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Interpretation of section 23A of the Indian Income-tax Act, 1922 regarding declaration of dividend based on capital losses suffered by the assessee-company on account of depreciation in the value of shares. Analysis: The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the justification of the Tribunal's decision on the declaration of dividend by the assessee-company in light of a capital loss of Rs. 11,86,000 due to depreciation in the value of shares of M/s. Elphinstone Mills Ltd. The Income-tax Officer had levied super-tax on distributable profits for the relevant years, which the Appellate Assistant Commissioner later canceled based on the decision in the assessee-company's own case for the assessment years. The revenue appealed before the Appellate Tribunal, arguing that the loss claimed was notional and should be disregarded for the application of section 23A of the Act. However, the Tribunal, following a previous decision of the Calcutta High Court, upheld the consideration of the loss in question for determining the reasonableness of dividend declaration. The revenue contended that the notional loss due to depreciation of shares should not be a factor in determining the reasonableness of dividend declaration without the actual realization of the investment leading to a loss. The Court, referencing the Supreme Court's decisions, emphasized that the reasonableness of dividend declaration should be judged from a business perspective, considering factors like previous losses, present profits, and future requirements. The Court reiterated that directors should act as prudent businessmen and not speculate on potential future gains. The Court also distinguished a previous case involving insurance company investments, stating it did not address the considerations for dividend declaration. In conclusion, the Court held in favor of the assessee, affirming that the principles laid down by the Supreme Court should guide the assessment of reasonableness in declaring dividends. The Court rejected the revenue's argument that notional losses should not be considered, emphasizing the need to assess reasonableness based on sound business principles. The judgment was delivered by SABYASACHI MUKHARJI J., with agreement from PYNE J.
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