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TMI Blog1971 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1922 (hereinafter referred to as "the Act"). The assessee-company carries on the business of structural contractors and during the previous years undertook erection work at Bhilai Steel Plant. The distributable profits of the assessee were determined by the Income-tax Officer for the assessment years 1960-61 and 1961-62 at Rs. 2,33,744 and Rs. 63,405 respectively. The assessee-company did not declare any dividend for either of these two relevant previous years and the Income-tax Officer was of the view that the company came within the purview of section 23A. He issued notice to the assessee-company to show cause why additional super-tax under the provisions of section 23A should not be levied on the assessee for these two years. In reply to the notice, the assessee contended that looking to the past losses and the smallness of profit in the two years, it was unreasonable to declare any dividend. The Income-tax Officer held that in view of the distributable profits available for the two years and the failure of the assessee to declare any dividend, additional super-tax was leviable. On appeal against this decision of the Income-tax Officer, the Appellate Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23A of the Act; the second part provides for the exercise of the jurisdiction in the manner prescribed thereunder; and the third part provides for the assessment of the statutory dividends in the hands of the shareholders. This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the 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 incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own facts. The reasonableness or unreasonableness of the amount distributed as dividends has to judged by business considerations as indicated in the passage quoted above. In New Star Industries Pvt. Ltd. v. Commissioner of Income-tax, the Bombay High Court considered the question of profits made by a company on forward hedging contracts in one particular year and the company not declaring the dividend in spite of the full amount available to it in view of the fact that the hedging contracts were entered into only to safeguard against future loss and there was loss of more than that amount in exports in the next year, before the date of declaration of dividend. In that case before the Bombay High Court, the company concerned had made a profit of Rs. 1,94,116 on forward hedging contracts in 1950 ; and though there was a balance of profit of Rs 93,703, it distributed only Rs. 8,000 as dividend for the year on the ground that hedging contracts were entered into only to safeguard against future loss and there was loss of more than that amount in exports in the next year, before the date of declaration of dividend. The departmental authorities being of the view that the only two mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ras High Court considered the question of reasonableness in the declaration of dividend and the concept of commercial prudence, and it was held that it is not necessary that, in order to exclude from computation of commercial profits, the reservation should always be in respect of a definite ascertained loss or liability. There may be circumstances which may warrant a reserve against possible liability which will have to be excluded in the computation of commercial profits for the purpose of section 23A. In that case it was held by the High Court that in order to determine the commercial profits of the assessee-company whose business included furnishing guarantees for debts borrowed by subsidiary companies, a liability reserve of companies, which had gone into liquidation, had to be excluded. At page 381 of the report, Veeraswami J., delivering the judgment of the court, observed: "The question always in such case is whether the payment of dividend or a larger dividend than that declared would be unreasonable. This question will have to be eventually decided in the light of commercial considerations and not on any technical view of the provisions made for liabilities likely to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion is whether a prudent businessman in the light of the particular facts facing him would or would not decide to declare a dividend, and if he would, how much amount would he set apart for declaration of dividend. It is in the light of the test of reasonableness that these questions have to be decided. In applying these tests of reasonableness, it cannot be said that the businessman errs on the side of unreasonableness if in the light of anticipated loss in subsequent years, he decides to set apart a certain sum from the current year's profit to meet future liabilities. The question which has been formulated for our consideration by the Tribunal mentions whether losses suffered by the assessee-company in subsequent years are to be taken into account for the purpose of determining the applicability of section 23A. It is only while applying the standard of reasonableness that the losses suffered by the assessee-company in subsequent years may in a particular case serve as evidence of the reasonableness of the anticipations which the board of directors had made at the time when they decided to declare a particular dividend or decided not to declare any dividend at all for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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