1966 (4) TMI 11 - HC - Income Tax

Whenever any fund, however small, is found available for distribution as dividend, its non-distribution will amount to an unreasonable Act on the part of the company - provisions of s. 23A of the IT Act have not been properly applied according to law to the assessee-company by the Appellate Tribunal

Issues Involved:
1. Application of Section 23A of the Indian Income-tax Act.
2. Reasonableness of non-distribution of dividends by the assessee-company.
3. Consideration of smallness of profit and other financial factors.
4. Legitimacy of the Tribunal's decision and its adherence to commercial standards.

Detailed Analysis:

1. Application of Section 23A of the Indian Income-tax Act:
The core issue was whether the provisions of Section 23A of the Indian Income-tax Act were correctly applied by the Income-tax Appellate Tribunal for the assessment years 1952-53 and 1953-54. The Income-tax Officer had initially invoked Section 23A, deeming the undistributed portion of the assessable income as dividends among the shareholders. This action was annulled by the Tribunal, leading to the revenue's appeal to the High Court.

2. Reasonableness of Non-Distribution of Dividends:
The Tribunal had concluded that the non-distribution of dividends by the assessee-banking company was reasonable due to the smallness of profit. The commercial profit for 1951 and 1952, after accounting for tax liabilities and required transfers to the reserve fund, was Rs. 10,886 and Rs. 21,334, respectively. These amounts were deemed too small for dividend distribution, especially when compared to the company's subscribed and paid-up capital of Rs. 20,00,000.

3. Consideration of Smallness of Profit and Other Financial Factors:
The judgment emphasized that the smallness of profit must be evaluated in the context of the company's overall financial position, including previous losses, present profits, and future requirements. The Tribunal's decision aligned with the Supreme Court's guidance in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd., which stated that the reasonableness of dividend distribution should be judged from the standpoint of a prudent businessman. The Tribunal considered the smallness of profit and the potential negative impact on the company's commercial credit if a meager dividend were distributed.

4. Legitimacy of the Tribunal's Decision and Adherence to Commercial Standards:
The High Court affirmed that the Tribunal's decision was legitimate and adhered to commercial standards. The Tribunal's view that a dividend not exceeding 1 1/2% was too small was supported by the facts. The High Court also rejected the revenue's argument that the company could have used its reserve fund to distribute dividends, noting that the reserve fund was statutorily required under Section 17 of the Banking Companies Act and was not meant for dividend distribution. The judgment reiterated that the tax authorities must demonstrate that it was commercially feasible for the company to distribute a reasonable portion of its actual income as dividends.

Conclusion:
The High Court reframed the question to clarify the issue and answered it in the negative, concluding that the provisions of Section 23A were not applicable against the assessee for the assessment years 1952-53 and 1953-54. The revenue was ordered to pay Rs. 200 as costs to the assessee. The judgment underscored the importance of evaluating the reasonableness of dividend distribution based on commercial standards and the overall financial position of the company.

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