1968 (7) TMI 47 - HC - Income Tax

Additional super-tax on the undistributed income - liability to pay super-tax under section 23A of the IT Act, 1922

Issues Involved:
1. Liability of the assessee-company to pay super-tax under section 23A of the Indian Income-tax Act, 1922.
2. Determination of commercial profit versus assessable income.
3. Relevance of tax payments for earlier years in determining dividend reasonableness.

Issue-wise Detailed Analysis:

1. Liability of the Assessee-Company to Pay Super-Tax Under Section 23A:

The central issue was whether the assessee-company was liable to pay super-tax under section 23A of the Indian Income-tax Act, 1922, for the assessment year 1958-59. The Income-tax Officer held that the company had declared a dividend below the statutory limit of 45%, necessitating additional super-tax. The Tribunal, however, concluded that the commercial profit indicated a loss, thus rendering the declaration of a larger dividend unreasonable.

2. Determination of Commercial Profit Versus Assessable Income:

The Tribunal's approach was to consider the commercial profit rather than the assessable income. It made adjustments to the assessed profit and acknowledged the tax liability of the previous year, leading to the conclusion that the net result was a loss. The Tribunal's decision was influenced by precedents such as *Gobald Motor Service Ltd. v. Commissioner of Income-tax*, which emphasized the importance of commercial profit over assessable income.

3. Relevance of Tax Payments for Earlier Years in Determining Dividend Reasonableness:

The Tribunal accepted the assessee's argument that the tax liability of the previous year, paid during the accounting year in question, should be considered in determining the reasonableness of the dividend declared. However, the High Court found this approach legally erroneous. It stated that generally, the tax demand for a particular year should be met from the profits of that year, and not affect the dividend declaration of subsequent years. The Court emphasized that only in exceptional cases, where special circumstances necessitate using current profits to pay previous tax liabilities, could this be considered reasonable.

Detailed Analysis:

Liability of the Assessee-Company to Pay Super-Tax Under Section 23A:

The High Court analyzed whether the assessee-company's dividend declaration met the statutory requirement under section 23A. The Income-tax Officer had determined that the company should have declared a dividend of Rs. 9,418, but only Rs. 1,701 was declared. The Tribunal, however, found that due to the commercial loss, the declaration was reasonable. The High Court disagreed, emphasizing that the primary condition of declaring a dividend below the statutory percentage was met, and thus, the company was liable for super-tax.

Determination of Commercial Profit Versus Assessable Income:

The High Court reviewed the Tribunal's method of calculating commercial profit, which included deductions for director's remuneration, cess, and depreciation differences. The Tribunal's reliance on the commercial profit principle, as established in cases like *Commissioner of Income-tax v. F. L. Smidth & Co. (Bombay) Ltd.*, was noted. However, the High Court pointed out that the Tribunal erred by considering the payment of previous year's tax liability as a factor reducing the commercial profit, leading to an incorrect conclusion of a loss.

Relevance of Tax Payments for Earlier Years in Determining Dividend Reasonableness:

The High Court clarified that typically, tax payments for earlier years should not affect the dividend declaration of the current year. It stated that the company is expected to reserve funds for tax payments from the profits of the same year. The Tribunal's acceptance of the previous year's tax payment as a justification for a lower dividend was deemed legally incorrect. The Court provided an example to illustrate that allowing such deductions could lead to unjustifiable avoidance of dividend declarations over multiple years.

Conclusion:

The High Court concluded that the Tribunal had committed an error of law by considering the previous year's tax payment in determining the commercial profit. It held that the assessee-company was liable to pay super-tax under section 23A for the assessment year 1958-59. The judgment emphasized that the primary condition of declaring a dividend below the statutory percentage was met, and the company's justification based on previous tax payments was not legally valid. The Commissioner of Income-tax was awarded costs of the reference, with a hearing fee fixed at Rs. 100.

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