1967 (12) TMI 1 - SC - Income Tax

Tribunal holding that the losses incurred prior to the reconstruction of the respondent-company are irrelevant for the purpose of application of s. 23A of the Act in subsequent years - Tribunal was not right in taking view that after adjustment of loss against capital the losses do not survive - Revenue s appeal is dismissed

Summary

Issues Involved:
1. Competence of the Income-tax Officer to pass an order under section 23A(1) of the Income-tax Act, 1922.
2. Determination of whether the respondent-company is a company in which the public are substantially interested for the purposes of section 23A of the Act.
3. Consideration of losses incurred by the company prior to its reconstruction in 1930 for the applicability of section 23A(1) of the Act.

Issue-wise Detailed Analysis:

1. Competence of the Income-tax Officer under Section 23A(1):
The Bombay High Court answered in the affirmative, holding that the Income-tax Officer was competent to pass an order under section 23A(1) of the Income-tax Act, 1922, and was not precluded from doing so by reason of having granted a rebate to the respondent-company. The Supreme Court upheld this view, confirming that the Income-tax Officer had the authority to apply section 23A(1) despite the rebate.

2. Determination of Public Interest in the Company:
The High Court initially held that the respondent-company was a company in which the public was substantially interested for the purposes of section 23A of the Act. However, the Supreme Court reversed this decision, holding that the respondent-company was a company in which the public were not substantially interested. This determination was crucial as it affected the applicability of section 23A, which imposes certain dividend distribution requirements on companies not substantially held by the public.

3. Consideration of Pre-Reconstruction Losses:
The crux of the case revolved around whether the losses incurred by the company prior to its reconstruction in 1930 could be considered for the purposes of section 23A(1). The High Court, upon remand, answered this question in the affirmative, stating that such losses could indeed be taken into account. The Supreme Court agreed with this interpretation, stating that there was no basis to exclude pre-reconstruction losses from consideration under section 23A(1). The Court emphasized that losses adjusted in the books at the time of reconstruction do not cease to be "losses incurred by the company in the earlier years" and should be considered in determining the reasonableness of dividend declarations.

Conclusion:
The Supreme Court concluded that the Appellate Tribunal had misdirected itself in law by excluding pre-reconstruction losses from consideration under section 23A. The Court affirmed the High Court's judgment that these losses are relevant for determining the applicability of section 23A. Consequently, the Tribunal must rehear the case, taking into account the High Court's interpretation and the relevant evidence, to determine whether the respondent-company acted reasonably in declaring a smaller dividend. The appeal was dismissed with costs, subject to the direction that the Tribunal must dispose of the case conformably with the High Court's judgment.