1972 (9) TMI 39 - HC - Income Tax

Whether the losses subsequent to the date of general meeting at which dividends were declared can be considered for the purposes of super-tax and undistributed dividends - Whether Tribunal was right in holding that in considering the reasonableness or unreasonableness of the assessee s action in not distributing any dividend, the Income-tax Officer should have taken into account the losses suffered up to the last day of the 12 months following the end of the previous year as distinct from up to the date of the general meeting - Tribunal was not right in considering the reasonableness of the assessee s action in not distributing any dividend with reference to losses suffered by the assessee in the following year - Question answered in the negative in favour of the department

Summary

Issues:
Interpretation of section 23A of the Indian Income-tax Act, 1922 regarding the reasonableness of not distributing dividends by a company based on losses suffered in subsequent years.

Analysis:
The judgment by the High Court of Allahabad involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the reasonableness of a company's decision not to distribute dividends. The case pertained to the assessment year 1956-57, where the assessee-company did not declare any dividend at the general meeting held on July 12, 1956, due to losses suffered in the subsequent year. The Income-tax Officer issued a notice under section 23A, questioning the lack of dividend distribution. The Appellate Assistant Commissioner upheld the decision, finding no justification for not distributing dividends. However, the Income-tax Appellate Tribunal opined that losses in subsequent years should be considered in assessing reasonableness, contrary to the Income-tax Officer's view.

The court analyzed section 23A, emphasizing that the Income-tax Officer must determine if dividend distribution would be unreasonable considering losses incurred in earlier years or the smallness of profits. The court deliberated on whether the reasonableness of the decision not to distribute dividends should be based on facts existing at the general meeting or include subsequent events. Referring to Supreme Court decisions, the court highlighted that the reasonableness of dividend distribution is judged based on business considerations, such as previous losses and present profits. The court rejected the argument that subsequent events should be considered, emphasizing that the decision at the general meeting must be based on existing or foreseeable facts.

The court differentiated two Supreme Court cases cited by the assessee, clarifying that they did not support including subsequent events in assessing reasonableness. The court reiterated that the Income-tax Officer must assess reasonableness as if acting as a director at the time of the general meeting. Considering that shares were purchased and sold after the meeting, resulting in losses, the court concluded that such subsequent events could not have been foreseen at the time of the decision not to distribute dividends. Therefore, the Income-tax Officer should evaluate reasonableness based on facts existing at the general meeting, not subsequent occurrences. Consequently, the court answered the question in the negative, in favor of the department, and awarded costs to the Commissioner.

In summary, the judgment clarified the interpretation of section 23A, emphasizing that the reasonableness of not distributing dividends should be assessed based on facts existing at the general meeting, without considering subsequent events. The court's analysis underscored the importance of business considerations and the need for the Income-tax Officer to evaluate reasonableness as if acting in the capacity of a director at the time of the decision.