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TMI Blog1979 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... on came to Rs. 2,53,407. In respect of the year in question, the assessee-company had declared a total dividend of Rs. 67,200. The ITO took the view that the amount declared as dividend being less than the statutory percentage of 65% of the distributable surplus which, according to the ITO, came to Rs. 3,26,172, and according to the assessee, came to Rs. 1,74,396, made an order under s. 23A(1) of the Indian I.T. Act, 1922, levying additional super-tax on the undistributed balance of Rs. 2,21,963. This order was confirmed by the AAC of Income-tax while dismissing the appeal filed by the assessee-company. The assessee-company, therefore, preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal first directed its attention to the question as to whether the primary condition for taking action under s. 23A was satisfied, the condition being that the assessee should have declared as dividend an amount less than the prescribed percentage of the amount of difference between the total income assessed and the tax payable thereon. The Tribunal then directed its attention to the question as to whether it would be unreasonable for the company to declare the balance of Rs. 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me being in force by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income. But it must be remembered that this is not the only condition which is required to be satisfied and merely because an amount lesser than the statutory percentage as contemplated by s. 23A(1) of the Indian I.T. Act, 1922, has been declared as dividend, the ITO cannot as a matter of course proceed to assess the company to super-tax. The ITO has to be further satisfied as provided in cl. (i) that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable. We are not concerned with cls. (ii) and (iii) in s. 23A(1). The provisions of s. 23A(1), are therefore, clear that before the ITO proceeds to assess a company to super-tax, he must apply his mind to the question as to whether the payment of a dividend larger than that declared would be unreasonable having regard to the smallness of the profits made in the previous year. When the ITO decides to take action under s. 23A(1), it is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the section. Would the satisfaction of the Income-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 pictur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh there was a balance of profit of Rs. 93,703, only a sum of Rs. 8,000 was distributed as dividend for the year on the ground that hedging contracts were entered into only to safeguard against future loss and there was loss of more than that amount in the exports in the next year, before the date of declaration of dividend. The income-tax authorities, taking the view that only two matters had to be considered in making an order under s. 23A, namely, losses of previous years and smallness of profits of the current year, had made an order under section 23A. On a reference, it was held by this court that the reasonableness and unreasonableness has to be judged on taking an overall picture of the financial position of the business and although a profit on hedging transactions bad been made to the extent of Rs. 1,94,116, the company was threatened with an imminent loss in the subsequent year and by the time it came to consider the question of the declaration of the dividend, the threat had materialised into an actuality and it could not be said that the company could be reasonably expected to declare a larger dividend and this court, therefore, held that the orders under s. 23A were n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as to whether the profits of a company were small as contemplated by s. 23A(1). Each case will have to be considered on its own merits and the circumstances as they appear in each case will have to be separately considered in order to find out their relevance for deciding whether the profits were so small that it would become unreasonable to declare a larger dividend. Mr. Colah has also referred to a decision of the Allahabad High Court in CIT v. Jananamandal Ltd. [1977] 106 ITR 976. The Allahabad High Court has in that case taken the view that a consideration of the nature and purpose of the object for which the assessee proposes to utilise its profits would be very material and there was no reason why such expenses as had to be incurred by the company in the near future could not be taken into account in considering whether it was reasonable for it to declare a dividend from out of its profits. Such being the legal position, it is apparent that the income-tax authorities and the Tribunal have failed to take into account the immediate requirements of the company and it is obvious to us that having regard to the liabilities which the assessee would be required to meet almost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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