The main legal point established in the judgment is that Section 23a of the Income-tax Act applies to property owning companies but must be applied in accordance with the conditions specified in the section.

( 1 ) THIS is a reference under Section 66 (1), Income-tax Act, made by the Income-tax Appellate Tribunal, Madras Bench, to this Court in respect of an assessment of the applicant company for the assessment years 1939-40 and 1940-41. The question which has been submitted to the Court for answer is as follows : "whether in the facts and circumstances of this case, the provisions of Section 23a were properly invoked ?"

( 2 ) THE assessee is a private limited company whose main source of income is income from property assessable under Section 9, Income-tax Act. Its only other source of income is interest on deposits, but such income is only slightly over 1 per cent, of the assessable income.

( 3 ) THE relevant accounting years for the two assessments were the calendar years 1938 and 1939. According to the assessee the company made a profit of Rs. 30,000 in 1938 and Rs. 15,000 in 1939 and the whole of the profit for these two years was distributed amongst the share-holders as dividends.

( 4 ) THE assessable income of this company was assessed by the taxing authorities at Rupees 1,26,581 for the year 1939-40 and at Rs. 1,24,787 for the year 1940-41. These figures included interest on deposits which amounted to Rs. 1,904 in the first year and Rs. 1,588 in the second year. It will be seen, therefore, that this income derived from interest on deposits formed a negligible portion of the assessable income of this company.

( 5 ) THE Tribunal has found that the company distributed by way of dividends its entire net profits for the years 1938 and 1939. In other words, the Tribunal found that the accounts submitted by this company were properly kept and were accurate and that the profits shown in the profit and loss account was the true profit earned by the company in the years in question.

( 6 ) THE income-tax department, however, contended that the company had not complied with the provisions of Section 23a (1), Income-tax Act, as they had not distributed by way of dividends amongst their share-holders at least sixty per cent, of the assessable income of the company for the two years in question. The only question which we have to decide in this reference is whether Section 23a, Income-tax Act, can be applied to the facts of this case. Sub-section (1) of Section 23a in so far as it is material reads 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 up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting, are less than sixty 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 large dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income 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 share-holders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each share-holder shall be included in the total income of such shareholder for the purpose of assessing his total income. . . "

( 7 ) THIS Sub-section is aimed at preventing companies from distributing too little of their profits. It had been found that frequently companies made large profits, but distributed very little. The undistributed profits were accumulated and very often distributed by way of bonus, shares and such like. By the terms of this sub-se