In determining the adequacy of dividends declared by a company in which the public is not substantially interested, under Section 23A, the Income-tax Officer must consider all relevant factors, including outstanding tax liabilities and the availability of surplus money.

( 1 ) BY this reference under Section 66 (1) of the Indian Income-tax Act, 1922, the Tribunal has referred the following question to this court :"whether, on the facts and circumstances of the case, the Tribunal were justified in confirming the order made by the Income-tax Officer under Section 23a (1) of the Indian Income-tax Act, 1922, for the assessment year 1959-60 ?"

( 2 ) THE facts leading to this reference are shortly as follows : The assessee is a private limited company and is admittedly a company in which the public are not substantially interested within the meaning of the Explanation to Section 23a (9) of the Act. For the assessment year 1959-60, for which the previous year was the financial year ending on the 31st March, 1959, the profits according to the assessee's books of account amounted to Rs. 17,269. After providing for liability for taxation of Rs. 8,537 there was a balance of Rs. 8,732. But in the assessment for that year the assessee was assessed to a total income of Rs. 27,742 on which the tax payable was Rs. 14,383 leaving a balance of Rs. 13,359. At its general meeting held on the 29th September, 1959, the assessee-company declared a dividend of Rs. 1,900 only. By an order dated the I2th October, 1960, made under Section 23a of the Act, the Income-tax Officer directed the assessee to pay super-tax on 50 per cent. of the undistributed balance of Rs. 11,459. Before the Income-tax Officer, it was contended by the assessee that a larger dividend could not be declared in this year on account of outstanding income-tax demands. The Income-tax Officer rejected the claim on the ground that under Section 23a, the only considerations to be applied when the declaration of dividends was less than the statutory percentage of the distributable surplus were : (i) losses incurred by the company in earlier years, and (ii) smallness of profit made in the previous year.

( 3 ) AS none of these grounds were advanced for failure to declare the statutory percentage of, the distributable surplus the Income-tax Officer made his order under Section 23a.

( 4 ) THE assessee's appeal to the Appellate Assistant Commissioner was rejected as the Appellate Assistant Commissioner agreed with the reasons given by the Income-tax Officer in his order.

( 5 ) THE assessee's further appeal to the Income-tax Appellate Tribunal also proved unsuccessful. In its order the Tribunal recorded that between January, 1958, and September, 1959, before the date of its general meeting, the assessee had received tax demands aggregating to Rs, 44,259 for the six assessment years from 1953-54 to 1958-59, and that is why the assessee did not consider it proper to declare a higher dividend. According to the Tribunal this argument was unavailing :"after the amendment of Section 23a (1) by Section 15 of the Finance Act, 1955, a private company, like the assessee, which has not distributed the requisite percentage of dividends can avoid an action being taken against it under Section 23a (1) by showing that there were 'losses incurred by the company in earlier years' and that due to 'the smallness of the profit made in the previous year' payment of dividend or a larger dividend is unreasonable. Admittedly, there were no losses incurred by the assessee in the earlier years; the assessee relies on the other factor, namely, the smallness of the profit made in the previous year'. It would be obvious that under Section 23a as amended by Section 15 of the Finance Act, 1955, 'the smallness of profit' has to be considered only in relation to the previous year. . . . . . It is manifest, therefore, that in consideration of the smallness or otherwise of the profit made in the previous year, the tax liability of the assessee outstanding from earlier years is not to be taken into consideration. . . . . . . However, as we have already said, the scope of section 23a (1) has been circumscribed by the amendment for the year 1955, and the smallness or adequacy of th