1973 (5) TMI 30 - HC - Income Tax

Summary

Issues Involved:

1. Deduction of wealth-tax under clause (b) of section 23A(1) for the assessment years 1958-59 and 1959-60.
2. Entitlement of the assessee to a notice for further distribution of dividend under sub-section (2) of section 23A for the assessment year 1959-60.
3. Application of section 23A regarding the reasonableness of the declared dividends considering the profits made in the respective previous years.

Issue-Wise Detailed Analysis:

1. Deduction of Wealth-Tax under Clause (b) of Section 23A(1):

The primary issue revolves around whether wealth-tax should be deducted from the total income of the previous years 1957 and 1958 for the assessment years 1958-59 and 1959-60, respectively. The Tribunal had held that wealth-tax deductible from the total income of the previous year 1957 was the wealth-tax for the assessment year 1957-58, and similarly, for the previous year 1958, it was the wealth-tax for the assessment year 1958-59. However, the court emphasized that for a tax to be deductible under clause (b) of section 23A(1), it must be "in excess of the amount, if any, which has been allowed in computing the total income." Given the retrospective effect of section 4 of the Income-tax (Amendment) Act, 1972, which explicitly disallows wealth-tax in the computation of income, the court concluded that wealth-tax could not be deducted under clause (b) of section 23A(1) for the relevant assessment years. Therefore, the court answered both questions 1 and 2 in the negative, stating that wealth-tax cannot be deducted from the total income for the assessment years 1958-59 and 1959-60.

2. Entitlement to Notice for Further Distribution of Dividend:

Since the answers to questions 1 and 2 were against the assessee, question 3, which pertained to whether the assessee is entitled to a notice from the Income-tax Officer for further distribution of dividend for the assessment year 1959-60, did not require an answer.

3. Application of Section 23A Regarding Reasonableness of Declared Dividends:

The fourth issue examined whether the Tribunal was justified in applying section 23A on the grounds that declaring a larger dividend than what was declared would not be unreasonable, considering the profits made in the respective previous years. The court reiterated that the computation of profits must be made from a commercial point of view, as established by the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd. and Commissioner of Income-tax v. Asiatic Textiles Ltd. The Tribunal had allowed the reserve for doubtful debts but excluded the provision for contingencies, contribution to repairs fund, and sinking fund for redemption of debentures from the commercial profits, deeming them excessive or not properly justified. The court agreed with the Tribunal's assessment, noting that the Tribunal had followed the principles laid down by the Supreme Court, and thus, the application of section 23A was justified. The court answered question 4 in the affirmative, endorsing the Tribunal's decision that the payment of a larger dividend than what was declared would not have been unreasonable.

Conclusion:

The court concluded that wealth-tax cannot be deducted under clause (b) of section 23A(1) for the assessment years 1958-59 and 1959-60. Consequently, the question of notice for further distribution of dividend did not arise. The court upheld the Tribunal's application of section 23A, affirming that declaring a larger dividend would not have been unreasonable based on the commercial profits of the respective years. Each party was ordered to bear its own costs.