Sabyasachi Mukharji, J.
1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922, The reference arises out of the assessment for the assessment years 1958-59 and 1959-60. The accounting years concerned are the two calendar years 1957 and 1958. The assessee is a public limited company. There is no dispute that the assessee is not a company in which the public are substantially interested within the meaning of Section 23 A of the Indian Income-tax Act, 1922. The following are the figures on the basis of which the Income-tax Officer held that the dividends distributed by the company for the two years were less than the statutory percentage (which was 60% in this case) required under the provisions of Section 23A of the Act:
Total income determined3,05,1523,24,853Income-tax as assessed1,57,153
1,47,9991,57,554Owner's share of municipal tax borne by the assessee but not allowed in the assessment
1,01,9301,11,495Dividends distributed as declared in the Annual General Meeting held on 5-8-1958 and 6-8-1959, respectively 44,000 50,600
2. The assessee claimed that for the assessment year 1958-59 the profits for the year before deduction for taxes amounted to Rs. 1,92,193 and after providing for Rs. 2,15,000 for taxation there was a loss of Rs. 22,807 in the year in the commercial sense. For the assessment year 1959-60, the profits according to the profit and loss account were Rs. 2,25,497 before providing for taxation. After deducting the provision for taxation for a sum of Rs. 1,99,009, there remained a surplus of Rs. 26,888. The assessee claimed that there was no case for passing an order under Section 23A for any of the two years. The Income-tax Officer held that the following items provided for in the accounts could not be considered as expenses for deduction for the purpose of commercial profits :
1.Reserve for doubtful debts 2,276 6,4742.Provision for contingencies 1,550 1,5503.Contributed to Repairs Fund40,97541,8024.Sinking Fund for Redemption of Debentures34,51436,066
3. There was an appeal from the aforesaid order of the Income-tax Officer. The Appellate Assistant Commissioner passed a consolidated order in respect of the two years. According to the Appellate Assistant Commissioner with regard to the provision for income-tax the taxes ultimately found payable were to be taken into consideration. He took into account a sum of Rs. 1,57,153 as income-tax payable in respect of the assessment year 1958-59 and a sum of Rs. 1,67,299 payable for income-tax for the assessment year 1959-60. With regard to the sinking fund for redemption of debentures he held that there was a contractual obligation according to the debenture trust for maintaining the sinking fund and the debits to the profit and loss account for the two years for such had been correctly made. He held that the amounts should be considered in determining the commercial profits. For the contribution to the repairs fund the Income-tax Officer held that this was not made on proper basis but considering that the depreciation had not been separately charged and the amounts contributed to the repairs fund were much less than the allowance for repairs under Section 9 of the Indian Income-tax Act, 1922, the Appellate Assistant Commissioner held that the provisions of Rs. 40,975 for the assessment year 1958-59 and Rs. 41,802 for the assessment year 1959-60 were not unreasonable and should have been considered as allowable deductions in determining the commercial profits. For the assessment year 1958-59 he found that after deducting the tax of Rs. 1,54,239 from the profits of Rs. 1,92,193 there remained a balance of Rs. 37,954. Even if the reserve for doubtful debts of Rs. 2,276 and the provision of contingency of Rs. 1,550 were not allowed, the amount left for distribution as dividend was accordingly found to be much less than the amount of Rs. 44,000 that was declared as dividend. The Appellate Assistant Commissioner accordingly cancelled the order under Section 23A for the assessment year 1958-59. For the assessment year 1959-60 the amount left after deducting the income-tax of Rs. 1.67,299 from the profits of Rs. 2,25,497 was Rs. 58,198 and this being more than the amount declared as dividend, namely, Rs, 50,600, the order under Section 23A for that year was confirmed.
4. The assessee preferred an appeal to the Appellate Tribunal from the aforesaid consolidated order of the Appellate Assistant Commissioner. The department appealed against the order relating to the assessment year1958-59. The Tribunal considered the assessee's claim that under Clause (b) of Section 23A(1) deduction had to be allowed in respect of wealth-tax. Wealth-tax assessment came to be made on the assessee starting from the assessment year 1957-58 on the passing of the Wealth-tax Act, 1957, which received the assent of the President on the 12th September, 1957. The Act was declared to have come into force from the 1st of April, 1957. Particulars regarding the first three assessments for wealth-tax on the assessee are as follows :
Assessment yearValuation dateDate of assessmentAmount of wealth-tax payable Rs.
5. It was contended on behalf of the revenue that since under Clause (b)of Section 23A(1) it was the tax 'levied' that had to be deducted, nodeduction should be made in the present case since no assessment or levyof wealth-tax was made during the accounting years 1957 and 1958. TheTribunal held that the taxes referred to in Clause (b) of Section 23A(1)should relate to the accounts of the relevant year and that such tax shouldbe a sum which was an outgoing for the year but not allowed wholly or inpart in computing the total income. The contention of the assessee wasthat the deduction for wealth-tax for the assessment year 1958-59, theaccounting year for which ended on the 31st December, 1957, would be thewealth-tax payable in relation to the valuation date on the 31st December,1957, and similarly for the assessment year 1959-60, the accounting yearfor which ended on the 31st December, 1958, would be the wealth-taxpayable in relation to the valuation date on the 31st December, 1958.Further, with regard to the wealth-tax relating to the valuation dateon the 31st December, 1956, the assessment year for which was the year1957-58, on the ground that the provision for taxes could not be made inthe accounts for the year 1956, as the Wealth-tax Act was not passed tillthe 12th of September, 1957, it was contended that the wealth-tax inrespect of this assessment should also be deducted as a charge against theprofits for the year 1957, assessable in 1958-59. The Tribunal consideredthat according to section 3 of the Wealth-tax Act the liability forwealth-tax for the assessment year 1957-58 arose on the 1st April,1957. The Tribunal considered that for liability which arose on the 1st ofApril, 1957, the actual figures might have been quantified on a subsequentdate. For the accounts for the year 1957, the wealth-tax that might betreated as outgoing was the wealth-tax for the assessment year 1957-58and similar would be the position for the later years. The Tribunal heldthat the wealth-tax deductible from the total income of the previous year 1957 under Clause (b) of Section 23A(1) was the wealth-tax for the assessment year 1957-58 and the wealth-tax similarly deductible from the total income of the previous year 1958 was the wealth-tax for the assessment year 1958-59. The Tribunal further found that the dividends declared for the two years being less than 60% of the reduced total income after deduction for wealth-tax as indicated, Section 23A was applicable and since the dividends distributed were even less than 55% of such reduced total income the assessee's contention that the Income-tax Officer should have issued notice to make further distribution to cover up the balance amount was rejected.
6. On the question whether the payment of larger dividends than that declared for the two years would be unreasonable the Tribunal considered the claim for deduction of the items under reserve for doubtful debts, provision for contingencies, contribution to repairs fund and sinking fund for redemption of debentures. The Tribunal considered that the department might well question whether certain items had been correctly charged in the accounts in determining the profits and relied for this on the judgment of the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee and Company (Private) Ltd. : 57ITR176(SC) . With regard to the reserve for doubtful debts, however, the Tribunal held that no objection could be taken to deduction of the amounts in arriving at the commercial profits. The provision for contingencies was found to be in the nature of a general reserve and the Tribunal held that this could not be excluded from the commercial profits. With regard to repairs fund the Tribunal considered the amounts credited to the fund over ten years from 1952 to 1961 and the actual expenses for repairs for these years. The Tribunal was of the opinion that no objection on principle could be made to the creation of repairs fund and credit of certain amounts to such fund and meeting of actual expenses for repairs by drawing from such funds provided that the amount credited each year to the repairs fund was a reasonable amount. What would be charged each year should be reasonable, based on past experience and on intelligent appreciation of future requirements. On a consideration of the relevant facts the Tribunal came to the finding that the provision in this respect was much in excess of the requirements for repairs. With regard to the contention that the provision was to be considered for depreciation also, the Tribunal held that the repairs fund could not be treated as representing depreciation reserve when the accounts did not indicate, this. The Tribunal, therefore, came to the conclusion that the provision for the sinking fund represented capital expenditure and that it was not deductible in arriving at the commercial profit. TheTribunal at the same time held that the liability could not be totally ignored and that the guidance in the matter should be sought from the observations of the Supreme Court in the case of Gangadhar Banerjee & Co.1 If in any year the assessee was found to have made sufficient profits and yet it could not meet the commitments as provided for in the debenture deed without falling on such profits, then in considering the amounts available for distribution as dividend only such amount had to be considered as was left out after meeting the commitments. The matter had to be considered taking an overall picture of the financial position of the business. The Tribunal held that the contribution to the sinking fund was not to be deducted in determining the commercial profits but the liability was to be kept in mind in determining the reasonableness of the amount distributed as dividend. The Tribunal further considered that the trust deed dated the 24th June, 1936, did not mention as to how the amounts to be applied each year in the redemption of the debentures were to be provided for and this was left to the company to take care of. The Tribunal found that the assessee was in a sufficiently good financial position and was redeeming the debentures much ahead of the schedule. Considering the share capital and the reserves and the balance in the profit and loss account the Tribunal found it difficult to accept the position that it was not reasonable to declare larger dividends than what were declared, unless adequate provision had been made for setting apart the specified amounts credited to the sinking fund. The Tribunal held that for both the years the commercial profits were sufficient to enable the assessee to declare dividends to the extent required under Section 23A of the Act.
7. Thereafter, the following questions have been referred to this court as mentioned hereinbefore under Section 66(1) of the Indian Income-tax Act, 1922:
' 1. Whether, on the facts and in the circumstances of the case, the wealth-tax to be deducted under Clause (b) of Sub-section (1) of Section 23A from the total income of the previous year 1957 relevant to the assessment year 1958-59 is the wealth-tax payable in respect of the wealth-tax assessment for the year 1957-58 or the aggregate of wealth-tax payable in respect of the wealth-tax assessments for the years 1957-58 and 1958-59
2. Whether, on the facts and in the circumstances of the case, the wealth-tax to be deducted under Clause (b) of Sub-section (1) of Section 23A from the total income of the previous year 1958 relevant to the assessment year 1959-60 is the wealth-tax payable in respect of the wealth-tax assessment for the year 1958-59 or the wealth-tax payable in respect of the assessment for the year 1959-60
3. If the answer to question No. 2 is in favour of the assessee, whether on the facts and in the circumstances of the case, for the assessment year 1959-60, the assessee is entitled to a notice from the Income-tax Officer for further distribution of dividend under Sub-section (2) of Section 23A of the Indian Income-tax Act, 1922
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying Section 23A on the ground that the payment of a larger dividend than what was declared would not be unreasonable having regard to the profits made in the respective previous years 1957 and 1958 relating to the assessment years 1958-59 and 1959-60 ?'
8. As it would be apparent, the first two questions deal with the problem of deduction of wealth-tax payable by the company and the question as to when this wealth-tax liability could be said to have been levied on the assessee. It is, therefore, necessary to refer to Section 23A(1) which provides as follows:
'23A. Power to assess companies to super-tax on undistributed income in certain cases.--(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 super tax 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 a 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
(ii) that the payment of a dividend or a larger dividend than that declared would not have resulted in a benefit to the revenue; or
(iii) that at least seventy-five per cent, of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in the taxable territories for a charitable purpose the income whereof is exempt under Clause (i) of Sub-section (3) of Section 4;
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.'
9. The contention upon which the Tribunal based its decision was the expression 'tax levied' in Clause (b) of Section 23A(1) of the Act. It was contended on behalf of the assessee that the tax levied indicated a liability imposed by the legislature and that liability was imposed according to counsel for the assessee on the valuation date after coming into operation of the Wealth-tax Act, 1957, on the 12th September, 1957. But in so far as there was liability for wealth-tax for 1957-58 and 1958-59 in the assessment year 1958-59 from a commercial point of view it would have been improper to declare dividend without taking into consideration the liability on this account. It was further contended that unlike the Income-tax Act the liability under the Wealth-tax Act was not dependent on the passing of the Finance Act but the liability was imposed by the Wealth-tax Act itself on the relevant valuation date. The rate of the wealth-tax payable is not dependent unlike the liability under the Income-tax Act upon the passing of the annual Finance Act. It was, therefore, contended that for the liability for wealth-tax for both these years the assessee was entitled to deduction in the assessment year 1958-59 and accordingly taking this amount into consideration the assessee did not come within the mischief of Section 23A(1) of the Indian Income-tax Act, 1922. Counsel for the revenue on the other hand contended that under Clause (b), Section 23A(l), the deductions that the assessee was entitled to were only those that were mentioned in Section 10(2)(ix) of the Indian Income-tax Act, 1922. It appears to us, however, that in order to be entitled to deduction under Clause (b) of Section 23A(1) the tax or the levy must come within the terms mentioned in Clause (b) of that section. The said clause provides for exclusion of the amount of any other tax levied under any law for the time being in force on the company; wealth-tax is imposed under law for the time being in force on the company by the Government but it has to fulfil another qualification, namely, that such tax or levy must be 'in excess of the amount, if any, which has been allowed in computing the total income'. Therefore, it must not only be any tax levied under the law but the amount of such levy must be in excess of the amount which has been allowed in computation of the total income of the assessee. Therefore, eligibility for allowance in the computation of the total income of the assessee is a qualification which it must fulfil in order to merit deduction under Clause (b) of Section 23A(1) of the Indian Income-tax Act, 1922. Wealth-tax paid or imposed can be deducted only to the extent the levy or the tax is in excess of the amount which can be allowed in computation of the total income of the assessee-company. In view of certain decisions of the court Parliament passed a statute known as the Income-tax (Amendment) Act, 1972. Section 4 of the said Act provides as follows :
'4. Wealth-tux not deductible in computing the total income for certain assessment years.--Nothing contained in the Indian Income-tax Act, 1922 (11 of 1922), shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head 'profits and gains of business, profession or vocation' or 'income from other sources' for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax.
Explanation--For the purposes of this section 'wealth-tax' shall have the same meaning as is assigned to it in the Explanation to Sub-clause (iia) of Clause (a) of Section 40 of the principal Act.'
10. Therefore, in view of the provisions of Section 4 of the Amending Act it is clear that wealth-tax cannot be deducted in computation of the income of the assessee. If that is the position, then under Section 23A(1) of the Indian Income-tax Act, 1922, wealth-tax paid/payable under the Wealth-tax Act, 1957, whatever view is taken of the expression 'tax levied' cannot go to reduce the total income of the assessee-company. It is undisputed that Section 4 of the Amending Act is retrospective in effect. Counsel for the assessee contended that the expression 'allowed' in Clause (b) of Section 23A(1) should not be construed in the sense of anything that is allowed in the computation of the total income of the assessee under the Income-tax Act. We are, however, in view of the use of the expression 'allowed', unable to accept this position. In support of the contention on the expression 'levied' counsel for the assessee referred us to the decision in the case of Hazari Mal Kuthiala v. Income-tax Officer and in the case of A. N. Lakshman Shenoy v. Income-tax Officer, Ernakulam : 34ITR275(SC) . In the view, however, we have taken on the question of deduction it is not necessary for us to examine this aspect of the matter any further.
11. In the view we have taken, therefore, the question No. 1 must be answered by saying that the wealth-tax cannot be deducted under Clause (b) of Section 23A(1) from the total income of the previous year relevant to the assessment year 1958-59 at all. Similarly, question No. 2 has to be answered by saying that the wealth-tax cannot be deductedunder Clause (b) of Section 23A(1) from the total income of the previous year relevant to the assessment year 1959-60. In view of the aforesaid answers which are against the assessee, question No. 3 need not be answered.
12. As regards question No. 4, it depends upon the examination of the facts whether having regard to the losses incurred by the company or the smallness of profits made a larger dividend should have been declared. The computation of the profit must be made from a commercial point of view. The principles upon which such computations will have to be made are now well-settled by the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. and Commissioner of Income-tax v. Asiatic Textiles Ltd. : 82ITR816(SC) [n the first mentioned case the Supreme Court observed that in deciding whether the payment of dividend or a larger dividend than that declared by the company would be unreasonable, the Income-tax Officer could take into consideration the circumstances other than losses and smallness of the profit. The statute by the words used while making sure that losses and smallness of profits were never lost sight of required that all matters relevant to the question of unreasonableness should be considered. The words 'smallness of profit' in Section 23A referred to actual accounting of profits and not assessable profits of the year. In arriving at the assessable profits the Income-tax Officer might disallow many expenses actually incurred by the assessee and in computing his income he might include any item on notional basis. But the commercial or accounting profits should be the actual profits earned by the assessee calculated on commercial principles. At page 181 of the report, explaining the scheme of the section, the Supreme Court observed:
'What does the expression 'profit' mean Does it mean only the assessable income or does it mean commercial or accounting profits If the scope of the section was properly appreciated the answer to the said question would be apparent. The Income-tax Officer, acting under this section, was not assessing any income to tax : that would be assessed in the hands of the shareholder. He only did what a director should have, done and he put himself in the place of the directors. Though the object of the section was 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 dividend 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 was neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It would depend upon the facts of each case. The only guidance was his capacity to put himself in the position of a prudent businessman or a director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression 'having regard to' that precedes the said words.'
13. The problem is presented in each case as to how to apply this principle of the Supreme Court in the facts of the particular case. As mentioned hereinbefore in this case four items required consideration. Regarding reserve for doubtful debts the Tribunal allowed this amount in considering the commercial profits. Regarding provision for contingencies which, again, was for a very small sum of money, as the contingencies for which these were provided had not been indicated, the Tribunal rejected the claim for reduction of this amount in the consideration of commercial profits. Then there was the question of the contribution to repairs fund and the sinking fund for redemption of debentures. We have set out in extenso from the reasonings of the Tribunal in not allowing these two items from the computation of the commercial profits. Essentially, the Tribunal seems to have proceeded on the basis that in the facts and circumstances as indicated by the company's position of reserve for the repairs and as indicated by the company's other financial position the provisions for these were far in excess of the legitimate need for which these amounts had been earmarked. In doing so, it appears to us that the Tribunal has followed the principles laid down by the Supreme Court in the aforesaid decision of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd.
14. Counsel for the assessee drew our attention to the decision in the case of Commissioner of Income-tax v. Bangodaya Cotton Mills Ltd. : 69ITR812(Cal) . The facts of that case, in our opinion, were entirely different from the issues involved in the case before the Tribunal. The principles enunciated by this decision are the same as the principles enunciated by the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd.
15. Reliance was also placed on the case of Amalgamation (Pvt.) Ltd. v. Commissioner of Income-tax : 73ITR380(Mad) . There, it was held that, in order to exclude from computation of commercial profit, the reservation should always be in respect of a definite ascertained loss or liability. There might be circumstances which might warrant a reserve against possible liability which would have to be excluded in the computation of commercial profits. In that case before the Madras High Court, the High Court held that in order to determine the commercial profits of the assessee-company whose business included furnishing of guarantees for debts borrowed by subsidiary companies, a liability reserve of Rs. 60,000 created in order to meet a guarantee furnished to one of such companies, which had gone into liquidation, had to be excluded. This case was referred for the purpose of showing that contribution to the repairs fund was a necessary deduction. The facts of this case, however, as mentioned hereinbefore, are entirely different. From the order of the Tribunal, it appears that the balance of the repairs fund as at the end of 1951 stood at Rs. 2,20,480. The actual expenditure for repairs to the building was debited year after year to the repairs fund and the Tribunal has indicated in a chart the expenses and the additions to the repairs fund, from which it appears that after doing the repairs over ten years from the repairs fund there is still a balance of Rs. 2,51,156 in 1961. The Tribunal observed that there was no objection on principle to the assessee's creating a repairs fund and crediting certain amounts to such funds and meeting actual expenses for repairs by drawing from such funds. What was reasonable has to be examined from the circumstances of the case. In this case the Tribunal found that land and building stood at the end of 1956 at a value of Rs. 46,42,030 from which was deducted a sum of Rs. 6,01,000 representing the reserve created by redemption of 5 per cent. The same was the position relating to sinking fund for redemption of debentures. Having regard, therefore, to this aspect of the matter we are of the opinion that the Tribunal came to the correct decision and was justified in applying Section 23A on the ground that the payment of a larger dividend than what was declared would not have been unreasonable having regard to the profits made in the respective previous years 1957-58 and 1958-59, relating to the assessment years 1958-59 and 1959-60.
16. The question No. 4 is answered, therefore, in the affirmative. We must, however, observe that though wealth-tax liability would not be allowable as deduction under Clause (b) of Section 23A(1) of the Indian Income-tax Act, 1922, in so far as this was liability created by the law of the land, this liability should also be taken into consideration in examining whether larger dividend should have been declared having regard to the profits made which should be computed after taking into consideration the liability for the wealth-tax.
17. In the facts and circumstances of the case, each party will pay and bear its own costs.
18. I agree.