Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1965 Supreme(SC) 93

SUPREME COURT OF INDIA
22nd March, 1965
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commissioner of income tax, West Bengal, Appellant
Versus
Gangadhar Banerjee and Co. (Private) Ltd., Respondent.
Civil Appeal No. 807 of 1963.
Advocates Appeared
Mr. C. K. Daphtary. Attorney General for India (M/s. R. Ganapathy Iyer and R. N. Sachthey, Advocates with him), for Appellant, Mr. A. V. Viswanatha Sastri, Senior Advocate (Mr. S. C. Mazumdar, Advocate, with him), for Respondent.

Advocates:
A.V.VISHWANATHA SASTRI, C.K.DAFTARY, R.Ganapathy Iyer, R.N.SACH, S.C.MAJUMDER

The Income-tax Officer's satisfaction under S. 23A of the Indian Income-tax Act, 1922, that a larger dividend could reasonably be distributed must be based on a consideration of all relevant circumstances, including losses incurred in earlier years, the smallness of the profit, and other relevant factors.

Headnote:
INCOME TAX - S. 23A - Scope and interpretation - Satisfaction of Income-tax Officer - Circumstances to be considered - Smallness of profit - Meaning - Balance-sheet - Finality - Burden of proof.
Fact of the Case:

The assessee company declared a dividend of 5 1/2% per share for the accounting year 1947-48, resulting in a distribution of Rs. 44,000. The Income-tax Officer, finding that the distributed amount was less than 60% of the profits available for distribution, passed an order under S. 23A of the Indian Income-tax Act, 1922, directing that an additional sum of Rs. 1,07,902 be deemed to have been distributed as dividends. The assessee challenged the order, contending that the dividend declared was reasonable considering the smallness of the profits.
Finding of the Court:

The Supreme Court held that the Income-tax Officer's order was unreasonable and set it aside. It interpreted S. 23A of the Act and held that the Income-tax Officer's satisfaction that a larger dividend could reasonably be distributed must be based on a consideration of all relevant circumstances, including losses incurred in earlier years, the smallness of the profit, and other relevant factors. The Court also held that the expression "smallness of profit" refers to actual accounting profits in comparison with the assessable profits of the year.
Issues: 1. Whether the Income-tax Officer's satisfaction under S. 23A of the Act is limited to the two circumstances of losses incurred in earlier years and the smallness of the profit. 2. Whether the Income-tax Officer can consider other relevant circumstances in determining the reasonableness of a dividend distribution. 3. Whether the balance-sheet is final and conclusive for the purpose of S. 23A of the Act. 4. Whether the burden of proof lies on the Revenue to establish that the conditions for invoking S. 23A are satisfied.
Ratio Decidendi: 1. The Court held that the Income-tax Officer's satisfaction under S. 23A of the Act is not limited to the two circumstances of losses incurred in earlier years and the smallness of the profit. The expression "having regard to" in the section indicates that all relevant circumstances must be considered. 2. The Court held that the Income-tax Officer can consider other relevant circumstances in determining the reasonableness of a dividend distribution, such as the previous losses, the present profits, the availability of surplus money, and the reasonable requirements of the future. 3. The Court held that the balance-sheet is not final and conclusive for the purpose of S. 23A of the Act. While it affords prima facie proof of the financial position of the company, the parties can establish by cogent evidence that certain items were inflated, deflated, or omitted. 4. The Court held that the burden of proof lies on the Revenue to establish that the conditions for invoking S. 23A are satisfied.
Final Decision: The Supreme Court dismissed the Revenue's appeal and upheld the High Court's decision quashing the Income-tax Officer's order under S. 23A of the Act.

Judgement

SUBBA RAO, J. : - This appeal by certificate raised the question of the construction of the provisions of S. 23A of the Indian Income-tax Act, 1922, hereinafter called the Act, before it was amended by the Finance Act, 1955.

2. The relevant and undisputed facts may be briefly stated. Messrs. Gangadhar Banerjee and Co. (Private) Ltd., the respondent herein, is a private limited company. At the General Body Meeting of the Company held on December 6, 1948, the Directors declared a dividend at the rate of 5 1/2 per cent per share. The said distribution of dividends related to the accounting year 1947-48 which ended on April 13, 1948. According to the balance-sheet of the Company for that year the net profit for the said year was Rs. 1,28,1 12/ 7 / 5. The taxation reserve was Rs. 56,000. The profit left was Rs. 72,000. The Directors declared a dividend at the rate of 5 1/2 per cent per share thus making a total distribution of Rs. 44,000. On that basis the profit that was available for further distribution was Rs. 28,000. Though under the balalce-sheet the estimated tax was Rs. 66,000, the tax assessed for the year was Rs. 79,400. If the difference between the tax assessed and the estimated tax was also deducted from the profits; there would only be a sum of Rs. 4,000 that would remain as undistributed profits.

3. The Income-tax Officer assessed the total income of the assessee for the year 1948-49 at Rs. 2,66,766. After deduction the tax payable under the two heads, namely, I. T. of Rs. 81.,517/ 13/0 and C. T. of Rs. 33,345/12/0, he held that a sum of Rs.1,51,902 / 7 / 0 was available for distribution to the shareholders as dividends. As the amount distributed by the Company was below 60 per cent of the profits available for distribution, the Income-tax Officer, with the previous approval of the Inspecting Assistant Commissioner of Incometax, passed an order under S. 23-A of the Act directing that the amount of Rs. 1,07,902 (i.e. Rs. 1,51,902 minus Rs. 44,000 = Rs. 1,07,902) shall be deemed to have been distributed as dividends as on the date of the annual general meeting of the Company. He found that having regard to the profits earned in the earlier years and the capital and taxation reserves, payment of larger dividends would not be unreasonable.

4. The assessee preferred an appeal to the Appellate Assistant Commissioner against the order made by the Income-tax Officer under S. 23A of the Act. By the time the appeal came to be disposed of in an appeal against the order of assessment the assessed income was reduced by it sum of Rs. 80,926. Notwithstanding the said deduction, as the amount of Rs. 44,000 distributed by the Company was less than 60 per cent of the balance of Rs. 1,64,440 arrived at on the basis of the revised calculation, the Appellate Assistant Commissioner held that an action under S. 23A of the Act was justifed. He further held that the assessee incurred no losses in the previous years. that in almost all the past assessments the assessee showed substantial profit, that the profits disclosed in the year of account were, not small and that, therefore, the direction to pay a higher dividend was not unreasonable.

5. On a further appeal, the Income-tax Appellate Tribunal held that the amount of profits should be judged only from the balance-sheet and that judged by the figures given thereunder a dividend to the extent of Rs. 64,000, being 60 per cent, of the assessed profits less income-tax, could be distributed and that such distribution was not unreasonable.

6. The Tribunal referred the following question under S. 66 (1) of the Act for the decision of the High court of Calcutta :

"Whether on the facts and in the circumstances of the case any larger dividend than that declared by the company could reasonably be distributed within the meaning of Section 23A of the Indian Income-tax Act and the application of S. 23A of the Indian Income-tax Act was in accordance with law."

The High Court held that the Tribunal went

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1965 Supreme(SC) 93

Cases Referred (1)