1965 (12) TMI 37 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, section 23A was properly applied? Held that - From the judgment of the High Court that the assessee s contention before it was that the expression profits made in section 23A refers to profits disclosed by the accounts and further to the profits that were made only during that year, disregarding any profits of the previous year that might have been carried forward as such. The fact that this argument was raised before the High Court further shows that the assessee never urged at any previous stage that in view of previous losses and other facts, it would not be reasonable to require the assessee to distribute a larger dividend. We agree with the High Court that the answer to the question must be in the affirmative. Appeal dismissed.

Summary

Issues:
Application of section 23A - Reasonableness of dividend declared - Consideration of business factors in dividend declaration.

Analysis:
The judgment pertains to an appeal against the High Court's decision on the application of section 23A of the Income-tax Act, 1922. The Income-tax Officer found the dividend declared by a private limited company to be less than 60% of the profits available for distribution, leading to the application of section 23A. The Officer considered the company's ability to declare a larger dividend based on book profits and assessable income. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the Officer's decision. The High Court affirmed the application of section 23A, emphasizing the need to consider concealed profits in determining the reasonableness of the dividend declared.

The High Court held that the Income-tax Officer had material justifying the conclusion that a larger dividend could have been reasonably declared by the company. The Court rejected the argument that certain disallowed expenditures should not be added to book profits, emphasizing the importance of considering real commercial profits. Additionally, the Court addressed the contention that the Officer exceeded the permissible distribution limit, stating that once the conditions of section 23A are met, the Officer is mandated to order the distribution of the undistributed portion of assessable income.

The appellant raised concerns regarding the Officer's failure to consider various business factors in determining the reasonableness of the dividend, citing previous judicial interpretations emphasizing a prudent business approach. However, the Court noted that the appellant did not raise these points before the lower authorities. The Court also highlighted the appellant's argument that "profits made" in section 23A should only refer to profits of the current year, not considering carried forward profits or previous losses. Ultimately, the Court agreed with the High Court's decision, dismissing the appeal and affirming the application of section 23A.

In conclusion, the judgment underscores the importance of considering all relevant factors, including concealed profits, in determining the reasonableness of dividends under section 23A. It also highlights the significance of raising pertinent arguments at the appropriate stages of the legal proceedings. The Court's decision emphasizes the need for a comprehensive assessment of business considerations in dividend declarations to prevent tax evasion effectively.