TMI Blog1975 (6) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... e available distributable surplus the dividend declared was adequate. The Income-tax Officer, however, held that the existence of past losses could not be substantiated as they were neither considered in the profit and loss account filed in the assessment made. As according to the Income-tax Officer tax liabilities were neither ascertained nor admitted by the assessee, argument in that behalf was not tenable. He further observed that the net profit shown by the assessee in the return after making various adjustments was Rs. 14,77,737 and even from the point of view of the returned profit the dividend distributed would fall short of the statutory percentage as the tax payable thereon would be Rs. 6,64,970 and there would be a surplus of Rs. 8,12,767. In these circumstances, he did not accept the plea of the assessee and levied additional super-tax at 37% amounting to Rs. 1,79,458. Being aggrieved by the order of the Income-tax Officer the assessee appealed therefrom to the Appellate Assistant Commissioner. It was urged before the Appellate Assistant Commissioner that on appeal in regard to the quantum of assessment there was a reduction and the assessed profit was Rs. 15,49,323 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount books would also have to be taken into account. He further observed that if the brokerage and commission was treated as a part and parcel of commercial profits, the company would be left with a huge surplus and had commercial profits to declare a larger dividend than declared. The Appellate Assistant Commissioner, therefore, confirmed the action of the Income-tax Officer. The Appellate Assistant Commissioner in his order observed that : " Now, coming back to the appellant's case, it has been established beyond doubt that the company has deliberately claimed fictitious payments of brokerage and commission and thus artificially reduced its income. This income has gone out of the account books and is not reflected in the balance-sheets at all. If the appellant's counsel claims that the outstanding taxes relating to the years 1944-45 to 1954-55 have to be taken into account in ascertaining the commercial profits, the brokerage and commission fictitiously taken out of the account books will also have to be taken into account. If the brokerage and commission is treated as a part of the commercial profits, the company would be left with a huge surplus available with it for the decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a prudent businessman, and proceeded to consider the financial aspect as well as the liability of the assessee. It noticed from the balance-sheet for the year under consideration that for the first time in the relevant year of account, a general reserve of Rs. 5 lakhs was created out of the distributable profit and observed that such an appropriation to the general reserve indicated sound stability of the company. It further observed that the auditors of the company did not advise for making a provision for earlier income-tax liability but referred to it by way of a note under the head " contingent liability ". The Tribunal also observed that the profit without making any provision for taxation of the year was Rs. 14,84,951 and if earlier income-tax liability as well as liability of the year was taken together, it totalled to Rs. 14,40,285 leaving nil amount for making any dividend in the year. The Tribunal further noticed that for the year ending December 31, 1958 (relevant to the assessment year 1959-60) the assessee declared a dividend of Rs. 60,500 when commercial profit was Rs. 51,399 and provision for taxation for that year was Rs. 72,000. In these circumstances the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfied with the decision of the Tribunal, asked for a reference to this court and the question in controversy has been referred in the following terms : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the outstanding income-tax liability could not be considered as an item of liability and that the order under section 23A was rightly passed ? " As in this reference we are concerned with section 23A of the Indian Income-tax Act, 1922, the relevant part of that section, as it stood at the relevant time, may be set out : " 23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by-- (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section ; (b) the amount of any other tax levied under any law for the time being in force on the company by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also not relevant. Learned counsel has also contended that for the purpose of arriving at the commercial profit of the year in question fictitious payments disallowed by the Income-tax Officer in the past years cannot be taken into account and only commercial profits of a particular year are to be taken into account for the purpose of section 23A. Learned counsel has also submitted that in determining the reasonableness of the amount available for the purpose of distribution of dividend the test is to consider the smallness of the profit made during the previous year relevant to the assessment year in question. Even if there is accumulated profit of the past years that cannot be considered as profit made in the assessment year in question ; such profit cannot be taken into account for the purpose of determining the reasonableness of the amount available for distribution of dividend under section 23A. To do so, learned counsel has submitted, would be to rewrite the section and to obliterate the expression " made in the previous year " contained therein. It is the submission of the counsel that even if it is permissible to consider the profits of the past years for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of shifting of this burden on the assessee. With regard to the frame of the question learned counsel for the assessee has submitted that in the instant case the Tribunal has not given any finding that the amount representing the fictitious payment was available to the company at the relevant time and, therefore, there could not be any question of challenging any such finding of the Tribunal as perverse. Learned counsel has submitted that the question as to what was the profit available for distribution was raised by the Appellate Assistant Commissioner and the Tribunal. But, according to the learned counsel, the question referred is whether the order under section 23A was rightly passed in this case and this, according to the counsel, is wide enough to embrace within its fold the question as to what are the correct legal tests to be applied for determining the profits available for distribution of dividend for the purpose of section 23A. According to the counsel this aspect of the question was not only agitated by the revenue authorities but is also included in the question referred. Counsel for the assessee in support of his contentions has relied upon the various decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able profits, counsel has submitted, float from year to year and, therefore, it can be said that earlier year's profit can be taken into account in determining the subsequent year's profit. Learned counsel has submitted that when the Supreme Court says that for determining the reasonableness or unreasonableness of the amount distributed availability of the surplus is a relevant factor to be considered, it means that the profits of the earlier years which are available for dividend in a subsequent year can also be taken into account. Learned counsel has further submitted that section 23A expressly mentions about the tax liability of the year in question and not of the earlier years. Distinguishing the decision of the Supreme Court in the case of Gobald Motor Service Pvt. Ltd. v. Commissioner of Income-tax [1966] 60 ITR 417 relied upon by the assessee, learned counsel submitted that in the instant case no argument was made before the Tribunal as to the availability of the surplus money on the date of distribution of dividend and, therefore, that point cannot be agitated at this stage. Relying on the case of Commissioner of Income-tax v. Jubilee Mills Ltd. [1968] 68 ITR 630 (SC), lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e composed partly of the accounting profits and partly of notional income, coming in either as disallowed items of expenditure or as income computed on some artificial basis. The evil which the section aims at checking is unreasonable withholding of profits from distribution as dividend in spite of money for distribution being available. Obviously, notional income cannot be distributed and, therefore, in judging the reasonableness or otherwise of a company's action in distributing dividend at the rate at which it actually made the distribution or in making no distribution at all, one must pay regard only to the money that was actually at the disposal of the company and not money of which it might be deemed to be possessed. " In the case of Commissioner of Income-tax v. Bipinchandra Maganlal Co. Ltd. [1961] 41 ITR 290 (SC), the facts were : For the year of account 1946-47, the assessee-company (which was not one in which the public were substantially interested within the meaning of section 23A of the Income-tax Act) disclosed trading profits of Rs. 33,245. As it had realised the sum of Rs. 15,608 in that year by the sale of machinery in excess of its written down value, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of each case ....... The expression ' smallness of profit ' came under the judicial scrutiny of this court in Commissioner of Income-tax v. Bipinchandra Maganlal Co. Ltd. [1961] 41 ITR 290 (SC). Therein, Shah J., speaking for the court, observed thus : ' Smallness of the profit in section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional. This view appears to have been taken by the High Courts in India without any dissentient opinion. ' The learned judge laid down the following test : ' Whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profits of the year in question.' If the assessable income was the test and if the commercial profits are small, the learned judge pointed out, the company would have to fall back either upon its reserves or upon its capital which in law it could not do. This decision is binding on us and no further citation in this regard is called for. These two concepts, ' accounting profits ' and ' assessable profits ', are distinct. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of ascertaining its commercial profits available for distribution relying on the principles enunciated in Gangadhar Banerjee's case [1965] 57 ITR 176, the Supreme Court held that the two items were rightly added to the book profits in order to arrive at the true commercial or accounting profits of the appellant-company. Reliance was also placed on the Madras High Court decision in Gobald Motor's case [1963] 47 ITR 825. As the decision of the Madras High Court was affirmed by the Supreme Court in Gobald Motor Service P. Ltd. v. Commissioner of Income-tax [1966] 60 ITR 417, we do not feel it necessary to deal with the said decision of the Madras High Court. In view of the various decisions of the Supreme Court on the subject, in our view it is not necessary to deal with the case of Gobald Motor Service P. Ltd. v. Commissioner of Income-tax [1963] 47 ITR 734 (Mad) and Bipinchandra Maganlal Co. Ltd. v. Commissioner of Income-tax [1955] 28 ITR 1 (Bom). In the case of Srinivas Banking Co. Ltd. v. Commissioner of Income-tax [1965] 58 ITR 89, 92, 93 (Cal) the Calcutta High Court, while dealing with a case under section 23A, after considering the relevant decisions on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst and many other business and commercial considerations : vide the judgment of P. B. Mukharji J. (sitting with Niyogi J.) in I.T.R. No. 85 of 1956 (Gangadhar Banerjee Co. v. Commissioner of Income-tax at page 9). (5). There is no abstract conception of ' reasonableness ' and each case must depend on its own facts : Thomas Fattorini (Lancashire) Ltd. v. Commissioners of Inland Revenue [1943] 11 ITR (Suppl) 50 (HL). (6) All considerations which ordinary commercial men take into account are relevant to determine whether it is unreasonable to declare a dividend : vide the decision of the Privy Council in Commissioner of Income-tax v. Williamson Diamonds Ltd. [1959] 35 ITR 290, 297, 298 and Income-tax Reference No. 85 of 1956, ibid. at pages 9 and 10. (7) The crucial test appears to be whether the assessee could have produced sums out of which it could declare a dividend without jeopardising the interests of the company. The tax authorities must show that it was commercially possible for the company to distribute as dividend a reasonable part of its actual income : vide Thomas Fattorini's case. " [1943] 11 ITR (Suppl) 50 (HL). In the case of Universal Bank of India Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in that case considered the question of payment of dividend out of the profits of the three years. That is, however, not the case here. Therefore, in our view that case is not of any assistance to the assessees. In the case of Central Calcutta Investment (P.) Ltd. v. Commissioner of Income-tax [1971] 82 ITR 480 (Cal) when dealing with section 23A of the Indian Income-tax Act, 1922, the Calcutta High Court, relying on the principles enunciated in Gangadhar Banerjee's case [1965] 57 ITR 176 (SC), has held that tax liability outstanding from previous years must be taken into account in determining the availability of surplus money for purposes of declaring dividends under section 23A of the Indian Income-tax Act, 1922. In the case of Commissioner of Income-tax v. Jubilee Mills Ltd. [1968] 68 ITR 630 (SC) facts were : " The respondent, which was held to be a company in which members of the public were not substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922, had suffered large losses prior to 1930. In 1930, a debit balance of Rs. 12,75,000 in its profit and loss account was adjusted by reducing the paid-up capital. For the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve which in course of time would enable the company to regain its original strength of capital which had been crippled by the adjustment of losses at the time of reconstruction. According to the Supreme Court, the Appellate Tribunal misdirected itself in law in holding that the losses incurred prior to the reconstruction of the respondent-company were irrelevant for the purpose of the application of section 23A of the Act in subsequent years." In the case of Commissioner of Income-tax v. R. N. Bagchi Bros. [1969] 72 ITR 645 (Pat), the assessee, a private limited company, was engaged in the business of coal mining. In the assessment year 1958-59, the total income of the assessee was determined at Rs. 42,810. The company had returned an income of Rs. 34,790 only. It had declared a dividend of Rs. 1,701 which the Income-tax Officer held was below the statutory limit of 45% under section 23A of the Act as it stood at the relevant time. Calculating on the basis of statutory percentage of 45% the Income-tax Officer held that the assessee-company ought to have declared a dividend of Rs. 9,418. Under section 23A of the Act, an opportunity was given to the assessee to declare divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for fulfilment of the primary condition, the Income-tax Officer will have to take into account the tax demand of the particular year and after deducting the demand from the income assessed, he will have to determine whether the dividend declared falls short of the statutory percentage. That being so, it is manifest that the tax demand for any particular year is expected to be paid out of the profits of that particular year and in no sense is to be included in the Amount of dividend declared for that year. It may well be that in some exceptional cases the payment of the outstanding demand of tax in respect of earlier years will be relevant if it can be shown by the assessee-company that due to some exceptional circumstances the tax demand for the earlier year had to be met out of the profits of the year in question in respect of which an order under section 23A was proposed to be passed." In the case of Commissioner of Income-tax v. Uttam Singh Duggal Co. P. Ltd. [1974] 94 ITR 486, 494, the Delhi High Court, while considering section 23A of the Indian Income-tax Act, 1922, observed that : "Although dividends may not be paid out of capital yet nothing would prevent a prudent b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59] 35 ITR 290, 296 ; [1958] AC 41 (PC), the Judicial Committee had to consider the scope of section 21(1) of the Tanganyika Income-tax (Consolidation) Ordinance (27 of 1950) which was in pari materia with section 23A of the Indian Income-tax Act, 1922. The Judicial Committee held that it was impossible for the Commissioner to arrive at a conclusion as to reasonableness by considering the two matters mentioned in section 21--" losses previously incurred " and " smallness of the profits "--isolated from other relevant factors ; the Ordinance did not say " having regard only " to those matters. The Ordinance required all matters relevant to the question of unreasonableness to be considered, and capital losses, if established, would be one of them. The Judicial Committee observed that--See [1959] 35 ITR 290, 296 (PC) : " It was argued that some losses were established and that, therefore, it was for the commissioner to find out for himself whether there had been compensating gains. Their Lordships do not think that there is anything in the language of the Ordinance which casts any such duty upon the commissioner. It would, moreover, be in the generality of cases, a task, which a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld only mean profits earned by a company and not distributed as dividend to the shareholders, but kept back for any future purposes. Profits lying unutilised do not constitute a " reserve " within the meaning of the proviso to section 23A(1). In the case of Commissioner of Income-tax v. Hind Lamps Ltd. [1973] 90 ITR 487, the Allahabad High Court while dealing with the question of computation of the capital base of the assessee-company under the Super Profits Tax Act, 1963, relying on the rule laid down in the case of Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), observed that to constitute a " reserve ", the amount must be specifically kept apart for future use or for a specific occasion. In the case of Indian Steel Wire Products Ltd. v. Commissioner of Income-tax [1955] 27 ITR 436 (Cal), it was held that if the surplus was simply carried forward without the persons in requisite authority allocating it to particular periods, it did not acquire the character of reserve for the purpose of capital computation of the Business Profits Tax Act. In the case of Commissioner of Income-tax V. Girdhardas Co. (Pvt.) Ltd. [1967] 63 ITR 300, 303, the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one arising out of its order. (3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order. (4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it. Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order." In the case of T. D. Kumar Brothers (P.) Ltd. v. Commissioner of Income-tax [1967] 63 ITR 67 the Supreme Court following its earlier decision in Scindia Steam Navigation Company's case [1961] 42 ITR 589 (SC) has held that it is only a question that has been raised before and decided by the Tribunal that can be held to arise out of its order. In respect of a question which was not raised or argued before the Tribunal, or decided by it, a reference under section 66(2) cannot be asked for. From the various decisions of the Supreme Court noted earlier it appears that the principles applicable to cases under section 23A of the Indian Income-tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the question is whether the revenue authorities were justified in taking that amount into consideration in deciding the question of the application of section 23A in the instant case. Relying on the observation of the Supreme Court in Bipinchandra Maganlal's case [1961] 41 ITR 290, to the effect : " That the test of 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 "--it was urged by the assessee that since the disallowed items of fictitious payment did not form part of the profit of the relevant previous year they should not be taken into consideration for deciding the commercial or accounting profit for the purpose of section 23A. On the other hand, the submission of the revenue is that the sums disallowed as fictitious payments are, secret profits of the assessee and, therefore, they should be taken into account, in view of the decision of the Supreme Court in Gobald Motor's case [1966] 60 ITR 417, but there the commercial income of the assessment year in question was taken into conideration for the purpose of determining the commercial profit of the assessee under section 23A of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arrears of tax liability for those earlier years, assuming for the time being that Rs. 13,68,000 can be taken into account in the relevant assessment year for the purpose of section 23A of the Act. The Tribunal has taken into consideration the assessee's balance-sheet ending on December 31, 1959, and the correctness of this balance-sheet has not been questioned by the revenue at any stage of the proceedings. It appears from the balance-sheet that there was a cash balance of Rs. 85,786.08 on December 31, 1958, and, therefore, it cannot be said that Rs. 13,68,000 was in the till of the assessee on January 1, 1959. Further, there is no material on the record to show that Rs. 13,68,000 was still available to the assessee in the relevant assessment year, nor is there any such finding by the Tribunal. Therefore, Rs. 13,68,000 cannot, in any event, be taken into consideration, and even if Rs. 85,786.08 is taken into consideration the contention of the revenue must fail, because the arrears of tax liabilities far exceeded that amount. That apart, every company normally distributes the surplus out of the commercial profit of the current year in question and to determine its reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in question is the decision of the Supreme Court in Gangadhar Banerjee's case [1965] 57 ITR 176 at page 181 of the report. The law laid down in that case was reiterated by the Supreme Court in Commissioner of Income-tax v. Asiatic Textiles Ltd. [1971] 82 ITR 816, and at page 819 of the report, the Supreme Court said as follows : " Whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. The Income-tax Officer can step in under section 23A(1) only if the directors unjustifiably refrain from declaring dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-director. " And at page 820 of the report, the Supreme Court says this : " The directors of a company will be justified in taking things as they stand and not befool themselves in the wild hope that the value of the shares may come up again. They are expected to act as hard-headed businessmen. They are not expected to gamble with the future of the concern. The question is not whether the value of the shares may not go up in future but whether the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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