1949 (4) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 23A to the income of a company from property assessable under Section 9 of the Indian Income-tax Act.
2. Whether there was evidence to show that owing to the smallness of the profit made by the company, the declaration of a larger dividend than that declared would be unreasonable.

Issue-wise Analysis:

1. Applicability of Section 23A to the income of a company from property assessable under Section 9:

The primary issue addressed was whether Section 23A of the Indian Income-tax Act could be invoked for a company whose income was primarily derived from property, assessable under Section 9. The court affirmed that Section 23A is indeed applicable to property-owning companies. The judgment clarified that even though a property-owning company does not carry on a business in the traditional sense, it is still considered to be carrying on business vis-a-vis its shareholders for the purposes of the Companies Act. Therefore, the provisions of Section 23A, which aim to prevent companies from distributing too little of their profits as dividends, are applicable to such companies. This conclusion was consistent with a previous Bench decision in the matter of Kilburn Properties, Limited, Calcutta v. Commissioner of Income-tax, Bengal.

2. Evidence to show that owing to the smallness of the profit made by the company, the declaration of a larger dividend than that declared would be unreasonable:

The court examined whether there was sufficient evidence to support the Income-tax Officer's satisfaction that a larger dividend could have been reasonably declared by the company. It was found that the company had distributed all its actual profits as dividends for the relevant years, which amounted to Rs. 30,000 in 1938 and Rs. 15,000 in 1939. The assessable income, however, was significantly higher at Rs. 1,26,581 for 1939-40 and Rs. 1,24,787 for 1940-41, due to the notional income assessed under Section 9.

The court highlighted that dividends must be paid out of actual profits, not the notional assessable income, as distributing dividends out of capital would be a breach of trust and illegal. Given that the entire actual profits were distributed, the declaration of a larger dividend was not only unreasonable but impossible. The judgment emphasized that the Income-tax Officer's satisfaction must be based on evidence, and in this case, there was no evidence to support a finding that a larger dividend could have been reasonably declared. The court concluded that the provisions of Section 23A were improperly invoked as the declaration of a larger dividend was both unreasonable and legally impossible.

Conclusion:

The court answered the reference in the negative, indicating that Section 23A was improperly applied in this case. The assessee was entitled to the costs of the reference and the return of the deposit made. The judgment reiterated that while Section 23A applies to property-owning companies, it was not applicable on the facts of this case due to the smallness of the actual profits and the impossibility of declaring a larger dividend.