1970 (1) TMI 14 - HC - Income Tax

Applicability of section 23A - provisions of section 23A of the Act were applicable to the case inasmuch as the assessee company had declared no dividends in the years in question but the order of the Tribunal setting aside the assessments under section 23A was correct in view of its finding on the question of losses in the earlier years

Summary

Issues Involved:
1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Consideration of losses in earlier years.
3. Determination of commercial profits.
4. Reasonableness of non-declaration of dividends.

Detailed Analysis:

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

The primary issue was whether Section 23A was applicable to the assessee for the assessment years 1956-57 and 1957-58. The Income-tax Officer (ITO) invoked Section 23A due to the non-declaration of dividends by the assessee, despite the computation of profits on an estimated basis under the proviso to Section 13. The Tribunal found that the ITO had jurisdiction to act under Section 23A since no dividends were declared, which amounted to a deficiency in the statutory percentage.

2. Consideration of Losses in Earlier Years:

The Tribunal emphasized that before applying Section 23A, the assessing authorities must consider the losses incurred by the company in earlier years. The Appellate Assistant Commissioner (AAC) acknowledged the losses of Rs. 13,400 in 1953-54 and Rs. 3,000 in 1954-55 but held that these losses did not justify the non-declaration of dividends. However, the Tribunal found that the AAC's approach was erroneous, as the Supreme Court in Commissioner of Income-tax v. Jubilee Mills Ltd. held that losses adjusted in the books do not cease to be "losses incurred in the earlier years" for the purposes of Section 23A.

3. Determination of Commercial Profits:

The Tribunal ruled that only commercial profits should be considered to determine the applicability of Section 23A. The ITO had added Rs. 36,603 and Rs. 10,488 to the gross profits of the assessee for the years 1956-57 and 1957-58, respectively, based on estimated income. The Tribunal excluded these additions, stating that the estimated additions were not commercial profits. However, the High Court disagreed, stating that estimated additions to income under the proviso to Section 13 are commercial profits and should be considered when determining the smallness of profits.

4. Reasonableness of Non-Declaration of Dividends:

The Tribunal held that the non-declaration of dividends was not motivated by the avoidance of super-tax but was due to the smallness of profits and losses in earlier years. The High Court agreed with the Tribunal's finding that the non-declaration of dividends was reasonable due to the losses in earlier years. The Tribunal's finding on this point was binding and justified setting aside the orders under Section 23A.

Conclusion:

The High Court concluded that Section 23A was applicable due to the non-declaration of dividends. However, the Tribunal's order setting aside the assessments under Section 23A was correct, given the losses in earlier years. The High Court emphasized that losses incurred in earlier years must be considered, and the estimated additions to income should be treated as commercial profits. The parties were left to bear their own costs.