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TMI Blog1975 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 2,36,700, the difference being mainly due to the dividend being grossed up under the law then in force. Included in the income is a sum of Rs. 2,75,640 which was the dividend declared in favour of the assessee on December 28, 1956. The general meeting of the assessee was held on December 29, 1956. The assessee being an investment company should have distributed 100% of the distributable income. The distributable income is the balance left out of the assessed income after deduction of the tax payable thereon and Rs. 1,82,426 was the surplus or distributable income in this case. The Income-tax Officer by his letter dated November 1, 1957, requested the assessee to give reasons why the provisions of section 23A of the Indian Income-tax Act, 1922, should not be made applicable in this case. The assessee by its letter dated January 15, 1958, inter alia, stated that the profit was computed after taking into account a sum of Rs. 3,21,813 as dividend receivable and this dividend did not reach the hands of the assessee and when such dividend was distributed it was appropriated by the creditors of the assessee. It was contended before the Income-tax Officer by the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3A." The order of the Income-tax Officer ex facie shows that the question of smallness of profit was directly in issue before him and, therefore, we will now look at the relevant portion of the Tribunal's order which is as follows : " The question presented in this appeal is an interesting one and relates to the factors which have to be taken into consideration for judging the capability of a company to declare dividend. The proposition laid down above would be clear soon, as we say, that the assessee, which is an investment company, has been saddled with an order under section 23A by reason of its income having been calculated on the basis of certain dividends which had been declared in its favour but had neither been distributed nor been paid to it during the relevant accounting year. There is no dispute with regard to the fact that the dividend of Rs. 2,75,840 declared in the assessee's favour had not been distributed or paid up to the date of passing the assessment order, ie., up to 25th October, 1957. The total income after deducting certain expenses and other charges as per profit and loss account was Rs. 2,05,840 but was assessed at Rs. 2,46,700. This means that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen... It follows from the above that the mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received and under that system, book profits are assessed as liable to tax." Mr. Pal also cited the decision of the Supreme Court in the case of Commissioner of Income-tax v. Gajapathy Naidu. on the mercantile system of book-keeping, in support of his contention that the Tribunal erred in excluding the dividends declared in favour of the assessee in calculating its commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions relating to the year in which different heads of income became taxable...The year in which a particular class of income becomes taxable must, therefore, be determined, in the light of its true character, and subject to the special provision, if any, applicable thereto. The legislature has enacted an express provision making dividend income taxable in the year in which it is paid, credited or distributed or is to be deemed, so paid, credited or distributed. The test applied by Chagla C.J. that because the dividend becomes due to the assessee who has the right to deal with or dispose of the same in any manner he likes, it is taxable in the year in which it is declared, cannot be regarded as correct. The expression 'paid' in section 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. Chagla C.J. has himself in Purshotamdas Thakurdas v. Commissioner of Income-tax expressed a different view. The learned Chief Justice in delivering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividends would be unreasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The legislature has not provided in section 23A that, in considering whether an order directing that the undistributed profits shall be deemed to be distributed, the smallness of the assessable income shall be taken into account. The test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question. Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do. For instance, in the case of companies receiving income from property, even though tax is levied und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust form part of the accounting profits." The law, in our opinion, is well-settled on the question involved before us. " Accounting profits " and assessable profits " are two different concepts under the Income-tax Act. "The commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles ". While acting under section 23A of the Act, the Income-tax Officer must not act as a tax collector, but should act as a prudent director of the company. In the absence of any special circumstances no prudent director will ever take into account the money which has never come into the hands of the company for the purpose of distribution. It is the duty of the Income-tax Officer to take an overall picture of the financial position of the company at the date of distribution. He " must determine the commercial profits " of the company which must be the actual available profits at the date of declaration of dividends and such available commercial profits must be calculated by him from a broad commercial point of view. Actual commercial profits may be far less than the book entries under the mercantile system of accounting and, therefore, in our o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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