1973 (7) TMI 8 - HC - Income Tax

Whether Tribunal was right in holding that the provisions of section 23A(1) of the Indian Income-tax Act 1922 were not applicable to the case of Messrs. Uttam Singh Duggal & Co. P. Ltd. New Delhi for the assessment year 1955-56 ? - Whether Tribunal s finding that due to amounts disallowed and amounts remaining uncollected no larger could had been declared by the assessee-company would be justified - Reference answered in the affrimative viz. in favour of the assessee and against the revenue.

Issues Involved:
1. Applicability of Section 23A(1) of the Indian Income-tax Act, 1922.
2. Determination of "smallness of profit" for dividend distribution.
3. Consideration of commercial profit versus assessable profit.
4. Availability of surplus money for dividend distribution.
5. Validity of the Tribunal's findings and the Revenue's burden of proof.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A(1) of the Indian Income-tax Act, 1922:
The primary issue was whether Section 23A(1) of the Indian Income-tax Act, 1922, was applicable to the assessee, Messrs. Uttam Singh Duggal & Co. P. Ltd., for the assessment year 1955-56. The Income-tax Officer initially held that Section 23A was applicable due to the assessee declaring a dividend amounting to Rs. 1,86,300, which was less than the statutory percentage of the distributable surplus, leading to the imposition of super-tax on the undistributed balance. However, the Tribunal concluded that the action under Section 23A was not called for, considering the actual availability of funds for distribution.

2. Determination of "smallness of profit" for dividend distribution:
The Tribunal and the court examined the "smallness of profit" in the context of Section 23A. The court noted that the Income-tax Officer must consider the commercial profits rather than the assessable profits when determining the smallness of profit. The Tribunal found that after accounting for disallowed expenses and amounts that remained to be collected, there was not enough profit left in the hands of the assessee to pay a higher dividend.

3. Consideration of commercial profit versus assessable profit:
The court emphasized that the commercial profits, not the assessable profits, should be considered for determining the smallness of profit. The Tribunal agreed with the assessee's contention that expenses disallowed in the computation of income should not be considered available for distribution. The court cited various precedents, including the Supreme Court's judgment in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd., which stated that the source of dividend distribution should be the commercial profits.

4. Availability of surplus money for dividend distribution:
The Tribunal and the court found that the actual availability of surplus money was crucial for determining the reasonableness of the dividend declared. The Tribunal concluded that the payment of Rs. 3,50,000 to certain Americans was not established, and thus, it could not be considered available for distribution. The court reiterated the Supreme Court's view that the Income-tax Officer must consider the availability of surplus money and the reasonable requirements of the future when determining the reasonableness of the dividend declared.

5. Validity of the Tribunal's findings and the Revenue's burden of proof:
The court upheld the Tribunal's findings, stating that the Revenue failed to discharge its burden of proving that the conditions laid down in Section 23A were satisfied. The court emphasized that the Tribunal's conclusion that there was not enough profit left for higher dividend distribution was based on a thorough examination of the facts. The court also noted that the Revenue did not challenge the correctness of the facts before the Tribunal, nor did it provide evidence to contradict the Tribunal's findings.

Conclusion:
The court answered the question in the affirmative, in favor of the assessee and against the revenue, concluding that Section 23A(1) of the Indian Income-tax Act, 1922, was not applicable in this case. The court highlighted that the determination of the reasonableness of the dividend declared, considering the smallness of profit, was a matter for the Income-tax Officer's satisfaction, based on the overall financial position and availability of surplus money.

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