Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order made under Section 104 of the Income-tax Act, 1961 ?'
2. The assessment year involved in this reference is the assessment year 1968-69 for which the relevant previous year ended on 31st December, 1967. The assessee was assessed on a total income of Rs. 1,14,980. After deducting the statutory amounts, it was left with a distributable income of Rs. 38,981. Since it was an investment company, it was obliged to declare 90 per cent. of the distributable income amounting to Rs. 35,082 as dividends to avoid application of Section 104 of the I.T. Act, 1961. The dividend actually distributed was only Rs. 5,012 with a shortfall of Rs. 30,070. It was asserted on behalf of the assessee before the ITO that a larger dividendcould not he declared as the assessee was required to repay its loan to M/s. Binani Investment Co, (P.) Ltd. as the creditor was pressing hard for its repayment. It was contended that, faced with this situation, the directors of the company did not think it proper to fritter away its resources by declaring a higher dividend. The ITO did not accept this explanation. He, therefore, subjected it to an additional super-tax of Rs. 16,990. It may not be inappropriate to refer to the ITO's finding in the assessment order. The ITO observed, inter alia, as follows :
'3. The arguments advanced by the company for non-declaration of dividend up to the statutory percentage prescribed in the Act are not convincing. The total receipts of the company for the year were Rs. 1,90,764. After deduction of the necessary expenses the company was left with Rs. 1,22,394. The company had provided Rs. 70,000 for income-tax and Rs. 45,000 were appropriated towards the general reserve. The general reserve was not intended for repayment of the loan as the cash position including bank balance as on 31st December, 1967, was only Rs. 12,156. The company has discharged the loan of M/s. Binani Investment Co. (P.) Ltd. only to the extent of Rs. 35,000. In these circumstances, the argument put forward by the company that the dividend was not declared up to the statutory percentage only with a view to enable the company to repay the loan is not convincing.'
3. The assessee thereafter went up in appeal before the AAC. The arguments placed before the ITO were repeated before him. Although the AAC agreed with the statement that the ITO should have put himself in the armchair of the board of directors, he considered, having regard to the particular facts and circumstances of the case, a larger dividend was not unreasonable. He found that the principal creditor, M/s. Binani Investment Co. (P.) Ltd., was an associate concern of the assessee. It would be better to refer to the actual observations of the AAC on this aspect of the matter. He observed, inter alia, as follows :
'5. The solitary ground on which further dividend was not declared was the loan of Rs. 2,65,000 outstanding on account of Binani Investment Co. Ltd. This outstanding liability was said to be causing anxiety to the directors and the creditor was said to be pressing for early repayment of the loan. At this stage, I should mention that the appellant's income was derived from the house properties at 38, Strand Road, and 81, N. S. Road, Calcutta, which were acquired by the company out of borrowed funds.
The principal creditor was Binani Investment Co. Ltd. It was conceded that the directors of Binani Investment Co. Ltd. and the appellant-company were common and both the companies were controlled and managed by the same directors. It was also conceded that the majority of shareholders of both the companies were common. In this peculiarsituation, there was no question of the creditor pressing for the repayment of the loan advanced to the appellant. No evidence was made available by Shri Bhide to show that Binani Investment Co. was asking for return of loan and this was worrying the directors of the appellant-company.
6. Another interesting development was the amalgamation of the appellant-company with Binani Investment Co. with effect from 1st January, 1970. When the appellant-company was merged with the Binani Investment Co. there was still an outstanding loan of Rs. 2,50,000. In this situation, the loan theory stands shattered. No other reason was adduced for non-declaration of dividend larger than Rs. 5,013. It is in the light of, this situation, the test of reasonableness or unreasonableness should be looked into. Having regard to the facts and circumstances of the case, the ITO was quite justified in applying the provisions of Section 104(1) and charging additional super-tax of Rs. 16,990.'
4. In the premises, he rejected the assessee's contention.
5. Being aggrieved by the aforesaid order, there was a further appeal before the Tribunal by the assessee. The Tribunal noted the rival contentions and referred to certain decisions of the Supreme Court as well as this High Court. Thereafter, the Tribunal went on to observe, inter alia, as follows :
'5. The learned departmental representative on the other hand submitted that there was no dispute that the commercial profit was sufficient to declare the required amount of dividend which was also clear from the fact that the assessee had transferred a sum of Rs. 45,000 to the general reserve during the year. He contended that if that was the case, there was no reason why the assessee should not be subjected to penalty under Section 104(1) of the Act. He also reiterated the facts found by the Appellate Assistant Commissioner that there was no pressing demand for the repayment of the loan and that the amalgamation of the two companies in 1970 was a pointer to the fact that the two companies were following identical policies and were under common management.
6. We have carefully considered the submissions placed before us. There is no dispute before us that there was sufficient commercial profit for the declaration of dividend. The question, however, arises whether there were enough cash resources with the assessee to declare any such dividend. In this connection, we have perused the balance-sheet of the assessee-company. Its only source of income was property which was also the only asset whose value (land, building and lift), as declared in the balance-sheet, amounted to more than Rs. 10 lakhs. A perusal of the balance-sheet does not show any other asset which could be realised by the assessee for augmenting its resources of declaring any dividend. The building was obtained out of the assessee's own capital as well as the loansecured from Binani Investment Co. (P.) Ltd. The company had, therefore, to fall back upon its cash resources which, as stated above, were of Rs. 12,155 as on 31st December, 1967, and of Rs. 28,186 on 30th April, 1968. We are not concerned with the propriety of the assessee's action in repaying its loan during the year. The fact remains that it was repaid to the extent of Rs. 35,000. It cannot be suggested that the company should not have repaid the loan and should have kept enough money at its hands only to declare the dividend. That, in our opinion, would not have been a sound policy from the point of view of the directors. If the assessee would have declared any dividend the only course for its payment was to sell away its property which, in our opinion, would again not have been a business proposition. That being the position we are of the considered opinion that the declaration of a higher dividend than that already declared by the assessee was not possible on the basis of the available resources of the company. It is no doubt correct that it had earned a good profit but even that profit was not available to it at the end of the year as it was partly spent away in repaying the loan. The directors at best could take into consideration the financial position of the company as on the date they submitted their report to the shareholders, i. e., on 27th May, 1968. On that date a part of the debt had already been repaid and could not be called back for declaring any dividend. In our opinion, the counsel for the assessee has correctly relied on the two decisions of the Calcutta High Court referred to above.'
6. Thereafter the Tribunal referred to the observations of this court in the case of CIT v. Bangodaya Cotton Mills : 69ITR812(Cal) . In the premises the appeal was allowed. Thereafter, the Tribunal has referred the question to this court, as indicated before.
7. On behalf of the Revenue, it was urged, before us, that the Tribunal should have taken an overall view of the matter. It was stressed that the two aspects of the matter were not properly considered. It was, firstly, sought to be argued that there was surplus and the assessee was not justified in transferring a sum of Rs. 45,000 to the general reserve which the Tribunal noted as a fact, to which the attention of the Tribunal was drawn by the Revenue. It was, secondly, urged that in view of the fact that both the company, M/s. Binani Investment Co. (P.) Ltd. as well as the assessee, being under the same management and same directors and the fact that three years after the date of the repayment of the loan there was amalgamation between the assessee-company and the said company and also there was no evidence, as such, of a very pressing demand being made by the lender-company, the Tribunal was in error in not givingproper weight to these facts and coming to the conclusion that the dividend declaration could not have been higher.
8. How this problem will have to be judged has been settled by the decision of the Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) of the report the Supreme Court laid down the following principles :
'The section is in three parts :, the first part defines the scope of the jurisdiction of the Income-tax Officer to act under Section 23A of the Act ; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder ; and the third part provides for the assessment of the statutory dividends in the hands of the shareholders. This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, that is, 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or 'the smallness of the profit made', the payment of a dividend or a larger dividend than that declared would be reasonable. The argument mainly centered on this part of the section. Would the satisfaction of the Income-tax Officer depend only on the two circumstances, viz., losses and smallness of profit Can he take into consideration other relevant circumstances 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 is properly appreciated, the answer to the said question would be apparent, 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 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. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer.'
9. Basing his arguments on the aforesaid observations of the Supreme Court, learned advocate for the Revenue stressed that in this case the overall view had not been taken into consideration by the Tribunal. According to him, when there was a distributable surplus, without distributing the dividend, the assessee was not justified in transferring the sum of Rs. 45,000 to the general reserve fund. It was, secondly, stressed that in respect of the loan, the subsequent fact of amalgamation and the fact that both the lender-company and the assessee-company were in the same group of management were not given due weight. In this connection reliance was placed on certain observations of this court in the case of Calcutta Landing & Shipping Co. Ltd. v. CIT : 123ITR172(Cal) . We are, however, unable to accept these contentions. The genuineness of the loan has not been doubted. It has not been found that the loan was a fictitious one. Further, it appears that with the loan the property of the assessee was purchased, which was apparent from the report of the directors. If the genuineness of the loan could not be disputed then the repayment to a creditor was certainly the responsibility of a prudent businessman. Therefore, if the assessee had repaid the money, when it had distributable surplus, then, in our opinion, it could not be said that the assessee was not acting as a prudent businessman. The fact that the assessee-company and the lender-company were in the same group of management is not decisive of the matter. Indeed, it very often happens that loans are obtained in easy terms from the concerns which are either friendly or in the same group of management. It is a fact that these two companies were amalgamated. But that happened three years after the close of the assessment year. There is no evidence that that factor was present in the relevant assessment year. If in that perspective the assessee-company or the board of directors of the assessee-company thought it justified and proper to liquidate its debt out of the distributable money or the available surplus among its shareholders, then it cannot be said that they had acted imprudently or acted as an unreasonable businessman. In this connection, we must observe that the decision in the case of Calcutta Landing & Shipping Co. Ltd. : 123ITR172(Cal) was rendered on entirely different circumstances and in a different context. There, it was contended that the subsequent expenditure which was incurred after the end of the relevant assessment year should have been taken into consideration by the Revenue in considering the reasonableness of the dividend distributed. This court repelled that submission.
10. The facts and circumstances of this case are entirely different. Here, the assessee was not asking that any subsequent expenditure should be taken into consideration. On the contrary, it was the Revenue which was seeking to agitate this theory that subsequent to the assessment, in the sense, three years after the close of the assessment, the amalgamation of the assessee-company with the lender-company was a factor which should have been considered. In our opinion, the observations of the Division Bench of this court in the case of Calcutta Landing & Shipping Co. Ltd. v. CIT : 123ITR172(Cal) , negative the contentions urged on behalf of the Revenue.
11. Now, so far as the other aspect of the matter is concerned, that is to say, the transfer of the sum of Rs. 45,000 to the general reserve account, it has to be borne in mind that the company has the property owning income. Revenue has never challenged that this was done improperly. There was no objection for creating such a general reserve fund account. Normally, a property owning company requires certain reserves for repairs and other incidental expenses. In those circumstances, on the materials placed before us it cannot be said that the company acted improperly or in any unreasonable manner in transferring the sum of Rs. 45,000 to the general reserve account. Indeed, it was neither held by the ITO nor contended before the AAC or the Tribunal that such a transfer was a device or a fictitious one or a make-believe action. As a matter of fact, the ITO in his order has proceeded on the basis that the distributable surplus available was Rs. 38,081 after taking into consideration the transfer of the sum of Rs. 45,000 to the general reserve account. He never doubted the genuineness or propriety of the transfer to the general reserve fund. In this background and in view of the principles laid down by the Supreme Court in the decision, referred to hereinbefore, we cannot say that the Tribunal has arrived at an erroneous decision by setting aside the order of the ITO.
12. In the premises, the question referred to this court must be answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, the parties will pay and bear their own costs.
C.K. Banerji , J.
13. I agree.