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TMI Blog1965 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve was Rs. 56,000. The profit left was Rs. 72,000. The directors declared a dividend at the rate of 5 1/2 per cent. per share thus making a total distribution of Rs. 44,000. On that basis the profit that was available for further distribution was Rs. 28,000. Though under the balance-sheet the estimated tax was Rs. 66,000, the tax assessed for the year was Rs. 79,400. If the difference between the tax assessed and the estimated tax was also deducted from the profits, there would only be a sum of Rs. 4,000 that would remain as undistributed profits. The Income-tax Officer assessed the total income of the assessee for the year 1948-49 at Rs. 2,66,766. After deducting the tax payable under the two heads, namely, I. T. of Rs. 81,517-13-0 and C. T. of Rs. 33,345-12-0, he held that a sum of Rs. 1,51,902-7-0 was available for distribution to the shareholders as dividends. As the amount distributed by the company was below 60 per cent. of the profits available for distribution, the Income-tax Officer, with the previous approval of the Inspecting Assistant Commissioner of Income-tax, passed an order under section 23A of the Act directing that the amount of Rs. 1,07,902 (i.e. Rs. 1,51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the profits, the order of the Income-tax Officer was not justified. In the result, it answered both parts of the question referred to it in the negative. Hence, the appeal. Learned Attorney-General, appearing for the revenue, contended that the balance-sheet of a company on the basis of which dividends were declared was final and the profits disclosed thereunder would be the correct basis for the Income-tax Officer acting under section 23A of the Act ; and, as the balance-sheet of the company for the relevant year showed a sum of Rs. 1,05,950 as " capital reserve brought forward ", a sum of Rs. 5,73,161 as taxation reserve, and a sum of Rs. 56,000 as estimated tax, the Income-tax Officer rightly held that the financial condition of the company was sufficiently sound to warrant an order under section 23A of the Act. Alternatively he contended that if the respondent could be permitted to go behind the balance-sheet to ascertain the real profit, the department should also be likewise allowed to go behind the balance-sheet to show that the commercial profit was larger and the reserves were in excess of the past liabilities and that in that event to remand the case for ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first part defines the scope of the jurisdiction of the Income-tax Officer to act under section 23A of the Act ; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder ; and the third part provides for the assessment of the statutory dividends in the hands of the shareholders. This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax was relied upon by the appellant. Chagla C.J., speaking for the court, held in that case that " the reasonableness or unreasonableness of the payment of a dividend or a larger dividend has to be judged only with reference to the two factors mentioned in the section, viz., losses incurred by the company in earlier years or the smallness of the profit ". To put the contrary construction, the learned Chief Justice said, would be to import into it words which the legislature did not think fit to insert in that section and to expand the ambit of the discretion exercised by the Income-tax Officer. But the learned Chief Justice did not expressly consider the scope of the expression " having regard to " found in the section. The Judicial Committee in Commissioner of Income Tax v. Williamson Diamonds Ltd., had to consider the scope of section 21(1) of the Tanganyika Income-tax (Consolidation) Ordinance (27 of 1950) which was pari materia with section 23A of the Act. Adverting to the argument based upon the words " having regard to ", their Lordships observed : " The form of words used no doubt lends itself to the suggestion that regard should be paid only to the two matters men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he words " smallness of profit " in the section refer to actual accounting profits in comparison with the assessable profits of the year. Another incidental question is whether for the purpose of ascertaining the net commercial profits the tax estimated or the tax actually assessed shall be deducted. In a case where an Income-tax Officer takes action under section 23A of the Act before the tax for the relevant period is assessed, only the estimated tax can be deducted ; but, there is no reason why, when the tax had already been assessed before he takes action under this section, the estimated tax and not the real tax shall be deducted therefrom. In this view in the present case to ascertain the commercial profits what should be deducted is not the tax shown in the balance-sheet but the actual tax assessed on the income of the company. Another question raised is whether the balance-sheet is final and both the parties are precluded from questioning its correctness in any respect. There is no provision in the Income-tax Act which makes the balance-sheet final for the purpose of section 23A of the Act or even for the assessment. It no doubt affords a prima facie proof of the financ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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