1. This reference is at the instance of the Commissioner of Income-tax, West Bengal-I, Calcutta. Under Section 66(1) of the Indian I.T. Act, 1922, the Tribunal has drawn up a case and referred the following question:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no occasion to impose any additional super-tax under Section23A of the Indian Income-tax Act, 1922?'
2. The facts found are, inter alia, that in the assessment year 1960-61, M. M. Press (P.) Ltd., the assessee, was assessed on a total income of Rs. 68,619 on which tax payable was Rs. 30,879. Distributable surplus in the hands of the assessee was, therefore, Rs. 37,740. The assessee declared dividend of Rs. 15,625 within the statutory period after the close of the relevant accounting year.
3. The ITO held that the assessee not having declared dividend to the extent of Rs. 24,531, i.e., sixty-five per cent. of the distributable surplus, were liable to be proceeded against under Section 23A of the Indian I.T. Act, 1922, and initiated proceedings thereunder.
4. The assessee contended, firstly, that the statutory percentage should be fifty per cent, of the distributable surplus as the assessee was carrying on business of manufacturing and processing of goods and, secondly, that its liability to additional tax for earlier years should also be taken into consideration in determining the reasonableness of the dividend declared. The ITO did not accept the contentions of the assessee and levied additional super-tax. On appeal, the AAC sustained the order passed by the ITO.
5. In a further appeal to the Tribunal, the assessee contended that there was no shortfall in the declaration of dividend. It was submitted that the commercial profits in the hands of the assessee was Rs. 56,969 and after deduction of tax from the same, distributable surplus was Rs. 28,484, fifty per cent. whereof came to Rs. 14,242. The dividend declared was more than the said figure and Section 23A did not apply. It was contended on behalf of the revenue that it was the assessed income which had to be taken into consideration for determination of the available surplus and prima facie the provisions of the section did apply.
6. The Tribunal held that it is the commercial profits which had to be taken into consideration for ascertaining the dividend distributable and onthe basis of the calculation furnished by the assessee came to the conclusion that the amount of dividend declared was not less than the statutory percentage. The assessee's appeal was allowed.
7. In proceedings under Section23A, the ITO has to consider first whether the profits and gains distributed as dividend by a company had been less than the statutory percentage of the total income of the company reduced by the amount of income-tax and super-tax payable thereon. If the dividend declared is found to be less than the statutory percentage then he has to consider whether having regard to the losses incurred by the company in earlier years or to the smallness of profit made in the previous year, payment of a dividend or a larger dividend than that declared would be unreasonable. After this stage, the imposition of additional super-tax will arise.
8. It has been laid down by the Supreme Court in CIT v. Gangadhar Banerjee and Co. (Private) Ltd. : 57ITR176(SC) that the ITO had to consider the reasonableness or the unreasonableness of the amount distributed on business considerations and after taking into account an overall picture of the financial position of the business. The Supreme Court reiterated this principle subsequently in CIT v. Asiatic Textiles Ltd. : 82ITR816(SC) and further laid down that the directors of the company in declaring dividends are expected to act as hardheaded businessman and if they have reasonable grounds for not declaring any dividend, it would not be open to the ITO to constitute himself as a 'super-director'.
9. In the instant case, admittedly, there was sufficient material for the ITO to initiate proceedings under Section 23A inasmuch as the statutory percentage, i.e., 50% of the available surplus calculated on the basis of total income of the assessee as laid down in Section 23A, was not distributed as dividend. The Tribunal was patently incorrect in holding that it would suffice for the company to distribute only 50% of the commercial profits.
10. No enquiry, however, appears to have been made on the aspect whether the dividend declared was unreasonable or too low in view of the financial position of the company judged by business considerations.
11. For the reasons given above, we answer the question in the negativeand against the assessee. The Tribunal, however, is directed to dispose ofthe matter according to law as discussed above. The Tribunal will give theparties opportunity of being heard further and if necessary to take freshevidence.
12. In the facts and circumstances, there will be no order as to costs.
13. I agree.