Dipak Kumar Sen, J.
1. The facts found or admitted in this reference are shortly as follows:
In the assessment year 1963-64, the relevant accounting period being that from the 1st November, 1961, to the 31st October, 1962, Calcutta Landing & Shipping Co. Ltd., the assessee, filed the return disclosing an income of Rs. 4,49,095 but was assessed on a total income of Rs. 5,08,956. In the said assessment year, the assessee did declare a dividend of Rs. 1,37,500.
2. A concern named Calcutta Marine and Engineering Private Ltd., under a contract with the assessee with effect from the 25th March, I960, was responsible for all repair work of the assessee at a fixed annual remuneration of Rs. 75,000. The assessee had also demised its shipway to the said repairers on lease from the 25th March, 1960, at a rent of Rs. 4,130 per month. On a representation of the repairers, the board of directors of the assessee passed a resolution on the 29th January, 1963, whereby the remuneration payable to the repairers was increased to Rs. 85,000 per year. By another resolution, passed in the same meeting, it was decided that the rant payable by the repairers for the shipway would be reduced by Rs. 9,000 per annum but instead of amending the lease, such reduction would be indirectly effected by a grant of Rs. 9,000 per annum to the said repairers, by way of compensatory allowance for repair work. It was decided, in the same meeting, that such enhanced payments aggregating Rs. 94,000 (Rs. 85,000 and Rs. 9,000) per annum would be made to the repairers with retrospective effect from the 25th March, 1960.
3. In consonance with the aforesaid resolution the assessee debited its account in the said assessment year by Rs. 49,469 of which amount Rs. 26,048 was by way of increased annual payment for repairs and the balance Rs. 23,431 was compensatory allowance in lieu of reduction in rent.
4. The ITO held that the liability for payment of the said amount of Rs. 49,479 did not arise or accrue in the year of accounting and, therefore, disallowed the same. The ITO further found that the dividend distributed by the assessee was less than the statutory percentage and accordingly, he initiated proceedings under Section 104 of the I.T. Act, 1961. It was held in the said proceedings that the distributable surplus in the said assessment year was Rs. 1,95,087. 90% of the said surplus was calculated to be Rs. 1,75,578. The assessee having distributed only Rs. 1,37,550, an additional super-tax was imposed on the balance Rs. 54,301.
5. It was contended on behalf of the assessee that on a proper computation taking into account the legal charges and the revenue expenditure, disallowed in the assessment, there would be no further distributable income left to be distributed as dividend. The computation of the assessee was as follows :
Rs. Assessed income5,04,656Lesstax3,09,569
1,95,087Less (i)dividend distributed1,37,500 (ii)legal charges 3,563 (iii)amounts claimed as revenue expenditure but disallowed 56,454
6. The ITO rejected the contentions of the assessee and held that the items of expenditure claimed in the assessment had been disallowed as not being trading expenses at all or not being expenditure in the relevant accounting year.
7. Being aggrieved, the assessee preferred an appeal therefrom to the AAC, who confirmed the order of the ITO.
8. There was a further appeal by the assessee to the Tribunal, where it was contended, inter alia, that the dividend declared by it was reasonable in view of the profits earned and that the revenue should have taken into account the loss of Rs. 49,479 by reason of the enhancement of the repair charges with retrospective effect and the payment of compensatory allowance also retrospectively allowed. The said sum was claimed to have become a loss to the assessee on the 29th January, 1963, when its directors sanctioned such enhancement and, therefore, when the dividends were passed by the general body, the said loss was rightly taken into account.
9. The Tribunal held that under Section 104 of the Act, expenses which had been incurred or had accrued wholly or exclusively for the purpose of business during the previous year could be taken into account in determining the reasonableness of the dividend and not expenses which had been incurred subsequent to the previous year. The Tribunal held further that loss, if any, suffered in the subsequent year which could be taken into account for the purpose of Section 104 of the Act had to be a net loss and not a loss in respect of any particular item. Accordingly, the Tribunal dismissed the appeal of the assessee.
10. On an application of the assessee under Section 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising out of its aforesaid order :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 49,479 could not be taken into account for purposes of determining the quantum on which the appellant was liable to pay additional super-tax or for purposes of holding that the profits were too small ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the assessee's case did not fall within the purview of Section 105(1)(iii) of the Income-tax Act, 1961, was correct ?'
11. At the hearing, Dr. Debi Pal, learned counsel for the assessee, did not press for an answer to question No. 2 as referred and confined his submissions to question No. 1. He contended that deduction of the said amount of Rs. 49,479 had been duly claimed at the assessment as expenses pertaining to repairs as a revenue expenditure, and the same had been disallowed. He submitted that this expenditure also did not result in the creation of any asset or on the enhancement of the value of any existing asset of the assessee and, therefore, it fell within the four corners of Section 104(1)(ii)(d) and the distributable income had to be reduced by this amount before levy of super-tax. Alternatively, he submitted that the said expenditure had to be taken into account in deciding the reasonableness of the amount to be distributed as dividend. No prudent director could ignore the extra expenses, liability for which was assumed and which had to be met in the near future.
12. In support of his first contention Dr. Pal drew our attention to Section 104 of the Act as it stood at the relevant time. It will be convenient to refer to the section at this stage.
' 104. Subject to the provisions of this section and of Sections 105, 106, 107 and 107A, 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 distributable income of the company of that previous year, the Income-tax Officer shall 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 143 or Section 144, be liable to pay super-tax at the rate of-
(a) fifty per cent., in the case of an investment company, and
(b) thirty-seven per cent., in the case of any other company, on the distributable income as reduced by-
(i) the amount of dividends actually distributed, and
(ii) any expenditure actually incurred bona fide for the purposes of the business, but not deducted in computing the income chargeable under the head ' Profits and gains of business or profession' being-
(a) a bonus or gratuity paid to an employee,
(b) legal charges,
(c) any such expenditure as is referred to in Clause (c) of Section 40,
(d) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or enhancement in the value of an existing asset.'
13. In support of his alternative submission, i.e., in determining the reasonableness of the dividend distributed it is necessary to take into account a future loss or a future expenditure, Dr. Pal cited a number of decisions which are considered hereafter in their chronological order :
(a) CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) . This decision was cited for the following observations of the Supreme Court (at p. 182 of the report).
' 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.' (b) Gobald Motor Service (P.) Ltd. v. CIT : 60ITR417(SC) . In this decision, the Supreme Court quoted the aforesaid passage from its eailier judgment Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) and reiterated the propositions therein.
(c) New Star Industries Pvt. Ltd. v. CIT : 68ITR470(Bom) : The facts of this case were that the assessee, a company had a distributable surplus of Rs. 93,703 but distributed only Rs. 8,000 as dividend in the relevant assessment year on the ground that certain hedging contracts, which had resulted in substantial profits and in the aforesaid distributable surplus, had been entered into to safeguard against future loss and that in fact there had been substantial loss in exports in the next year before the date of declaration of dividend. Following the principles laid down by the Supreme Court in Gangadhar Banerjee and Co.'s case : 57ITR176(SC) , the Bombay High Court held on these facts that though a profit on hedging transactions had been made, the assessee was threatened with an imminent loss in the subsequent year and that by the time it came to consider the question of the declaration of dividend the threat had materialised into an actuality. Accordingly, the assessee could not be reasonably expected to have declared a larger dividend,
(d) CIT v. Bangodaya Cotton Mills Ltd. : 69ITR812(Cal) The facts in this case were that in two assessment years the assessee who had substantial distributable surplus declared some dividend, after the lapse of the statutory period, which was less than the statutory percentage required to be distributed. In proceedings under Section 23A of the Indian I.T. Act, 1922, it was contended by the assessee that it had incurred substantial debts for the import of machinery in an earlier assessment year on which large amounts had to be paid as interest and commission and, therefore, it was not reasonable for the assessee to have declared a higher dividend. The ITO and the AAC rejected the contentions of the assessee on the ground that the assessee had substantial reserves at the material time. On a further appeal, the Tribunal held that on account of the heavy liability incurred for the purpose of import of machinery it would not have been reasonable for the assessee to declare a larger dividend. The High Court upheld the order of the Tribunal and held that the ITO and the AAC had ignored the availability of surplus money and reasonable requirements of the future.
(e) Amalgamations (P.) Ltd. v. CIT : 73ITR380(Mad) The facts in this case were that the assessee had guaranteed debts incurred by its subsidiary companies. One of the subsidiary companies went into liquidation and the assessee in anticipation of a claim against its guarantee created a liability reserve for Rs, 60,000 being the amount of the debt guaranteed. On these facts, the Madras High Court held that the said amount of Rs. 60,000 should not be included in the commercial profits of the company for the purpose of determining the amount of dividend to be distributed under Section 23A of the Indian I.T. Act, 1922, as the assessee was justified in creating a reserve against a possible liability for the purpose of Section 23A of the Indian I.T. Act, 1922.
(f) CIT v. Ramji Dayawala & Sons Pvt. Ltd. : 85ITR37(Guj) . This decision of the Gujarat High Court was cited for the following observations from the judgment of Divan J. (p. 44):
' 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 loss 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.' (g) CIT v. Jananamandal Ltd. : 106ITR976(All) . In this case, in proceedings initiated under Section 23A of the Indian I.T. Act, 1922, the assessee sought to justify non-distribution of any dividend from its distributable surplus, in the relevant assessment years, on the grounds that, (a) it was under a statutory obligation to make provision for payment of gratuity to its workmen which had not been done earlier because of lack of funds, and, (b) it had to arrange for substantial funds for the purchase of a rotary machine and the construction of a factory building. Such requirement it was contended exceeded the distributable surplus. The ITO and the AAC rejected the contentions of the assessee. The Tribunal, however, held that the assessee was justified in not declaring any dividend from its profits. On a reference, the Allahabad High Court held that the finding of fact was that the assessee needed Rs. 7 lakhs for the purchase of a rotary machine and construction of a new building and that such requirement was not unreasonable. The High Court held as follows (p. 980): ' We do not see any reason why such expenses which have to be incurred by the company in the near future cannot be taken into account in considering whether it was reasonable for it to declare the dividends from out of its profits. In our opinion, while concluding that, considering the smallness of the profits earned by the assessee in the relevant years, it was not reasonable for it to declare any dividend, the Tribunal did not take any irrelevant material into consideration. The finding recorded by the Appellate Tribunal is not vitiated in any manner.'
14. Dr. Pal also cited a decision of the Supreme Court in Morvi Industries Ltd. v. CIT : 82ITR835(SC) and a decision of this court in CIT v. Jalan Investment (P.) Ltd. : 103ITR198(Cal) . The same do not lay down any new principle beyond what has been noted earlier and need not be considered any further.
15. Mr. A.K. Sengupta, learned counsel, contended on behalf of the revenue that the said amount of Rs. 49,479 could not be said to be an expenditure incurred in the relevant accounting period and, therefore, the distributable income of the assessee should not be reduced by this amount for the purpose of imposition of super-tax. He submitted that to obtain the benefit of Section 104(b)(ii)(d), the assessee had to establish first that an expenditure has been incurred and thereafter the other conditions as laid out in that section have to be considered. In the instant case, the assessee had not been able to establish the first pre-condition, viz., that it had incurred the expenditure and as such there was no scope for application of Section 104(b)(ii)(d) on the basis of an expenditure, not incurred in the relevant accounting year, which had been wrongly claimed by the assessee as a deduction.
16. On the assessee's alternative submission that the said expenditure of Rs. 49,479 though incurred subsequent to the accounting year in question should be taken into account for the purpose of holding that the profits of the assessee were too small for the distribution of a larger dividend. Mr. Sengupta submitted that all that the assessee had been able to establish was that by a resolution of the board of directors passed on the 29th January, 1962, i.e., subsequent to the relevant accounting period, the assessee assumed liability for payment of an extra amount. This by itself did not establish that the profits of the assessee in the relevant accounting period was insufficient for declaration of a higher dividend. The liability for the expenditure to be incurred having been assumed by the assessee in a subsequent accounting period, unless the overall financial position of the assessee in the subsequent period was known, it could not be said that it was not commercially prudent for the assessee to declare a larger dividend. The assessee did not establish that there was a net loss in th'e subsequent period.
17. On a plain reading of Section 104, as it stood at the relevant time, it appears to us that the Tribunal was right in holding that the amount of Rs. 49,479 could not be taken into account for the purpose of arriving at the quantum on which the assessee was liable to pay additional super-tax. The section was concerned with the distributable income of a company in a previous year which, for the purpose of levy of additional super-tax, had to be reduced, inter alia, by expenditures actually incurred bona fide for the purpose of business and claimed to be a revenue expenditure, not allowed to be deducted as a revenue expenditure and which did not result in the creation of or enhancement of the value of any asset. Such an expenditure, in our view, has to be shown as having been incurred during the relevant previous year. In the instant case, it has been found, as a fact, that the said amount of Rs. 49,479 was not incurred during the relevant previous year. This finding of fact has not been challenged and, therefore, in our opinion, the distributable income of the assessee for the purpose of distribution of dividend cannot be reduced by this amount.
18. On the question whether the said amount should be taken into account for determining whether the profits of the company were too small in the relevant previous year for distribution of a higher dividend, we also accept the conclusion arrived at by the Tribunal. It has been found, as a fact, that the said amount of Rs. 49,479 was an item of expenditure incurred by the assessee after the end of the relevant previous year and was not a net loss in the subsequent period. This finding has also not been challenged by the assessee. This expenditure necessarily falls in the same category as that of all other items of expenditure incurred in the subsequent period. In our view, the assessee will be not justified in picking up one particular item of expenditure incurred subsequent to the relevant previous year arid calling upon the revenue authorities to consider only that particular item and contend that the distributable surplus of the previous year was not sufficient for declaration of a larger dividend.
19. From the decisions cited, the law, as settled, appears to be that the reasonableness or unreasonableness of an amount distributed as dividend can be judged in the background of a reasonable requirement of the future. This in our view must mean the overall requirement and not confined to a particular item of expenditure incurred subsequently. The subsequent expenditure does not appear to us to be significantly large in the background of the assessed income of the assessee during the relevant previous year. It has also not been found that by reason of this particular expenditure in the subsequent year the assessee could reasonably anticipate a loss in the near future.
20. For the reasons above, the revenue succeeds in this reference. Question No. 1 is answered in the affirmative and in favour of the revenue. As question No. 2 has not been pressed we decline to answer the same. In the facts and circumstances, there will be no order as to costs.