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TMI Blog1980 (8) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act, 1961, for the assessment year 1961-62 on the assessee-company should not be taken into consideration in determining the reasonableness of the distribution of any dividend ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalties levied under sections 271(1)(a),271(1)(c) and 221(1) of the Income-tax Act, 1961, were not deductible as tax in arriving at distributable surplus ?" In order to appreciate these questions, it is necessary to state some facts. The assessment year involved is 1961-62. The assessee disclosed a loss of Rs. 4,629 in its return. The assessment was completed at Rs. 3,42,950. The assessment included an income of Rs. 3,30,000 from undisclosed sources and the interest of Rs. 17,165 from bogus hundi loans. These additions were made on account of a disclosure statement. The ITO treated the assessed income of Rs. 3,42,950 as the commercial profit of the assessee and, after adjusting the tax, computed the distributable surplus at Rs. 1,88,622. As the assessee did not declare any dividend the ITO levied additional super-tax of Rs. 69,790 under s. 23A of the Indian I.T.Act, 1922. In the appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend. The Tribunal further observed that the assessee did not take up the plea in the assessment proceedings and in the quantum appeals that a peak of Rs. 1,20,000 had already been arrived at in the preceding year and to that extent the bogus loans out of Rs. 3,30,000 could not be assessed and become final and that it could not be reopened. The Tribunal, therefore, rejected these contentions. In respect of the other contention, the Tribunal found that the assessee had furnished particulars of the penalties which, according to it, should have been deducted in computing the distributable surplus. It was not disputed on behalf of the assessee that all those penalties were imposed after the impugned order had been passed. The Tribunal was of the view that only the existing tax liability was to be adjusted for the application of s. 23A of the Indian I.T. Act, 1922. The Tribunal observed that penalties arising out of subsequent misconduct on the part of the assessee could not be foreseen and that such penalties could not affect the view of a prudent businessman in determining whether, out of the profits, dividend should been declared or not. The Tribunal, accordingly, held that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l provision and, therefore, the revenue had to strictly comply with the conditions laid down thereunder and that the burden lay upon the revenue to prove that the conditions laid down thereunder were satisfied before the order was made. Explaining the duty of the ITO, the Supreme Court observed at page 181 of the report, inter alia, as follows : "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 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 the business. It is neither possible nor advisable to lay down a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be be fooled by the wild hope that the value of the shares might go up again. The Supreme Court observed that the directors were expected to act as hard-headed businessmen. Though from a different point of view, and not on this aspect directly, in a case as to whether a particular loss was to be allowed or not under s. 10 of the Indian I.T. Act, 1922, the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40 found that the assessee, there, was carrying on smuggling activity and was apprehended by the Indian Police while crossing the border into Pakistan and a sum of Rs. 65,000 in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. The customs authorities confiscated the currency notes. The I.T. authorities found that the assessee was carrying on the business of smuggling and that he was liable to incometax on income from that business and such Income was assessed to tax. The question was, whether the assessee was entitled, under s. 10 of the Indian I.T. Act, to deduct the loss of Rs. 65,000 arisen from the confiscation of the currency notes. The Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , was it or was it not prudent for a businessman like the directors of a company, who knew that they were dealing with undisclosed income, to take into consideration the legal or lawful hazards or the lawful liability arising from such an unauthorised activity of dealing with undisclosed income?. The Tribunal seems to have proceeded on the basis of the subsequent misconduct. The misconduct was very much present at the time of the assessability of the income. It was admitted to be concealed. But the persons who were concealing were the directors and if they were prudent businessmen then they would have, in the present context, visualised the consequences of having concealed the income and the possibility of penalty that would be imposable upon them. If that is the context which they must keep in view, then, acting as prudent businessmen or as hard-headed businessmen, which the Supreme Court would like them to be, they were running the risk of distributing the dividend out of the said income, rather they should have made a provision for the payment of that penalty. If this perspective is kept in view, then from the commercial or prudent business point of view, these amounts were liab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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