1967 (8) TMI 34 - HC - Income Tax

Capital loss suffered by the assessee on account of depreciation in the value of the shares of E - If the loss was a capital loss then the Tribunals decision that it would be unreasonable for the assessee-company to have declared any dividend was correct

Summary

Issues:
1. Application of section 23A to an assessee-company not declaring dividends due to claimed capital loss.
2. Consideration of capital losses in determining reasonableness of dividend distribution under section 23A.

Analysis:
The judgment involves the application of section 23A to an assessee-company that did not declare dividends due to a claimed capital loss. The assessee, a selling agent of a textile mill, had suffered a loss on shares of Elphinstone Mills Ltd., which was disallowed as a deduction in income tax assessments for two years. The Income-tax Officer levied additional super-tax under section 23A due to the undistributed balance. The Appellate Assistant Commissioner held that as there was no commercial profit, section 23A did not apply in the relevant years.

The department appealed to the Tribunal, arguing that the capital loss should not be considered in determining commercial profits. The Tribunal acknowledged that the shares were purchased at inflated rates to help others acquire managing agency, resulting in actual depletion of the company's resources. It held that any dividend distribution would have been unreasonable and upheld the Appellate Assistant Commissioner's decision, dismissing the department's appeal.

The Tribunal referred a question to the High Court regarding the reasonableness of not declaring dividends due to the capital loss. The High Court cited previous Supreme Court judgments emphasizing that capital losses should be considered in assessing dividend distribution reasonableness. The Commissioner contended that the loss was not a capital loss until realization, but the High Court rejected this argument, as it was not raised earlier and the Tribunal had already made a determination.

The High Court concluded that as the loss was considered a capital loss, the Tribunal's decision on the unreasonableness of declaring dividends was correct. The question was answered in favor of the assessee, and the Commissioner was directed to pay the costs of the reference. Justice Banerjee agreed with the decision.