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TMI Blog1973 (8) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... oss account in the balance-sheet as on March 31, 1954, was Rs. 283. The annual general meeting of the company was held on December 20, 1954, but no dividend was declared at that meeting. For the assessment year 1954-55, the company was assessed on a total income of Rs. 4,44,854. This total income was subsequently reduced in appeal to Rs. 1,35,449 and the tax payable by the company was computed on Rs. 58,836. In this reference, we are concerned with the inclusion of the amount of Rs. 1,01,189 which had been omitted by the company to be shown in its income and the resultant order passed under section 23A of the Act. It is not disputed that the Government of Bombay had appointed the assessee as its agent for the distribution of fertilizers like ammonium sulphate, etc., in the year 1950, and that during the relevant accounting year the assessee had acted as such and in respect of this work that was done by the assessee, it became entitled to receive storage charges, supervision charges and transport or clearing expenses. The total amounts receivable by the assessee-company from the Government of Bombay were as follows : Rs. (1) Godown rent 93,576 (2) Storage charges 2,770 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 23(2) accordingly. Since the company had not declared any dividends and since, according to the Income-tax Officer's view, after making provision for tax liability there was distributable surplus available with the assessee-company, he passed an order under section 23A of the Act. Initially by his order dated March 24, 1960, the Income-tax Officer passed an order to the effect that the undistributable portion of the assessable income amounting to Rs. 3,08,183 shall be deemed to have been distributed amongst the shareholders as on December 20, 1954. Then the total income assessed was reduced in appeal to Rs. 1,35,449. The Income-tax Officer passed a revised order on March 14, 1962, to the effect that the undistributable portion of the assessable income amounting to Rs. 76,613 shall be deemed to have been distributed amongst the shareholders as on December 20, 1954. The assessee preferred an appeal to the Appellate Assistant Commissioner but the latter officer confirmed the order of the Income-tax Officer on October 30, 1962. It was contended on behalf of the assessee before the Appellate Assistant Commissioner that the company did not have the necessary commercial profits for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected all the submissions that were put forward on behalf of the assessee. It took the view that the commercial profits, in the light of which the smallness of profits had to be measured, were commercial profits according to the method of accounting followed by the company and, according to the mercantile system which was followed by the assessee-company, profits could be crystallised not only in cash but also in debts receivable from outside parties and that in omitting to take into account the dues from the Government in respect of handling charges for the year 1953-54, the company had definitely understated its commercial profits and the Income-tax Officer was entitled to take into account the item omitted to get the correct idea of the commercial profits. In this behalf the Tribunal relied upon the decision of the Madras High Court in the case of Gobald Motor Service Ltd. v. Commissioner of Income-tax . The Tribunal further took the view that on the assessee's own admission, the profit of about Rs. 1 lakh was not reflected in the books and this had to be taken into account while considering the commercial profits and even if, for the sake of argument, set-off claimed by the Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taking about the second contention urged by Mr. Shah, it seems to us unnecessary to deal with his first contention at great length. However, we shall briefly indicate the nature of the correspondence which Mr. Shah relied upon for the purpose of canvassing the first contention before us, for, in our view, from that correspondence a circumstance emerges which would have a bearing on the second contention urged by him. Out of 3 letters, which have been annexed to the statement of the case as annexures " B ", " C " and " D ", Mr. Shah laid considerable emphasis on two letters being annexures " C " and " D " in support of his first contention. Annexure " C " is a copy of the letter dated June 21, 1956, addressed by the Government of Bombay to the assessee-company on the subject-matter " Ammonium Sulphate/Charges on account of storage contract in the year 1953 in respect of ..........." and the relevant portion of that letter runs as follows " " Sirs, With reference to the correspondence resting with your letter No. 6319/55, dated the 26th April, 1955, on the above subject, I am directed to say that Government have after very careful consideration of the case decided that your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable by the assessee to the Government were reiterated and at the end of the letter the Government informed the assessee that as the assessee had failed to remit payment of the aforesaid amounts which were due for a considerably long time, the Government had decided to proceed with the recoveries in accordance with the remedies available to it. It was urged by Mr. Shah that having regard to the contents of these two letters a reasonable inference should be drawn that storage charges, supervision charges and transport charges had really accrued to the assessee-company in June, 1956, when for the first time by its letter dated June 21, 1956, the Government categorically stated that after very careful consideration of the case it had decided that the assessee-firm " should be paid charges for storage work of ammonium sulphate performed during the year 1953 at the following rates ". His contention was that not merely were the rates and the resultant quantum of charges decided by the Government by its letter dated June 21, 1956, but even the liability to pay such charges to the assessee-company was for the first time accepted by the Government by this very letter and, therefore, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en incorporated in the formal agreement which was forwarded by the Government to the assessee-company or it may be that the rates of the charges specified in this letter might be a variation of the rates incorporated in the formal agreement that was forwarded by the Government to the assessee-company. In the absence of proper material being placed on record, it would not be possible for us to accept Mr. Shah's contention that it was by the letter dated June 21, 1956, that for the first time the Government had accepted the liability to pay the said storage charges, supervision charges and transport charges to the assessee-company or that both liability as well as quantum thereof was for the first time accepted by this letter. From the paucity of material on record, therefore, it may not be possible to accept Mr. Shah's contention. However, as we have said at the outset, in the view which we are taking about the second contention urged by Mr. Shah, it is really unnecessary for us to pronounce our opinion upon this first contention raised by him. As stated earlier, according to Mr. Shah, even if we were to proceed on the assumption that the income of Rs. 1,01,189 ought to have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and we would like to refer to some of the decisions to which our attention was drawn by Mr. Shah for the assessee. In the case of Commissioner of Income-tax v. Gangadhar Banerjee Co. (P.) Ltd. the nature, scope and object of this section have been indicated. The Supreme Court has stated that the Income-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of section 23A of the Act, does not assess any income to tax. He only does what the directors should have done putting himself in their place. 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 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. The Income-tax Officer must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging agency commission of Rs. 41,842, and determined the assessable income at Rs. 58,503. The tax on that assessable income was Rs. 23,950. As the assessee-company had declared dividends only of Rs. 9,516, the Income-tax Officer applied section 23A and passed an order holding that the balance of Rs. 25,037 should be deemed to have been distributed as dividend. The Supreme Court held that under the managing agency agreement the assessee-company did not have any right to receive the commission till the general meeting of the managed company was held. Therefore, the commission could not form part of the accounting profits of the assessee-company for the year ending March 31, 1952, which profits the Income-tax Officer had to consider in determining whether a larger dividend than that declared would be unreasonable. The managing agency commission which was not due in the accounting period did not become part of the accounting profits because the Income-tax Officer erroneously treated it in the assessment order to be due in that period. After approving certain observations in Gangadhar Banerjee and Co.'s case, the Supreme Court at page 628 has observed as follows : " It follows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee-company could not have distributed as dividends more than it did and had it distributed sums equal to its assessable income, it could only have done so by drawing on its capital and distributing the same which was prohibited by law. It further held that on the facts of the case the provisions of section 23A(1) were not attracted, inasmuch as the Income-tax Officer was bound to be satisfied that the payment of a larger dividend would have been not only unreasonable but impossible having regard to the smallness of the profits made by the company. The court also observed that whether the payment of a larger dividend than that declared would be unreasonable by reason of losses in earlier years or the smallness of the profit for that particular year is a question of fact and if the Income-tax Officer was satisfied in this case that a larger dividend could have been reasonably paid, then his satisfaction was based on no evidence. This decision clearly takes the view that if the position as reflected by the balance-sheet and profit and loss account clearly indicates that distribution of dividends larger than that declared by the company would result in the company drawi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... still, having regard to the position which emerged from the consideration of the balance-sheet and profit and loss account of the company placed before the general meeting of the shareholders of the company on December 20, 1954, it could not be said that the act on the part of directors in not declaring any dividend was unreasonable and according to Mr. Shah, if the relevant aspects which emerged from the consideration of the balance-sheet and the profit and loss account of the company were taken into account, no Income-tax Officer, after putting himself in the armchair of the director could have come to any contrary conclusion. For this purpose he invited our attention to the balance-sheet of the assessee-company as on March 31, 1954, and the profit and loss account for the year ended on March 31, 1954, copies whereof have been annexed as annexure " A " to the statement of the case. According to the statement of profit and loss account, the net profit for the relevant period which was carried to the balance-sheet was Rs. 8,500 but since in the previous year as per last balance-sheet the assessee-company had suffered loss to the tune of Rs. 8,212, the balance-sheet as on March 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets were to be sold in the market, they would not fetch price anywhere near what is shown against each in the balance-sheet. Besides, out of the total book debts shown on the credit side debts due from sundry customers for the goods supplied to the tune of Rs. 34,261 have been stated to be doubtful debts ; similarly, out of advances and deposits, advances to the tune of Rs. 16,750 for business on joint venture are considered doubtful and advances against goods to be supplied to the tune of Rs. 68,626 are also considered doubtful ; out of unsecured loans given, loans of Rs. 99,440 are stated to be doubtful ; similarly, investment made for the purchase of business of New Cure International to the tune of Rs. 9,200 is also shown as doubtful ; the total of these 5 items which are shown on the credit side of the balance-sheet as doubtful of recovery comes to Rs. 2,28,277. If these debts, loans or investment to the tune of Rs. 2,28,277 are considered as doubtful of recovery, it is obvious that even the entire paid-up capital could be said to have been eaten away. It is in the light of these aspects which emerge very clearly from the reading of the balance-sheet and profit and loss accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends. But it must be mentioned that it is on a consideration of these items which have been pointed out by Mr. Hajarnavis that the net result as disclosed in the balance-sheet was that there was a surplus of Rs. 288 of assets over liabilities and to this net surplus we have to add the item of income of Rs. 1,01,189 and it is after taking into account all these factors that we have to consider the question as to whether it would have been prudent on the part of directors of the company to declare any dividend to the shareholders in the relevant accounting year. We may observe that except for the non-inclusion of the item of Rs. 1,01,189 the rest of the accounts of the company culminating in the balance-sheet and profit and loss account for the relevant year were accepted as correct by the department. Therefore, having regard to the aforesaid three or four aspects which emerge very clearly from the balance-sheet and profit and loss account of the company for the relevant period, we are clearly of the view that any declaration of dividend by the company to its shareholders would have been very unreasonable. In fact, it would have been an imprudent, if not criminal, act on the part of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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