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TMI Blog1981 (9) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... 070. It was asserted on behalf of the assessee before the ITO that a larger dividend could not be declared as the assessee was required to repay its loan to M/s. Binani Investment Co. (P.) Ltd. as the creditor was pressing hard for its repayment. It was contended that, faced with this situation, the directors of the company did not think it proper to fritter away its resources by declaring a higher dividend. The ITO did not accept this explanation. He, therefore, subjected it to an additional super-tax of Rs. 16,990. It may not be inappropriate to refer to the ITO's finding in the assessment order. The ITO observed, inter alia, as follows: " 3. The arguments advanced by the company for non-declaration of dividend up to the statutory percentage prescribed in the Act are not convincing. The total receipts of the company for the year were Rs. 1,90,764. After deduction of the necessary expenses the company was left with Rs. 1,22,394. The company had provided Rs. 70,000 for incometax and Rs. 45,000 were appropriated towards the general reserve. The general reserve was not intended for repayment of the loan as the cash position including bank balance as on 31st December, 1967, was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red. No other reason was adduced for non-declaration of dividend larger than Rs. 5,013. It is in the light of this situation, the test of reasonableness or unreasonableness should be looked into. Having regard to the facts and circumstances of the case, the ITO was quite justified in applying the provisions of section 104(1) and charging additional super-tax of Rs. 16,990. In the premises, he rejected the assessee's contention. Being aggrieved by the aforesaid order, there was a further appeal before the Tribunal by the assessee. The Tribunal noted the rival contentions and referred to certain decisions of the Supreme Court as well as this High Court. Thereafter, the Tribunal went on to observe, inter alia, as follows: " 5. The learned departmental representative on the other hand submitted that there was no dispute that the commercial profit was sufficient to declare the required amount of dividend which was also clear from the fact that the assessee had transferred a sum of Rs. 45,000 to the general reserve during the year. He contended that if that was the case, there was no reason why the assessee should not be subjected to penalty under section 104(1) of the Act. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On that date a part of the debt had already been repaid and could not be, called back for declaring any dividend. In our opinion, the counsel for the assessee has correctly relied on the two decisions of the Calcutta High Court referred to above. Thereafter the Tribunal referred to the observations of this court in the case of CIT v. Bangodaya Cotton Mills [1968] 69 ITR 812 (Cal). In the premises the appeal was allowed. Thereafter, the Tribunal has referred the question to this court, as indicated before. On behalf of the Revenue, it was urged, before us, that the Tribunal should have taken an overall view of the matter. It was stressed that the two aspects of the matter were not properly considered. It was, firstly, sought to be argued that there was surplus and the assessee was not justified in transferring a sum of Rs. 45,000 to the general reserve which the Tribunal noted as a fact, to which the attention of the Tribunal was drawn by the Revenue. It was, secondly, urged that in view of the fact that both the company, M/s. Binani Investment Co. (P.) Ltd. as well as the assessee, being under the same management and same directors and the fact that three years after the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit' mean ? Does it mean only the assessable income or does it mean commercial or accounting profits ? If the scope of the section is properly appreciated, the answer to the said question would be apparent. 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 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 the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. " Basing his arguments on the aforesaid observations of the Supreme Court, lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was incurred after the end of the relevant assessment year should have been taken into consideration by the Revenue in considering the reasonableness of the dividend distributed. This court repelled that submission. The facts and circumstances of this case are entirely different. Here, the assessee was not asking that any subsequent expenditure should be taken into consideration. On the contrary, it was the Revenue which was seeking to agitate this theory that subsequent to the assessment, in the sense, three years after the close of the assessment, the amalgamation of the assessee-company with the lender-company was a factor which should have been considered. In our opinion, the observations of the Division Bench of this court in the case of Calcutta Landing Shipping Co. Ltd. v. CIT [1980] 123 ITR 172 at p. 180, negative the contentions urged on behalf of the Revenue. Now, so far as the other aspect of the matter is concerned, that is to say, the transfer of the sum of Rs. 45,000 to the general reserve account, it has to be borne in mind that the company has the property owning income. Revenue has never challenged that this was done improperly. There was no objection fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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