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1967 Supreme(Cal) 188
HIGH COURT OF CALCUTTA
B.N. BANERJEE, K.L.ROY, JJ.
Commissioner Of Income-Tax WB - Appellant
Versus
Bangodaya Cotton Mills Ltd – Respondent
Decided On : Aug 14, 1967
D.K.Sen, S.K.Banerjee, S.R.Bhattacharjee,
The yardstick for determining the reasonableness of the amount distributed as dividends is that of a prudent businessman, taking into account factors such as previous losses, present profits, availability of surplus money, and reasonable requirements of the future.
Headnote:
INCOME TAX - Section 23A - Smallness of profits - Whether the profits of the assessee Company for the assessment years 1955-57 and 1956-57 were small within the meaning of the expression "smallness of profits" in Section 23a of the Indian Income-tax Act, 1922, and that any further declaration of dividend than that declared by the assessee would be unreasonable.
Fact of the Case:
The assessee, Messrs. Bangodaya Cotton Mills limited, is a Company and there is no dispute that it was a Company in which the public were not substantially interested within the meaning of Explanation 1 to Section 23a (9) of the Indian Income-tax Act, 1922 for the assessment years 1955-56 and 1956-57, the corresponding previous years of the company being the financial years ending on the 31st March, 1955 and the 31st march, 1956 respectively. There is also no dispute that for those two years, under the provisions of Section 23a as it then stood, the Company had to distribute 60 per cent, of its distributable surplus as determined under that section.
Finding of the Court:
The Tribunal had taken into consideration all these factors and had come to the conclusion that a prudent businessman would have preferred to meet its liabilities rather than pay further dividends. The conclusion arrived at by the Tribunal, in view of the aforesaid decision of the Supreme Court, cannot be said to be unjustified or irrational.
Issues: Whether the profits of the assessee Company for the assessment years 1955-57 and 1956-57 were small within the meaning of the expression "smallness of profits" in Section 23a of the Indian Income-tax Act, 1922, and that any further declaration of dividend than that declared by the assessee would be unreasonable.
Ratio Decidendi: The reasonableness or the unreasonableness of the amount distributed as dividend was to be adjudged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others.
Final Decision: The question referred to this court must be answered in the affirmative and in favour of the assessee.
1. This reference arises in the following circumstances. The assessee, Messrs. Bangodaya Cotton Mills limited, is a Company and there is no dispute that it was a Company in which the public were not substantially interested within the meaning of Explanation 1 to Section 23a (9) of the Indian Income-tax Act, 1922 for the assessment years 1955-56 and 1956-57, the corresponding previous years of the company being the financial years ending on the 31st March, 1955 and the 31st march, 1956 respectively. There is also no dispute that for those two years, under the provisions of Section 23a as it then stood, the Company had to distribute 60 per cent, of its distributable surplus as determined under that section. The Income-tax Officer found that the co.'s assessed profits were Rs. 4,14,669 and Rs. 5,34,366 respectively and after deduction of income tax and super tax payable thereon, the distributable surplus amounted to Rs. 2,23,491/ - and Rs. 3,02,824/- respectively for the aforesaid two years. As the Company had mot declared any dividend within the statutory period of 12 months from the end of the- respective previous years, the income tax Officer required the assessee to show cause why the provisions of Section 23a should not be applied to it in respect of these two years. The Company had declared dividends of two identical sums of Rs. 49,266/- for the aforesaid two assessment years on 5th of Sept. 1956 and 31st of July 1957 respectively, that is, after the lapse of the statutory period of 12 months from the end of each of the relevant previous years. The Company submitted to the Income tax Officer that it had imported some spinning machinery during the financial year 1952-53 at heavy cost, thereby incurring debis to the extent of over Rs. 11,00,000/. The Company had to borrow a large sum of money from lloyds Bank Limited, to whom a sum of Rs. 1,97,354/- was paid as interest but was disallowed in the company's assessment. The Company had to borrow a further large sum from the Life insurance Corporation of India also at high interest and on condition of paying commission. It was, therefore, submitted that owing to the smallness of profits it was not reasonable for the company to have declared a larger dividend than that already declared. The Income-tax Officer was unable to accept this contention as, in his opinion, what was to be taken into account in considering the application of s. 23a was the commercial profits earned by the Company. In this case the Company's book profit for the assessment year 1955-56 was Rs. 81,945/ - and the amount brought forward from the profit and loss balance of the earlier year was Rs. 1,29,185/-thereby giving a book profit for this year of Rs. 2,11,130/ -. Similarly, the assessee's profits as per its profit and loss account for the assessment year 1956-57 were Rs. 3,17,033/ -. He held further that the debts incurred by the assessee for a capita] expenditure could not be taken into consideration in considering the smallness of profits under sec. 23a. The Income Tax Officer was of opinion that if the Company was in financial difficulties it should have approached the commissioner under Section 23a (3), seeking his sanction for either not distributing any dividends or for distributing a smaller amount of dividend. Accordingly, the Income-tax Officer charged super-tax on the Company on the entire distributable surplus for these two years. On the assessee's appeals against the aforesaid orders under Section 23a to the Appellate Assistant Commissioner, the same contentions were raised. In addition to the facts found by the Income-tax officer the Appellate Assistant Commissioner observed that in the year 1955-56 the assessee had the following reserves, namely, (a) Reserve for plant and machinery-Rs. 5,00,000/ ; (b) Investment reserve-Rs. 38,390/- ; (c) Contingent reserve-Rs. 60,000/- ; (d) Reserve for bad debt-Rs. 32,047/- and these reserves had, for the subsequent year, increased to Rs. 6,50,000j-
