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TMI Blog1967 (8) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 11,00,000. The company had to borrow a large sum of money from Lloyds Bank Limited, to whom a sum of Rs. 1,97,354 was paid as interest, but was disallowed in the company's, assessment. The company had to borrow a further large sum from the Life Insurance Corporation of India also at high interest and on condition of payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 reasonable for the assessee to have declared a dividend larger than that declared for these two years. The Tribunal accepted the assessee's contention and, after considering an unreported decision of this court in Gangadhar Banerjee & Co. Ltd. v. Commissioner of Income-tax, made the following observations. " In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 would be unreasonable ? " Since the decision of the Tribunal, the Supreme Court had to interpret the words " losses incurred by the company in earlier years or the smallness of profit made ", occurring in section 23A before its amendment in 1953. As the section, both before and after the aforesaid amendment, requires the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, 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. " Mr. Sen, learned counsel for the Commissioner, argued that, in view of the aforesaid observations of the Supreme Court, he could not object to the Tribunal taking into consideration the capital expenditure and noncommitant outgoings in considering the surplus available for distribution. But, he argued while taking such liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pointed out that the Supreme Court had not accepted that contention in that case as in holding that the amount available for distribution was a small sum of Rs. 4,000, the Supreme Court had not taken into consideration the reserves of the assessee-company. What we have to consider in this case is whether the decision of the Tribunal, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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