1968 (9) TMI 33 - HC - Income Tax

Super-tax levied on the profits withheld by the assessee in excess of the permissible limits under section 23A - whether a sum donated by the assessee-company to Nachimuthu Industrial Association would form part of the total income and if so whether distribution of a larger dividend than that declared would be unreasonable - donations to charity by the assessee-company can not be regarded as proper outgoing eligible for deduction

Summary

Issues:
1. Propriety of super-tax levied on profits withheld by assessee.
2. Inclusion of donation in total income for assessment.
3. Reasonableness of not distributing a larger dividend than declared.

Analysis:
1. The judgment concerns the propriety of super-tax levied on profits withheld by the assessee in excess of permissible limits under section 23A of the Income-tax Act, 1922. The court deliberated on whether a donation made by the assessee should be considered as part of the total income and if the distribution of a larger dividend than declared would be unreasonable. The Tribunal disagreed with the revenue's view and allowed the appeal, stating that the donation amount was not available for distribution as dividend, justifying the non-levy of super-tax. The court agreed with the Tribunal's conclusion, emphasizing the commercial principles that should be considered in determining total income for section 23A purposes.

2. The court examined the revenue's argument that the donation, being made from the profits, should not be allowed as a deduction from total income under section 23A. The court acknowledged that while profits are ascertained at the end of the accounting year, certain expenditures may not be allowed as deductions, thus forming part of the profits. The court accepted the revenue's stance that a charitable donation by a commercial company should not be considered a proper outgoing eligible for deduction, leading to the invocation of section 23A(1) by the revenue.

3. Regarding the reasonableness of not distributing a larger dividend, the court highlighted that the section requires consideration of various factors beyond losses or small profits, including business considerations and the company's financial position. The court emphasized that the policy of section 23A aims to prevent tax evasion through corporate exploitation. In this case, the directors made a charitable donation during business operations, which, when considered in light of the company's memorandum and absence of tax evasion motives, justified the non-distribution of further dividends. The court clarified the proper framing of the question related to the application of section 23A and ruled against the revenue, concluding that the super-tax levied was not in accordance with the law.