1967 (9) TMI 11 - HC - Income Tax

Assessee, a company, carrying on the business of dealing in and holding of investments - valuation of the investment - market value - question of the mode of accounting employed in the balance-sheet would be clearly immaterial in considering the applicability of section 23A

Summary

Issues Involved:
1. Applicability of Section 23A of the Income-tax Act.
2. Valuation of investments at market price versus cost for determining profits.
3. Justification for non-declaration of dividends due to smallness of profit.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Income-tax Act:
The primary issue was whether the assessee's non-declaration of dividends was justified under Section 23A due to the smallness of profit. The court examined whether the Income-tax Officer (ITO) correctly applied Section 23A, which mandates that if dividends distributed are less than the statutory percentage, the ITO must assess whether the non-declaration was reasonable considering losses in earlier years or smallness of profit.

The court noted that the ITO and the Appellate Assistant Commissioner (AAC) did not fully address whether the smallness of profit justified the non-declaration of dividends. The Tribunal's findings were cryptic but implied that the smallness of profit and the overvaluation of investments were special circumstances justifying the non-declaration.

2. Valuation of Investments at Market Price versus Cost:
The assessee argued that the market value of its investments was lower than their cost, which should be considered in determining profits for dividend declaration. The AAC rejected this, stating that the company's method of accounting had always been to value investments at cost, and it could not change this for dividend purposes.

The Tribunal, however, considered the overvaluation of Rs. 68,583 as a special circumstance preventing dividend declaration. The Supreme Court precedent allowed for revaluation if it could be shown that the balance-sheet figures were inflated or deflated by mistake or design. Thus, the Tribunal's acceptance of the market value over the cost was deemed appropriate.

3. Justification for Non-Declaration of Dividends Due to Smallness of Profit:
The court referenced the Supreme Court's interpretation that the reasonableness of dividend payment must be judged by business considerations, including previous losses, present profits, and future requirements. The Tribunal concluded that the small profit of Rs. 17,154 against a capital of Rs. 5 lakhs was insufficient for dividend distribution.

The court agreed with the Tribunal, emphasizing that the small profit and the depreciation in investment value justified the non-declaration of dividends. The Tribunal's decision was seen as correct, aligning with the principles of prudent business judgment.

Conclusion:
The court answered the reference question in the affirmative, supporting the Tribunal's decision that the smallness of profit and the overvaluation of investments justified the non-declaration of dividends under Section 23A. The Commissioner was directed to pay the assessee's costs. The question of revaluing investments at market price for accounting purposes was deemed irrelevant in light of the Supreme Court's interpretation of Section 23A.