TMI Blog1967 (8) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 23A as it then stood, the company had to distribute 60 per cent. of its distributable surplus as determined under that section. The Income-tax Officer found that the company's assessed profits were Rs. 4,14,669 and Rs. 5,34,366, respectively, and, after deduction of income-tax and super-tax payable thereon, the distributable surplus mounted to Rs. 2,23,491 and Rs. 3,02,824, respectively, for the aforesaid two years. As the company had not declared any dividend within the statutory period of 12 months from the end of the respective previous years, the Income-tax Officer required the assessee to show cause why the provisions of section 23A should not be applied to it in respect of these two years. The company had declared dividends of two identical sums of Rs. 49,266 for the aforesaid two assessment years on 5th of September, 1956, and 31st of July, 1957, respectively, that is, after the lapse of the statutory period of 12 months from the end of each of the relevant previous years. The company submitted to the Income-tax Officer that it had imported some spinning machinery during the financial year 1952-53, at heavy cost, thereby incurring debts to the extent of over Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration could not be considered to be small, the Appellate Assistant Commissioner upheld the orders of the Income-tax Officer and dismissed the assessee's appeals. Dissatisfied with the order of the Appellate Assistant Commissioner, the assessee appealed to the Income-tax Appellate Tribunal. Before the Tribunal, the assessee submitted two statements purporting to show the surplus available to the assessee after deducting its liabilities from its assessed profits for these two years. The liabilities deducted were the assessee's income-tax liabilities for the past years as well as the present year and its liabilities incurred in connection with the import of the spinning machinery. On the basis of these liabilties, the assessee showed a distributable surplus of Rs. 4,485 for the first year and a nil surplus for the second. The same contentions were raised by the assessee before the Tribunal, namely, that though it had suffered no loss in the past years and had sufficient profits in its profit and loss account for declaring a dividend, yet taking into consideration its heavy liabilities in respect of the import of spinning machinery, it should be considered that it was not reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll its capital and reserves would be hardly sufficient to meet the enforcement. Although the surplus disclosed by deducting a part of such commitments and expenses comes to a paltry sum of Rs. 4,485 in the assessment year 1955-56, and to nil in the assessment year 1956-57, the assessee had itself declared dividend to the tune of Rs. 49,256. Be that as it may, on a consideration of the entire facts and circumstances of the case and the necessary commitments which the assessee has to fulfil, we hold that the company's profits were small within the meaning of the term 'smallness of profit' under section 23A and any further declaration of dividend would be unreasonable. " The Tribunal accordingly allowed the assessee's appeals. At the instance of the Commissioner, the Tribunal has referred the following question of law to this court : " Whether, on the facts and in the circumstances of the case, the profits of the assessee-company for the assessment years 1955-56 and 1956-57 were small within the meaning of the expression 'smallness of profits' in section 23A of the Indian Income-tax Act, 1922, and that any further declaration of dividend than that declared by the assessee woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in earlier years or 'the smallness of the profit made', the payment of a dividend or a larger dividend than that declared would be reasonable. . . He (the Income-tax Officer) only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has placed before us its total commitments and expenses which it must have to incur. The commitments are so heavy that if the company be forced to pay it at once, all its capital and reserves would be hardly sufficient to meet enforcement. " Mr. Banerjee further pointed out that the Tribunal had found that the company would have gone into liquidation if the onerous loan was not taken from the Life Insurance Corporation and that the fixed assets had to be hypothecated. It was submitted that no company would take loans if its capital and reserves were sufficient to meet its liabilities. Mr. Banerjee further pointed out that a similar argument was raised before the Supreme Court in Gangadhar Banerjee's case by the Attorney-General at page 180 of the report to the following effect : " ....... and, as the balance-sheet of the company for the relevant year showed a sum of Rs. 1,05,950 as capital reserve brought forward, a sum of Rs. 5,73,161 as taxation reserve, and a sum of Rs. 56,000 as estimated tax, the Income-tax Officer rightly held that the financial condition of the company was sufficiently sound to warrant an order under section 23A of the Act. " It was point ..... X X X X Extracts X X X X X X X X Extracts X X X X
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