Sudhindra Mohan Guha, J.
1. In this reference under Section 66(2) of the Indian I. T. Act, 1922, the court called for the following question:
'Whether, on the facts and in the circumstances of the case, any larger dividend than that declared by the assessee-company could reasonably be distributed within the meaning of Section 23A of the Indian Income-tax Act, 1922, and the application of Section 23A of the said Act was according to law?'
2. The statement of the case relates to the assessment year 1961-62, the relevant accounting period being 1st July, 1959, to 30th June, 1960. The ITO observed that the profit and loss account showed a profit of Rs. 2,05,303. After adjusting income-tax to the extent of Rs. 2,353 the ITO worked out the commercial profit at Rs. 2,07,661. Deducting taxes @ 45% he arrived at a surplus of Rs. 1,14,214. The dividend declared was Rs. 70,000. Holding that the assessee was an investment company, the ITO found that 90% of the surplus should have been declared as dividend and thus there was a shortfall in the dividend declared. This was only 6%. The ITO was further of the view that the credit balance of Rs. 1.03 lakhs carried forward in the profit and loss account should also be taken into account for determining the commercial profits of the assessee. The assessee's plea that because of large tax liability relating to the assessment year 1960-61 the declaration of a larger dividend was not possible did not weigh with the ITO. He rejected the contention on the ground that the demand in question was raised only in March, 1965, which was subsequent to the date when the general body meeting was called to pass the accounts of the company.
3. The assessee preferred an appeal before the AAC. It was contended that the dividend declared was fair and the declaration of a larger dividend would not have been feasible. It was also contended that the company was not one whose main business was the dealing in or holding of investments and hence the dividend to be declared was only 65% and not 90% of the surplus. But all these contentions did not find favour with the appellate authority. It was held by the appellate authority that the commercial profits were actually not Rs. 2,05,303 but should have been about Rs. 2,65,000 with reference to which figure after deducting taxes of Rs. 1,17,337 the balance available for distribution would have been Rs. 1,43,000. The findings of the ITO that the assessee was an investment company and hence the dividend to be declared should have been 90% of the distributable surplus were upheld.
4. There was a further appeal to the Tribunal. The first point reiterated was that the assessee-company was not one whose business consisted wholly or mainly in the dealing in or holding of investments. It was submitted that the mere holding of investments would not tantamount to the assessee carrying on a business of holding investments. On behalf of the assessee reliance was placed on the decision of the Gujarat High Court in the case of Distributors (Baroda) Pvt. Ltd. v. CIT : 69ITR614(Guj) .
5. The assessee also challenged the finding of the AAC that the quantum of commercial profits was Rs. 2,65,000.
6. The assessee had submitted before the Tribunal that on 15th June, 1960, there was a notice in the Hindusthan Standard issued by the Corporation of Calcutta stating that the valuation of properties in Ward No. 54 had been completed and the list could be inspected. It was submitted that the properties belonging to the assessee which hitherito had an annual value of only Rs. 38,124 had been revalued at Rs. 2,29,605 and the assessee had, therefore, made a provision on the basis of the enhanced annual value which provides for appropriate corporation tax that would become payable. It was the assessee's contention that the date of the notice announcing the revaluation fell in the accounting period and though subsequently additional tax was imposed only from the second quarter of 1960, the provision as made was necessary and no adjustment was called for in determining the commercial profits. The Tribunal held that the amount of Rs. 60,000 could not go to increase the commercial profits and the figure of the commercial profits would remain at Rs. 2,05,000.
7. The next plea before the Tribunal was that in view of the smallness of profits in the earlier year and the huge unprovided for tax liability relating to that year, the declaration of a larger dividend would have been unreasonable. The Tribunal found that the income, according to the revised return submitted for 1960-61, was only Rs. 24,291 and a substantial increase in the assessed income for that year was because the capital loss as shown for about Rs. 64,000 was converted into a capital gain of Rs. 1.24 lakhs.
8. In the view of the Tribunal smallness of profit in 1960-61, was, therefore, a factor to be taken into consideration. The Tribunal then stated that deducting the tax assessed of Rs. 1,17,337 from the commercial profit of Rs. 2,05,308 the surplus was Rs. 87,971. The dividend declared was Rs. 70,000. Though there were reserves the paid-up capital of the company, the Tribunal found, was only Rs. 5 lakhs and looking to this aspect and the other factors as stated and considering the same in the light of the principle enunciated by the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) , the Tribunal was of the view that there was force in the assessee's contention that declaration of a larger dividend would in the circumstances have been unreasonable. The order under Section 23A was accordingly cancelled.
9. It is contended by Mr. Balai Pal, learned counsel for the revenue, that since the additional amount of corporation tax became payable only from the second quarter of 1960, (i.e., a period subsequent to the close of the accounting period), the provision as made was clearly excessive and an appropriate adjustment was called for in determining the commercial profit.
10. Mr. R. N. Bajoria, learned counsel for the assessee, argues that it is not necessary that in order to exclude from the computation of commercial profit the provision should always be in respect of a definite ascertained loss or liability and there may be circumstances which may warrant a provision against possible liability which will have to be excluded in the computation of commercial profit for the purpose of Section 23A. In support of his argument he places reliance on the decision of the Madras High Court in the case of Amalgamations (P.) Ltd. v. CIT : 73ITR380(Mad) . In this case, the question was whether the payment of a dividend or a dividend larger than that declared would be unreasonable. It is held by their Lordships that this question will have to be eventually decided in the light of commercial consideration and not on any technical view of the provisions made for liability likely to be enforced against the assessee. In the opinion of their Lordships it was also not necessary that in order to exclude from computation all commercial profits the reservation should always be in respect of a definite ascertained loss or liability. There may be circumstances which may warrant a reserve against a possible liability which will have to be excluded in the computation of commercial profits for the purpose of Section 23A. Mr. Bajoria also refers to the decision of this court in the case of Cooch Behar Trading Go. Pvt. Ltd. v. CIT : 112ITR150(Cal) . It is held therein that the tax officer must take into account all relevant factors while acting under Section 23A of the Indian I.T. Act, 1922. He must do what a prudent director of a company should have done. In this case, it was held that the tax liability of earlier years cannot be paid out of the general reserve. The ITO was to take into account the additional tax liability of earlier years even if the directors had not done so. It is also held that the directors may not anticipate the additional tax liability at the time when the dividend was declared but the tax officer must take that fact into account under Section 23A of the Act. So it is settled law that a future or anticipatory liability has to be taken into account in determining the commercial profits for the purpose of Section 23A of the. Act.
11. As the municipal valuation of the property of the assessee was suddenly increased to Rs. 2,29,605 from Rs. 38,124, the directors of the assessee were justified in-maintaining the provision for the corporation tax that would become payable due to the revaluation of the said property.
12. In other words, this act of the directors cannot be regarded as unreasonable. The Tribunal found it as a fact that the profit for the assessment year 1960-61 was small which was, however, enhanced in view of the capital loss being turned into capital gain by the ITO as already stated.
13. In the premises and having regard to the smallness of the profits and the principles laid down by the Supreme Court in the case of Gangadhar Banerjee and Co. (P.) Ltd. : 57ITR176(SC) , and by the High Court in the cases cited by Mr. Bajoria, it must be held that the Tribunal was right in cancelling the order under Section 23A(1) of the Act.
14. In the result, we answer the question in the negative and in favour of the assessee.
15. There will be no order as to costs.