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Reform Flour Mills (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 360 of 1971
Judge
Reported in[1978]111ITR852(Cal)
ActsIndian Income Tax Act, 1922 - Section 23A
AppellantReform Flour Mills (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal and ;S.K. Dutt, Advs.
Respondent AdvocateS. Sen and ;Ajoy MItter, Advs.
Cases ReferredCentral Calcutta Investment (P.) Ltd. v. Commissioner of Income
Excerpt:
- r.n. pyne, j. 1. in this reference under section 66(1) of the indian income-tax act, 1922, we are concerned with the assessment year 1960-61. the assessee is a private limited company to which the provisions of section 23a are applicable. for the said year the income assessed under section 23(3) was rs. 15,56,405 and the tax payable thereon was rs. 7,00,382. the income-tax officer, therefore, arrived at the distributable surplus at rs. 8,56,023. the assessee had declared a dividend of rs. 3,71,000 only. the statutory percentage applicable to tbe assessee was 50% and, therefore, as the dividend declared by the assessee fell short of the statutory percentage, the income-tax officer issued a notice calling upon the assessee to show cause why additional super-tax should not be levied. in.....
Judgment:

R.N. Pyne, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, we are concerned with the assessment year 1960-61. The assessee is a private limited company to which the provisions of Section 23A are applicable. For the said year the income assessed under Section 23(3) was Rs. 15,56,405 and the tax payable thereon was Rs. 7,00,382. The Income-tax Officer, therefore, arrived at the distributable surplus at Rs. 8,56,023. The assessee had declared a dividend of Rs. 3,71,000 only. The statutory percentage applicable to tbe assessee was 50% and, therefore, as the dividend declared by the assessee fell short of the statutory percentage, the Income-tax Officer issued a notice calling upon the assessee to show cause why additional super-tax should not be levied. In response to this, the assessee urged that if past losses were considered and the estimated past tax liabilities were deducted from the available distributable surplus the dividend declared was adequate. The Income-tax Officer, however, held that the existence of past Josses could not be substantiated as they were neither considered in the profit and loss account filed in the assessment made. As according to the Income-tax Officer tax liabilities were neither ascertained nor admitted by the assessee, argument in thatbehalf was not tenable. He further observed that the net profit shown by the assessee in the return after making various adjustments was Rs. 14,77,737 and even from the point of view of the returned profit the dividend distributed would fall short of the statutory percentage as the tax payable thereon would be Rs. 6,64,970 and there would be a surplus of Rs. 8,12,767. In these circumstances, he did not accept the plea of the assessee and levied additional super-tax at 37% amounting to Rs. 1,79,458. Being aggrieved by the order of the Income-tax Officer the assessee appealed therefrom to the Appellate Assistant Commissioner. It was urged before the Appellate Assistant Commissioner that on appeal in regard to the quantum of assessment there was a reduction and the assessed profit was Rs. 15,49,323 and the tax payable thereon, Rs. 6,97,196, and the distributable surplus would work out at Rs. 8,62,127. While admitting that even on the basis of the revised figures, prima facie Section 23A was applicable, it was urged on behalf of the assessee that the Income-tax Officer had ignored the outstanding income-tax liabilities of Rs. 7,28,557 and thus computed a wrong figure in regard to distributable surplus. On this basis a calculation was filed before the Appellate Assistant Commissioner as follows :

Rs.

Profit as per Profit & Loss a/c. 8,84,951Add Provision for taxation 6,00,000

14,84,951Less : Taxes levied on the company 6,97,196

7,87,755Less :(a)Outstanding income-tax liabilitiesRs. 7,28,557 (b) Income-tax provisionRs. 2,03,477

5,25,080

Surplus available for distribution 2,62,676

2. It was accordingly submitted that as the company had declareddividend of Rs. 3,71,000 there could not be any scope for applying theprovisions of Section 23A as the assessee did not have sufficient funds fordeclaring a larger dividend. The Appellate Assistant Commissioner whileobserving that income-tax liability outstanding on the relevant date wassurely one of the circumstances to be taken into consideration in determining whether it was unreasonable to declare a larger dividend, went on toobserve that the taxes of Rs. 7,28,557 related to the assessment years 1944-45 to 1954-55. On scrutinising those assessments he found that theIncome-tax Officer had disallowed certain amounts as fictitious payment ofcommission and brokerage to certain parties aggregating to Rs. 13,68,000. He also referred in this behalf to the orders of the Tribunal on appeals for the years 1952-53, 1953-54 and 1954-55 wherein the disallowance of payments of commission was confirmed. The Appellate Assistant Commissioner observed that the fictitious payments of commission had been kept out by the company and was nowhere to be found in its account books or balance-sheet and by claiming fictitious payments of brokerage and commission the company had artificially reduced its income. He took the view that if the claim of outstanding taxes relating to the years 1944-45 to 1954-55 had to be taken into account in ascertaining the commercial profits, the brokerage and commission fictitiously taken out of the account books would also have to be taken into account. He further observed that if the brokerage and commission was treated as a part and parcel of commercial profits, the company would be left with a huge surplus and had commercial profits to declare a larger dividend than declared. The Appellate Assistant Commissioner, therefore, confirmed the action of the Income-tax Officer. The Appellate Assistant Commissioner in his order observed that:

'Now, coming back to the appellant's case, it has been established beyond doubt that the company has deliberately claimed fictitious payments of brokerage and commission and thus artificially reduced its income. This income has gone out of the account books and is not reflected in the balance-sheets at all. If the appellant's counsel claims that the outstanding taxes relating to the years 1944-45 to 1954-55 have to be taken into account in ascertaining the commercial profits, the brokerage and commission fictitiously taken out of the account books will also have to be taken into account. If the brokerage and commission is treated as a part of the commercial profits, the company would be left with a huge surplus available with it for the declaration of dividends. Viewing the extent of the commercial profits from this angle also, it is clear that the appellant-company had sufficient commercial profits to declare a larger dividend than it has declared. The appellant's contention, therefore, fails in this respect.

The figures reproduced above will clearly show that the appellant had sufficient profits available with it for a larger distribution of dividends than declared and, hence, the company was not justified in not declaring the requisite percentage of dividends. In the circumstances, the provisions of Section 23A are clearly applicable to the present case and I do not see any reason to upset the order of the Income-tax Officer.''

3. From the order of the Appellate Assistant Commissioner there was a second appeal by the assessee to the Tribunal. Before the Tribunal, it was contended by the assessee that the tax liabilities of the earlier years shouldbe taken into consideration and in view of these liabilities a distribution of a larger dividend would be unreasonable. It was further urged by the assessee that there was no basis for holding that the payments of commission were fictitious and the assessee had not accepted the finding of the Tribunal in that behalf and the matter was being taken up before the Supreme Court and the commercial profits disclosed by the profit and loss account of the assessee should be the guideline. The Tribunal, however, referred to the order of the Tribunal in the quantum appeal relating to 1953-54 in I.T.A. No. 4108 of 1959-60 and also of later years and observed that:

'It is abundantly clear from the above facts that the payment was not genuine and rightly dubbed as fictitious payment routed through the firm of M/s. Bimal Kumar Nirmal Kumar to the appellant.'

4. The Tribunal referring to the view taken by the Appellate Assistant Commissioner that if the outstanding income-tax liability was to be taken into account, the fictitious nature of the commission payment should also be considered, agreed with him that there was scope for the Income-tax Officer to make adjustment in order to arrive at the true and correct commercial profits.

5. The Tribunal, further, referring to the rulings of the Supreme Court in Gangadhar Banerjee's case : [1965]57ITR176(SC) and Gobald Motors' case : [1966]60ITR417(SC) observed that the question had to be looked at from the point of view of a prudent businessman, and proceeded to consider the financial aspect as well as the liability of the assessee. It noticed from the balance-sheet for the year under consideration that for the first time in the relevant year of account, a general reserve of Rs. 5 lakhs was created out of the distributable profit and observed that such an appropriation to the general reserve indicated sound stability of the company. It further observed that the auditors of the company did not advise for making a provision for earlier income-tax liability but referred to it by way of a note under the head 'contingent liability'. The Tribunal also observed that the profit without making any provision for taxation of the year was Rs. 14,84,951 and if earlier income-tax liability as well as liability of the year was taken together, it totalled to Rs. 14,40,285 leaving nil amount for making any dividend in the year. The Tribunal further noticed that for the year ending December 31, 1958 (relevant to the assessment year 1959-60) the assessee declared a dividend of Rs. 60,500 when commercial profit was Rs. 51,399 and provision for taxation for that year was Rs. 72,000. In these circumstances the Tribunal observed that:

'Thus, it is clear that at any time the income-tax liability of the pastdid not deter the assessee in taking the decision as to the reasonablenessof the amount of dividend to be declared.'

6. Noticing that even on the basis of the commercial profit as disclosed by the assessee, the dividend declared fell short of the statutory percentage, the Tribunal observed that there was no satisfactory reason for the shortfall of a small amount. The Tribunal, referring to the ruling of the High Court of Patna in the case of Commissioner of Income-tax v. R. N. Bagchi & Bros. : [1969]72ITR645(Patna) , wherein it was held that the tax demand for any particular year was expected to be paid out of the profits of that year unless it was shown by the company that due to special circumstances the tax demand for the earlier year had to be met out of the profits of the year in question in respect of which an order under Section 23A was proposed to be made, observed that the facts of the instant case were almost analogous to the facts of that case. It further held that even otherwise the provision of Rs. 5 lakhs as reserve made in the assessment year was sufficient and would go to a large extent to clear off the past income-tax liability. According to the Tribunal the burden of the company was not so heavy or imminent which would disrupt its normal working nor could it be said that if the income-tax liabilities were enforced in that year the assessee would have been faced with insurmountable difficulties. The Tribunal also noticed that the past income-tax liabilities were wiped off by making easy yearly payments in instalments from the assessment year 1962-63 onwards.

7. In the aforesaid view of the matter the Tribunal came to the conclusion that :

'Thus it resolves that the past income-tax liability cannot be regarded as an item of liability which could, if no provision is made, bring disaster to the assessee-company in the year under consideration. Taking the totality of the circumstances, we hold that the assessee-company failed to declare the statutory dividend as required by law and, therefore, made itself amenable to the provisions of Section 23A of the Indian Income-tax Act, 1922.' In the aforesaid view of the matter, the Tribunal dismissed the assessee's appeal and confirmed the order of the Appellate Assistant Commissioner.

The assessee, not being satisfied with the decision of the Tribunal, asked for a reference to this court and the question in controversy has been referred in the following terms I

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the outstanding income-tax liability could not be considered as an item of liability and that the order under Section 23A was rightly passed ?' As in this reference we are concerned with Section 23A of the Indian Income-tax Act, 1922, the relevant part of that section, as it stood at the relevant time, may be set out:

'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 as reduced by-

(a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any supertax payable under this section ;

(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income; and

(c) in the case of banking company, the amount actually transferred to a reserve fund under Section 17 of the Banking Companies Act, 1949 (X of 1949);

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; or......

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 at the rate of fifty per cent. in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven per cent. in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in Clause (a), Clause (b) or Clause (c) and the dividends actually distributed, if any.'

8. Counsel for the assessee has submitted that in computing the distributable profits the Income-tax Officer must take into account the ascertained income-tax liability of the years earlier to the assessment year in question. He has further submitted that, in computing the distributable' profits for the purpose of Section 23, only the accounting or commercial profits should be taken into account. The Income-tax Officer should not take into account any profits which are only notional or fictional, viz., disallowed items of expenditure or other notional income which cannot be called actual or commercial profits of the company. It is the submission of the counsel that the Income-tax Officer in computing the distributable profits of a particular year will have regard only to the profits of that year because dividend can be paid only out of the profits of the assessment year and not out of theaccumulated profits of the past year and, therefore, in computing the distributable profits, profits of the earlier years are not relevant and cannot enter into the computation. Counsel has further submitted that the past conduct of the company in declaring dividend in early years is also not relevant. Learned counsel has also contended that for the purpose of arriving at the commercial profit of the year in question fictitious payments disallowed by the Income-tax Officer in the past years cannot he taken into account and only commercial profits of a particular year are to be taken into account for the purpose of Section 23A. Learned C9unsel has also submitted that in determining the reasonableness of the amount available for the purpose of distribution of dividend the test is to consider the smallness of the profit made during the previous year relevant to the assessment year in question. Even if there is accumulated profit of the past years that cannot be considered as profit made in the assessment year in question ; such profit cannot be taken into account for the purpose of determining the reasonableness of the amount available for distribution of dividend under Section 23A. To do so, learned counsel has submitted, would be to rewrite the section and to obliterate the expression 'made in the previous year' contained therein. It is the submission of the counsel that even if it is permissible to consider the profits of the past years for the purpose of Section 23A revenue authorities will have to apply a legal test, viz., what would be the profit available at the date of declaration of dividend. The Tribunal, learned counsel submitted, misdirected itself in law in not applying the said legal test and on that basis did not arrive at a finding as to what was the profit available for distribution at the date of declaration of the dividend. According to the learned counsel the Tribunal has proceeded on a mistaken view of the law that if profits were earned in the earlier years and not shown in the books of the assessee still that would become the profit made during the year without any enquiry or finding as to what was the profit available at the date of distribution.

9. Learned counsel for the assessee has further contended that the balance-sheet of a company prima facie represents the financial position thereof. In this case, the balance-sheet of the assessee-company for the relevant year has not been challenged. The Income-tax Officer must consider all relevant factors in order to find out the financial position of the company in the year in question and the real commercial profit of that year. It is the further submission of the learned counsel that though the balance-sheet of a company is the prima facie proof of its financial position yet nothing prevents either party to the reference to dispute any figure in the balance-sheet by a cogent evidence and if that is not done, only the items in the balance-sheet must be considered and those can only be taken into account. Learned counsel has submitted that in this case the revenue hasnot adduced any cogent evidence for disputing any figure in the balance-sheet, and, therefore, the balance-sheet for the relevant year should be taken as the prima facie proof of the financial proof of the assessee-company during the year in question.

10. It has been further contended by the learned counsel for the assessee that Section 23A is penal in nature and the burden is on the revenue to prove that the conditions laid down in the section have been satisfied. This burden, according to the learned counsel, is originally on the revenue and it continues to remain on it. In the instant case, there is no allegation that the assessee has not furnished or has with held any information which the revenue authorities wanted from the assessee and, therefore, there could not be any question of shifting of this burden on the assessee.

11. With regard to the frame of the question learned counsel for the assessee has submitted that in the instant case the Tribunal has not given any finding that the amount representing the fictitious payment was available to the company at the relevant time and, therefore, there could not be any question of challenging any such finding of the Tribunal as perverse. Learned counsel has submitted that the question as to what was the profit available for distribution was raised by the Appellate Assistant Commissioner and the Tribunal. But, according to the learned counsel, the question referred is whether the order under Section 23A was rightly passed in this case and this, according to the counsel, is wide enough to embrace within its fold the question as to what are the correct legal tests to be applied for determining the profits available for distribution of dividend for the purpose of Section 23A. According to the counsel this aspect of the question was not only agitated by the revenue authorities but is also included in the question referred.

12. Counsel for the assessee in support of his contentions has relied upon the various decisions of the Supreme Court as also of different High Courts and we shall deal with them hereafter.

13. Counsel for the revenue has submitted that in the instant case the revenue authorities in taking action under Section 23A have rightly taken into account the amounts of fictitious payment of commission and brokerage disallowed by the Income-tax Officer. According to the learned counsel those amounts have been concealed by the assessee and kept out of the account. It is the submission of the learned counsel that according to the principles laid down by the Supreme Court while interpreting Section 23A in various cases, the Income-tax Officer when taking action under the said section should take into account not only the two factors, viz., losses of the past years and smallness of profit but all matters relevant to the question of reasonableness and unreasonableness of the amount available for distribution. It is further submitted that the findings of the Tribunalhave not been challenged by the assessee as perverse and, therefore, they are binding on the assessee. Referring to the case of Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. : [1961]41ITR290(SC) counsel has submitted that that case is distinguishable because in that case the contention was that as there were large profits in the earlier years those should be taken into account and added to the profits of the year available for distribution of the dividend whereas in the instant case profits of the earlier years have not been added to the profit of the year in question. Counsel has further submitted that if it is shown that a particular sum was with the company it is not necessary to prove that it still remains with it. On the contrary, it is for the company to show that such amount is not with it. It is the contention of the learned counsel that undistributed profits remain a mass of profits. Secret profits or fictitious payments which have been disallowed and which have not been converted into reserve remain as a mass of undistributed profits and these would be available for distribution of dividend and would also be treated as surplus available for distribution according to rulings of the Supreme Court. According to the counsel, the company cannot be heard to say that as the disallowed amount of fictitious payment has not been carried forward it cannot be taken into account. Undistributable profits, counsel has submitted, float from year to year and, therefore, it can be said that earlier year's profit can be taken into account in determining the subsequent year's profit. Learned counsel has submitted that when the Supreme Court says that for determining the reasonableness or unreasonableness of the amount distributed availability of the surplus is a relevant factor to be considered, it means that the profits of the earlier years which are available for dividend in a subsequent year can also be taken into account. Learned counsel has further submitted that Section 23A expressly mentions about the tax liability of the year in question and not of the earlier years. Distinguishing the decision of the Supreme Court in the case of Gobald Motor Service Pvt. Ltd. v. Commissioner of Income-tax : [1966]60ITR417(SC) relied upon by the assessee, learned counsel submitted that in the instant case no argument was made before the Tribunal as to the availability of the surplus money on the date of distribution of dividend and, therefore, that point cannot be agitated at this stage. Relying on the case of Commissioner of Income-tax v. Jubilee Mills Ltd. : [1968]68ITR630(SC) , learned counsel has submitted that on the line of reasoning of the Supreme Court in that case it can be said that like past losses, past profits, which have an impact on the company, may also be considered while determining the commercial profit of a company for the purpose of Section 23A. Counsel has further submitted that only presence of tax liability will not do but such liability must be ascertained or incurred during the year in question. It is further submittedthat Section 23A expressly mentions about the tax liability of the year in question and, therefore, tax liability of the earlier years should not be considered in ascertaining the commercial profit of the subsequent year. It is also the contention of the counsel that it has not been challenged by the assessee before the Tribunal that the moneys which were available to the company are still with it. It was also not urged before the Tribunal that the moneys representing the disallowed items of fictitious payments were not with the company. Further, this point, according to counsel, is not covered by the frame of the question referred by the Tribunal. Therefore, according to counsel, that question does not arise out of the Tribunal's order. It cannot also be said to be a different aspect of the question referred. The question of availability of fund, counsel has submitted, is a question of fact and this has not been challenged by the assessee. Counsel has further pointed out that the case before the Tribunal was whether the payments were fictitious. Now, however, the question sought to be raised is, assuming those payments are fictitious, if moneys were still with the company. That is a question regarding the availability of money and there is no challenge with regard to that question. Before we proceed further, it would be convenient if at this stage we deal with the various cases cited at the Bar.

14. In the case of Indra Singh & Sons Ltd. v. Commissioner of Income-tax : [1958]33ITR341(Cal) , Chakravartti C.J., while dealing with Section 23A of the Indian Income-tax Act, 1922, observed that:

'I may pause here to point out that there can be no doubt that whatever else the word 'profit' in the expression 'smallness of the profit made' may mean and whatever may be the sources of that profit, it is only the accountable profits of the company which are contemplated and not the assessable income composed partly of the accounting profits and partly of notional income, coming in either as disallowed items of expenditure or as income computed on some artificial basis. The evil which the section aims at checking is unreasonable withholding of profits from distribution as dividend in spite of money for distribution being available. Obviously, notional income cannot be distributed and, therefore, in judging the reasonableness or otherwise of a company's action in distributing dividend at the rate at which it actually made the distribution or in making no distribution at all, one must pay regard only to the money that was actually at the disposal of the company and not money of which it might be deemed to be possessed.'

15. In the case of Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. : [1961]41ITR290(SC) , the facts were: For the year of account 1946-47, the assessee-company (which was not one in which the public weresubstantially interested within the meaning of Section 23A of the Income-tax Act) disclosed trading profits of Rs. 33,245. As it had realised the sum of Rs. 15,608 in that year by the sale of machinery in excess of its written down value, the Income-tax Officer included that amount and computed its assessable income at Rs. 48,761. At the general meeting to consider the accounts for that year, a dividend of Rs. 12,000 only had been declared. The Income-tax Officer passed an order under Section 23A that a sum of Rs. 15,429 being the undistributed portion of the assessable income of the company (as reduced by the taxes) shall be deemed to have been distributed. It was held that the sum of Rs. 15,608 not being in the nature of commercial profit could not be taken into account in considering whether, in view of the smallness of the profits of the company, a larger dividend would be unreasonable.

16. Explaining Section 23A, the Supreme Court in that case observed as follows : [1961]41ITR290(SC)

'The test 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. Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do.......Smallness of the profit in Section 23A has to be adjudged inthe light of commercial principles and not in the light of total receipts, actual or fictional. '

17. In the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. Pvt. Ltd. : [1965]57ITR176(SC) , while considering the ambit and scope of Section 23A of the Indian Income-tax Act, 1922, has observed that I

'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 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 expression 'smallness of profit' came under the judicial scrutiny of this court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co.Ltd. : [1961]41ITR290(SC) . Therein, Shah J., speaking for the court, observed thus: 'Smallness of the profit in Section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional. This view appears to have been taken by the High Courts in India without any dissentient opinion.'

18. The learned judge laid down the following test :

'Whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profits of the year in question.' If the assessable income was the test and if the commercial profits are small, the learned judge pointed out, the company would have to fall back either upon its reserves or upon its capital which in law it could not do. This decision is binding on us and no further citation in this regard is called for. These two concepts, 'accounting profits' and 'assessable profits', are distinct. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred by the assessee ; and in computing his income, he may include many items on notional basis. But the commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles. Therefore, the words 'smallness of profit' in the section refer to actual accounting profits in comparison with the assessable profits of the year......

There is no provision in the Income-tax Act, which makes the balance-sheet final for the purpose of Section 23A of the Act or even for the assessment. It no doubt affords a prima facie proof of the financial position of the company on the date when the dividend was declared. But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions......

Section 23A of the Act is in the nature of a penal provision. In the circumstances mentioned therein the entire undistributed portion of the assessable income of the company is deemed to be distributed as dividends. Therefore, the revenue has strictly to comply with the conditions laid down thereunder. The burden, therefore, lies upon the revenue to prove that the conditions laid down thereunder were satisfied before the order was made : See Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue Commissioners [1943] 11 ITR (SuppI) 50.'

19. In the case of Gobald Motor Service Pvt. Ltd. v. Commissioner of Income-tax : [1966]60ITR417(SC) , it was held that the commercial or accounting profits which should be taken into consideration to see whether a larger amount than that declared by the company could be distributed in view of the smallness of profits made, are the real commercial or accounting profits. If an item of receipt is deliberately omitted from the accounts it cannot besaid that commercial principles prevent that amount being added to the profits in order to arrive at the real or accounting profits. In that case, in considering whether a larger amount than that declared by the appellant-company, a transport operator, to which he had applied Section 23A of the Income-tax Act, could be distributed by way of dividends, the Income-tax Officer added to the profits disclosed by the books of the company, amounts of luggage collections suppressed as well as expenditure on spare parts disallowed as inflated, for the purpose of ascertaining its commercial profits available for distribution relying on the principles enunciated in Gangadhar Banerjee's case : [1965]57ITR176(SC) , the Supreme Court held that the two items were rightly added to the book profits in order to arrive at the true commercial or accounting profits of the appellant-company.

20. Reliance was also placed on the Madras High Court decision in Gobald Motor's case : [1963]47ITR825(Mad) . As the decision of the Madras High Court was affirmed by the Supreme Court in Gobald Motor Service P. Ltd. v. Commissioner of Income-tax : [1966]60ITR417(SC) , we do not feel it necessary to deal with the said decision of the Madras High Court.

21. In view of the various decisions of the Supreme Court on the subject, in our view it is not necessary to deal with the case of Gobald Motor Service P. Ltd. v. Commissioner of Income-tax : [1963]47ITR734(Mad) and Bipinchandra Maganlal & Co. Ltd. v. Commissioner of Income-tax : [1955]28ITR1(Bom) . In the case of Srinivas Banking Co. Ltd. v. Commissioner of Income-tax : [1965]58ITR89(Cal) the Calcutta High Court, while dealing with a case under Section 2 3 A, after considering the relevant decisions on the point, laid down the following principles:

'The principles emerging out of this section relevant for our purposes in this reference have been judicially considered on a number of occasions. These principles are:

(1) The object underlying Section 23A is to prevent avoidance of supertax by the shareholders of a company in which the public are not substantially interested. The rates of super-tax applicable to companies are much lower than the highest rates applicable to other assessees. The income-tax paid by the company is deemed to have been paid on behalf of the shareholders, but the shareholders have to pay super-tax again in respect of the dividends even if the dividends are paid out of profits which have borne supers-tax in the hands of the company. An individual might avoid the high incidence of super-tax by transferring to a private limited company, in return for shares, the source of his income, and by securing that, instead of any dividend being declared the profits made by the company should be allowed to accumulate in the hands of the company and should be ultimately distributed in a capital form by creating bonus shares which are not assessable as income in the hands of the shareholders. This section aims at foiling anattempt to avoid super-tax by such means. But the section would apply even if in a given case there is no intention to evade super-tax 1 vide Kanga and Palkhivala on Income-tax, 4th edition, volume 1, page 582, and the decision of the Supreme Court in Sardar Baldev Singh v. Commissioner of Income-tax : [1960]40ITR605(SC) .

(2) The test of reasonableness indicated by the section has, therefore, to be applied keeping the above object in view.

(3) The 'smallness of profit' in Section 23A has to be adjudged in the light of commercial principles and not in the light of assessable income or total profits, actual or fictional. In other words, it is the business profit or commercial profit that has to be taken into account I See the Supreme Court's judgment in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. : [1961]41ITR290(SC) .

(4) The 'smallness of profit' is a relative or comparative concept. The smallness may be with reference to numerous tests or standards, such as, for instance, the assessee's capital structure, his projects of development, actual payment of taxes to be provided for and anticipated against and many other business and commercial considerations : vide the judgment of P.B. Mukharji J. (sitting with Niyogi J.) in I.T.R. No. 85 of 1956 (Gangadhar Banerjee & Co. v. Commissioner of Income-tax at page 9).

(5) There is no abstract conception of 'reasonableness' and each case must depend on its own facts: Thomas Fattorini (Lancashire) Ltd. v. Commissioners of Inland Revenue [1943] 11 ITR (Supp) 50 .

(6) All considerations which ordinary commercial men take into account are relevant to determine whether it is unreasonable to declare a dividend : vide the decision of the Privy Council in Commissioner of Income-tax v. Williamson Diamonds Ltd. 1959] 35 ITR 290 and Income-tax Reference No. 85 of 1956, ibid, at pages 9 and 10.

(7) The crucial test appears to be whether the assessee could have produced sums out of which it could declare a dividend without jeopardising the interests of the company. The tax authorities must show that it was commercially possible for the company to distribute as dividend a reasonable part of its actual income : vide Thomas Fattorini's case.' [1943] 11 ITR (Supp) 50 .

22. In the case of Universal Bank of India Ltd. v. Commissioner of Income-tax : [1967]65ITR536(Patna) facts were that the assessee did not distribute any dividends for the assessment year 1954-55, for which the previous year was the calendar year 1953, in view of the smallness of profits. The Income-tax Officer took action under Section 23A of the Indian Income-tax Act, 1922, and since there was an accumulated profit of over Rs. 7,44,000 with the company in addition to the profits earned during the accounting year, he made an order that Rs. 1,17,169 would be deemed to have beendistributed as dividends on May 3, 1954. The Appellate Tribunal took the view that as the accumulated undistributed profits of the three years 1951, 1952 and 1953 put together amounted to Rs. 88,566 the application of the provisions of Section 23A was justified. On a reference to the High Court, it was held that, in view of the smallness of the profits in the previous year, the Appellate Tribunal was not right in holding that any profit should be deemed to have been distributed as dividends among the shareholders for the assessment year 1954-55. Under Section 23A of the Act, the Tribunal must have taken into consideration the profits of the previous year only, though the losses incurred in the years preceding the previous year and other relevant matters should also be taken into consideration. The overall financial position of the company had to be considered before action under Section 23A could be confirmed. The court observed--See : [1967]65ITR536(Patna) :

'The distribution of dividend, ordinarily in the commercial world, is related to the profit earned during the year. Whether the amount of such profit will justify a distribution of dividend is to be judged while keeping in view the losses that may have been sustained by the company during the past. It is the overall financial position of a company that the management and the shareholders are to keep in view before deciding upon the desirability or otherwise of any distribution of dividend. That is the task which has been cast under Section 23A upon the Income-tax Officer.'

23. It should be noted that in the above case as the accumulated profits for 1951, 1952 and 1953 came to Rs. 88,566 the Tribunal was of the view that the assessee had funds in its hands to declare dividend of more than 4%. This was, however, negatived by the High Court. Therefore, it appears that the Tribunal in that case considered the question of payment of dividend out of the profits of the three years. That is, however, not the case here. Therefore, in our view, that case is not of any assistance to the assessee.

24. In the case of Central Calcutta Investment (P.) Ltd. v. Commissioner of Income-tax : [1971]82ITR480(Cal) when dealing with Section 23A of the Indian Income-tax Act, 1922, the Calcutta High Court, relying on the principles enunciated in Gangadhar Banerjee's case : [1965]57ITR176(SC) , has held that tax liability outstanding from previous years must be taken into account in determining the availability of surplus money for purposes of declaring dividends under Section 23A of the Indian Income-tax Act, 1922.

25. In the case of Commissioner of Income-tax v. Jubilee Mills Ltd. : [1968]68ITR630(SC) facts were :

'The respondent, which was held to be a company in which members of the public were not substantially interested within the meaning ofSection 23A of the Indian Income-tax Act, 1922, had suffered large lossesprior to 1930. In 1930, a debit balance of Rs. 12,75,000 in its profit and lossaccount was adjusted by reducing the paid-up capital. For the assessmentyear 1948-49, the respondent was assessed to a total income of Rs. 7,47,639on which the tax assessed was Rs. 3,27,091. Since the company hadactually declared a dividend of only Rs. 24,750, the Income-tax Officerapplied the provisions of Section 23A and passed an order that the companyshould be deemed to have declared a dividend of Rs. 3,95,798. The AppellateTribunal upheld the order on the ground that for the purpose of theapplicability of Section 23A the reconstructed capital alone had to be takeninto account and not the original capital. The losses prior to the reductionof capital having been wiped out by being written off against the paid upcapital, they could not be taken into consideration. It was held that therewas nothing in the language or context of Section 23A(1) of the Act tosuggest that the expression 'losses incurred in earlier years' should beconstrued so as to exclude losses incurred prior to the reconstruction and toinclude only unadjusted or carried forward losses still outstanding in thebooks of the company. The losses which had been adjusted in the books ofthe company at the time of reconstruction did not cease to be 'lossesincurred by the company in earlier years' within the meaning of Section 23A(1). The consideration of losses in the earlier years should be madein the setting and context of the inquiry whether the company could beregarded as acting reasonably in declaring a smaller dividend. As a resultof the losses having been adjusted against the paid up capital they no longerremained as unadjusted losses or carried forward losses but it did not meanthat they ceased to have any impact on the financial position of the respondent in subsequent years. Even if the respondent resorted to the methodof wiping out the losses by adjusting them against its capital, the procedureresulted in crippling its finances and the company might in future yearsreasonably take steps for improving its crippled financial position. If acompany which had got over its losses for some years by adjusting themagainst its capital and reducing its capital, made a profit in the subsequentyear, it might theoretically be in a position to distribute the whole of itsprofits for that year but it could not be said to have acted unreasonably ifit chose not to do so and retained a portion of the profits for the purpose ofbuilding up a capital reserve which in course of time would enable thecompany to regain its original strength of capital which had been crippledby the adjustment of losses at the time of reconstruction. According to theSupreme Court, the Appellate Tribunal misdirected itself in law in holdingthat the losses incurred prior to the reconstruction of the respondent-company were irrelevant for the purpose of the application of Section 23Aof the Act in subsequent years.'

26. In the case of Commissioner of Income-tax v. R. N. Bagchi & Bros. : [1969]72ITR645(Patna) , the assessee, a private limited company, was engaged in the business of coal mining. In the assessment year 1958-59, the total income of the assessee was determined at Rs. 42,810. The company had returned an income of Rs. 34,790 only. It had declared a dividend of Rs. 1,701 which the Income-tax Officer held was below the statutory limit of 45% under Section 23A of the Act as it stood at the relevant time. Calculating on the basis of statutory percentage of 45% the Income-tax Officer held that the assessee-company ought to have declared a dividend of Rs. 9,418. Under Section 23A of the Act, an opportunity was given to the assessee to declare dividend within three months of the receipt of the notice which was issued by the Income-tax Officer on 18th December, 1961. The assessee was also called upon to show cause why proceedings under Section 23A(1) should not be initiated and additional super-tax should not be levied for deficiency in the distribution of statutory dividend. On 18th March, 1962, the assessee, In a letter addressed to the Income-tax Officer, took the stand that, owing to the smallness of profit coupled with the fact that the company suffered losses in the earlier years and in view of the pending of tax liability, it was not possible for the company to declare a larger dividend than that declared by it. The contention of the assessee was rejected by the Income-tax Officer. In doing so, he took into consideration the fact that the company itself had declared an income of Rs. 34,790 which was not a small profit. He, therefore, levied additional super-tax on the undistributed income which worked out to Rs. 20,929 at the rate of 37 paise per rupee. The total amount of the additional super tax imposed was Rs. 7,743.73. The assessee went up in appeal and the Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In the second appeal, the Tribunal, however, took the view that the commercial profit had to be taken into consideration. After making certain adjustments in the figure of the assessed profit the Tribunal determined the commercial profit and thereafter accepting the case of the assessee that the tax liability of the assessment year 1957-58 to the tune of Rs. 19,187 was paid in the accounting year 1957, relating to the assessment year 1958-59, the Tribunal found that the net result from the commercial view was a loss. According to the Tribunal, it could not be said that the declaration of the dividend by the company was unreasonable. The High Court, however, held that in computing the profits of a closely held company for the purpose of determining whether the dividend distributed by it during a particular year was reasonable, income-tax due in respect of an earlier year, but paid during the accounting year in question, could not be deducted. The High Court observed that--See : [1969]72ITR645(Patna) :

'Ordinarily and generally in a large number of cases, the demand of outstanding dues of the tax of earlier years will not be relevant, because in each year, for fulfilment of the primary condition, the Income-tax Officer will have to take into account the tax demand of the particular year and after deducting the demand from the income assessed, he will have to determine whether the dividend declared falls short of the statutory percentage. That being so, it is manifest that the tax demand for any particular year is expected to be paid out of the profits of that particular year and in no sense is to be included in the amount of dividend declared for that year. It may well be that in some exceptional cases the payment of the outstanding demand of tax in respect of earlier years will be relevant if it can be shown by the assessee-company that due to some exceptional circumstances the tax demand for the earlier year had to be met out of the profits of the year in question in respect of which an order under Section 23A was proposed to be passed.'

27. In the case of Commissioner of Income-tax v. Uttam Singh Duggal & Co. P. Ltd. : [1974]94ITR486(Delhi) , the Delhi High Court, while considering Section 23A of the Indian Income-tax Act, 1922, observed that :

'Although dividends may not be paid out of capital, yet nothing would prevent a prudent businessman from paying it not only out of the profits of the relevant year, but also out of the profits of the previous financial years, which is allowed under the law. The criterion, as laid down by the Supreme Court, is the availability of surplus money. The question has to be examined on the merits of each case, and there is no question of re-writing the accounts.'

28. In the case of Commissioner of Income-tax v. Bangodaya Cotton Mills Ltd. : [1968]69ITR812(Cal) , it was held that in the matter of distribution of dividends, a company has to look to various necessary outgoings to judge the situation in its reality and not only to look to its business profits. In doing so, the company has necessarily to take not only admissible and revenue expenses but also other commitments and outgoings, even though they may be of a capital and inadmissible nature, to find out the amount, which has been actually left with it to be distributed as dividend. It would not be proper to consider only the past losses and present profits and to ignore the availability of surplus money and the reasonable requirements of the future.

29. In the case of Ramchand & Sons Sugar Mills Private Ltd. v. Commissioner of Income-tax : [1970]75ITR428(All) , the Allahabad High Court, relying on the principles laid down by the Supreme Court in Gangadhar Banerjee's case : [1965]57ITR176(SC) and Bipinchandra Maganlal's case : [1961]41ITR290(SC) , held that when applying the provision of Section 23A(1) of the Indian Income-tax Act, 1922, and determining what are the profits andgains of a company available for distribution as dividend what the Income-tax Officer must consider is not the assessable income but the commercial or accounting profits of the assessee. The High Court observed--See 0065/1969 : AIR1969All383 :

'What has to be considered under Section 23A is the amount of commercial profits, and there is no ground for supposing that the concealed profits of a company do not form part of its commercial profits. Neither principle nor practice justifies that assumption. No businessman can with any show of reason be heard to say that only the profits, disclosed in his account books from his commercial profits and those which he has earned but withheld from the account books are to be considered outside his commercial profits.'

30. In the case of Commissioner of Income-tax v. Williamson Diamonds Ltd. [1959] 35 ITR 290 ; [1958] AC 41, the Judicial Committee had to consider the scope of Section 21(1) of the Tanganyika Income-tax (Consolida-tion) Ordinance (27 of 1950), which was in pari materia with Section 23 A of the Indian Income-tax Act, 1922. The Judicial Committee held that it was impossible for the Commissioner to arrive at a conclusion as to reasonableness by considering the two matters mentioned in Section 21--'losses previously incurred' and 'smallness of the profits'--isolated from other relevant factors ; the Ordinance did not say 'having regard only' to those matters. The Ordinance required all matters relevant to the question of unreasonableness to be considered, and capital losses, if established, would be one of them. The Judicial Committee observed that--See [1959] 35 ITR 290:

'It was argued that some losses were established and that, therefore, it was for the commissioner to find out for himself whether there had been compensating gains. Their Lordships do not think that there is anything in the language of the Ordinance which casts any such duty upon the commissioner. It would, moreover, be in the generality of cases, a task, which a person with the limited knowledge of the affairs of a company which can be imputed to the commissioner, could not efficiently perform.' In the case of Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) facts were: For the year ending 31st December, 1945, the profit of the assessee-company, whose accounting year was the calendar year, was a certain sum according to the profit and loss account. After making provision for depreciation and taxation the balance of Rs. 5,08,637 was carried to the balance-sheet. This sum was not allowed in computing the profits for the purposes of income-tax. In February, 1946, the directors recommended that out of that amount, a sum of Rs. 4,92,426 should be distributed as dividend and the balance of Rs. 16,211 was to be carried forward to the next year's account. Thisrecommendation was accepted by the shareholders in their meeting on 3rd April, 1946, and an amount was shortly afterwards distributed as dividend. In computing the capital of the assessee-company on 1st April, 1946, under the Business Profits Tax Act, 1947, the assessee claimed that the sum of Rs. 5,08,637 and the profit earned by it during the period 1st January, 1946, to 1st April, 1946, should be treated as 'reserves' for the purpose of Rule 2(1) of Schedule II. The High Court held that the sum of Rs. 5,08,637 must be treated as a reserve for the purpose of Rule 2, but profit made by the assessee during the period 1st January 1946, to 1st April, 1946, could not be included in the reserves. The Supreme Court, however, held that the sum of Rs. 5,08^637 and the profit earned by the assessee during the period 1st January, 1946, to 1st April, 1946, did not constitute reserves within the meaning of Rule 2(1) of Schedule II. The Supreme Court observed that--See : [1953]24ITR499(SC) 'The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profits on 1st January, 1946, cannot automatically make it a reserve.'

31. In the case of Commissioner of Income-tax v. Kores (India) Pvt. Ltd. : [1969]72ITR431(Bom) , the Bombay High Court in dealing with the proviso to Section 23A(1) as it stood prior to its amendment by the Finance Act of 1955, observed that 'reserves' could only mean profits earned by a company and not distributed as dividend to the shareholders, but kept back for any future purposes. Profits lying unutilised do not constitute a 'reserve' within the meaning of the proviso to Section 23A(1).

32. In the case of Commissioner of Income-tax v. Hind Lamps Ltd. : [1973]90ITR487(All) , the Allahabad High Court while dealing with the question of computation of the capital base of the assessee-company under the Super Profits Tax Act, 1963, relying on the rule laid down in the case of Century Spinning and . : [1953]24ITR499(SC) , observed that to constitute a 'reserve', the amount must be specifically kept apart for future use or for a specific occasion.

33. In the case of Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax : [1955]27ITR436(Cal) , it was held that if the surplus was simply carried forward without the persons in requisite authority allocating it particular periods, it did not acquire the character of reserve for the purpose of capital computation of the Business Profits Tax Act.

34. In the case of Commissioner of Income-tax v. Girdhardas & Co. (Pvt.) Ltd. : [1967]63ITR300(SC) , the Supreme Court observed that:

'It is well settled that a company as a going concern distributing profits of the year or accumulated profits is regarded as distributing dividend among the shareholders, but if the company is wound up beforedistributing its accumulated profits, any distribution of profits by a liquidator is not regarded under the Companies Act as dividend.'

35. In the case of Commissioner of Income-tax v. Union Company Ltd. : [1966]59ITR483(Cal) , the Calcutta High Court held that smallness is a relative term and in considering smallness of profits for purposes of Section 23A, the profits available for distribution must be considered as compared to the commercial profits as also the capital structure of the company. Factors like reserves of the company or its future development projects cannot, however, be taken into account. It appears that in this case the decision of the Supreme Court in Gangadhar Banerjee's case [1956] 57 ITR 176 was neither cited before nor considered by the Calcutta High Court.

36. In the case of Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) , the Supreme Court, in dealing with Section 66(1) and (2) of the 1922 Act, observed as follows :

'If the true scope of the jurisdiction of the High Court is to give advice when it is sought by the Tribunal, it stands to reason that the Tribunal should have had an occasion to consider the question so that it may decide whether it should refer it for the decision of the court. How can it be said that the Tribunal should seek for advice on a question which it was not called upon to consider and in respect of which it had no opportunity of deciding whether the decision of the court should be sought ?......

Now, if we are to hold that the court can allow a new question to be raised on the reference, that would in effect give the applicant a right which is denied to him under Section 66(1) and (2) and enlarge the jurisdiction of the court so as to assimilate it to that of an ordinary civil court of appeal......

The result of the above discussion may thus be summed up :

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.

Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order.'

37. In the case of T. D. Kumar & Brothers (P.) Ltd. v. Commissioner of Income-tax : [1967]63ITR67(SC) the Supreme Court following its earlierdecision in Scindia Steam Navigation Company's case : [1961]42ITR589(SC) has held that it is only a question that has been raised before and decided by the Tribunal that can be held to arise out of its order. In respect of a question which was not raised or argued before the Tribunal, or decided by it, a reference under Section 66(2) cannot be asked for.

38. From the various decisions of the Supreme Court noted earlier it appears that the principles applicable to cases under Section 23A of the Indian Income-tax Act, 1922, are well settled and the question now is one of application of those well-settled principles to the facts and circumstances of a particular case. In the light of those principles it is now to be seen whether on the facts and in the circumstances of a case the outstanding income-tax liability could not be considered as an item of liability and that whether the order under Section 23A of the Act was rightly passed. According to the rules laid down by the Supreme Court in Gangadhar Banerjee's case : [1965]57ITR176(SC) and the Calcutta High Court in the case of Central Calcutta Investment (P.) Ltd, v. Commissioner of Income-tax : [1971]82ITR480(Cal) , income-tax liability is a relevant factor to be taken into account while determining the commercial or accounting profit of the assessee available for distribution under Section 23A. But the further question which arises in the facts and circumstances of the present case is whether from a commercial point of view it would be reasonable to say that such liability would prevent the assessee from declaring more dividend than that declared and, therefore, the action taken under Section 23A is not justified.

39. In the instant case in deciding the question of commercial or accounting profits of the assessee for the purpose of Section 23A the revenue authorities while considering the past income-tax liability of the assessee also took into consideration the disallowed items of payment of commission and brokerage made by the assessee to certain parties, which according to the revenue are fictitious in nature. It is said that since the disallowed items of payment of commission and brokerage are notional profit or income of the assessee they should not be taken into account while determining the commercial or accounting profit of the assessee. Regarding the nature of the disallowed items of payments of commission and brokerage, the Tribunal has held that :

''On enquiries, it was found by the Income-tax Officer that no such payment has been made to the party. It is abundantly clear from the above facts that the payment was not genuine and rightly doubted as fictitious payment and routed through the firm of Bimal Kumar Nirmal Kumar to the appellant. The total payment fcorn the assessment year 1944-45 to 1954-55 was Rs. 13,68,000.'

40. This finding of the Tribunal, it should be noted, has not been challenged by the assessee. Now, therefore, the question is whether the revenue authorities were justified in taking that amount into consideration in deciding the question of the application of Section 23A in the instant case. Relying on the observation of the Supreme Court in Bipinchandra Maganlal's case : [1961]41ITR290(SC) , to the effect: 'That the test of 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 '--it was urged by the assessee that since the disallowed items of fictitious payment did not form part of the profit of the relevant previous year they should not be taken into consideration for deciding the commercial or accounting profit for the purpose of Section 23A. On the other hand, the submission of the revenue is that the sums disallowed as fictitious payments are secret profits of the assessee and, therefore, they should be taken into account in view of the decision of the Supreme Court in Gobald Motor's case : [1966]60ITR417(SC) , but there the commercial income of the assessment year in question was taken into consideration for the purpose of determining the commercial profit of the assessee under Section 23A of the Act, and, therefore, that case does not lend any assistance to the contention of the revenue. The question, therefore, is whether in determining the amount of commercial or accounting profit of the relevant previous year for the purpose of Section 23A disallowed items of payment of commission and brokerage can be taken into account or considered. In other words, in judging the financial position of the assessee while determining the amount of commercial or accounting profit of the relevant previous year for the purpose of Section 23A, were the revenue authorities right in taking into consideration the said disallowed items of payment As noted earlier in Gangadhar Banerjee's case : [1965]57ITR176(SC) , the Supreme Court has said:

'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 (tax officer) 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.'

41. thus in determining the reasonableness or unreasonableness of the amount to be distributed as dividend it is the duty of the Income-tax Officer to take into consideration various factors depending upon the facts and circumstances of a particular case as indicated in the said decision of the Supreme Court. It, therefore, appears that depending on the facts and circumstances of a particular case the availability of surplus money and taking an overall picture of the financial position of the companyare relevant considerations for judging the reasonableness or unreasonableness of the amount distributed.

42. Disallowed items of brokerage and commission cannot be treated as notional profit or income of the assessee but as commercial profits of those earlier years as contended by the revenue. But Section 23A is a penal provision and the burden is on the revenue to establish that Rs. 13,68,000 being the total sum of the disallowed items of those earlier years was in the till of the assessee in the relevant assessment year before any part of it can be taken into consideration for the purpose of making adjustment with Rs. 7,28,537, being the arrears of tax liability for those earlier years, assuming for the time being that Rs. 13,68,000 can be taken into account in the relevant assessment year for the purpose of Section 23A of the Act.

43. The Tribunal has taken into consideration the assessee's balance-sheet ending on December 31, 1959, and the correctness of this balance-sheet has not been questioned by the revenue at any stage of the proceedings. It appears from the balance-sheet that there was a cash balance of Rs. 85,786.08 on December 31, 1958, and, therefore, it cannot be said that Rs. 13,68,000 was in the till of the assessee on January 1, 1959. Further, there is no material on the record to show that Rs. 13,68,000 was still available to the assessee in the relevant assessment year, nor is there any such finding by the Tribunal. Therefore, Rs. 13,68,000 cannot, in any event, be taken into consideration and even if Rs. 85,786.08 is taken into consideration the contention of the revenue must fail, because the arrears of tax liabilities far exceeded that amount.

44. That apart, every company normally distributes the surplus out of the commercial profit of the current year in question and to determine its reasonableness or unreasonableness the tax officer is only concerned with such profit of that year and not with the commercial profit of the earlier years. Therefore, Rs. 13,68,000 must be left out of consideration. In other words, Rs. 13,68,000 cannot be brought forward notionally from the earlier years for making adjustment with Rs. 7,28,537 in the relevant assessment year, for to do so is to determine the surplus available for distribution by adding the commercial profit of the earlier years with the commercial profit of the relevant assessment year which is against the law laid down by the Supreme Court in Bipinchandra Maganlal's case : [1961]41ITR290(SC) .

45. As already stated, the arrears of tax liabilities for the earlier years have to be taken into account as held by the Supreme Court in Gangadhar Banerjee's case : [1965]57ITR176(SC) and also by our court in Central Calcutta Investment (P.) Ltd. v. Commissioner of Income-tax : [1971]82ITR480(Cal) , and, therefore, we are not in agreement with the decision of the Patna High Court in R.N. Bagchi's case : [1969]72ITR645(Patna) . So far as this court is concerned it is well established by the above decision of our court that thearrears of tax liability for the earlier years must be taken into account in determining the available surplus money for the purpose of declaring dividend under Section 23A of the Act. It has been stated in the statement of the case that the 'profit, without making any provisions for taxation of the year, was Rs. 14,84,951 and if earlier income-tax liability as well as liability of the year is taken together it totalled Rs. 14,40,285 leaving nil amount for making any dividend in the year'. Therefore, making a general reserve of Rs. 5 lakhs for the first time by the assessee is of no consequence and it is also not a relevant factor for consideration, because this amount is included in the above commercial profit and the overall picture of the financial position of the business of the assessee has been sufficiently reflected in the foregoing quoted statement and from the statement of the case.

46. Similarly, what the assessee did in the past relating to distribution of available surplus money is not a relevant factor for consideration, for the tax officer, while acting under Section 23A of the Act, should do 'what the directors should have done' as a prudent businessman in the relevant assessment year in question is the decision of the Supreme Court in Gangadhar Banerjee's case : [1965]57ITR176(SC) of the report. The law laid down in that case was reiterated by the Supreme Court in Commissioner of Income-tax v. Asiatic Textiles Ltd. : [1971]82ITR816(SC) of the report, the Supreme Court said 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.'

47. And at page 820 of the report, the Supreme Court says this :

'The directors of a company 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 expected to act as hard-headed businessmen. 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.'

48. The directors in the instant case before us has taken into consideration the arrears of income-tax liabilities of the earlier years as appears from the auditors' report by treating the said liability as contingent liability in view of the pendency of the appeal and they have made a general reserve of Rs. 5 lakhs so that in case of necessity this liability can be metout of this reserve. Hence, we are not impressed by the observations of the Tribunal made in this behalf.

49. In this view of the matter, we return our answer in the negative and in favour of the assessee. In the facts and circumstances of the case, we do not propose to make any order as to costs.

Deb, J.

50. I agree.


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