1969 (7) TMI 18 - HC - Income Tax

Whether the Tribunal was right in holding that the statutory percentages applicable u/s 23A(1) of the Income-tax Act 1922 to the distribution of dividends on 24th March 1960 were 45 per cent. and 60 per cent. in respect of processing receipts and trading receipts respectively - Held yes

Summary

Issues Involved:

1. Applicability of statutory percentages under section 23A(1) of the Income-tax Act, 1922, for dividend distribution.
2. Entitlement to notice under section 23A(2)(ii) of the said Act due to shortfall in dividend distribution.

Issue-wise Detailed Analysis:

Issue 1: Applicability of Statutory Percentages

The first issue concerns whether the Tribunal correctly applied the statutory percentages of 45% and 60% for processing and trading receipts, respectively, under section 23A(1) of the Income-tax Act, 1922, for dividend distribution on March 24, 1960. The assessee, a private limited company, had a net profit of Rs. 72,959, with the Income-tax Officer determining a total income of Rs. 87,103 and tax payable of Rs. 39,196, leaving Rs. 47,907 for dividend distribution. The Income-tax Officer applied an average statutory percentage of 57.5%, requiring a minimum dividend distribution of Rs. 27,546, while the actual distribution was Rs. 20,295, resulting in a shortfall exceeding 5% of the distributable surplus. Consequently, an additional super-tax at 37% was levied on the undistributed balance.

The Tribunal, however, concluded that the applicable statutory percentages were 45% for processing and 60% for trading, resulting in an average of 52.5%. The Tribunal held that the shortfall was less than 5% of the distributable surplus, thus entitling the assessee to an opportunity to declare additional dividends. The Tribunal's decision was based on the interpretation that the statutory percentages prevailing during the previous year (1959-60) should apply, rather than the amended rates effective from April 1, 1960, as per the Finance Act, 1959.

The judgment emphasized that the statutory percentages should be those prevailing during the previous year, as indicated by the language in section 23A, which refers to "any previous year" and "distributed within 12 months immediately following the expiry of the previous year." The Finance Act, 1959, amended the statutory percentages to 50% and 65%, effective from April 1, 1960, indicating that the old rates (45% and 60%) were applicable until that date. The court held that applying the new rates retrospectively would be unfair and contrary to the clear legislative intent.

Issue 2: Entitlement to Notice under Section 23A(2)(ii)

The second issue addresses whether the shortfall in dividend distribution was less than 5% of the total income, as reduced by amounts mentioned in section 23A(1), entitling the assessee to a notice under section 23A(2)(ii). The Tribunal found that the shortfall was indeed less than 5%, based on the statutory percentages of 45% and 60%. The Tribunal's finding was that the net profit from processing was Rs. 67,006, and from trading was Rs. 5,953, applying the respective statutory percentages to these figures.

The court noted that the Tribunal's determination of processing receipts at Rs. 67,006 was based on the overall net profit, reduced by the director's remuneration. The Income-tax Officer had initially applied a 50:50 rule for processing and trading receipts, but the Tribunal found this approach inadequate. The court emphasized the need for a more careful examination of the actual business activities, particularly in a photographic business where "processing" might have a technical definition influenced by the specific facts of the business.

The judgment concluded that the Tribunal's order was not entirely without evidence, and therefore, the answer to the second question was also in the affirmative, favoring the assessee. The court highlighted the importance of precise consideration of the business's nature and activities in such cases.

Conclusion:

The court affirmed the Tribunal's application of the statutory percentages of 45% and 60% for processing and trading receipts, respectively, for the relevant period. It also upheld the Tribunal's finding that the shortfall in dividend distribution was less than 5%, entitling the assessee to an opportunity to declare additional dividends. The judgment emphasized the need for clear legislative language in tax statutes and careful consideration of the specific business activities in determining tax liabilities.