In determining the reasonableness of a dividend distribution under Section 23A of the Income-tax Act, 1922, the tax officer must take into consideration all relevant factors, including the anticipated tax liability of the assessee.

( 1 ) THE following questions are involved in this reference under the Income-tax Act, 1922 :" (I) Whether, on the facts and in the circumstances of the case, the Tribunal should have held that the payment of a larger dividend than that declared by the assessee would have been unreasonable ? (2) If the answer to the first question is in the negative, whether the Tribunal was justified in holding that in determining the distributbale surpuls, only the net tax payable by the assessee should be taken into consideration without any regard to the credit given under Section 18 (5) of the Indian Income-tax Act, 1922 ?"

( 2 ) THE assessee is a private limited company to which Section 23a of the Act applies. The assessment year is 1954-55. The previous, year ends on December 31, 1953. The total income was determined at Rs. 2,15,825. The tax payable thereon, after deducting the amount treated as tax paid under Section 18 (5), was found to be Rs. 45,297. In the general meeting held on March 31, 1955, the assessee declared a dividend of Rs. 60,000 which was short of 60% of the distributable surplus and, therefore, the tax officer was invested with jurisdiction to take action under Section 23a of the Act.

( 3 ) IN the proceedings under Section 23a of the Act the contention of the assessee before the tax officer was that no action should be taken against the assessee, because it would have been unreasonable for the assessee to declare a larger dividend in view of the anticipated tax liability as a result of the reopening of the assessment under Section 34 (1) (a) of the Act for the assessment year 1946-47. The tax officer found that the estimated additional tax liability might be about Rs. 90,000 and as the assessee had transferred Rs. 35,000 to the general reserve of Rs. 5 lakhs such estimated tax liability arising out of the reassessment proceedings could be paid out of the general reserve. In that view of the matter the tax officer passed an order to the effect that the balance of distributable surplus, namely, Rs. 1,10,528, should be deemed to have been distributed as dividend amongst the shareholders as on the date of the said general meeting. The appeals filed by the assessee were dismissed by the appellate authorities and, thereafter, the above questions were referred by the Appellate Tribunal.

( 4 ) THE reference came up for hearing before a Division Bench of this court and in its judgment dated September 3, 1965, the Division Bench after considering the decisions of the Supreme Court in the cases of Commissioner of Income-tax v. Bipinchandra Maganlal and Co. Ltd. and Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. observed as follows :"the opinion of the Supreme Court appears to be that an order under Section 23a should not be passed if that has the effect of compelling the company to fall back upon its reserve or upon its capital. Therefore, in the instant case, it is important to ascertain the nature of the reserve mentioned by the Income-tax Officer. The Tribunal also failed to consider by reason of its mistaken view of the law whether the apprehension of additional tax liability as a result of reassessment under Section 34 (1) (a) was genuine or not at the date of the general meeting at which the dividend was declared. It is to be seen whether there is any trace of this apprehension either in the directors' report or in the balance-sheet placed before the general meeting. It has no doubt been found as a fact that the proceedings under Section 34 culminated in a levy of further tax of Rs. 1,28,000 for 1946-47, but it is not known whether this heavy amount was really anticipated by the directors and how far this anticipation influenced the declaration of dividend. "

( 5 ) IN that view of the matter the Division Bench referred back the matter to the Tribunal under Section 66 (4) of the Act with the direction to send a supplementary statement of the case with the following directions ;"the Tribunal is