TMI Blog1989 (5) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... n Income-tax Act, 1922, was clearly applicable in this case. The assessee explained that the facts of the case did not warrant a larger distribution. It was claimed G that there was a huge loan payable by the company, that the cash and bank balances were poor and that there was no sufficient liquid fund after meeting the cost of new construction. This explanation was not accepted by the Income-tax Officer and so he passed an order under section 23A directing the assessee to pay super-tax at 50% on the balance surplus of Rs. 38,429, H i.e., Rs. 19,214.50. On appeal, the Appellate Assistant Commissioner upheld the conclusion of the Income-tax Officer as he was of the opinion that the conditions required for avoidance of an order under section 23A(1) are the smallness of profits and losses of earlier years which did not exist in this case. He, therefore, held that this was a fit case for invoking the provisions of section 23A(1) of the Indian Income-tax Act, 1922. On second appeal, the Tribunal held that it was not possible, for the assessee to declare a larger dividend in view of the available commercial profits in the light of the decision of this court in the case of Aviquipo o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of this case, held as follows: "We have considered the facts of the case and are of the opinion that a larger dividend ought to have been declared on a consideration of the assessee's position of share capital, reserves and commercial profits as noted above. It may be seen that the difference between the returned income and the assessed income for the year under consideration was Rs. 7,000 only. Therefore, the assessed income could be said to be commercial profits of the assessee. On a consideration of the assessee's position of share capital, reserves, tax payment, refund of tax and having regard to the losses incurred by the assessee in the earlier year and in consideration of the assessee's claim of smallness of profit, we hold that a larger dividend should have been declared. As has been held by the Supreme Court in the case of Gangadhar Banerjee [1965] 57 ITR 176, the reasonableness of a payment of dividend or a larger dividend should be determined not only by considering the losses suffered by the company in the earlier year or the smallness of the profit made during the year but having regard to all the facts, circumstances and relevant considerations, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces. In considering whether a larger distribution of dividend would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The Legislature has not provided in section 23A that in considering whether an order directing that the undistributed profits shall be deemed to be distributed, the smallness of the assessable 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. For instance, in the case of companies receiving income from property, even though tax is levied under section 9 of the Act on the bona fide annual value of the property, the actual receipts may be considerably less than the annual value and if the test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Officer depend only on the two circumstances, namely, losses and smallness of profit ? Can he take into consideration other relevant circumstances ? What does the expression 'profit' mean ? Does it mean only the assessable income or does it mean commercial or accounting profits ?If the scope of the section is properly appreciated the answer to the said question would be apparent. The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. As indicated, this court, while remanding the case earlier, gave positive guideline to the Tribunal to adjudge the reasonableness of the amount distributed as dividend. The Tribunal was asked to consider what as a prudent director the Tribunal itself would have declared as dividend taking a cumulative view of the various factors that should go into such decision-making. We have to see whether the Tribunal properly acquitted itself of that task. The deficiency in the distribution itself is not large. The Revenue, however, turned this small shortfall in the distribution as a ground against the assessee ; if the assessee could declare a dividend of Rs. 1,25,000, declaration of a further sum of Rs. 38,429 would make no material impact on its financial resources. But, in our view, that is not a correct approach. We cannot oversimplify the question like that, when the real question is whether there were any constraints which could reasonably lead a prudent director to restrict the distribution to an extent and to lay by the minimum possible and whether this little measure of conservation was a prudential act. So, the question boils down to whether the Tribunal showed commercial pru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to say that it was not impossible for the company to declare a larger dividend but quite another to say that it was prudent to declare a larger dividend. The Tribunal, to our mind, has followed a stark approach, going merely by availability of income for declaration but not the advisability of the declaration of a larger dividend. In this connection, we may usefully refer to the provisions of the new Act of 1961, corresponding to section 23A. What was section 23A under the old Act now is incorporated in the re-enactment as a complement of sections 104 to 109. In this connection, we particularly notice the provisions of section 107A of the new Act. This new provision gives the assessee forum for seeking permission to declare lesser dividend than distributable on the ground of the current requirements for the development of its business. There was no such forum under the repealed Act of 1922. What is notable is the aspect that even the current and future development requirements should be a material consideration in adjudging whether the extent of profit declared as dividend was reasonable or not. In the case before us, the assessee, if assessed under the new Act, could have appl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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