Patna High Court
Jamshedpur Engineering & Machine ... vs Commissioner Of Income-Tax on 19 July, 1973
Equivalent citations: [1975]98ITR33(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT Untwalia, C.J.
1. The Income-tax Appellate Tribunal, Patna Bench, as per direction of this court, has referred these cases under Section 66(2) of the Indian Income-tax Act, 1922, hereinafter called the Act, on the following question of law which is common in both the cases ;
"Whether, on the facts and in the circumstances Of the case, any dividend could reasonably be distributed within the meaning of Section 23A of the Indian Income-tax Act, 1922, and the application of the said section was in accordance with law ?"
2. For the assessment year 1956-57, the corresponding accounting year of which is 1955-56, the assessee-company returned an income of Rs. 94,602. This income was accepted and total taxes amounting to Rs. 41,093 were imposed. After the payment of taxes, according to the income returned and assessed, a surplus of Rs. 53,509 remained in the hands of the company for declaring and distribution of dividend. No dividend at all was declared by the company. Similarly, in respect of the assessment year 1957-58, the company returned an income of Rs. 32,900. The Income-tax Officer assessed it at Rs. 35,873. The amount of tax levied was Rs. 18,475.
The surplus in the hands of the company in relation to the assessment year was to the tune of Rs. 17,398. The company did not declare any dividend and distribute any portion of the surplus income in its hands. The Income-tax Officer initiated proceedings against the assessee-company under Section 23A of the Act as it stood at the relevant time. Cause was shown on behalf the company, and not finding any substance in the stand taken on its behalf the Income-tax Officer has charged additional super-tax at the rate of 37 per cent, on a sum of Rs. 33,509, in relation to the assessment year 1956-57 and 30 per cent, which was later corrected by correction order to 37 per cent, on a sum of Rs. 17,398, in respect of the assessment year 1957-58.
3. The company filed two appeals from the two orders in respect of the two periods. Both the appeals were dismissed by the Appellate Assistant Commissioner. Two further appeals were taken by the assessee-company before the Income-tax Appellate Tribunal and both the appeals were dismissed. On being asked to make references to this court the Tribunal refused the prayer of the company. It came to this court under Section 66(2) of the Act and references were called for on the common question of law as stated earlier.
4. The principles for attraction of the provision of Section 23A are well settled by several decisions of various courts. In Commissioner of Income-tax v. Williamson Diamonds Ltd., the Privy Council pointed out that the Income-tax Officer has to judge the question of payment of a dividend or a larger dividend not only taking into consideration the losses incurred by the company in the earlier years and/or to the smallness of the profits made in the previous year but also other relevant facts and circumstances. This decision has been followed and the principles laid down by the Privy Council have been approved by the Supreme Court in several decisions; mention may be made of only two--Commissioner of Income-tax v. Gangadhar Banerjee & Co. and Commissioner of Income-tax v. Asiatic Textiles Ltd. The hon'ble judges of the Supreme Court in the two decisions just referred to have pointed out that the Income-tax Officer has to view the various aspects of the matter not with an angle of a tax collector but with a vision of a prudent businessman. It has further been pointed out that the Income-tax Officer has to place himself in the position of the directors of the company and not act as a super director. The phrase "smallness of the profits "occurring in Sub-clause (i) of the later part of Sub-section (1) of Section 23A has been interpreted to mean the smallness of commercial profits and not the assessed income. It is a matter of common knowledge that the assessed income is ordinarily and generally different from the commercial profits earned by an undertaking. The figure of the assessable income is arrived at by adding certain notional incomes and by disallowing certain actual expenditure incurred by the asscssee. It would be noticed from the two Supreme Court decisions referred to above as also from certain decisions of the High Courts including ours, that ordinarily and generally the profits which are deducible from the profit nnd loss account of a company have been taken to be the commercial profits until and unless it is shown that the figures deducible from the profit and loss account have been arrived at by making fictitious entries either on the creditor debit side of the profit and loss account. It will be useful to refer in this connection to four decisions of the High Courts--Commissioner of Income-tax v. Universal Bank of India Lid., Universal Bank of India Ltd. v. Commissioner of Income-tax, two Patna decisions; Srinivas Banking Co. Ltd. v. Commissioner of Income-tax, a decision of the Calcutta High Court; and Commissioner of Income-tax v. Avon Cycles Private Ltd., a judgment of the Punjab High Court. In the instant case, although it would appear from the records that in the profit and loss account the asstssee-company had debited larger sums on account of depreciation than the ones which wer permissible under the law, the order against the company under Section 23 A does not rest on this ground. I shall, therefore, leave it out of consideration. From the order of the Tribunal as also from the copies of the balance-sheet attached as annexures to the statement of the case it would appear that the paid up capital of the company was Rs. 2,50,000. On vaiious accounts the total sum of money which the company had in reserve was Rs. 2,01,863. For the accounting year, the corresponding assessment year of which is 1956-57, the net profit was Rs. 29,635. This was after deducting a sum of Rs. 45,000 in the profit and loss account on account of reserve for taxation. The total commercial profit, therefore, rightly taken into account by the Tribunal was Rs. 74,635. The company had to pay about Rs. 41,000 as tax out of the said sum of Rs. 74,000, thus leaving a balance of Rs. 33,000 in its hands. Even according to the figure of commercial profits available for payment of dividend it did not declare and pay any dividend at all. On the facts and in the circumstances of this case, having regard to the commercial profits made in the relevant year and there being no loss in the, year before that and taking into consideration the financial positions of the company as discussed by tne Tribunal in its order there was no reason as to why dividends ought not to have been paid out of the surplus money in the hands of the company. Although it is not necessary to specifically find under the law, inference could be drawn that the directors of the company, in which the public were not substantially interested as it was a private limited company, did not declare any dividend to escape assessment of tax in the hands of the shareholders. It was exactly for this reason that Section 23A was introduced in the Act. Mr. R. S. Chatterji, learned counsel for the assessee-company, was not right in his submission that the commercial profits was Rs. 29,635 only and not Rs. 74,635, as mentioned in the appellate order of the Tribunal.
5. In the accounting year corresponding to the assessment year 1957-58 the position of commercial profit apparent on the profit and loss account is not very clearly mentioned in the balance-sheet appended to the statement of the case. Nonetheless, sufficient items of figures were there from which the figure of Rs. 25,041 mentioned in the order of the Tribunal could be found out. It may be stated here that Sri R. S. Chatterji did not contest the correctness of this figure mentioned in the order of the Tribunal. The remainder of the profit and loss account in the accounting year corresponding to the assessment year 1956-57 was Rs. 1,40,026. The remainder at the end of the accounting year corresponding to the assessment year 1957-58 was Rs. 1,49,067. Thus the net balance in the profit and loss account of this year was Rs. 9,041 as would appear from the figure and remainder of profit and loss account mentioned in the balance-sheet of that year. This figure was arrived at after deducting a sum of Rs. 16,000 on account of tax reserve. Thus the total commercial profit of this year was Rs. 25,041. The company had to pay about Rs. 18,000 as tax and yet Rs. 7,000 even on this basis was available to the company for payment of dividend. The company did not pay any dividend at all.
6. Learned counsel for the assessee-company submitted that there was smallness of commercial profit and, therefore, additional super-tax under Section 23A of the Act ought not to have been imposed. On the facts and in the circumstances of the case, no error was committed, much less an error of law either by the departmental authorities or by the Income-tax Appellate Tribunal in repelling such a contention. Learned counsel then submitted that there were heavy losses in the subsequent years. This fact is not found mentioned in the appellate order of the Tribunal or in any of the orders of the departmental authorities. Heavy losses were mentioned for the subsequent years in the application filed by the assessee-company. They could not be taken into account. It has to be emphasised that under Section 23A for deciding the question of the reasonableness of the assessee's action in relation to the payment of dividend the question of losses in, the subsequent period is not relevant.
7. Learned counsel further submitted that there were many types of business expenditure, there were heavy loans on the company and replacement of the machineries were necessary. The Tribunal has referred to the sound financial position of the company even with reference to heavy loans.
It is pointed out that annual interest were being credited in the accounts of the creditors. No payment was ever made. They were, therefore, long-term loans and to all intents and purposes would be treated as the capital of the company. No expenditure was made in the two years in question except in regard to a minor portion. There were no such business expenditure claimed to have been made by the assessee in any of the two years which could justify the taking of the view that the company was not unreasonable in not paying any dividend in either of the two years. The point as to the intention of the directors to replace new machineries by new ones was taken at the time of reference and was rightly not entertained by the Tribunal, The Tribunal has pointed out in its order that more than 50 per cent, of the cost of the machinery accumulated by way of depreciation has also been invested in the business. The capital employed (leaving the loan capital) is Rs. 5,28,310 as on March 31, 1957, against fixed assets of Rs 8,20,202. From these figures it was inferred that the company was in a position to replace its machinery and pay off this long-term loan and yet even from a sound business point of view was in a position to release a portion of its income as dividend.
8. It was faintly argued by the learned counsel for the assessee that additional super-tax ought not to have been imposed on the balance of the income as assessed. Under the statute, super-tax has to be imposed at a specified rate on the balance of the income which remains after deducting the taxes from the assessed income and not after deducting the tax from the commercial profit as was argued on behalf of the assessee.
9. For the reasons stated above, the question of law must be answered in the affirmative in both the cases against the assessee-company and in favour of the Commissioner of Income-tax. It is held that, on the facts and in the circumstances of the case, dividend could reasonably be distributed within the meaning of Section 23A of the Indian Income-tax Act, 1922, and the provisions of the said section were rightly applied in law in the case of the assessee for both the years. The Commissioner must have the costs of these references. One consolidated hearing fee is assessed at Rs. 100 only.
S.K. Jha, J.
10. I agree.