....They are not expected to gamble with the future of the concern.The question is not whether the value of the shares may not go up in future but whether the directors were justified in not declaring dividends in view of the loss incurred.'
16. It is well established that the tax officer must take into consideration all relevant factors while acting under Section 23A of the Act. He must do what a prudent director should have done. The contention of the assessee at every stage of the proceedings was that the anticipated tax liability should be taken into consideration and it cannot be said to be an unreasonable stand. The directors may not anticipate the additional tax liability at the time the dividend was declared, but the tax officer must take that fact into account under Section 23A of the Act in view of the above decisions ofthe Supreme Court and also in view of the decision of our court in the cases already cited. Therefore, in our opinion, the Tribunal should have held that the payment of a larger dividend than that declared by the assessee would have been unreasonable.
17. In this view of the matter, question No. 2 has become purely academic and we decline to answer it. We return our answer to question No. 1 in the affirmative and in favour of the assessee.
18. In the facts and circumstances of the case, we make no order as to costs.
Dipak Kumar Sen, J.
19. I agree.