1973 (8) TMI 41 - HC - Income Tax

Issues Involved:
1. Applicability of Section 23A(1) of the Indian Income-tax Act, 1922, to the company for the assessment year 1954-55.
2. Inclusion of Rs. 1,01,189 in the company's income for the assessment year 1954-55.
3. Determination of commercial profits and the reasonableness of non-declaration of dividends.

Detailed Analysis:

1. Applicability of Section 23A(1) of the Indian Income-tax Act, 1922:
The primary legal question was whether Section 23A(1) applied to the company for the assessment year 1954-55. Section 23A(1) mandates that if a company distributes less than 60% of its assessable income as dividends, the Income-tax Officer can deem the undistributed portion as distributed among shareholders unless the smallness of profits or losses in earlier years justifies the non-distribution.

2. Inclusion of Rs. 1,01,189 in the Company's Income:
The company's accounts, maintained on a mercantile basis, did not include Rs. 1,01,189 as income for the year ending March 31, 1954, due to a dispute with the Government of Bombay over the amount receivable. The Income-tax Officer included this amount in the company's income, arguing that it accrued during the relevant accounting year. The Appellate Assistant Commissioner and the Tribunal upheld this inclusion, stating that under the mercantile system, income accrues when the right to receive it arises, irrespective of actual receipt.

3. Determination of Commercial Profits and Reasonableness of Non-Declaration of Dividends:
The Tribunal and the lower authorities considered the Rs. 1,01,189 as part of the commercial profits, thus making the non-declaration of dividends unreasonable. However, the company argued that even if this amount was included, the financial position reflected in the balance-sheet and profit and loss account did not justify declaring dividends. The company had significant liabilities and doubtful debts, making any dividend declaration imprudent.

Judgment:
The court, considering the second contention, found it unnecessary to delve deeply into the first contention about the accrual of Rs. 1,01,189. The court noted that even if this amount was included in the commercial profits, the financial position of the company, as reflected in the balance-sheet and profit and loss account, did not support the declaration of dividends.

The court emphasized the following points:
- The company's paid-up capital was Rs. 1,96,000, while its liabilities exceeded Rs. 38 lakhs, creating an equity-debt ratio of 1:19.
- The balance-sheet showed several doubtful debts and loans amounting to Rs. 2,28,277, indicating that the company's capital was effectively eroded.
- The company's financial position, with significant liabilities and doubtful assets, made any dividend declaration unreasonable and imprudent.

The court cited several precedents, including the Supreme Court's observations in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P.) Ltd., emphasizing that the Income-tax Officer must consider the commercial profits and the company's overall financial position from a businessman's perspective.

Conclusion:
The court concluded that the provisions of Section 23A were not attracted in this case. The question referred was answered in the negative, favoring the assessee. The revenue was directed to pay the costs of the reference to the assessee-company.

Question answered in the negative.

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