1970 (12) TMI 14 - HC - Income Tax

Whether tax liability outstanding from previous years, should be considered for determining the availability of surplus money, for distribution of dividends u/s 23A

Summary

Issues:
Interpretation of section 23A(1) of the Indian Income-tax Act, 1922 regarding the declaration of dividends by a private limited company not substantially interested by the public.
Consideration of factors like losses incurred in earlier years and smallness of profit made in the previous year in determining the justification of the Income-tax Officer's order.
Impact of outstanding tax liabilities on the declaration of dividends by the company.
Applicability of the Supreme Court's interpretation in Commissioner of Income-tax v. Gangadhar Banerjee & Company Ltd. on the Income-tax Officer's decision-making process.

Detailed Analysis:

The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, where the Tribunal questioned the justification of the Income-tax Officer's order under section 23A(1) for the assessment year 1959-60. The company in question, a private limited company not substantially interested by the public, had declared a dividend lower than the statutory percentage due to outstanding tax liabilities. The Income-tax Officer's decision was based on the lack of grounds like losses in earlier years or smallness of profit in the previous year for not declaring a higher dividend.

The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the Income-tax Officer's decision, emphasizing that outstanding liabilities should not affect the assessment of distributable surplus for dividend declaration. The Tribunal specifically highlighted the amended section 23A(1) post the Finance Act, 1955, which focused on the smallness of profit in the previous year, excluding consideration of outstanding tax liabilities.

The legal counsel for the assessee referred to previous court decisions, including Commissioner of Income-tax v. Bangodaya Cotton Mills Ltd., and Commissioner of Income-tax v. Gangadhar Banerjee & Company Ltd., to argue that the Income-tax Officer's assessment should consider factors like losses incurred in earlier years and the smallness of profit made in the previous year. The Supreme Court's interpretation emphasized the need for the Income-tax Officer to assess dividend declarations based on business considerations and the financial position of the company.

The High Court judges, K. L. Roy and Sankar Prasad Mitra, concluded that the Income-tax Officer's decision should consider outstanding tax liabilities in determining the distributable surplus available for dividend declaration. They disagreed with the Tribunal's narrow interpretation of section 23A(1) and emphasized the need for a comprehensive assessment of all relevant factors by the Income-tax Officer. The judges ruled in favor of the assessee, stating that outstanding tax liabilities should be considered in determining the justification for not declaring a higher dividend, as per the guidance provided by the Supreme Court. The question was answered in the negative, favoring the assessee.