1995 (11) TMI 6 - SC - Income Tax

Assessee owns a sugar mill and a farm attached to it in what was then the East Paksitan. At the relevant time there were restrictions upon remittances from Pakistan to India. The books of the assessee for the said year showed a profit of Rs. 93,449, after making provision for taxation in India and Pakistan - Indian income was not sufficient to declare dividends - provision of section 23A could be applied the assessee

Summary

Issues:
Interpretation of section 23A of the Indian Income-tax Act, 1922 regarding the application of additional super tax on undistributed income by a company.

Analysis:
The case involved an appeal from the judgment of the Calcutta High Court regarding the application of section 23A of the Indian Income-tax Act, 1922 to an assessee for the assessment year 1960-61. The assessee, owning a sugar mill and a farm in East Pakistan, faced restrictions on remittances to India, leading to a delay in declaring dividends within the prescribed period. The Income-tax Officer levied additional super tax on the undistributed balance, which the assessee contested, citing reasons for the delay. The Tribunal accepted the assessee's reasons and canceled the order under section 23A. However, the High Court upheld the Income-tax Officer's decision, leading to the appeal in question.

The relevant provision, section 23A, aims to assess companies not substantially interested by imposing super tax on undistributed income to prevent tax evasion. The section is stringent and requires strict construction. The Supreme Court highlighted that the Income-tax Officer must consider all relevant circumstances beyond just losses and smallness of profit to determine if non-declaration of dividends was justified. The court emphasized that the officer should adopt a prudent businessman's perspective and evaluate the financial position of the business comprehensively.

In this case, the Supreme Court found the reasons provided by the assessee for the delay in declaring dividends to be valid and adequate. The factual correctness of the reasons was undisputed by the Revenue. The assessee faced genuine challenges due to the inability to bring money from Pakistan, appointing a local auditor, and substantial liabilities in India, making it financially unfeasible to declare dividends within the prescribed period. The court held that the Tribunal was justified in accepting the assessee's explanation, which was not presented before the High Court, resulting in an adverse decision. Consequently, the appeal was allowed, the High Court's judgment was set aside, and the question referred was answered in favor of the assessee against the Revenue.