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1975 Supreme(Cal) 166
High Court Of Calcutta
S. C. Deb, R. N. Pyne
REFORM FLOUR MILLS (P.) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 360 Of 1971
Decided On : 06/19/1975
AJOY MITTER, D.PAL, S.K.DUTTA, S.SEN
Outstanding income tax liability can be considered as an item of liability while determining the commercial or accounting profit of the assessee available for distribution under Section 23a.
Headnote:
INCOME TAX - SECTION 23A - OUTSTANDING INCOME TAX LIABILITY - WHETHER CAN BE CONSIDERED AS AN ITEM OF LIABILITY - WHETHER ORDER UNDER SECTION 23A WAS RIGHTLY PASSED - HELD, YES
Fact of the Case:
The assessee, a private limited company, was engaged in the business of coal mining. In the assessment year 1958-59, the total income of the assessee was determined at Rs. 42,810. The company had returned an income of Rs. 34,790 only. It had declared a dividend of Rs. 1,701 which the Income-tax Officer held was below the statutory limit of 45% under Section 23a of the Act as it stood at the relevant time. Calculating on the basis of statutory percentage of 45% the Income-tax Officer held that the assessee-company ought to have declared a dividend of Rs. 9,418. Under Section 23a of the Act, an opportunity was given to the assessee to declare dividend within three months of the receipt of the notice which was issued by the Income-tax Officer on 18th December, 1961. The assessee was also called upon to show cause why proceedings under Section 23a (1) should not be initiated and additional super-tax should not be levied for deficiency in the distribution of statutory dividend. On 18th March, 1962, the assessee, In a letter addressed to the Income-tax Officer, took the stand that, owing to the smallness of profit coupled with the fact that the company suffered losses in the earlier years and in view of the pending of tax liability, it was not possible for the company to declare a larger dividend than that declared by it. The contention of the assessee was rejected by the Income-tax Officer. In doing so, he took into consideration the fact that the company itself had declared an income of Rs. 34,790 which was not a small profit. He, therefore, levied additional super-tax on the undistributed income which worked out to Rs. 20,929 at the rate of 37 paise per rupee. The total amount of the additional super tax imposed was Rs. 7,743. 73. The assessee went up in appeal and the Appellate Assistant Commissioner upheld the order of the Income-tax Officer. In the second appeal, the Tribunal, however, took the view that the commercial profit had to be taken into consideration. After making certain adjustments in the figure of the assessed profit the Tribunal determined the commercial profit and thereafter accepting the case of the assessee that the tax liability of the assessment year 1957-58 to the tune of Rs. 19,187 was paid in the accounting year 1957, relating to the assessment year 1958-59, the Tribunal found that the net result from the commercial view was a loss. According to the Tribunal, it could not be said that the declaration of the dividend by the company was unreasonable. The High Court, however, held that in computing the profits of a closely held company for the purpose of determining whether the dividend distributed by it during a particular year was reasonable, income-tax due in respect of an earlier year, but paid during the accounting year in question, could not be deducted.
Finding of the Court:
The Tribunal has taken into consideration the assessee's balance-sheet ending on December 31, 1959, and the correctness of this balance-sheet has not been questioned by the revenue at any stage of the proceedings. It appears from the balance-sheet that there was a cash balance of Rs. 85,786. 08 on December 31, 1958, and, therefore, it cannot be said that Rs. 13,68,000 was in the till of the assessee on January 1, 1959. Further, there is no material on the record to show that Rs. 13,68,000 was still available to the assessee in the relevant assessment year, nor is there any such finding by the Tribunal. Therefore, Rs. 13,68,000 cannot, in any event, be taken into consideration and even if Rs. 85,786. 08 is taken into consideration the contention of the revenue must fail, because the arrears of tax liabilities far exceeded that amount.
Issues: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the outstanding income-tax liability could not be considered as an item of liability and that the order under Section 23a was rightly passed.
Ratio Decidendi: The arrears of tax liabilities for the earlier years have to be taken into account as held by the Supreme Court in Gangadhar Banerjee's case and also by our court in Central Calcutta Investment (P.) Ltd. v. Commissioner of Income-tax , and, therefore, we are not in agreement with the decision of the Patna High Court in R. N. Bagchi's case [1969] 72 ITR 645.
Final Decision: In the facts and circumstances of the case, we return our answer in the negative and in favour of the assessee.
( 1 ) IN this reference under Section 66 (1) of the Indian Income-tax Act, 1922, we are concerned with the assessment year 1960-61. The assessee is a private limited company to which the provisions of Section 23a are applicable. For the said year the income assessed under Section 23 (3) was Rs. 15,56,405 and the tax payable thereon was Rs. 7,00,382. The Income-tax Officer, therefore, arrived at the distributable surplus at Rs. 8,56,023. The assessee had declared a dividend of Rs. 3,71,000 only. The statutory percentage applicable to tbe assessee was 50% and, therefore, as the dividend declared by the assessee fell short of the statutory percentage, the Income-tax Officer issued a notice calling upon the assessee to show cause why additional super-tax should not be levied. In response to this, the assessee urged that if past losses were considered and the estimated past tax liabilities were deducted from the available distributable surplus the dividend declared was adequate. The Income-tax Officer, however, held that the existence of past Josses could not be substantiated as they were neither considered in the profit and loss account filed in the assessment made. As according to the Income-tax Officer tax liabilities were neither ascertained nor admitted by the assessee, argument in that behalf was not tenable. He further observed that the net profit shown by the assessee in the return after making various adjustments was Rs. 14,77,737 and even from the point of view of the returned profit the dividend distributed would fall short of the statutory percentage as the tax payable thereon would be Rs. 6,64,970 and there would be a surplus of Rs. 8,12,767. In these circumstances, he did not accept the plea of the assessee and levied additional super-tax at 37% amounting to Rs. 1,79,458. Being aggrieved by the order of the Income-tax Officer the assessee appealed therefrom to the Appellate Assistant Commissioner. It was urged before the Appellate Assistant Commissioner that on appeal in regard to the quantum of assessment there was a reduction and the assessed profit was Rs. 15,49,323 and the tax payable thereon, Rs. 6,97,196, and the distributable surplus would work out at Rs. 8,62,127. While admitting that even on the basis of the revised figures, prima facie Section 23a was applicable, it was urged on behalf of the assessee that the Income-tax Officer had ignored the outstanding income-tax liabilities of Rs. 7,28,557 and thus computed a wrong figure in regard to distributable surplus. On this basis a calculation was filed before the Appellate Assistant Commissioner as follows :
.
Rs . Rs .
Profit as per Profit & Loss a/c. 8,84,951 Add Provision for taxation 6,00,000 14,84,951 Less : Taxes levied on the company 6,97,196 7,87,755 Less : 5,25,080 (a) Outstanding income-tax liabilities 7,28,557 (b) Income-tax provision 2,03,477 Surplus available for distribution 2,62,675
( 2 ) IT was accordingly submitted that as the company had declared dividend of Rs. 3,71,000 there could not be any scope for applying the provisions of Section 23a as the assessee did not have sufficient funds for declaring a larger dividend. The Appellate Assistant Commissioner while observing that income-tax liability outstanding on the relevant date was surely one of the circumstances to be taken into consideration in determining whether it was unreasonable to declare a larger dividend, went on to observe that the taxes of Rs. 7,28,557 related to the assessment years 1944- 45 to 1954-55. On scrutinising those assessments he found that the Income-tax Officer had disallowed certain amounts as fictitious payment of commission and brokerage to certain parties aggregating to Rs. 13,68,000. He also referred in this behalf to the orders of the Tribunal on appeals for the years 1952-53, 1953-54 and 1954-55 wherein the disallowance of payments of commission was confirmed. The Appellate Assistant Commissioner observed that the fi
