TMI Blog1975 (5) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Income-tax Act, 1922, were not attracted in the instant case, after taking into account the capital expenditure incurred by the company and its tax liability as also the fact that the assessee had declared a dividend of Rs. 12,000 in September, 1958 (the period falling beyond 12 months from the end of the previous year) ? " The facts related to the assessment years 1955-56, 1956-57 and 1957-58. The relevant and undisputed facts may be briefly stated : The assessee is a private limited company in which the public are not substantially interested within the meaning of Explanation 1 to section 23A(9) of the Act. The assessee-company did not declare any dividend within the statutory period allowed by the Act although it had earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not within, but beyond, the statutory period of six months ; and that the company made a total profit of Rs. 5,98,565 during the aforesaid period of three years. The Income-tax Officer found, and his finding was upheld by the Appellate Assistant Commissioner, that the company had incurred no losses during the earlier years. But the Tribunal found that losses of Rs. 10,000 of earlier years had to be brought forward by the company. In a reference under section 66(1) of the Act, a finding of fact of the Tribunal is binding on the High Court. One of the arguments advanced on behalf of the company before the Tribunal was that in view of the huge capital expenditure incurred by the company during the years in question, the orders under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The material portion of section 23A of the Act is in the following terms : " 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-- (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section ... the Income-tax Officer shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inessman. In the case of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. [1965] 57 ITR 176, 181 (SC), their Lordships of the Supreme Court have observed : " The section (section 23A) is in three parts : the first part defines the scope of the jurisdiction of the Income-tax Officer to act under section 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remains a distributable balance of profit of Rs. 3,44,184. The dividend at 60 per cent. comes to Rs. 1,69,616. The dividends have to be declared and paid within three months (at the relevant time) and the default is punishable under section 207 of the Companies Act. In the case in hand dividends were found to have been paid not within, but beyond, 12 months. Payment of the dividends beyond 12 months is all the more reason justifying an order under section 23A unless the relaxing clause of the section is attracted. The capital expenditure has been found to be Rs. 2,46,829. The dividend is payable from profit, but capital expenditure is not necessarily met from profit ; it may be met from the capital reserve or other sources. Capital expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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