The expression "smallness of profit" in S. 23A of the Indian Income Tax Act, 1922, means smallness of the commercial profit and not smallness of the assessable income.

Judgment

SHAH, J. : The Income Tax Appellate Tribunal, Bombay Bench "A" referred under S. 66(1) of the Indian Income Tax Act, 1922 - hereinafter referred to as the Act - the following question :

"Whether the sum of Rs. 15608 should have been included in the assessee Company s "profit" for the purpose of determining whether the payment of a larger dividend than that declared by it would be unreasonable ?"

2. The High Court answered the question in the negative. Against the order of the High Court, with special leave under Art. 136 of the Constitution, this appeal is preferred.

3. M/s. Bipinchandra Maganlal & Co., Ltd. - hereinafter referred to as the Company - is registered under the Indian Companies Act. The Company is one in which the public are not substantially interested within the meaning of S. 23A Explanation of the Act. Its paid-up capital at the material time was Rs. 20,800 made up as follows :

20 shares of Rs. 50 each fully paid up and 1980 shares of Rs. 50 each, Rs. 10 being paid up per share.

4. In December 1945, the Company purchased certain machinery for Rs. 89,000 and sold it sometime in March, 1947, for the price for which it was originally purchased. In the books of account of the Company, the written down value of the machinery in the year of account 1946-47 (April 1, 1946 to March 31, 1947) was Rs. 73,392. The trading profits of the Company as disclosed by its books of account for the year 1946-47 were Rs. 33, 245. At the General Meeting held on October 21, 1947, the Company declared a dividend of Rs. 12,000 for the year of account. In assessing tax for the year of assessment 1947-48, the Income Tax Officer computed the assessable income of the Company for the year of account 1946-47 at Rs. 48,761 after adding back to the profit of Rs. 33,245 returned by the Company, Rs. 15608 realised in excess of the written down value of the machinery sold in March 1947. The Income Tax Officer passed an order under S. 23A of the Act that Rs. 15429 (being the undistributed portion of the assessable income of the Company as reduced by taxes payable) shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the General Meeting, and the proportionate share of each shareholder shall be included in his total income. Appeals preferred against his order to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal proved unsuccessful, but the Appellate Tribunal at the instance of the Company referred the question set out hereinbefore to the High Court at Bombay under S. 66(1) of the Act.

5. Section 23A(1) of the Act as it stood at the relevant time (in so far as it is material) was as follows :-

"Where the Income Tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company upto the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than 60 per cent of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner in order in writing that the undistributed portion of the assessable income of the amount of the company of that previous year as computed for income tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid. ................"

6. Clearly, by S. 23A, the Income Tax Officer is required to pass an order directing that the undistributed portion of the assessable income of any company (i