1967 (8) TMI 24 - HC - Income Tax

Company declared dividends after the lapse of the statutory period of 12 months from the end of each of the relevant previous years - profits of the assessee-company for the assessment years were small within the meaning of the expression smallness of profits in section 23A - therefore, further declaration of dividend than that declared by the assessee would be unreasonable

Summary

Issues Involved:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Reasonableness of dividend declaration by the assessee company.
3. Interpretation of "smallness of profits" under Section 23A.
4. Consideration of company's financial commitments and liabilities.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922:

The case revolves around the applicability of Section 23A of the Indian Income-tax Act, 1922, which mandates that a company must distribute 60% of its distributable surplus as dividends. The Income-tax Officer found that the company, for the assessment years 1955-56 and 1956-57, had not declared dividends within the statutory period of 12 months from the end of the respective previous years. Consequently, the officer charged super-tax on the entire distributable surplus for these years.

2. Reasonableness of Dividend Declaration by the Assessee Company:

The assessee company argued that due to heavy debts incurred from importing spinning machinery and borrowing from financial institutions, it was not reasonable to declare a larger dividend. The Income-tax Officer rejected this contention, emphasizing that commercial profits should be considered, and the company's book profits were sufficient to declare the statutory percentage of dividends. The Appellate Assistant Commissioner upheld this view, noting the company's substantial reserves.

3. Interpretation of "Smallness of Profits" under Section 23A:

The Tribunal accepted the assessee's argument, considering the company's imperative commitments and necessary outgoings. They observed that declaring the statutory percentage of dividends would have left the company unable to meet its other commitments. The Tribunal concluded that the company's profits were small within the meaning of Section 23A, making any further declaration of dividends unreasonable.

4. Consideration of Company's Financial Commitments and Liabilities:

The Tribunal took into account the company's heavy liabilities, including interest on loans and income-tax liabilities for past years. They determined that these commitments justified the smallness of profits, despite the book profits indicating otherwise. The Tribunal's decision was influenced by a Supreme Court ruling in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd., which emphasized that the reasonableness of dividend declarations should be judged from a businessman's standpoint, considering previous losses, present profits, and future requirements.

Conclusion:

The Tribunal's decision was challenged by the Commissioner, who argued that the Tribunal erred by not considering the company's reserves while determining the reasonableness of the dividend declaration. However, the Tribunal's view that a prudent businessman would prioritize meeting liabilities over declaring dividends was upheld. The court concluded that the Tribunal's decision was justified, answering the referred question in the affirmative and in favor of the assessee. The assessee was entitled to the costs of the reference.

Separate Judgments:

Both judges, B. N. Banerjee and K. L. Roy, agreed with the Tribunal's decision, thus delivering a unanimous judgment.