TMI Blog1978 (11) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... of the repairers, the board of directors of the assessee passed a resolution on the 29th January, 1963, whereby the remuneration payable to the repairers was increased to Rs. 85,000 per year. By another resolution, passed in the same meeting, it was decided that the rent payable by the repairers for the shipway would be reduced by Rs. 9,000 per annum but instead of amending the lease, such reduction would be indirectly effected by a grant of Rs. 9,000 per annum to the said repairers, by way of compensatory allowance for repair work. It was decided, in the same meeting, that such enhanced payments aggregating Rs. 94,000 (Rs. 85,000 and Rs. 9,000) per annum would be made to the repairers with retrospective effect from the 25th March, 1960. In consonance with the aforesaid resolution the assessee debited its account in the said assessment year by Rs. 49,469 of which amount Rs. 26,048 was by way of increased annual payment for repairs and the balance Rs. 23,431 was compensatory allowance in lieu of reduction in rent. The ITO held that the liability for payment of the said amount of Rs. 49,479 did not arise or accrue in the year of accounting and, therefore disallowed the same. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year which could be taken into account for the purpose of s. 104 of the Act had to be a net loss and not a loss in respect of any particular item. Accordingly, the Tribunal dismissed the appeal of the assessee. On an application of the assessee under s. 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising out of its aforesaid order : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 49,479 could not be taken into account for purposes of determining the quantum on which the appellant was liable to pay additional super-tax or for purposes of holding that the profits were too small ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the assessee's case did not fall within the purview of section 105(1)(iii) of the Income-tax Act, 1961, was correct ? " At the hearing, Dr. Debi Pal, learned counsel for the assessee, did not press for an answer to question No. 2 as referred and confined his submissions to question No. 1. He contended tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative submission, i.e., in determining the reasonableness of the dividend distributed it is necessary to take into account a future loss or a future expenditure, Dr. Pal cited a number of decisions which are considered hereafter in their chronological order : (a) CIT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176. This decision was cited for the following observations of the Supreme Court. " 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. " (b) Gobald Motor Service (P.) Ltd. v. CIT [1966] 60 ITR 417. In this decision, the Supreme Court quoted the aforesaid passage from its earlier judgment Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176 (SC) and reiterated the propositions therein. (c) New Star Industries Pvt. Ltd. v. CIT [1968] 68 ITR 470 (Bom) : The facts of this case were that the assessee, a company had a distributable surplus of Rs. 93,703 but distributed only Rs. 8,000 as dividend in the relevant assessment year on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held that the said amount of Rs. 60,000 should not be included in the commercial profits of the company for the purpose of determining the amount of dividend to be distributed under s. 23A of the Indian I.T. Act, 1922, as the assessee was justified in creating a reserve against a possible liability for the purpose of s. 23A of the Indian I.T. Act, 1922. (f) CIT v. Ramji Dayawala Sons Pvt. Ltd. [1972] 85 ITR 37. This decision of the Gujarat High Court was cited for the following observations from the judgment of Divan J. : " The losses suffered in subsequent years by themselves are not to be taken into account for the purpose of determining the applicability of section 23 A ; but while judging whether the decision of the company or the board of directors of the company to declare a particular dividend or not to declare any dividend at all was reasonable or not, the fact that loss did occur in subsequent years and to that extent went to justify or to substantiate the reasonableness of the anticipated losses at the time when the decision regarding dividend was taken, would be relevant circumstances and relevant pieces of evidence to be taken into account by the taxation author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture has been incurred and thereafter the other conditions as laid oat in that section have to be considered. In the instant case, the assessee had not been able to establish the first pre-condition, viz., that it had incurred the expenditure and as such there was no scope for application of s. 104(b)(ii)(d) on the basis of an expenditure, not incurred in the relevant accounting year, which had been wrongly claimed by the assessee as a deduction. On the assessee's alternative submission that the said expenditure of Rs. 49,479 though incurred subsequent to the accounting year in question should be taken into account for the purpose of holding that the profits of the assessee were too small for the distribution of a larger dividend. Mr. Sengupta submitted that all that the assessee had been able to establish was that by a resolution of the board of directors passed on the 29th January, 1962, i.e., subsequent to the relevant accounting period, the assessee assumed liability for payment of an extra amount. This by itself did not establish that the profits of the assessee in the relevant accounting period was insufficient for declaration of a higher dividend. The liability for the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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