1967 (2) TMI 2 - HC - Income Tax

Whether the Tribunal was justified in holding that the order passed by the ITO u/s. 23A(1) of the IT Act, 1922, as it stood at the material time, was vitiated by reason of the fact that the ITO had not issued to the assessee a notice under the second proviso to s. 23A(1) before passing the said order - Held, no

Summary

Issues:
1. Interpretation of section 23A of the Indian Income-tax Act regarding the distribution of dividends by a private limited company.
2. Application of the provisions of section 23A to a specific case involving the declaration of dividends below the statutory minimum.
3. Jurisdiction of the Income-tax Officer to pass orders under section 23A based on assessable income and commercial profit considerations.
4. Review of the Tribunal's decision regarding the calculation of distributable dividend and the absence of a notice under the second proviso of section 23A(1).
5. Analysis of the Tribunal's error in considering commercial profit instead of assessable income for determining dividend distribution percentages.

Analysis:

The judgment pertains to a reference made under section 66(1) of the Indian Income-tax Act, involving a private limited company subject to section 23A provisions. The case concerned the declaration of dividends below the statutory minimum of 60% of assessable income, leading to action by the Income-tax Officer. The Tribunal found discrepancies in the calculation of distributable surplus and highlighted the absence of a notice under the second proviso of section 23A(1), leading to the vacating of the order under section 23A(1) passed by the Income-tax Officer.

The Tribunal's decision was challenged, questioning the interpretation of section 23A and the consideration of commercial profit in determining dividend distribution percentages. The judgment emphasized that the Income-tax Officer's jurisdiction under section 23A is based on assessable income criteria, not commercial profit. The Tribunal's failure to address the reasonableness of declaring a larger dividend based on losses incurred or smallness of commercial profits was noted, leading to a directive for the Tribunal to reconsider this aspect.

Ultimately, the High Court answered the reference question in the negative, highlighting the need for adherence to statutory provisions and proper consideration of assessable income for determining dividend distribution percentages. The judgment underscored the importance of distinguishing between assessable income and commercial profit in applying section 23A provisions, emphasizing the need for a holistic assessment based on legal requirements and factual circumstances.

The judges, Banerjee J. and Masud J., concurred in answering the reference question negatively, indicating a comprehensive analysis of the issues surrounding the application of section 23A in the context of dividend distribution by private limited companies.