1979 (1) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Whether the primary condition for taking action under section 23A(1) was satisfied.
2. Whether it would be unreasonable for the company to declare a larger dividend than the one declared.
3. Whether the Tribunal and income-tax authorities erred in their approach contrary to the Supreme Court decision in CIT v. Gangadhar Banerjee & Co. Pvt. Ltd.

Issue-wise Detailed Analysis:

1. Primary Condition for Action under Section 23A(1):
The Tribunal first examined if the primary condition for invoking section 23A was met, specifically whether the assessee declared a dividend less than the prescribed percentage of the difference between the total income assessed and the tax payable. The Tribunal confirmed that the condition was satisfied, as the dividend declared by the company was less than the statutory percentage.

2. Reasonableness of Declaring a Larger Dividend:
The Tribunal then considered whether it would be unreasonable for the company to declare a larger dividend. The company argued that it had an expansion program and significant liabilities amounting to Rs. 10 lakhs, necessitating the retention of profits. The Tribunal dismissed these as normal business developments and upheld the additional super-tax under section 23A(1).

3. Error in Approach by Tribunal and Income-tax Authorities:
The assessee contended that the authorities' approach was contrary to the Supreme Court's decision in CIT v. Gangadhar Banerjee & Co. Pvt. Ltd. The Supreme Court had established that the ITO must consider the smallness of profits not merely by their quantum but by taking into account various business considerations, including future requirements and financial implications. The Tribunal failed to apply this principle and did not consider the company's expansion needs and liabilities.

Legal Precedents and Principles:
The judgment emphasized the Supreme Court's principle that the ITO, while acting under section 23A(1), must adopt the perspective of a prudent businessman. The reasonableness of the dividend declared should be judged based on overall business considerations, including future requirements and liabilities. The Tribunal's restricted view was incorrect, as it did not fully consider the company's financial position and future needs.

Conclusion:
The High Court concluded that the income-tax authorities and the Tribunal failed to consider the immediate financial requirements of the company. Given the company's liabilities and expansion plans, declaring a dividend less than the statutory percentage was reasonable. The question referred was answered in the negative, favoring the assessee, and the assessee was awarded costs from the revenue.

Final Judgment:
The income-tax authorities and the Tribunal erred in their approach by not considering the relevant business circumstances, and the declaration of a lesser dividend by the company was justified. The assessee was entitled to relief, and the additional super-tax under section 23A(1) was not warranted.