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TMI Blog1987 (3) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, in considering the application of section 23A(1) to the company for the assessment year 1953-54 by reference to its past losses, the amounts lying to the credit of the reserve account of the company could be set off against the past losses ? 2. Whether, in view of the past losses and the pending claims in various litigations against the assessee company, a declaration of a dividend for the assessment year 1954-55 would have been reasonable ? " The assessee is a private limited company doing business in mining. The total income of the assessee was determined at Rs. 9,54,825 for the first of the two aforementioned years and Rs. 7,16,452 for the second of those years. The assessments were modified in appeal and at the time th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions had to be given on account of secret commission that had been paid ; (2) in determining such commercial profits, whether the depreciation on fixed assets to be considered was the depreciation charged by the assessee in its accounts or the depreciation allowed by the income-tax authorities in the assessments for those years; (3) in judging the reasonableness of the non-declaration of dividends by reference to the past losses of the assessee, whether the reserves of the assessee had to be taken into account ; (4) in judging such reasonableness, whether contingent liabilities of the assessee had to be taken into account. The Tribunal held that the secret commission had to be deducted in determining the commercial profits. It held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the capacity of the assessee to declare dividends, especially when there were sizeable commercial profits and only some contingent liabilities were put forward as a ground for withholding dividends. The aspect of the setting off of the reserves against commercial losses is the subject matter of the first question that we are called upon to answer. The aspect of the contingent liabilities is the subject-matter of the second question. It is convenient to set out, first, the provisions of section 23A(1) as it read "23A. Power to assess individual members of certain Companies. (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 up to the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he object, of the section was to prevent evasion of tax, the provision had to be worked, not from the standpoint of the tax collector, but from that of businessman. The yardstick was that of a prudent businessman. The reasonableness or unreasonableness of the amount distributed as dividend had to be judged by business considerations, such as previous losses, present profits, availability of surplus money, the reasonable requirements of the future and other similar considerations, in other words, the overall picture of the financial position of the business. Approving these observations in CIT v. Asiatic Textiles Ltd. [1971] 82 ITR 816, the Supreme Court added that " it was not open to the Incometax Officer to constitute himself as a super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. CIT [1975] 98 ITR 536. This was a case in which the assessee had not declared dividend because, it contended, it was contemplating a manufacturing activity for which it had to build up sufficient finance. It was held that the fact that developmental activity was proposed did not show that the assessee wanted to build up reserves for such activity or that it was for that reason that a lesser dividend had been declared. This decision of the Madras High Court does not assist us. It is not rendered in a case in which there had been losses in previous years and the directors had decided to set off the profits of the current year thereagainst. That was the position in the case of Bombay Cycle Stores Co. (P) Ltd. [1964] 51 ITR 460 (Bom). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich has been taken by the directors objectively and in a businesslike manner, as if he was occupying their chairs. He must look at the matter with only the good of the business in mind. In the facts of the present case, considering that there had been losses over several consecutive years in the past and the contingent liabilities that might have to be met, a taxing authority, so looking at the matter, could not have concluded that the directors had acted unreasonably in not declaring a dividend. The second question must, therefore, be answered in favour of the assessee. In conclusion, the first question is answered in the negative and in favour of the assessee. The second question is also answered in the negative and in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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