Sudhindra Mohan Guha, J.
1. This reference under Section 256(1) of the I.T. Act, 1961, at the instance of the assessee relates to the assessment year 1966-67, the relevant previous year being the one ended on June 30, 1965.
2. The assessee is a company to which the provisions of Section 104 of the I.T. Act, 1961, are applicable. The assessee was assessed to tax on a total income of Rs. 4,31,200 on which a tax of Rs. 2,14,661 was levied. After deduction of tax, the balance of assessed income came to Rs. 2/16,539. The assessee had not declared any dividend in respect of the relevant previous year within 12 months immediately following the expiry of the previous year. In reply to the notice issued by the ITO the assessee pleaded that, in view of the past years' tax liability of Rs. 6,58,592, there was hardly any scope for them to distribute any dividends and, therefore, the liability under Section 104 to pay additional tax was not attracted.
3. The plea, however, was not accepted by the ITO. According to him there was enough money to meet all the tax liabilities and also the tax liability of the year in question. Accordingly, the ITO levied an additional tax of Rs. 50,565.
4. Aggrieved by the said order the assessee preferred an appeal before the AAC. The AAC, in modifying the order of ITO, gave partial relief to the assessee.
5. Both the assessee and the department preferred appeals before the Tribunal. The Tribunal allowed the department's appeal, upholding its contention that the capital gains included in the assessed income were not liable to be excluded from consideration in determining the distributable surplus of the company. Dealing with the assessee's appeal, the Tribunal upheld the finding of the authorities below.
6. It should be mentioned that before the Tribunal the assessee's counsel raised a new contention, viz., that Indo-Pak war broke out on September 5, 1965, in which the vessels of the assessee plying in the inland waterways between Calcutta and Assam via East Bengal were seized by the Pakistan authorities and when the general meeting was called on December 29, 1966, there was no certainty that the assessee's vessels seized by the Pakistan authorities would be released. As the business of the assessee-company was virtually at a standstill at that time, the assessee-company in those circumstances could not declare the dividend. The relevant portion of the directors' report for the year ended 30th June, 1965, placed before the general meeting of the company held on December 29, 1966, was as follows 1 'Unfortunately, the company's fleet to the extent of about Rs. 8,00,000 have been lying detained in Pakistan and the Central Government has been approached with a view to obtain their release, but nothing has yet come out. The company is, therefore, not only losing its present income but the position of that fleet would also be considerably deteriorating. In view of the above, the directors do not recommend any dividend and the above amount together with the balance of Rs. 3,41,484 of last year totalling Rs. 5,42,582 is, therefore, carried forward to the next year.'
7. Having regard to the financial position of the company as at the end of the relevant accounting year, as seen from the balance-sheet and having regard to the real commercial profits of the company, the Tribunal agreeing with the authorities below held that there was no justification for the assessee-company for not distributing any dividend and that liability to pay additional tax under Section 104 of the Act was attracted. The Tribunal rejected the contention of the assessee based on the aforesaid report of the board of directors for not declaring any dividend and this reference arises out of such rejection. The question stated below was referred to this court for opinion :
' Whether, on the facts and in the circumstances of the case and on a proper construction of the provisions of Section 104 of the Income-tax Act, 1961, the Tribunal was right in upholding the order passed under the said section for the assessment year 1966-67 '
8. There is no dispute about the proposition that if a company fails to distribute by way of dividend the minimum amount required to be distributed, the company has to pay the additional tax at the prescribed rate. In such a case it is for the ITO to see that the shareholders of a company in which the public are not substantially interested, cannot avoid payment of tax. He is to be satisfied that the payment of a dividend or a larger dividend than that declared was unreasonable. But the ITO has been sufficiently cautioned by the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) . It is observed by their Lordships that the ITO should have a 'sympathetic and objective approach' and should put himself in the position of a director acting as a prudent businessman. With this background we are to approach the issue before us. Dr. Debi Pal, learned counsel for the assessee, relying on the decisions of this court in the case of Cooch Behar Trading Co. Pvt. Ltd. v. CIT : 112ITR150(Cal) and Panama Pvt. Ltd. v. CIT : 113ITR290(Cal) , argues that the I.T. authorities should not have been oblivious to the fact that the company's fleet to the extent of Rs. 8,00,000 had been lying detained in Pakistan and the company had not only been deprived of its income but also the fate of the fleet was completely uncertain. Being faced with such calamities the directors thought it wise not to declare dividends for the year in question. Whether in a particular year dividends should be declared or not was a matter primarily for the directors of the company to decide. The ITO would certainly step in for taking action, if the directors unjustifiably refrained from declaring the dividend. But if the directors had reasonable ground for not declaring any dividend, it was not open for the ITO to constitute himself as a super director. It was similarly observed by their Lordships in the case of Cooch Behar Trading Co. Pvt. Ltd. v. CIT : 112ITR150(Cal) that the tax officer must take into consideration all relevant factors while acting under Section 23A of th' Act (of 1922). He must do what a prudent director should have done. It was also held to be reasonable to take into account the anticipated tax liability of the assessee.
9. Mr, Bagchi, learned counsel for the revenue, referring to Sub-section (2) of Section 104 of the Act, contends that the ITO shall not make an order under Sub-section (1) if he is satisfied '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...............would be unreasonable '. So according to him losses of a subsequent year were specifically excluded and that the losses or any fact subsequent to the year of assessment would in no way be taken into consideration. In support of his argument he also refers to the observation of their Lordships in the case of Jamshedpur Engineering & Machine . v. CIT : 98ITR33(Patna) , wherein it is observed that under Section 23A fordeciding the question of reasonableness of the assessee's action in relation to the payment of dividend the question of losses in the subsequent period is not relevant. In this case it was admitted that there were heavy losses in the subsequent years. This fact was not found mentioned in the appellate order of the Tribunal or in any of the orders of the departmental authorities. Heavy losses of the subsequent years were mentioned in the application filed by the assessee-company. In this view of the matter the observation of their Lordships was wholly obiter and that without any reason. Mr. Bagchi, however, conceded the point that the observation was an obiter. Moreover in that case, the phrase ' smallness of profit' was the criterion for finding the fact whether the dividends should be declared or not. But there is no such question before us.
10. Mr. Pranab Pal, learned counsel for the assessee, to meet the point raised by Mr. Bagchi, refers to the decision of the Gujarat High Court in CIT v. Ramji Dayawala & Sons Pvt. Ltd. : 85ITR37(Guj) of the report their Lordships observed as follows :
' The losses suffered in subsequent years by themselves are not to be taken into account for the purpose of determining the applicability of Section 23A ; but while judging whether the decision of the company or the board of directors of the company to declare a particular dividend or not to declare any dividend at all was reasonable or not, the fact that losses did occur in subsequent years and to that extent went to justify or to substantiate the reasonableness of the anticipated losses at the time when the decision regarding dividend was taken, would be relevant circumstances and relevant pieces of evidence to be taken into account by the taxation authorities.'
11. It should not be out of place to mention that this case was not referred to before their Lordships of the Patna High Court in deciding the case of Jamshedpur Engineering & Machine . : 98ITR33(Patna) .
12. In my opinion the controversy, if any, has been set at rest by the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co (P.) Ltd : 57ITR176(SC) . At page 181-182 of the reports the law was clearly laid down as such :
' 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.'
13. It was abundantly clear that not only the facts and circumstances of the earlier years but most of the other facts including the facts and circumstances and reasonable requirements of the future should also be taken into consideration. This case, to my mind, has humanized the law on the subject.
14. Thus, in the above facts and circumstances of the case and having regard to the position in law, I am fully in agreement with Dr. Pal that the company could not ignore the fact that the Indo-Pakistan war broke out within two months and a few days after closing of the year on June 30, 1965. The Indo-Pakistan conflict broke out on September 5, 1965; 12 months immediately following the expiry of the previous year in question expired on June 30, 1965. The annual general meeting of the assessee-company was held on December 29, 1966, when the profit and loss account and balance-sheet of the company for the year ended on June 30, 1965, was placed and considered along with the directors' report. So before declaring the dividend a prudent businessman would surely take into consideration that the company's fleet to the extent of about Rs. 8,00,000 had been detained in Pakistan depriving the company not only of its present income but facing it with future uncertainties. There was no knowing when there would be truce. In such circumstances, before passing any order for additional tax, it was for the ITO to take into consideration whether the intention was to evade tax or the action of the directors was prompted by business exigencies. In this view of the matter, I do not consider that the Tribunal was justified in ignoring the glaring facts which were brought to its notice by the learned counsel for the assessee.
15. In view of the foregoing findings, I answer the question in the negative and in favour of the assessee. Each party to pay and bear its own costs.
16. At the very outset, it may be noted here that the authorities below have levied additional tax under Section 104 of the I.T. Act, 1961, on the assessee without ascertaining the amount of commercial profits made by the assessee for the relevant accounting year.
17. The assessee is a shipping company to which Section 104 of the Act applies. The accounting year ended on June 30, 1965. The assessee did not declare any dividend. The ITO found that there was a distributable surplus of Rs. 2,02,261 and, therefore, he levied additional tax on the assessee under the aforesaid section. The assessee got some relief in the first appeal and, therefore, filed a further appeal.
18. A new plea was taken by the assessee before the Tribunal and the facts relevant for our purposes as found and stated by the Tribunal may now briefly be stated.
19. During the Indo-Pakistan war of September, 1965, a part of the assessee's fleet of the value of Rs. 8 lakhs was seized in East Pakistan. Theassessee was not only losing its income but the condition of the fleet was also deteriorating. The Government of India was unable to get the ships released even after the end of the war and in these circumstances the assessee did not declare any dividend in the annual general meeting which was held after 18 months of the closing of the accounting year.
20. Relying on the aforesaid facts and the circumstances, the assessee argued before the Tribunal that additional tax under Section 104 of the Act could not be levied, but the Tribunal rejected it on the ground that the Indo-Pakistan war broke out on September 5, 1965, and that the assessee decided not to declare any dividend after 18 months of the closing of the accounting year and, therefore, these facts being subsequent facts, should not be taken into account for determining the financial position of the assessee in the accounting year for the purposes of Section 104 of the Act, The Tribunal dismissed the appeal by saying that having regard to the financial position of the assessee as reflected in its balance-sheet and the commercial profits, the assessee was not justified in not declaring the dividend.
21. But the amount of commercial profits was not ascertained by the authorities below as already stated. Further, the financial position reflected in the balance-sheet is not conclusive..
22. To get rid of this difficulty, Mr. Bagchi, learned counsel for the revenue, argues before us that the expression ' reasonable requirements of the future ' used by the Supreme Court in CIT v. Gangadhar Banerjee : 57ITR176(SC) means 'only the requirements for the future extension of the assessee's business '. But I reject it, as the expression includes any reasonable requirement of the future.
23. Mr. Bagchi then argues that the facts subsequent to the accounting year cannot be taken into consideration for the purposes of Section 104 of the Act. In support of this argument, he places reliance on Jamshedpur Engineering & Machine . v. CIT : 98ITR33(Patna) , at page 37 of the report, where it has been stated that the loss suffered by a company in the subsequent year is not a relevant consideration under Section 23A of the 1922 Act. But it is not only a pure obiter but is also unsupported by any reason.
24. That apart, we are not concerned with any loss but with 'the reasonable requirements of the future', which expression must necessarily include the future needs of the assessee, that is to say, the requirements of the next year which may be ascertained by the prudent directors of the assessee before the annual general meeting of the earlier year is held which must necessarily be held after the close of the accounting year and, accordingly, the contention of Mr. Bagchi must fail.
25. On the facts and circumstances of the case, I hold that the prudent directors of the assessee and the assessee respectively were fully justifiedin not recommending and declaring any dividend for this year and, therefore, I agree with the answer given by my learned brother and also with the order relating to costs made by him.