TMI Blog1976 (4) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ,80,000 as dividend. The Income-tax Officer, therefore, considered that the provisions of section 23A were attracted to this case and he, accordingly, passed an order levying additional super-tax on a sum of Rs. 10,32,622 (Rs. 18,12,622-Rs. 7,80,000) at the rate of 50% resulting in a tax liability of Rs. 5,16,311. The assessee appealed to the Appellate Assistant Commissioner. By the time he came to dispose of the appeal against the order under section 23A, he had already disposed of the appeal against the assessment, as a result of which the total income had been reduced to Rs. 19,51,411. After deducting the taxes and other outgoings, there was a distributable surplus of Rs. 10,52,525. Before him the assessee contended that the statutory percentage of distribution applicable to it was only 65 and not 90 and that, alternatively, looking to its profits in the commercial sense, it could not have declared a larger dividend. If 65% alone had to be distributed, it was enough for it to have declared Rs. 7,03,641.25, and as it had declared Rs. 7,80,000 as dividends, the levy of additional super-tax would not have been attracted. The Appellate Assistant Commissioner rejected the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st March 1976 [Commissioner of Income-tax v. Amalgamations (P.) Ltd. [1977] 108 ITR 895 (Mad) ] in the tax cases mentioned already wherein we have held that the assessee is a company whose business consisted wholly or mainly in the holding of investments. It would, therefore, follow that the statutory percentage applicable to the assessee is 90 and not 65. The second question is, accordingly, answered in the affirmative and in favour of the revenue. The third question does not, in our opinion, require to be answered, as any answer to it could only be of an academic interest. If for instance we uphold the application of section 23A, then the additional super-tax would have to be levied on the distributable balance of the total income minus the tax and other outgoings provided in section 23A(1). The figures in question No. 3 would, in that event, have no relevance. If, on the other hand, we hold that section 23A is not applicable, then the point regarding exclusion of the two amounts in question would not arise. The company would have declared reasonable dividends so as to be out of the operation of the levy of additional super-tax, notwithstanding the correctness or otherwise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the standpoint of the current year's profit and that the action of the company in drawing upon the earlier years' profit so as to make up 200% distribution on the paid up capital of the company would have no relevance to what the statute contemplates being done. The Supreme Court considered the scheme of section 23A and the statutory requirements thereunder in Commissioner of Income-tax v. Bipinchandra Maganlal Co. Ltd. [1961] 41 ITR 290 (SC). That was a case in which the assessee had sold certain assets on which it had obtained depreciation in the relevant income-tax assessments. The difference between the original cost of the said assets and the written-down value was brought to tax by applying the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. The question before the Supreme Court was whether this difference should have been included in the assessee's profit for the purpose of determining whether the payment of a larger dividend than that declared would be unreasonable. The Supreme Court held that by the fiction in section 10(2)(vii), second proviso, what was really not income was, for the purpose of computation of assessable income, made taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three years put together came to Rs. 88,566, the company had sufficient funds to declare dividends. The relevance of the consideration of the earlier years' profit was put in issue before the Patna High Court. At page 538 it was observed as follows: "Section 23 A speaks of two things to be taken into consideration losses incurred by the company in earlier years and the smallness of the profit made. The language is clear. While the period preceding the previous year is mentioned with reference to the losses, no such reference is given with regard to the profit. The distinction maintained by the legislature in respect of the losses and the profit is significant and can only be taken to mean that the extent of profit to be considered in that connection is confined to the previous year and not to any period preceding that. The distribution of dividend, ordinarily in the commercial world, is related to the profit earned during the year ...... The Tribunal could not have brought back the accumulated profits of the two preceding years which had not been distributed either in part or in whole as dividends to the shareholders, to their consideration with a view to finding whether the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " has to be adjudged in the light of the commercial principles and not in the light of the total receipts, actual or fictional, and that "commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles". It was added that the words "smallness of profit" in the section referred to actual accounting profits, in comparison with the assessable profits of the year. We may extract the relevant portion of the provision in order to emphasise that the conclusion arrived at in the decision discussed above is inescapable on a proper construction of its language, which is as follows: " 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 the previous year as reduced by....... the Income-tax Officer shall, unless he is satisfied-- (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid additional super-tax in the earlier years. If the balance had been brought forward in the profit and loss account and if the said brought-forward balance were also taken into account, then it would result in the same amount being taken into consideration for more than one year in the application of section 23A. We do not find any warrant in the statute for any such assumption. The whole scheme of the Income-tax Act is to divert attention on the facts of the relevant year unless as in clause (i) of section 23A(1) in the case of losses the position of the earlier years has also to be considered. We hold, therefore, that the question of reasonableness or unreasonableness of the distribution has to be adjudged by taking into account the current year's profit and not the accumulated profit of the earlier years. In the present case there is no dispute that the current year's profit was only Rs. 7,60,016.30. The provision for taxation has been found to be quite reasonable by the Tribunal. Therefore, there is no need to make any upward adjustment to the commercial profits. As the company had not only declared the whole of the commercial profit of the year, but something more, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the resources of the company. Further, the attempt of the learned counsel for the revenue is to construe the expressions used in the passage as if they are statutory words. The effect of the whole judgment has to be taken and we are of the opinion that the Supreme Court in Gangadhar Banerjee's case [1965] 57 ITR 176 (SC) did not intend to express any opinion contrary to what had been expressed in Bipinchandra Maganlal's case [1961] 41 ITR 290 (SC). The learned counsel for the revenue then submitted that the question of reasonableness or unreasonableness in the matter of distribution of dividends is a question of fact and that, in the present case, the conclusion of the Tribunal holding that the action of the company in the matter of distribution of dividend was not reasonable cannot be interfered with. We consider that this is not a pure question of fact especially in the context of the facts mentioned above. The real question that has been put in issue here is whether the company was obliged to draw on or distribute the earlier year's profits also, so as to demonstrate its reasonableness in the matter of distribution of dividends. This involves consideration of a question of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
