1967 (7) TMI 50 - HC - Income Tax

Non-declaration of dividend - company left with no accumulated profits - ITO determined the distributable surplus u/s 23A - Tribunal was justified in holding that no order under s. 23A should have been made for the three years in view of the fact that the non-trading loss of Rs. 6,88,000 was not wiped off in the accounts

Summary

Issues:
Interpretation of section 23A of the Indian Income-tax Act, 1922 regarding the treatment of past losses in determining the applicability of dividend distribution orders.

Analysis:
The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the justification of not imposing orders under section 23A for three assessment years due to an outstanding non-trading loss of Rs. 6,88,000. The assessee, a public limited company with house properties in Calcutta, contended that the past loss made it impossible to declare dividends for the relevant years. The Income-tax Officer disagreed, citing excess depreciation provisions as a reason for not wiping out the loss earlier and imposed additional super-tax under section 23A.

The Appellate Assistant Commissioner upheld the Income-tax Officer's decision, emphasizing the distinction between commercial losses and capital losses in determining the applicability of section 23A. However, the Tribunal, on further appeal, considered the unrecovered loan amount as a capital loss and held that the absence of accumulated profits justified the company's inability to declare dividends, thus setting aside the orders under section 23A.

The Court referenced the Supreme Court's decision in Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd., which emphasized considering all relevant factors, including capital losses, in assessing reasonableness under section 23A. It agreed with the view that capital losses, if established, should be a factor in determining the reasonableness of dividend declarations. Consequently, the Court affirmed the Tribunal's decision, answering the referred question in favor of the assessee and holding the Commissioner of Income-tax liable for costs.

Therefore, the judgment clarified that past capital losses, when established, are relevant in evaluating the reasonableness of dividend distributions under section 23A, aligning with the broader consideration of all relevant factors to determine the applicability of the provision.