1971 (8) TMI 49 - HC - Income Tax

Provisions for anticipated future losses determination of the reasonableness of the dividends distributed for the purpose of section 23A - Whether losses suffered by the assessee-company in subsequent years were to be taken into account for the purpose of determining the applicability of the provisions of section 23A of the Income-tax Act, 1922

Summary

Issues Involved:
1. Applicability of section 23A of the Income-tax Act, 1922.
2. Consideration of subsequent years' losses for determining dividend declaration.
3. Reasonableness of the decision not to declare dividends.

Issue-wise Detailed Analysis:

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

The core issue was whether the losses suffered by the assessee-company in subsequent years should be considered when determining the applicability of section 23A of the Income-tax Act, 1922. The assessee, a private limited company, did not declare any dividend for the assessment years 1960-61 and 1961-62. The Income-tax Officer determined distributable profits and issued a notice for additional super-tax under section 23A due to the absence of dividend declaration. The Tribunal, referencing Supreme Court cases, set aside the orders and remanded the case to the Income-tax Officer for fresh adjudication, emphasizing the need to consider subsequent losses and the company's stability.

2. Consideration of subsequent years' losses for determining dividend declaration:

The Tribunal and the court referred to the Supreme Court's judgment in Commissioner of Income-tax v. Gangadhar Banerjee & Co., which clarified that the Income-tax Officer must adopt a businessman's perspective when assessing the reasonableness of dividend declarations. The Supreme Court stated that the officer must consider various business considerations, including previous losses, current profits, surplus availability, and future requirements. The Tribunal highlighted that subsequent losses should be reviewed to determine if they were real or artificial and to assess the company's financial stability.

3. Reasonableness of the decision not to declare dividends:

The court emphasized that the reasonableness of not declaring dividends should be judged from the perspective of a prudent businessman. It cited several cases, including New Star Industries Pvt. Ltd. v. Commissioner of Income-tax, where the Bombay High Court held that the expression "having regard to" in section 23A does not limit the enquiry to previous losses and smallness of profits. All relevant circumstances must be considered. The court also referenced Amalgamations (P.) Ltd. v. Commissioner of Income-tax, where it was held that reserves against possible liabilities should be excluded in computing commercial profits for section 23A purposes. The court concluded that subsequent losses serve as evidence of the reasonableness of the board's anticipations when deciding on dividend declarations.

Conclusion:

The court answered the referred question affirmatively, stating that losses suffered by the assessee-company in subsequent years can be considered as evidence to indicate whether the board of directors' anticipations were reasonable. This approach aligns with the test of reasonableness judged from business considerations and the standpoint of a prudent businessman. The question was answered in the affirmative to the extent indicated, with no order as to costs.