1969 (6) TMI 3 - HC - Income Tax

Summary

Issues Involved:

1. Whether the assessee is entitled to exemption envisaged in the third proviso to section 23A(1)?
2. Whether, on the facts and in the circumstances of the case, section 23A(1) of the Act was rightly applied to the assessee-company?
3. Whether the Tribunal erred in holding that before the Income-tax Officer can consider whether having regard to the loss incurred by the company in earlier years or to the smallness of the profit the payment of a dividend or a larger dividend than that declared would be unreasonable, the assessee must distribute by way of dividend the whole of its commercial profit?

Detailed Analysis:

Issue 1: Exemption Under Third Proviso to Section 23A(1)

The assessee, a public limited company, claimed exemption from the operation of section 23A(1) on the grounds that it was a company in which the public were substantially interested and a subsidiary of a company in which the public were substantially interested. The Tribunal, however, held that the assessee was not entitled to this exemption because 99.5% of its shares were held by the Premier Construction Company, which constituted a block of voting power. According to the Supreme Court's interpretation in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, the term "public" does not include a single shareholder or a group acting in concert holding more than 75% of the voting power. Therefore, the assessee did not satisfy the requirement that shares carrying not less than 25% of the voting power be held unconditionally and beneficially by the public.

Issue 2: Application of Section 23A(1)

The Tribunal confirmed that section 23A(1) was rightly applied to the assessee-company. The assessee's argument that it was unreasonable to expect a larger dividend due to the smallness of profits was dismissed. The Tribunal pointed out that the assessee had a distributable surplus of Rs. 10,21,734, which was far in excess of the Rs. 7 lakhs declared as dividend. The Tribunal emphasized that for an order under section 23A to be avoided on the grounds of smallness of profits, the assessee must have declared the whole of the commercial profits, not just 60% thereof.

Issue 3: Tribunal's Error on Commercial Profits

The Tribunal's view that the assessee must distribute the whole of its commercial profits before claiming that a higher dividend would be unreasonable was found to be incorrect. The court held that this condition was not a prerequisite for the assessee to raise the claim. Therefore, the Tribunal erred in its interpretation, and this issue was decided in favor of the assessee.

Conclusion:

The court answered the first question in the negative, indicating that the assessee was not entitled to the exemption under the third proviso to section 23A(1). The second question was answered in the affirmative, affirming that section 23A(1) was rightly applied to the assessee-company. The third question was also answered in the affirmative, acknowledging that the Tribunal erred in its requirement for the assessee to distribute the whole of its commercial profits. The assessee was ordered to pay the costs of the Commissioner.