1960 (11) TMI 13 - SC - Income Tax

Whether the sum of ₹ 15,608 should have been included in the assessee company s profit for the purpose of determining whether the payment of a larger dividend than that declared by it would be unreasonable ? Held that - By the fiction in section 10(2)(vii), second proviso, read with section 2(6C), what is really not income is, for the purpose of computation of assessable income, made taxable income; but on that account, it does not become commercial profit, and if it is not commercial profit, it is not liable to be taken into account in assessing whether in view of the smallness of profits a larger dividend would be unreasonable. The High Court was right in holding that the amount of ₹ 15,608 was not liable to be taken into account in considering whether having regard to the smallness of the profit made by the company, it would be unreasonable to declare a larger dividend.Appeal dismissed.

Summary

Issues:
1. Interpretation of Section 23A of the Indian Income-tax Act, 1922 regarding the inclusion of certain sums in the assessable income for determining dividend distribution.
2. Determining the applicability of the term "smallness of profit" in the context of dividend distribution by a company.
3. Analysis of the distinction between assessable income and commercial profit for the purpose of dividend distribution.

Analysis:

The Supreme Court judgment dealt with the interpretation of Section 23A of the Indian Income-tax Act, 1922, in a case where the Income-tax Officer had included a sum of Rs. 15,608 in the assessable income of a company for determining dividend distribution. The primary issue revolved around whether this sum should be considered while deciding if a larger dividend than the one declared would be unreasonable. The Court outlined the conditions under Section 23A that needed to be satisfied for the Income-tax Officer to direct the distribution of undistributed income as dividends among shareholders.

The Court emphasized the distinction between assessable income and commercial profit concerning dividend distribution by a company. It highlighted that the source from which dividends are distributed should be the focus, not just the assessable income. The judgment clarified that the term "smallness of profit" in Section 23A should be evaluated based on commercial principles, not merely the assessable income. The Court rejected the argument that the sum of Rs. 15,608, arising from the sale of machinery, should be included in determining the reasonableness of declaring a larger dividend, as it was not part of the company's commercial profit.

The Court delved into the provisions of the Act regarding the treatment of sums deemed as profits for tax purposes, emphasizing that not all such sums constitute commercial profits eligible for dividend distribution. It underscored that the legislative intent was to assess reasonableness based on commercial profit rather than total receipts, whether actual or fictional. The judgment referenced previous cases to support the interpretation that "smallness of profit" in Section 23A should align with commercial principles.

Ultimately, the Court upheld the High Court's decision that the sum of Rs. 15,608 should not be considered in determining the reasonableness of a larger dividend. The appeal was dismissed, affirming that the amount in question was not part of the commercial profit and, therefore, should not impact the dividend distribution decision.