TMI Blog1968 (7) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... he statutory limit of 45 per cent. under section 23A of the Act as it stood at the relevant time. Calculating on the basis of the statutory percentage of 45 per cent. the Income-tax Officer held that the assessee-company ought to have declared a dividend of Rs. 9,418. Under section 23A of the Act, an opportunity was given to the assessee to declare dividend within three months of the receipt of the notice which was issued by the Income-tax Officer on December 18, 1961. The assessee was also called upon to show cause why proceedings under section 23A(1) should not be initiated and additional super-tax should not be levied for deficiency in the distribution of statutory dividend. On March 18, 1962, the assessee, in a letter addressed to the Income-tax Officer, took the stand that owing to the smallness of profit coupled with the fact that the company suffered losses in the earlier years and in view of the pending tax liability it was not possible for the company to declare a larger dividend than that declared by it. The contention of the assessee was rejected by the Income-tax Officer. In doing so, he took into consideration the fact that the company itself had declared an income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profits made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. " After the recasting of the section by the Finance Act, 1955, the relevant provision which stood at the relevant time of the assessment year 1958-59 read as follows : " (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable income of the company of the previous year as computed for purposes of income-tax and reduced in the manner aforesaid shall be deemed to have been distributed as dividends amongst the shareholders at a particular date. It is to be noted here that section 23A was introduced in the year 1930 to avoid the exploitation of the juristic personality by the individuals. The rate of super-tax on the shareholders was much higher than the super-tax charged on the profits of the company. It was found that private companies in which members of the public were not substantially interested took recourse to a device to escape the burden of the super-tax on the individual holders by not declaring dividends adequately and keeping the profits of the companies in their funds so that a lower rate of super-tax could be charged. The difficulty, however, was felt from time to time in giving effect to the provision of law contained in section 23A, and it was once substantially amended in the year 1939, and then in the year 1955. The section, as it stands after the amendment in the year 1955, does not empower the Income-tax Officer, on satisfaction of the primary condition, to straightaway make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains distributed by the assessee as dividend amongst the shareholders is less than sixty per cent. of the assessable income as reduced by the amount of income-tax and super-tax payable in respect thereof. Even if this condition is satisfied, if, having regard to the losses sustained in the previous years or to the smallness of the profits made, it would be unreasonable to distribute a dividend larger than the one declared, the Income-tax Officer will not pass the order that the undistributed portion of the assessable income shall be deemed to be distributed as dividends." And that necessitated an investigation into the question of the commercial profits of the company. The argument before the High Court was that the Tribunal erroneously arrived at the commercial profits in regard to two matters. After determining the commercial profits at Rs. 56,800 the Tribunal had deducted from that amount a tax liability of Rs. 19,325 which was payable on the commercial profits of Rs. 56,800 and not the amount of tax which was payable on the assessed income ; secondly, the Tribunal had committed an error in adding the amount of Rs. 20,433 standing to the credit of the bonus pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable income shall be taken into account. The test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question. Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do. " In Commissioner of Income-tax v. Gangadhar Banerjee Co. (Private) Ltd. were enunciated some new propositions of law favourable to the assessees on the interpretation of section 23A of the Act, which hitherto, if I may say so with respect, had not been so clearly enunciated by any High Court. Subba Rao J., as he then was, sitting with Shah and Sikri JJ., said at page 181 : " To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaring the dividend or declaring it as a low percentage. It appears to me, however, that although, as pointed out by the Supreme Court in the case of Gangadhar Banerjee and Co., section 23A being in the nature of a penal provision, the revenue authority has strictly to comply with the conditions laid down therein and the burden lies upon the revenue authority to prove that the conditions laid down therein were satisfied before the order was made, it is for the assessee to place facts before the revenue authority to assist it to find out whether in spite of the fulfilment of the primary and the first condition that the requisite percentage of dividend has not been declared, what has been done by the company is reasonable either because of the losses incurred by it in the earlier years, or because of the smallness of the profit in the commercial sense or because of any other relevant fact or circumstance which would justify the action taken by the company in declaring a dividend or declaring a small percentage of dividend. On a reference to the case decided by the Privy Council in Commissioner of Income-tax v. Williamson Diamonds Ltd., it would be found that the language of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier years were not taken into consideration by the Income-tax Officer on the ground that they were set off much before the assessment year in question. The Tribunal did not differ from this view and, in my opinion, rightly. If the losses of the earlier years were not to be adjusted out of any portion of the profits made in the accounting year 1957 relating to the assessment year in question, the losses of the earlier years become irrelevant for answering the question of reasonableness or unreasonableness. To determine the commercial profit, the Appellate Tribunal rightly deducted the sum of Rs. 5,000 paid as director's remuneration, Rs. 487 paid. as cess of mining board and Rs. 2,000 being the difference between the depreciation claimed and that allowable. Hence, from the commercial point of view, after deducting the amount of tax of Rs. 22,047 from the assessed income of Rs. 43,152 and the three amounts aforesaid, the net profit which was available in the hands of the company came to Rs. 13,618 as mentioned n the order of the Tribunal. The first condition was, undoubtedly, fulfilled as the dividend declared amounted to Rs. 1,701 only, whereas under the first part of the sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is allowed to take the stand that the tax demand of the year 1968 was paid in the year 1969 and that of the year 1969 was paid in the year 1970 it would follow that the company will find justification in not declaring any dividend on account of the payment of the tax demand of the earlier years. Obviously, it cannot be allowed to be done. Even from the commercial point of view, it is supposed to keep in reserve for payment of the tax demand of a particular year an amount out of the profits of that particular year. In my opinion, therefore, the in are fact of payment of tax of an earlier year in the accounting year in relation to which an action under section 23A is proposed to be taken will, not justify the taking of the view that the dividend declared by the company was reasonable or that it was not unreasonable. It may well be that in the example which I have taken above, the company, according to it, had made a profit of, say, only, Rs. 5,000 in the year 1968 but the income assessed due to one reason or the other was Rs. 30,000 in which the company was required to pay total tax of Rs. 10,000. In such a situation, the company may say that it had no sufficient surplus in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Madras High Court relying upon which the Appellate Tribunal has taken the view in favour of the assessee. The principle of law decided in that case, if I may say so with respect, is firmly established now. After saying that the matter has to be looked into from the commercial point of view, their Lordships of the Madras High Court proceeded to examine the facts of the case in relation to the assessment years 1947-48 and 1949-50, the two years in respect of which orders under section 23A had been made. The order in respect of the year 1949-50 was maintained, but considering the figures for the year 1947-48, it was found that after deducting the earlier tax of Rs. 1,12,630, a balance of Rs. 1,12,151 was left. Then it was said that the total demand of tax for the assessment years 1943-44 to 1946-47 worked out to Rs. 1,75,921 as against which Rs. 1,49,877 had been paid. This amount was deducted from the gross available profit of Rs. 1,72,151. The balance came to Rs. 71,274 out of which the balance of tax demand for the earlier year was again deducted. Except the fact that such deduction in respect of the payment of tax of the earlier years was, as a matter of fact, made, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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