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Sudhir Chatterjee and Co. (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 215 of 1969
Judge
Reported in[1978]111ITR911(Cal)
ActsIncome Tax Act, 1922 - Sections 23A and 66
AppellantSudhir Chatterjee and Co. (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateP.K. Pal and ;M. Seal, Advs.
Respondent AdvocateS. Sen and ;A.K. Mitra, Advs.
Cases ReferredAviquipo of India (P.) Ltd. v. Commissioner of Income
Excerpt:
- a.n. sen, j. 1. in this reference under section 66(1) of the indian income-tax act, 1922, the following question has been referred by the tribunal to this court :'whether, on the facts and in the circumstances of the case, any larger dividend than rs. 12,000 declared by the assessee-company could have reasonably been distributed within the meaning of section 23a of the indian income-tax act, 1922, and the application of section 23a of the 1922 act was in accordance with law ?'2. the statement of the case relates to the assessment year 1954-55, the previous year being the financial year ended on march 31, 1954. the facts recorded in the statement of the case may be noticed. the assessee is a private limited company. the assessee is not exempt from the operation of the provisions of section.....
Judgment:

A.N. Sen, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred by the Tribunal to this court :

'Whether, on the facts and in the circumstances of the case, any larger dividend than Rs. 12,000 declared by the assessee-company could have reasonably been distributed within the meaning of Section 23A of the Indian Income-tax Act, 1922, and the application of Section 23A of the 1922 Act was in accordance with law ?'

2. The statement of the case relates to the assessment year 1954-55, the previous year being the financial year ended on March 31, 1954. The facts recorded in the statement of the case may be noticed. The assessee is a private limited company. The assessee is not exempt from the operation of the provisions of Section 23A of the Indian Income-tax Act, 1922, and it is not in dispute that in appropriate cases the provisions of Section 23A may be applied to the assessee. In the year 1954-55, the distributable surplus was found to be Rs. 41,546 and was arrived at on the following basis :

Rs.

Total income assessed73,451Less : Tax payable thereon31,905

Balance41,546

3. The assessee at the annual general meeting held on December 24, 1954, had distributed Rs. 12,000 as dividend. As this sum was below 60% of the distributable surplus, the Income-tax Officer gave notice to show cause why Section 23A should not be applied. After hearing the assessee's objection and with the prior approval of the Inspecting Assistant Commissioner, the Income-tax Officer passed an order under Section 23A deeming Rs. 41,546 to have been declared by the assessee as dividend to its shareholders at the annual general meeting held on December 24, 1954. The Income-tax Officer in his order noticed that the losses of the earlier years, i.e., the losses of the assessment years 1952-53 and 1953-54, were Rs. 27,194 only and thus even after the losses had been set off the assessee's total income remained at Rs. 73,451 resulting in a distributable surplus of Rs. 41,546 and there was no justification at all in the opinion of the Income-tax Officer for the assessee-company declaring only Rs. 12,000 as dividend. The Income-tax Officer, therefore, applied the provisions of Section 23A and made an order to the effect that the entire distributable surplus amounting to Rs. 41,546 would be deemed to have been declared as dividend by the assessee-company to its shareholders on the date of the annual general meeting held on December 24, 1954.

4. Against the order of the Income-tax Officer the assessee appealed to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, the assessee contended that the profit as per the profit and loss account was only Rs. 52,766, that after deducting therefrom the tax assessed for the year, the amount available for distribution came to only Rs. 20,862 and it was the contention of the assessee that considering the smallness of the surplus, the dividend declared by the assessee was not at all unreasonable. The Appellate Assistant Commissioner did not accept the contention of the assessee and dismissed the appeal. The assessee thereafter preferred an appeal before the Tribunal. The Tribunal accepted the assessee's figure of Rs. 20,862 as the balance available for distribution and the said figure was arrived at on the following basis:

Rs. Rs.

Profit as per profit & loss a/c. 98,299Less : Brought forward loss45,532 Tax assessed for the year31,905

77,437

Balance20,862

5. The Tribunal held that since the distribution of Rs. 12,000 as dividend by the assessee was more than 55% of the profits computed as available for distribution, apart from the question whether a distribution of a larger dividend would have been unreasonable or not, the assessee was entitled to a notice in terms of the second proviso to Section 23A(1) as it stood at the relevant time, so as to give the assessee an opportunity to declare further dividend to make up the deficiency. The Tribunal set aside the order of the Income-tax Officer on the ground that the Income-tax Officer had n6t complied with the said mandatory requirement of the provisions contained in Section 23A(1).

6. Against the said order of the Tribunal vacating and setting aside the order of the Income-tax Officer on only the said ground, a reference was made to this court in which the following question was considered i

'Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the order passed by the Income-tax Officer under Section 23A(1) of the Indian Income-tax Act, 1922, as 'it stood at the material time, was vitiated by reason of the fact that the Income-tax Officer had not issued to the assessee a notice under the second proviso to Section 23A(1) before passing the said order ?'

7. By a judgment dated February 20, 1967, this court answered the question in the negative holding that the Tribunal was wrong in proceeding upon the quantum of commercial profits in ascertaining the percentage of distributable dividends and that in order to determine whether the dividend declared fell below the statutory minimum, the Income-tax Officerneed not be troubled with the amount of commercial profit. As the aspect as to whether the distribution of larger dividend would have been unreasonable or not had not been considered by the Tribunal. This court remitted the matter to the Tribunal for considering that aspect. The matter was heard by the Tribunal in the light of the High Court's order. The Tribunal held:

'We have heard the parties. The paid-up capital of the company is Rs. 1,20,000. The distributed dividend, therefore, works out to 10% of the capital. It is common ground that the surplus available for distribution out of commercial profits amounts to Rs. 20,862. The only thing that requires our consideration is whether the assessee could pay or should have paid a larger dividend on the facts of the case. It may be noted that the earlier year's loss, this year's profits and the tax relating thereto have already been taken into account. In the circumstances, the distribution of the balance surplus to the shareholders as dividend would have meant a further dividend of 7% on their capital. This, in our opinion, is not so small as to call for a finding that a larger dividend would be unreasonable. In the premises we hold that the payment of a larger dividend than that declared should have been distributed by the assessee.'

8. It may be noted that before the Tribunal reliance was placed on behalf of the assessee on the two decisions of the Supreme Court in the cases of Bipinchandra Maganlal & Co. Ltd. : [1961]41ITR290(SC) and Gangadhar Banerjee & Co. (P.) Ltd. : [1965]57ITR176(SC) for the proposition that it was the commercial income that was required to be considered for the purpose of distribution of dividend in terms of Section 23A. We may also incidentally note that the Tribunal in its order has held :

'The relevant facts are that the profits of the assessee-company for the year ending March 31, 1959, as per the profit and loss account amounted to Rs. 98,299. The aforesaid profit was subject to a carry forward of the loss in the balance-sheet amounting to Rs. 45,532. The commercial profit was, thus, Rs. 52,767. After deducting taxes payable by the assessee for the previous year, there remained a surplus of Rs. 20,862 which was available for distribution as dividend. The assessee, however, declared a dividend of Rs. 12,000.'

9. On the application of the assessee, the Tribunal has referred to this court the question which we have earlier set out.

10. Mr. Pronab Pal, learned counsel appearing on behalf of the assessee, has submitted before us that the law relating to the applicability of Section 23A is fairly well settled by the decisions of the Supreme Court and he has referred to and relied on the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. : [1965]57ITR176(SC) , Commissioner of Income-tax v. Jubilee Mills Ltd. : [1968]68ITR630(SC) and Commissioner of Income-tax v. Asiatic Textiles Ltd. : [1971]82ITR816(SC) . He has also drawn our attention to a decision of the Division Bench of this court in the case of Aviquipo of India (P.) Ltd. v. Commissioner of Income-tax (Income-tax Reference No. 5 of 1962 decided on 27-7-65) [1966] 21 Taxation 84 (Cal). Mr. Pal submits that these decisions clearly lay down the principles which have to be considered in applying the provisions of Section 23A. Mr. Pal has argued that in the instant case the undisputed facts are the following :

The income assessed is Rs. 73,451 and the tax payable on the said income is Rs. 31,905 leaving a balance of Rs. 41,546.

11. On the basis of the said amount being the distributable surplus 60% works out at Rs. 24,927.60. The commercial profits out of which dividend has to be paid amounts only to Rs. 20,862. Mr. Pal, therefore, contends that on the admitted facts it was never possible for the company to declare and distribute the sum of Rs. 24,927.60 as dividend as the said amount was in excess of the commercial profits of the company and it would not be possible for the company to pay the said amount by way of dividend out of the commercial profits of the company. Mr. Pal contends that it is well settled that dividend must be distributed and paid out of commercial profits and not out of capital. It is the argument of Mr. Pal that if, on a calculation on the basis of 60% as provided in Section 23A of the distributable surplus, the amount of dividend to be declared and distributed exceeds the amount of commercial profits of the company, Section 23A should not be applied. Mr. Pal has further argued that in the instant case, the company has declared Rs. 12,000 as dividend which really amounts to 55% of the commercial profits of the company. It is the contention of Mr. Pal that taking into consideration the fact that the company had suffered losses in the two previous years it cannot be said to be unreasonable that the board of directors of the company as prudent businessmen considered it to be reasonable not to declare the entire amount of commercial profits by way of dividend and to declare and distribute the said sum of Rs. 12,000 as dividend leaving a small surplus of about Rs. 8,000 for the company and its business. Mr. Pal contends that it was essential for the board of directors to decide in the interest of the company what sum should be declared as dividend and it was the duty of the Income-tax Officer to approach and consider the entire problem not from the viewpoint of a tax collector but from the viewpoint of a prudent businessman. Mr. Pal has argued that normally no company would declare and distribute its entire commercial profits by way of dividend without leaving something for the company. Mr. Pal contends that, applying the principles laid down by the Supreme Court in the caseswhich we have mentioned earlier and taking into consideration the decision of the Division Bench of this court in the case already mentioned, it cannot be said that the declaration of the sum of Rs. 12,000 as dividend was unreasonable and a larger amount should have been declared as dividend. Mr. Pal has further submitted that the question as to what amount should be declared as dividend in the facts and circumstances of a particular case is not a question of fact and is undoubtedly a mixed question of fact and law. In support of this submission, Mr. Pal has referred to the decision of the Supreme Court in the case of Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax : [1957]31ITR28(SC) , to the decision of the Supreme Court in the case of Commissioner of Income-tax v. A. Tellery and Sons (P.) Ltd. : [1967]63ITR288(SC) and also to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) .

12. Mr. Pal, therefore, submits that the question in the instant reference should be answered in favour of the assessee.

13. Mr. Suhas Sen, learned counsel appearing on behalf of the department, has submitted that in making the order the Tribunal has taken into consideration the capital structure of the company, the commercial profits according to the balance-sheet, the adjustment of loss and also the amount of dividend declared. He has argued that, on a consideration of all these relevant materials, the Tribunal has come to the conclusion that distribution of a larger dividend would not be unreasonable and the Tribunal has held that payment of a larger dividend than that declared should have been distributed by the assessee. Mr. Sen submits that this finding of the Tribunal is a finding of fact. Mr. Sen has referred to the decision of this court in the case of Ezra Proprietary Estates Ltd. v. Commissioner of Income-tax : [1950]18ITR762(Cal) , and he has placed particular reliance on the following observations of Harries C.J., who delivered the judgment of the Bench, at pages 770-771 :

'Whether the payment of a larger dividend would be unreasonable by reason of losses in earlier years or the smallness of the profit for that particular year is of course a question of fact and it was suggested that the Income-tax Officer in the present case must have been satisfied that a larger dividend could have been reasonably paid in this case.'

14. Relying on the aforesaid observations Mr. Sen contends that the finding of the Tribunal that declaration of Rs. 12,000 as dividend was unreasonable and it would have been reasonable to declare a larger sum by way of dividend is a finding of fact. Mr. Sen has argued that the said finding of fact not being specifically challenged in this reference remains binding on this court and, in view of the aforesaid finding of fact, the question must neces-sarily be answered against the assessee. It is the argument of Mr. Sen that it cannot be disputed in the instant case that the Income-tax Officer acquired the jurisdiction to exercise his powers under Section 23A as admittedly the amount declared as dividend fell short of the required percentage. The exercise of jurisdiction of the Income-tax Officer must necessarily be considered to be proper in view of the finding that declaration of Rs. 12,000 as dividend was unreasonable and that a larger sum should have been declared as dividend. We have to note that Mr. Sen does not dispute, as he possibly cannot, the correctness of the facts and figures mentioned in the order of the Tribunal.

15. In our opinion, the question referred to this court is not a question of fact and the finding of the Tribunal that it was not reasonable to declare a sum of Rs. 12,000 as dividend and it would not have been unreasonable to declare a larger sum by way of a dividend is not a pure finding of fact. Undoubtedly, the finding of the Tribunal of the primary facts, namely, as to (1) income assessed, (2) tax payable, (3) losses carried forward and (4) commercial profit after deduction of tax, are findings of fact. The question as to the applicability of Section 23A on the findings of these facts involves the question of construction of the said section and also the principles of law involved therein. When any conclusion has to be drawn from certain facts found without taking into consideration the question of application of any legal principles, the conclusion may be a conclusion of fact. But if a conclusion has to be drawn on the basis of certain facts and in drawing the conclusion it is necessary to apply any legal principles on the basis of provisions contained in any statute on a proper construction and interpretation thereof, the conclusion though drawn from the facts found becomes a mixed question of law and fact.

16. In the case of Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax : [1957]31ITR28(SC)

'In between the domains occupied respectively by questions of fact and of law, there is a large area in which both these questions run into each other, forming so to say, enclaves within each other. The questions that arise for determination in that area are known as mixed questions of law and fact. These questions involve first the ascertainment of facts on the evidence adduced and then a determination of the rights of the parties on an application of the appropriate principles of law to the facts ascertained. To take an example, the question is whether the defendant has acquired title to the suit property by adverse possession. It is found on the facts that the land is a vacant site, that the defendant is the owner of the adjacent residential house and that he has been drying gains and cloth and throwing rubbish on the plot. The further question that has to be deter-mined is whether the above facts are sufficient to constitute adverse possession in law. Is the user continuous or fugitive Is it as of right or permissive in character? Thus, for deciding whether the defendant has acquired title by adverse possession, the court has firstly to find on an appreciation of the evidence what the facts are. So far, it is a question of fact. It has then to apply the principles of law regarding acquisition of title by adverse possession, and decide whether on the facts established by the evidence, the requirements of law are satisfied. That is a question of law. The ultimate finding on the issue must, therefore, be an inference to be drawn from the facts found, on the application of the proper principles of law, and it will be correct to say in such cases that an inference from facts is a question of law. In this respect, mixed questions of law and fact differ from pure questions of fact in which the final determination equally with the finding or ascertainment of basic facts does not involve the application of any principle of law.'

17. After referring to various authorities the Supreme Court held at page 42 :

'The result of the authorities then is that inference from facts would be a question of fact or of law according as the point for determination is one of pure fact or mixed question of law and fact.'

18. At page 50 the Supreme Court further observed :

'We have discussed the authorities at great length, as some of the observations contained therein appear, at first sight, to render plausible the contention of the appellant, and it seems desirable that the true meaning of those observations should be clarified, lest error and misconception should embarrass and fog the administration of law. The position that emerges on the authorities may thus be summed up:

(1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is open to reference to the court under Section 66(1).

(2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final its decision as to the legal effect of those findings is a question of law which can be reviewed by the court.

(3) A finding on a question of fact is open to attack under Section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.

(4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.'

19. In the case of Commissioner of Income-tax v. A. Tellery and Sons (P.) Ltd. : [1967]63ITR288(SC) , the Supreme Court, while considering the question whether a finding that a particular expenditure is deductible asbusiness expenditure under Section 10(2)(xv) on the facts found is a finding of fact or not, held that such a finding would not be a finding of fact and was a finding of mixed question of law and fact. The Supreme Court observed at pages 291-292 :

'It was submitted by learned counsel that the High Court was not right in holding that no question of law arose out of the order of the Tribunal and that the finding of the Tribunal that the payment was made for commercial considerations and not ex gratia was a pure finding of fact which could not be interfered with. In our opinion, the argument put forward on behalf of the appellant is well founded and must be accepted as correct. It is true that the question whether the assessee is entitled to a deduction of certain expenditure under Section 10(2)(xv) of the Act should be decided on the facts of each particular case but the final conclusion on the question is always one of law. To put it differently, the question whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business is a question which involves, in the first place, the ascertainment of facts by the Appellate Tribunal, and, in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of fact and law. It is a question of law because the Tribunal has to determine what is the meaning to be given to the statutory phrase ' expenditure laid out or expended wholly and exclusively for the purpose of such business '. The proper construction of statutory language is always a matter of law and, therefore, the claim of the assessee in any particular case that he is entitled to a deduction of certain items of expenditure under Section 10(2)(xv) of the Act involves the application of the law to the facts found in the setting of the particular case. In Eastern Investments Ltd. v. Commissioner of Income-tax : [1951]20ITR1(SC) , it was held by this court that the question whether an expenditure was incurred solely for the purpose of carrying on the business of the assessee and was made on the ground of commercial expediency was not a pure question of fact but was a mixed question of fact and law which was subject to review and the decision of the High Court was reversed and the claim of the assessee was allowed by this court on the ground that Section 12(2) of the Act applied to the case. Similarly, in a later case, Commissioner of Income-tax v. Royal Calcutta Turf Club : [1961]41ITR414(SC) , this court reiterated the principle that though the question whether an item of expenditure was wholly and exclusively laid out for the purpose of the assessee's business must be decided on the facts of each case, the final conclusion was one of law because it involved the interpretation of the scope and meaning of the statute.'

20. The same principles have been reiterated by the Supreme Court in the case of Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) and observations more or less identical to the observations already quoted, have been made by the Supreme Court at page 207. In our opinion, for consideration of the applicability of Section 23A it is undoubtedly necessary to ascertain various basic facts. Upon ascertainment of the basic facts it becomes necessary to apply the correct principles of law to the facts found and application of the correct principles involves proper construction and interpretation of the scope and effect of Section 23A. As application of the correct principles of law to the facts found is imperative for attracting and applying the provisions of Section 23A in each and every case. We are, therefore, of the opinion that the finding is not a pure finding of fact and raises a mixed question of law and fact. It is a finding of fact in so far as it relates to the findings of the basic materials, namely, (1) income assessed, (2) tax payable, (3) declaration of dividend, (4) loss brought forward, and (5) commercial profit in the relevant year. Further question as to whether Section 23A can be properly applied on the basis of the facts found involves consideration and proper application of principles of law and interpretation of the scope and meaning of Section 23A. We may incidentally note that a similar question in identical form came to be considered by the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. : [1965]57ITR176(SC) . The case decided by this court in Income-tax Ref. No. 5 of 1962 [Aviquipo of India Private Ltd. v. Commissioner of Income-tax, decided on 27-7-65) [1966] 21 Taxation 84 (Cal)] also involved a similar question in which a similar finding of the Tribunal was interfered with by this court in a reference under Section 66(1). In our view, the observations of Harries C.J. relied on by Mr. Sen are really in the nature of obiter. It appears that the learned Chief Justice made the said observations incidentally without giving any reasons for the said observations. The case, however, was decided in favour of the assessee.

21. Turning to the facts of the present case, we are of the opinion that distribution of the sum of Rs. 12,000 by way of dividend in the facts and circumstances of the present case cannot be considered to be unreasonable. It is to be borne in mind that the commercial profits of the company amounted to Rs. 20,862. It is quite clear that it was not possible for the company to declare and distribute a sum of Rs. 24,927.60 by way of dividend out of the commercial profits and, therefore, it was not possible for the company to declare dividend to the extent of 60% of the distributable surplus. We have also to bear in mind that in the two earlier years the company had suffered loss. The board of directors of the company would indeed be in the best position to judge as to the business needs and requirements of the company and the board would be the best judge of the financial position of the company. Taking into consideration the fact that thecompany had suffered loss in the immediately two previous years if the board decided not to declare the entire amount of its commercial profits by way of dividend and declared about 55% of the said amount by way of dividend, it cannot, in our view, be said to be unreasonable. In the instant case, it was not possible for the company to comply with the requirement of the statutory provision of declaration and distribution of 60% of its distributable surplus as dividend, as the commercial profits of the company would not permit the company to declare and distribute that amount by way of dividend. In the instant case, it was not possible for the company in any event to comply with the requirement of Section 23A and the company naturally would be the best judge to consider as to what amount should and could properly be declared as dividend. As we have earlier noted, taking into consideration the fact that in the previous two years immediately preceding the year in question the company suffered loss, it cannot, in our opinion, be said that it was unreasonable on the part of the directors to declare a sum of Rs. 12,000 as dividend. In our view, the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. : [1965]57ITR176(SC) , Commissioner of Income-tax v. Jubilee Mills Ltd. : [1968]68ITR630(SC) and Commissioner of Income-tax v. Asiatic Textiles Ltd. : [1971]82ITR816(SC) clearly support the view that we are taking.

22. In the case of Asiatic Textiles Ltd. : [1971]82ITR816(SC) , the Supreme Court observed at pages 819 and 820 as follows :

'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. As observed by this court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. : [1965]57ITR176(SC) , the Income-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of Section 23A of the Act does not assess any income to tax. He only does what the directors should have done putting himself in their place. 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 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. The Income-tax Officer must take anoverall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective approach.'

23. Mr. Pal, in our opinion, rightly points out that the facts of the present case have also a great deal of similarity with the facts in the case of Aviquipo of India (P.) Ltd. v. Commissioner of Income-tax (I. T. Ref. No. 5 of 1962), which is reported in [1966] 21 Taxation 84 (Cal). In the said case, the Division Bench more or less on similar facts took the view that application of the provisions of Section 23A was not justified.

24. We, therefore, answer the question in the negative in favour of the assessee and against the department. Each party will pay and bear its own costs.

Janah, J.

25. I agree.


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