TMI Blog1965 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.--- This appeal by certificate raises the question of the construction of the provisions of section 23A of the Indian Income-tax Act, 1922, hereinafter called the Act, before it was amended by the Finance Act, 1955. The relevant and undisputed facts may be briefly stated. Messrs. Gangadhar Banerjee Co. (Private) Ltd., the respondent herein, is a private limited company. At the general body meeting of the company held on December 6, 1948, the directors declared a dividend at the rate of 5 1/2 per cent. per share. The said distribution of dividends related to the accounting year 1947-48 which ended on April 13, 1948. According to the balance-sheet of the company for that year the net profit for the said year was Rs. 1,28,112-7-5. The taxation 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such distribution was not unreasonable. The Tribunal referred the following question under section 66(1) of the Act for the decision of the High Court of Calcutta : " Whether on the facts and in the circumstances of the case any larger dividend than that declared by the company could reasonably be distributed within the meaning of section 23A of the Indian Income-tax Act and the application of section 23A of the Indian Income-tax Act was in accordance with law ? " The High Court held that the Tribunal went wrong in taking into consideration the past profits instead of the past losses, the taxation reserves without consideration of the past liabilities for taxation, and the profits for the year in question disclosed in the balance-sheet, ignoring the actual tax assessed for that year. It came to the conclusion that, having regard to the smallness 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 fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income." The section is in three parts : the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression " having regard to " that precedes the said words. On the interpretation of the words " having regard to " in section 23A of the Act, the decision of a Division Bench of the Bombay High Court, consisting of Chagla C. J. and Tendolkar J. in Sir Kasturchand Ltd. v. Commissioner of 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 actually incurred by the assessee ; and in computing his income, he may include many items on notional basis. But the commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles. Therefore, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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