Sabyasachi Mukharji, J.
1. In this reference under Section 256(2) of the I.T. Act, 1961, the following questions have been referred to this court as directed by this court :
'1. Whether, on the facts and in the circumstances of the case, the imposition of additional super-tax under Section 23A of the Indian Income-tax Act, 1922, for the assessment year 1961-62 was justified in law ?
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,30,000 assessed as income from undisclosed sources in the hands of the assessee-company for the assessment year 1961-62 constituted its commercial profits available for distribution as dividend ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the liability of the penalties imposed under Sections 271(1)(a) and 221(1) of the Income-tax Act, 1961, for the assessment year 1961-62 on the assessee-company should not be taken into consideration in determining the reasonableness of the distribution of any dividend ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalties levied under Sections 271(1)(a), 271(1)(c) and 221(1) of the Income-tax Act, 1961, were not deductible as tax in arriving at distributable surplus ?'
2. In order to appreciate these questions, it is necessary to state some facts. The assessment year involved is 1961-62, The assessee disclosed a loss of Rs. 4,629 in its return. The assessment was completed at Rs. 3,42,950. The assessment included an income of Rs. 3,30,000 from undisclosed sources and the interest of Rs. 17,165 from bogus hundi loans. These additions were made on account of a disclosure statement. The ITO treated the assessed income of Rs. 3,42,950 as the commercial profit of the assessee and, after adjusting the tax, computed the distributable surplus at Rs. 1,88,622. As the assessee did not declare any dividend the ITO levied additional super-tax of Rs. 69,790 under Section 23A of the Indian I.T. Act, 1922.
3. In the appeal before the AAC, it was contended that a petition under Section 271(4A) of the I.T. Act, 1961, was pending and the assessment was not final and that there was commercial loss and not profit and that the penalties under Sections 271(1)(a), 271(1)(c) and 221(1) had to be deducted. All these contentions were rejected by the AAC. He, however, accepted the contention of the assessee of the computation of additional super-tax on the basis of reduced assessed income in appeal and adjustment of Rs. 462 of law charges not adjusted by the ITO in the assessment. He, accordingly, directed the ITO to recompute the additional super-tax.
4. There was a further appeal to the Tribunal. Several contentions were urged before the Tribunal. It was contended, firstly, that the assessee had made a disclosure statement and that it was held in the order thereon that the income did not belong to the assessee ; secondly, that the hundi loans admitted as bogus did not constitute commercial income; thirdly, that thehundi loans of Rs. 1,30,000 out of the admitted bogus loans had been taken in the preceding year and were wrongly brought to assessment in the year under consideration; fourthly, that the matter of hundi loans was still pending before the Board; fifthly, that the fund had been transferred to other companies; sixthly, that the Tribunal in the quantum appeal reduced the assessed income by Rs. 9,250; and, seventhly, that penalties which partook the nature of additional tax should have been deducted and that after adjusting all these deductions there was no income of the assessee and that the order under Section 23A of the Indian I.T. Act, 1922, was liable to be cancelled. Reliance was placed on several decisions by both sides. The Tribunal, further, observed that the assessee had not been able to show that the hundi loans of Rs. 3,30,000 were held by the Commissioner as not the income of the assessee nor the funds were transferred to other companies and that the pendency of any petition before the Board did not affect the finality of the assessment proceedings. The Tribunal found that the assessee admitted that the loans were not genuine and that the same represented concealed income. The Tribunal was also of the view that the concealed income was as much income as disclosed income and there was no reason why the concealed income if it had been brought to light should not be considered for a declaration of dividend. The Tribunal further observed that the assessee did not take up the plea in the assessment proceedings and in the quantum appeals that a peak of Rs. 1,20,000 had already been arrived at in the preceding year and to that extent the bogus loans out of Rs. 3,30,000 could not be assessed and become final and that it could not be reopened. The Tribunal, therefore, rejected these contentions. In respect of the other contention, the Tribunal found that the assessee had furnished particulars of the penalties which, according to it, should have been deducted in computing the distributable surplus. It was not disputed on behalf of the assessee that all those penalties were imposed after the impugned order had been passed. The Tribunal was of the view that only the existing tax liability was to be adjusted for the application of Section 23A of the Indian I.T. Act, 1922. The Tribunal observed that penalties arising out of subsequent misconduct on the part of the assessee could not be foreseen and that such penalties could not affect the view of a prudent businessman in determining whether, out of the profits, dividend should have been declared or not. The Tribunal, accordingly, held that the penalties could not be taken into consideration for determining the distributable surplus or in deciding whether a dividend should be declared or not and rejected this contention. The Tribunal further found substance in the contention of the assessee that as the addition of Rs. 3,30,000 had been reduced by Rs. 9,750 in the quantum appeal by the Tribunal, the tax liability should be recomputed after deducting from the income the sumsof Rs. 9,750 and Rs. 462 as allowed by the AAC. The Tribunal disposed of the appeal, accordingly.
5. Upon these, the questions, as we have indicated above, have been referred to this court.
6. As we have indicated, the questions really centre on three aspects, viz., whether only the peak figure of Rs. 1,30,000 should have been taken into account in considering the undisclosed income of the assessee and not Rs. 3,30,000 ; the second aspect is whether there was, in fact, a distributable surplus as computed in accordance with the requirement of Section 23A of the Indian I.T. Act, 1922, available for distribution which should have been taken into consideration by a prudent businessman; and the third and the main aspect, however, is whether the penalties imposed or imposable in respect of an undisclosed income of the assessee was a factor that should have been taken into consideration in judging the desirability or the necessity of distributing the dividend from the point of view of a prudent businesssman.
7. Section 23A of the Indian I.T. Act, 1922, stipulates that where the ITO 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 certain taxes including income-tax and super-tax payable by the company in respect of the total income, but excluding the amount of any super-tax payable under this section as also other taxes mentioned in different clauses, he may pass an order as contemplated by Section 23A of the Indian I.T. Act, 1922.
8. The effect and the implications of this section have been clearly laid down by the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) . The Supreme Court observed therein that Section 23A of the Indian I.T. Act, 1922, was in the nature of a penal provision and, therefore, the revenue had to strictly comply with the conditions laid down thereunder and that the burden lay upon the revenue to prove that the conditions laid down thereunder were satisfied before the order was made. Explaining the duty of the ITO, the Supreme Court observed at page 181 of the report, inter alia, as follows :
'The Income-tax Officer, acting under this section, is not assessing any income to tax: that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of theamount 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 only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case.'
9. Therefore, in substance, the Supreme Court was saying that in considering this aspect, the ITO was not assessing any income, but he was required, if it was possible for him, to do what a director should have done.
10. This aspect was emphasized again by the Supreme Court in the case of CIT v. Asiatic Textiles Ltd. : 82ITR816(SC) , where the Supreme Court observed that whether in a particular year dividend should be declared or not was a matter primarily for the directors of a company. The ITO could step in under Section 23A(1) only if the directors unjustifiably refrained from declaring dividends. If the directors of a company had reasonable grounds for not declaring any dividend, it was not open to the ITO to constitute himself as a super director. The ITO, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of Section 23A of the Indian I.T. Act, 1922, did not tax any income. He only did what the directors should have done putting himself in their place. Though the object of the section was to prevent evasion of tax, the provisions must be worked out not from the standpoint of a tax collector but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as dividends was to be judged by business considerations, such as previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. The ITO must take an overall picture of the financial position of the business and he should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective point of view. At page 820 of the report, on whether the depreciation in the value of the shares was a relevant factor to be taken into consideration in considering the availability of the distributable surplus, the Supreme Court observed, that the directors of the company were justified in taking things, as they stood, but they should not allow themselves to be befooled by the wild hope that the value of the shares might go up again. The Supreme Court observed that the directors were expected to act as hard-headed businessmen. Though from a different point of view, and not on this aspect directly, in a case as to whether a particular loss was to be allowed or not under Section 10 of the Indian I.T. Act, 1922, the Supreme Court in the case of CIT v. Piara Singh : 124ITR40(SC) found that the assessee, there, was carrying on smuggling activity and was apprehended by the Indian Police while crossing the border into Pakistan and a sum of Rs. 65,000 in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. The customs authorities confiscated the currency notes. The I.T, authorities found that the assessee was carrying on the business of smuggling and that he was liable to income-tax on income from that business and such income was assessed to tax. The question was, whether the assessee was entitled, under Section 10 of the Indian I.T. Act, to deduct the loss of Rs, 65,000 arisen from the confiscation of the currency notes. The Supreme Court held that the carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the customs authorities and the consequent confiscation was a necessary incident and constituted a normal feature of such an operation. The confiscation of currency notes was a loss occasioned in pursuing the business of smuggling. It was a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It was a loss which sprang directly from the carrying on of the business and was incidental to it and this deduction had to be allowed under Section 10 of the Act.
11. Now, the manner in which Section 23A was to be applied had been considered in different decisions of this court applying the principle of the Supreme Court as mentioned hereinbefore. We may incidentally refer to the decisions in the case of CIT v. Asiatic Textiles Co. Ltd. : 103ITR166(Cal) , where I had made similar observations at page 169 of the said report, in the case of Cooch Behar Trading Co, P. Ltd. v. CIT : 112ITR150(Cal) , in the case of Panama P. Ltd. v. CIT : 113ITR290(Cal) and in the case of CIT v. National Properties Ltd. : 121ITR126(Cal) , where my learned brother has made similar observations.
12. The ratio that follows from the aforesaid decisions of the Supreme Court as applied in the different decisions of the High Courts is that, in applying Section 23A, the ITO must act, in considering whether there was an available distributable profit, as a prudent businessman or to use the expression of the Supreme Court 'as hard-headed businessmen' and take into consideration all losses, liabilities, etc., springing directly from the nature of the transactions carried on by the assessee in respect of the income in respect of which he is assessed, and said to be available for distribution of profit Now, in this case, admittedly a certain sum of money was found asthe undisclosed income. Whether it should be Rs. 1,30,000 or Rs. 3,30,000, as undisclosed source of income, is not relevant for consideration on this matter. The assessee had disclosed this as an undisclosed income. If that is the position then the directors as hard-headed businessmen must have known about the penalties or the risk of penalties that they were running, as penalties were imposable on such item. In that context, was it or was it not prudent for a businessman like the directors of a company, who knew that they were dealing with undisclosed income, to take into consideration the legal or lawful hazards or the lawful liability arising from such an unauthorised activity of dealing with undisclosed income ?. The Tribunal seems to have proceeded on the basis of the subsequent misconduct. The misconduct was very much present at the time of the assessability of the income. It was admitted to be concealed. But the persons who were concealing were the directors and if they were prudent businessmen then they would have, in the present context, visualised the consequences of having concealed the income and the possibility of penalty that would be imposable upon them. If that is the context which they must keep in view, then, acting as prudent businessmen or as hard-headed businessmen, which the Supreme Court would like them to be, they were running the risk of distributing the dividend out of the said income, rather they should have made a provision for the payment of that penalty. If this perspective is kept in view, then from the commercial or prudent business point of view, these amounts were liable to be taken into consideration in considering the distributable available surplus. In that view of the matter, the order under Section 23A of the I.T. Act could not be sustained. In the aforesaid view of the matter, question No. 1 must be answered in the negative and in favour of the assessee.
13. So far as question No. 2 is concerned, it. is really academic in the light of the answer that we have given on question No. 1. The Tribunal had not considered whether the undisclosed income should have been taken at Rs. 3,30,000 or Rs. 1,30,000. It is not the position in law that whatever was held in the quantum appeal should be conclusive and final. Proceedings under Section 23A are penal in nature, as has been held by the Supreme Court and as we have indicated the Tribunal should have at least taken this contention into consideration. Therefore, had it been necessary for us to answer question No. 2 we would have said that the Tribunal should have considered this aspect of the matter and decided the question afresh on this aspect.
14. In view of the answer that we have given to question No. 1, question No. 3 must also be answered in the negative and in favour of the assessee. In the view we have taken, it is not necessary for us to consider question No. 4. Had it been independently, however, necessary to consider this, in view of the specific exclusion contemplated by Clauses (a), (b) & (c) of Section 23A(1) of the Act, it would have been difficult to accept the contention that the penalty was a tax which was to be deducted in making the mathematical calculation of available surplus but, in view of the fact that we have taken into consideration, in considering the distributable surplus for dividend, from the business view-point, this question need not be answered.
15. In the facts and circumstances of the case, each party will pay and bear their own costs.
Sudhindra Mohan Guha, J.
16. I agree.