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TMI Blog1967 (9) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments as its main business. It is also not in dispute that it is a company to which the provisions of section 23A apply. At the end of the accounting year the investments of this company were shown in the balance-sheet at their original cost. The market value on the same date was, however, less by Rs. 68,583. In order to arrive at the profit available for distribution after payment of taxes, the following computation was made by the Income-tax Officer : Rs. Rs. Income assessed 40,524 Less : Charity donations 2,500 Tax paid 20,870 23,370 -------------- Net Income 17,154 -------------- The assessee did not distribute any dividend in the year of account and the Income-tax Officer passed an order under section 23A in respect of the whole of the profit. In doing so, the Income-tax Officer added back Rs. 68,583, the difference between the cost and the market value of the shares. He merely stated : " the assessee's claim of Rs. 68,583 representing the difference between the cost and the market value of the shares claimed in the computation accompanying the return of income has been added back... " It was after adding back that difference in valuation that the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Officer nor the Appellate Assistant Commissioner has considered what it was that was required to be established having regard to the provisions of section 23A. They have merely answered certain points which were raised in the arguments. A considerable argument has been advanced before us as to what were the proper findings of the tax authorities and the Tribunal. We will presently indicate what they were in our opinion. The operative part of section 23A(1) runs as follows : " 23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by... the Income-tax Officer shall, unless he is satisfied--(i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment.... would be unreasonable ;.... make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier, years or 'the smallness of the profit made', the payment of a dividend or a larger dividend than that declared would be reasonable. The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) It was urged before the Supreme Court that the balance-sheet is final and the parties are precluded from questioning its correctness in any respect. The Supreme Court negatived the contention by saying at page 184 : " But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions. It does not also preclude the assessee from proving that the estimate in regard to certain items has turned out to be wrong and placing the actual figures before the Income-tax Officer. " In the light of these principles we turn to consider what has been found in the present case. Now in the reference itself the Tribunal has given extracts from the findings of the Income-tax Officer and the Appellate Assistant Commissioner and its own findings. We have gone through the same and it does not seem to us that any of these authorities have given any clear-cut finding as to whether " smallness of profit " in the year of account justified the non-declaration of a dividend by the assessee. The issue before the Appellate Assistant Commissioner was considerably clouded by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s computed itself must be taken into account, because in paragraph 9 of the reference the Tribunal has itself crystallised the issue before it by saying " The only dispute in the appeal was that the profits in the special circumstances were too small to justify a declaration ". As we have said, it would have been better if the Tribunal had separately stated both these contentions and dealt with them in greater detail giving reasons, but for the reason that it has been somewhat cryptic in its findings, we do not think that it can legitimately be argued that these issues were not at all present in their minds and not, decided by the Tribunal. We have shown that both the issues were raised before the Tribunal, namely, (a) that the smallness of the profit justified the non-declaration of the dividend, and (b) that the circumstance that the investments of the company had fallen in value to the tune of Rs. 68,583 ought to be taken into account in determining the justification for the non-declaration of dividend. We have already shown what are the requirements under section 23A and what is the interpretation placed by the Supreme Court upon the expression " smallness of profit ". We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstance was rightly taken into account by the Tribunal. Its conclusion was thus a correct conclusion to reach. Having discussed the question actually referred we must advert to a point raised by the Tribunal in paragraph 9 of its order of reference--a point which was pressed before us by Mr. Joshi on behalf of the Commissioner. The Commissioner had required the following question to be referred : " Whether, on the facts and in the circumstances of the case, the assessee is entitled to revalue the investments at market price for the purpose of determining the applicability of section 23A when its regular method of accounting was to value them at cost. " The Tribunal declined to refer that question for the simple reason that before the Tribunal there was no dispute to the mode of accounting and the Tribunal has remarked that it does not arise out of its order. Now we have already shown that the question was discussed at length in the order of the Appellate Assistant Commissioner and the Appellate Assistant Commissioner did come to the conclusion that the commercial profits of the company were to be determined only in accordance with the method of accounting regularly e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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