CHAKRAVARTTI, C.J. - The short point involved in this reference has been shortly put and I think I can dispose of it by a short judgment.
The assessee, Indra Singh & Sons Ltd., is a private limited company and the year of assessment with which we are concerned is 1948-49. The companys profit and loss account for the relative accounting year showed a net profit of Rs. 8,32,487. All that profit was, however, not profits and gains of business. It included undoubtedly income from business assessable under section 10, but it also included income from interest on securities assessable under section 8, income from property assessable under section 9 and income from dividends assessable under section 12.
The Income-tax Officer determined the assessable income of the company at Rs. 14,58,954. That amount was made up of Rs. 4,65,141 assessed under section 10 as business income, Rs. 12,647 assessed under section 8 as interest on securities, Rs. 21,994 assessed under section 9 as income from property and Rs. 9,59,172 assessed under section 12 as dividend income. The company, however, did not make any declaration of dividend. The Income-tax Officer thought that this was a case where section 23A(1) applied and since it could not be said that the omission to declare a dividend had been caused either by losses incurred by the company in earlier years or by the smallness of the profit made, the undistributed portion of the assessable income, as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable should be deemed to have been distributed as dividend among the shareholders. The actual order made by the Income-tax Officer was that the assessable income of Rs. 14,54,727 reduced by Rs. 6,36,443 the same being the taxes payable in respect thereof, should be deemed to have been distributed as dividend at the date of the relevant general meeting. The discrepancy between the figure of Rs. 14,58,964 given in the statement of the case as the assessable income determined by the Income-tax Officer and the figure of Rs. 14,54,727 mentioned as the assessable income in the order under section 23A remains unexplained.
The contention raised before the Income-tax Officer was that no order under section 23A(1) ought to be made, because the profit, contemplated by the expression 'smallness of the profit made' in section 23A(1) was only the profit derived from business and assessable under section 10 of the Act and not the entire profits of the company from whatever source derived. The next branch of the argument was that if only the profits derived from business and assessed under section 10 were to be recorded, the profits in this case were really small enough to justify the action of the company in not declaring a dividend. The Income-tax Officer and after him the Appellate Assistant Commissioner and finally the Tribunal all held that the word 'profit' as occurring in the expression 'smallness of the profit made' in section 23A(1) was not limited to profit derived from business, but covered the entire amount of the profit made by the company. The assessee not being satisfied with that decision asked for a reference to this court and the question in controversy has been referred in the following terms :
'Whether the expression smallness of the profits made occurring in section 23A(1) means only trading or business profit assessable under section 10 of the Income-tax Act or it also includes income from interest on securities assessable under section 8, income from property assessable under section 9, and income from dividend assessable under section 12.'
The Tribunal in their appellate order answered the question against the assessee by relying upon the decision of this court in the case of Kilburn Properties Limited v. Commissioner of Income-tax. They did not overlook the fact that the true meaning of the word 'profit' did not fall to be considered in the case relief on but they held that since the decision was that section 23A(1) would apply to a company even if the whole of its income was derived from property assessable under section 9, the word 'profit' in the expression 'smallness of the profit made' could not exclude such income or indeed could not be said to exclude all income other than income from business.
I do not think that the case referred to by the Tribunal does really answer the question raised in the case. It certainly creates a difficulty in the way of the assessee, because if section 23A(1) applies to all companies and if there be a company which is either a property-owing company or an investment company and thus a non-trading company, so that it has no income derived from business at all, it would be impossible to apply the section and consider whether the profit made was small or large, if the word 'profit' did not cover any profit other than profit from business. Even so, however, it seems to me that the question raised by the present case did not arise directly for decision and what was held in the case cannot be said to be decisive on the question. Nor, it seems to me, is the case of Ezra Proprietary Estates Ltd. Commissioner of Income-tax, cited before us, of any assistance, because the expression 'smallness of the profit made' did not fall to be construed even in that case. It would appear that practically the whole of the income of the assessee company in that case was income from property assessable under section 9 and only a negligible amount was derived as interest on deposits. In each of the two assessment years in question the whole of the profits had been distributed by the company as dividend but the Income-tax Officer had yet made an order under section 23A(1). In those circumstances, the only question which really arose for decision and the only question which the court really decided was whether the case could at all be taken as a case where an unreasonable proportion of the profits had been with held from distribution as dividend or, to put it in another way, whether there was any evidence in support of the Income-tax Officers finding that smallness of the profit made could not be paid to be a reason for the company not distributing as dividend at least sixty per cent. of its assessable income. The court naturally held that since the company had, in fact, distributed the entire amount of the profits of each of the two years, it had no other money available for distribution and, therefore, there could be no possible reason for saying that the smallness of the profit made had not prevented the company from declaring a large dividend or distributing a larger amount. The whole of the decision rests on that single point and it appears to me that no assistance can be derived from it so far as the question before us is concerned.
I may pause here to point out that there can be no doubt that whatever else the word 'profit' in the expression 'smallness of the profit made' may mean and whatever may be the sources of that profit, it is only the accountable profits of the company which are contemplated and not the assessable income composed partly of the accounting profits and partly of notional income, coming in either as disallowed items of expenditure or as income computed on some artificial basis. The evil which the section aims at checking is unreasonable withholding of profits from distribution as divided in spite of money for distribution being available. Obviously, national income cannot be distributed and, therefore, in judging the reasonableness or otherwise of a companys action in distributing dividend at the rate at which is actually made the distribution or in a making no distribution at all, one must pay regard only to the money that was actually at the disposal of the company and not money of which it might be deemed to be possessed. That obviously was the reason why it was held in the second of the cases cited before us that the order of the Income-tax Officer was supported by no evidence at all.
Turning now to the question before us it will be convenient to read at this stage the section where the word called for construction occurs. The section is section 23A(1) of the Act as it stood in 1948-49 and it reads as follows :
'Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth months after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for purpose of assessing his total income.
Mr. Mitra who appears for the assessee pointed out that the section used three expressions, namely 'profits and gains', 'assessable income' and 'profit'. He argued that the use of the three different expressions was not without significance and that the use of the word 'profit' in the expression 'smallness of the profit made' pointed clearly to section 10 of the Act and that that implication of the section was emphasised further by the use of the word 'made'. According to him, if the Legislature had in contemplation the whole income of the company, from whatever source derived, there was no reason why it should have used the expression 'profit' in speaking of the smallness of the profit made and not repeated the larger expression 'profits and gains' which had been used in the earlier part of the section.
I do not think that the argument of Mr. Mitra can be accepted. To my mind, the meaning of the section is perfectly plain. What that the section requires the Income-tax Officer to consider is whether a company having at its disposal sufficient profits which could in law be distributed as dividend, had yet distributed less than sixty per cent. of its assessable income. If he finds that less than sixty per cent. of the assessable income was distributed, he does not become entitled to make an order straightaway under section 23A(1). He has to consider whether the failure or omission to distribute as dividend at least sixty per cent. of the assessable income was caused by the 'smallness of the profit made'. I leave out the other alternative, losses incurred in earlier years, which is not relevant in the present case. At that point of time, what he has to pay regard to is the profit which was available to the company for distribution as dividend or to put it in other words, the size of the distributable fund which the company had in its hands. It is undoubtedly true that a company can distribute dividend only out of its profits, although capital profits also may, in certain cases, be distributable as dividend. But, broadly speaking, dividends are declared out of what we may call the revenue profits. But if dividend is distributable only out of profits, it is equally the law that all profits derived from whatever source shall contribute to the fund out of which the dividend may be declared or to put in other and simpler words the profits which are distributable as dividend are profits derived from all sources. If that be so, and if the Income-tax Officer has to judge under section 23A(1) whether in view of the funds at its disposal the company concerned had acted reasonably in not distributing a larger dividend, he has obviously to consider the whole fund available for distribution and not merely a portion of that fund contributed by a particular source. In my view, having regard to the scheme of section 23A(1) and the relation which the size of the profit at the disposal of the company bears to the question which the Income-tax Officer is to decided, there can be no doubt that the profit contemplated is not limited to profit from business or profit from any particular source at all, but it comprises the whole of the profits of the company distributable as dividend. I can see no answer to this construction of the phrase and Mr. Mitra at the end very fairly conceded that he was unable to find any reason for disagreeing.
For the reasons given above, the answer to the first part of the question referred must be in the negative and the second part in the affirmative.
The Commissioner of Income-tax, West Bengal, will have the costs of this reference.
GUHA, J. - I agree.
Reference answered accordingly.