1975 (6) TMI 4 - HC - Income Tax

Assessment Proceedings, General Reserve, Liability To Tax, Reassessment Proceedings, Tax Liability, Tax On Undistributed Income

Summary

Issues:
1. Whether the Tribunal should have held that the payment of a larger dividend than that declared by the assessee would have been unreasonable.
2. Whether the Tribunal was justified in holding that only the net tax payable by the assessee should be considered in determining the distributable surplus without regard to the credit under section 18(5) of the Indian Income-tax Act, 1922.

Analysis:
The case involved a private limited company subject to section 23A of the Income-tax Act, 1922 for the assessment year 1954-55. The company declared a dividend of Rs. 60,000, falling short of 60% of the distributable surplus, leading to jurisdiction under section 23A. The company argued that declaring a larger dividend was unreasonable due to anticipated tax liability from a reassessment. The tax officer estimated an additional tax liability of about Rs. 90,000, which could be covered by the general reserve. The Tribunal failed to consider if the apprehension of additional tax liability influenced the dividend declaration, leading to a reference to the High Court.

The High Court considered Supreme Court precedents emphasizing that an order under section 23A should not compel a company to fall back on its reserves or capital. The Court directed the Tribunal to gather more information on the nature of reserves and whether the tax liability influenced the dividend decision. The Tribunal found no evidence that the directors anticipated the tax liability during the dividend declaration, rejecting the argument that the liability should affect surplus for distribution.

The Court relied on previous decisions stating that arrears of tax liability from earlier years must be considered in determining surplus for dividend distribution. It rejected the Revenue's argument to adjust the liability with the commercial profit of a different assessment year, emphasizing that the decision should be based on the profit of the relevant year. The Court highlighted that the tax officer must consider all relevant factors and act as a prudent director.

Ultimately, the Court held that the Tribunal should have deemed a larger dividend reasonable, as anticipated tax liability should have been taken into account. The second question became academic, and the Court declined to answer it, ruling in favor of the assessee. No costs were awarded in the case.

The judgment was delivered by S. C. DEB J. and DIPAK KUMAR SEN J. agreeing with the decision.