Income Tax Appellate Tribunal - Ahmedabad
Bombay Mineral Supply Co. (P.) Ltd. vs Income-Tax Officer on 22 October, 1991
Equivalent citations: [1992]40ITD99(AHD)
ORDER
R.M. Mehta, Accountant Member
1. These appeals involve a common issue and that is whether the provisions of Section 23A of the Income-tax Act, 1922 (hereinafter referred to as 'the Act') are applicable in law and on facts of the case.
2. The appellant in this case is a Private Limited Company and the asst. years involved are 1958-59, 1959-60 and 1960-61 with the previous year ending on 23-10-1957, 11-11-1958 and 31-10-1959, Samvat Years being 2013 to 2.015. The ITO in these cases initiated proceedings under Section 23A(1) of the Act on the ground that the appellant company had not declared the dividend within the stipulated period. According to the ITO there were distributable profits in each of the asst. years under consideration and the assessee was expected to declare the statutory percentage as dividend. In response to the show-cause notices for the three years under consideration the assessee stated that it had already declared the profits of Rs. 30,000, Rs. 40,000 and Rs. 40,000 referable to each of the asst. years under consideration on 15-6-1961. The further arguments which were advanced were in the direction of contending that the one had to take into account the "commercial profits" and since the company had prior losses it could not declare the dividend within the statutory period. It was also stated that the payment of dividend within the statutory time limit would not have resulted in any benefit to the revenue since the dividends for all the three years were declared on one single date, viz., 15-6-1961 and the two share-holders of the company had been required to pay a much larger amount of tax than they would otherwise have paid. The further submission which was made was that the company wanted to plough back its profits into the business with a view to consolidate and expand the same and which in turn resulted in better profits and larger revenue to the Government in the subsequent asst. years. A plea was also taken that the action under Section 23A(1) of the Act was barred by limitation.
3. The aforesaid arguments were rejected by the ITO on the ground that even after setting of previous losses a surplus remained for purposes of declaring a dividend. He was also of the opinion that one had to examine the position in each asst. year separately and the ultimate benefit to the Revenue in some subsequent assessment was not relevant. He also rejected the explanation vis-a-vis the smallness of profits and the need to plough them back to expand and consolidate the business. The ITO also refused to grant any adjustment in respect of the dividends declared on 15-6-1961 on the ground that the date of declaration viz. 15-6-1961 was beyond the date prescribed by law. In the final analysis the ITO proceeded to levy the additional tax for each of the asst. years under consideration.
4. The levy was upheld by the CIT(A) who at the outset rejected the argument pertaining to the limitation on the ground that there was no time limit prescribed under the 1922 Act although such a limit had been prescribed by the 1961 Act. At this stage we may mention that the specific ground pertaining to limitation taken before the Tribunal was not pressed for our consideration. This aspect of the matter accordingly need not detain us any further and we straightaway reject the relevant ground in all these appeals. On the merits of the case, the CIT(A) in a consolidated order pertaining to assessment years 1958-59 and 1960-61 upheld the levy on the following lines :
With regard to the other objections that the company needed funds, profits were small and there were huge investments for future expansion etc., it may be stated that the appellant company had surplus and sufficient funds. In the assessment year 1956-57, after payment of taxes, the company had surplus funds to the tune of Rs. 44,000, which were undistributed. Similarly, in assessment year 1957-58, the surplus funds after payment of taxes were more than Rs. 43,000. In assessment year 1958-59, the appellant company made profits of Rs. 98,522, and after payment of taxes, the surplus was Rs. 47,786, but no dividends were declared. In assessment year 1959-60 the surplus was as high as Rs. 1,19,000 and in assessment year 1960-61 the company has made huge profits of Rs. 2,69,000 and after payment of taxes, the surplus available was Rs. 1,48,000 but no dividends have been declared. Even for the subsequent year the surplus after the payment is more than Rs. 1,35,000. In view of these facts, one has to consider that was there any smallness of profits and that the company needed funds for future expansion and development of business activities, and due to that the dividends have been declared after the expiry of the statutory period. It is not clear what made the appellant company to declare the dividends after expiry of statutory period especially with reference to the contention of the appellant that if needed funds for future development. Therefore, there is no consistency in the arguments of the learned counsel that funds were needed for future development of the company. There is a clear default on the part of the appellant company to declare the dividends for these two assessment years within the stipulated 12 months period after the closing of the respective accounting year and there is a direct decision on this point reported in 86 ITR 436 and 72 ITR 29 (SC) wherein it has been held that dividends were required to be declared within the period of 12 months and the dividends declared thereafter are not to be considered. The Supreme Court also in the case report in 72 ITR 729 has clearly held that subsequent distribution of the dividend by the company would be irrelevant for the purpose of passing of order under Section 23A of the 1922 Act. Therefore, the argument of the learned counsel on this point are required to be rejected because the profits earned by the appellant company in these two years are sufficient enough to declare dividends and there is a clear default on the part of the appellant company to declare dividend within the stipulated time-limit. Therefore, in my view, the ITO has very rightly passed the orders under Section 23A(1) of the 1922 Act for assessment years 1958-59 and 1960-61.
In a separate order passed in respect of assessment year 1959-60 the CIT(A) followed his consolidated order for assessment years 1958-59 and 1960-61.
5. The learned counsel for the appellant after stating the relevant facts (which we have already mentioned earlier) advanced arguments on the following lines :
(i) That one had to consider not only brought forward losses and smallness of profits but other relevant factors such as expansion of business, its consolidation etc., had also to be taken into account.
(ii) The relevant factor was to see the "commercial profits" and not the "assessed profits".
(iii) The ITO could not sit in the seat of the assessee and the approach to be taken was that of a businessman and that also a sympathetic and objective one.
(iv) The relevant words to be considered were not "sufficient" but "reasonable" in declaring a dividend.
(v) That although no dividend had been declared in the respective assessment years the assessee had suo moto on 15-6-1961 declared dividends of Rs. 30,000, Rs. 40,000 and Rs. 40,000 referable to each of the assessment years. That such declaration prior to the date of passing the orders under Section 23A(1) was required to be deducted from the distributable figure of profits for each of the assessment years.
(vi) That S.Y. 2013 (assessment year 1958-59) was the tenth year of business of the assessee and the position of the earlier assessment years revealed losses in six years, a profit of Rs. 10,000 in one year and profits of Rs. 30,000 and Rs. 20,000 in the immediately preceding assessment years viz., S.Y. 2011 and 2012.
(vii) That the assessee had just been able to wipe off the previous losses.
(viii) No distribution of dividend was made in the three years under consideration as the assessee wanted to expand its business and had in fact installed new machinery.
(ix) That there was no compulsion to declare any dividend in June 1961 but the assessee did so for the three years under consideration and this act on its part reflected its bona fides.
(x) That the company comprised of only two share-holders who were related to each other as husband and wife and there could be no motive whatsoever in avoiding payment of taxes by anybody by not declaring dividend.
(xi) That a substantial demand was raised in respect of taxes of earlier assessment years in S.Y. 2015.
In support of the aforesaid facts the learned counsel took us through the relevant documents appended on the paper book which contained the details of the additions in machinery from year to year, figures of carried forward losses and the demands in respect of the taxes pertaining to the earlier years. He also placed reliance on the following decisions in support of the proposition that the facts and circumstances of the case did not warrant the applicability of the provisions of Section 23A(1) of the Act:
(1) CIT v. Williamson Diamonds Ltd. [1959] 35 ITR 290 (PC), (2) CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 (SC), (3) CIT v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290 (SC), (4) CIT v. Asiatic Textiles Ltd. [1971] 82 ITR 816 (SC), (5) CIT v. T.V. Sundaram lyengar & Sons (P.) Ltd. [1975] 101 ITR 764 (SC), (6) Tulsi Lal Manilal v. CIT [1985] 154 ITR 665 (Raj.), (7) Webb's Sales & Services Ltd. v. CIT [1985] 155 ITR 401 (Kar.) and (8) CIT v. Abdul Rahim Osman & Co. (India) (P.) Ltd. [1972] 86 ITR 436 (SC).
6. The learned DR on the other hand strongly supported the orders passed by the tax authorities reiterating thereafter the arguments indentical to the reasons recorded by these authorities in levying and upholding the levy of additional tax under Section 23A(1). According to him, the provisions of Section 23A(1) did not warrant the consideration of any facts other than the "losses" and "smallness" of profits. In support of the said orders he placed reliance on the following decisions :
(1) Indo-Ceylon Dental & Surgical Co. Ltd. v. CIT [1975] 98 ITR 536 (Mad.), (2) Jamshedpur Engg. & Machine Mfg. Co. (P.) Ltd. v. CIT [1975] 98 ITR 33 (Pat.), (3) CIT v. M.M. Press (P.) Ltd. [1979] 117 ITR 885 (Cal.), (4) CIT v. Natwar Transport Co. (P.) Ltd. [1979] 116 ITR 284 (Bom.), (5) Mehar Singh & Co. (P.) Ltd. v. CIT [1977] 108 ITR 607 (Cal.), (6) CIT v. Ahmed Tea Co. (P.) Ltd. [1977] 108 ITR 853 (Gauhati) and (7) CIT v. Grace & Style (P.) Ltd. [1973] 90 ITR 247 (Delhi).
7. We have examined the rival submission and have also perused the material available on record. The authorities cited at the bar by both the parties have also been duly taken into account in deciding the issue raised for our consideration. No doubt, the company during the assessment years under appeal did have a surplus but taking into account the facts and circumstances we cannot approve of the action of the tax authorities in levying the additional tax under Section 23A(1) of the Act. As rightly pointed out by the learned counsel the assessee underwent losses in most of the assessment years prior to assessment year 1958-59 and it was only in some of the assessment years that nominal profits were earned. Then again in S.Y. 2015 relevant to assessment year 1960-61 the assessee had a net liability in respect of taxes pertaining to assessment years 1955-56 to 1957-58 amounting to Rs. 1,17,536. The company with a view to expand and consolidate its business also made substantial capital investments in some of the assessment years under appeal and these can be stated at Rs. 49,182 for assessment year 1959-60 and Rs. 1,61,032 for assessment year 1960-61. Even in the subsequent assessment years viz., 1961 -62 and 1962-63 the appellant made substantial additions towards capital assets amounting to Rs. 3.29 lacs and Rs. 1.37 lacs. According to us the cumulative effect of the aforesaid undisputed facts would lead to the conclusion that the appellant did not come within the ambit of Section 23A(1) of the Act and the action of the ITO in levying the additional tax and the CIT (Appeals) in confirming his action was not justified.
8. The assessee must also succeed in respect of its argument that the dividends declared on 15-6-1961 are required to be deducted from the figure of distributable profits. This proposition is directly covered by the decision of the Supreme Court in the case of Abdul Rahim Osman & Co. (India) (P.) Ltd. (supra). On the basis of identical facts pertaining to assessment years 1958-59 and 1959-60 their Lordships were pleased to hold that the dividend declared after the expiry of 12 months from the end of the previous year but prior to the date on which the ITO passed the order under Section 23A(1) was required to be deducted from the distributable profits. The observations of their Lordships are reproduced as under :
Though the ITO has jurisdiction to pass an order under Sub-section (1) he has to make a regular assessment on the company under Section 23 which he cannot do if in fact a dividend has been declared before the making of that order, as otherwise the company's undistributed balance which is assessed by the ITO would exceed its commercial profits. There is also a likelihood of double taxation because not only the company is charged with super-tax for not distributing the dividends, but also it will be assessed on the dividends it has in fact distributed to income-tax and once again to super-tax. Such a result was not intended. As the company can only declare dividends in general meeting from the profits earned by it, and when that is declared and paid the ITO, though for the non-fulfilment of the conditions prescribed in the section he may seek to reopen it, cannot make an assessment in cases where the dividend has actually been declared and paid before the date of his order.
9. In the final analysis we quash the orders passed by the ITO under Section 23A(1) of the Act for each of the assessment years under consideration.
10. The appeals are allowed.