TMI Blog1963 (5) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt for the consideration of question No. 3 and it has accordingly come before us for giving our answer to the said third question, which is as follows : Whether the loss of ₹ 12,75,000 incurred by the company prior to its reconstruction in 1930, could be taken into consideration for purposes of the applicability of section 23A(1) of the Act? The assessee-company is a limited liability company with a paid up capital of ₹ 15,25,000 as on the 30th of June, 1947. For the assessment year 1948-49 for which the relevant previous year was the year ended 30th June, 1947, the company was assessed on a total income of ₹ 7,47,639. The tax which was payable on the said income amounted to ₹ 3,27,091. The balance available for distribution, therefore, was ₹ 4,20,548. If section 23A was applicable to the company, it was under an obligation to declare a dividend, which would not be less than 60 per cent. of the said balance and, therefore, to declare a dividend of at least ₹ 2,52,328. The actual dividend, however, which was declared by the company was only ₹ 24,750. The Income-tax Officer with the previous approval of the Inspecting Assistant Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.Whether the loss of ₹ 12,75,000 incurred by the company prior to its reconstruction in 1930, could be taken into consideration for purposes of the applicability of section 23A(1) of the Act? The reference was heard by this court on the 13th of March, 1958. It then answered the first question in the affirmative holding that the Income-tax Officer was competent to pass an order under section 23A(1) of the Act and he was not precluded from doing so by reason of his having granted rebate to the assessee-company. On the second question also it gave its answer in the affirmative holding that the assessee-company was a company in which the public were substantially interested for the purpose of section 23A of the Act. In view of the answer to the said question, the provisions of section 23A would not be applicable to the company and; therefore, the third question, which was, whether the less of ₹ 12,75,000, which the company had suffered prior to its reconstruction, could be taken into consideration for the purposes of applicability of section 23A of the Act, was unnecessary to be considered. This court, therefore, did not answer the third question. When the matter w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the reduction of capital had been necessitated by the losses suffered, the reconstruction of the capital had resulted in wiping out the losses and starting the company afresh with the reduced capital as its paid up share capital. The financial position of the company and its capability to declare dividends in years subsequent to the reconstruction of its capital had, therefore, to be judged from the stage of reconstruction and not from any earlier stage and the losses prior to reconstruction, therefore, did not fall to be considered in judging these matters. In that view of the matter, the Tribunal did not consider the further question as to whether having regard to the said losses it would have been unreasonable for the company to declare a larger dividend. Now, the applicability of section 23A is attracted when it is found that a company in which public are not substantially interested has declared a dividend of less than 60 per cent. of the assessable income of the company as reduced by the amount of income-tax and super-tax payable by the company in respect thereof for any previous year. The section, however, has provided that even when the applicability of the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant to be considered. Now, the view, which has found, favour with the Income-tax Officer and the Tribunal is that losses which have been adjusted against the paid up capital of the company disappear altogether as losses and cease to have any bearing thereafter on the question of the distribution of dividends in subsequent years. In our opinion, this view cannot be said to be the correct view. It is true that as a result of the losses having been adjusted against the paid up capital they no longer remain as unadjusted losses or carried forward losses, but it does not mean that they cease to have their impact on the financial position of the company for the subsequent years. It also does not mean that the company can afford to forget the fact that it had suffered a loss in the earlier years or can afford to ignore it altogether simply because the loss has been adjusted against capital. Even if the company resorts to the method of wiping out the losses by adjusting them against its capital, the method results in crippling its finances and the company in future, years is bound to see that its crippled financial position is improved. If, therefore, a company, which has so got ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them against capital is fortunate to make a profit in the next year, it may be possible for it to distribute the whole of it as dividend amongst its shareholders but can it always be expected to do so and can it be said to be acting unreasonably if it did not distribute the whole of its profits and retained a part of it in view of the losses of the earlier years, which have crippled the strength of its capital ? Its experience of losses in the previous years and its crippled financial position may very reasonably make it disinclined to part away with all its profits. In our opinion, therefore, it is not possible to accept the view taken by the Tribunal that the losses incurred prior to reconstruction are irrelevant for the purpose of the application of section 23A of the Act in subsequent years. It is also not possible to agree with the Tribunal that once a company has reconstructed its capital, a new chapter begins in the life of the company so that for judging its financial position and its ability to declare, dividends in years subsequent to the reconstruction, no regard need be paid at all to its original capital and the matter should be judged solely with reference to the red ..... X X X X Extracts X X X X X X X X Extracts X X X X
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