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1963 (5) TMI 71

al. The reference was heard by this court on the 13th of March, 1958, when it answered two out of the three questions and in view of the answer which it had given to the second question, it did not find it necessary to answer the third question. The first question was answered in favour of the department and against the assessee and the second question in favour of the assessee and against the department. The department obtained leave from this court to go to the Supreme Court in appeal and in the said appeal the Supreme Court decided the second question in favour of the department and against the assessee. In view of the answer given by the Supreme Court to the second question, it became necessary to consider and decide the third question, which on the earlier occasion this court had not considered. The Supreme Court, therefore, remanded the reference back to this court 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 applica .....

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against it. All these contentions were negatived by the income-tax authorities and the Tribunal. At the instance of the assessee the Tribunal had then drawn up a statement of the case and referred to this court three questions under section 66(1) of the Income-tax Act. The questions referred to were : "1.Whether, on the facts and in the circumstances of the case, the Income-tax Officer was competent to pass an order under section 23A(1) of the Act after having allowed a rebate of one anna per rupee in the assessment under proviso (a) to paragraph (B) of Part I of the Second Schedule of the Finance Act, 1948? 2.If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee-company is a company in which the public are substantially interested for the purposes of section 23A of the Act? and 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 hold .....

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n the earlier years and was in a sound financial position so as to afford to distribute a larger dividend than what it had distributed. He, therefore, took the view that an order under section 23A could justifiably be passed against the company. When the matter went before the Tribunal, the view taken by the Tribunal was that as a result of the reconstruction of its capital by the company in 1930, a new chapter had begun in the life of the company and the losses, which it had suffered prior to the reconstruction of its capital, were altogether irrelevant to be considered for the purposes of section 23A so far as the subsequent years are concerned. According to the Tribunal, for the purposes of determining the applicability of the provisions of section 23A, it was the reconstructed capital alone and not the original capital that had to be taken into account. Although 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 subs .....

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be distributed and not the assessable income or the assessable profits, which may have no relation to the commercial or accounting profits and which do not form the actual source out of which the dividend could be paid. Just as in considering the smallness of profits, it is the commercial profits, which are required to be taken into consideration, similarly in considering the losses in earlier years the losses which will have to be considered will be such losses as have a bearing on the question of smallness or largeness of the dividend declared in respect of the given accounting year. Consideration of the losses in the earlier years is in the context of the inquiry, namely, whether the company could be regarded as acting reasonably in declaring a smaller dividend and unless the said losses have any bearing or impact on the said inquiry, they would not be 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 yea .....

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the payment of larger super-tax on the distributed dividends. We are not much impressed by this argument of Mr. Joshi. When a company resorts to a method of reconstruction of its capital by adjusting its losses against its paid up capital one of the objects in doing so may be that the losses have been got rid of, it may be possible for the company to give some dividend on the shares of the shareholders in case there is profit in the subsequent years. The mode adopted by it may also make it possible for it to do so because so long as the losses remain unadjusted or not wiped off, a dividend is not possible to be declared. But what is important to see is not whether it would be possible for the company to declare a dividend, but whether it would be unreasonable if it did not declare a dividend. If a company which has wiped out its losses by adjusting 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 lo .....

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