Back
1964 Supreme(Cal) 244
High Court of Calcutta
G.K. Mitter, S.A. Masud, JJ.
CIT Central Calcutta – Appellant
Versus
Union Company Ltd. – Respondent
Decided On : Nov 30, 1964
B. Gupta, B.L. Pal, D. Pal, S. Saraf
The interpretation of "smallness of the profit made" in section 23A(1) of the Income Tax Act, considering distributable profits, tax liability, and excluding reserves and other factors.
Headnote:
INCOME TAX - Section 23A(1) - Applicability - Conditions - Interpretation - Smallness of profit - Distributable profits - Reserves - Consideration.
Fact of the Case:
The assessee company declared dividends totaling Rs. 62,500/- for the assessment year 1952-53. The Income Tax Officer applied section 23A(1) of the Income Tax Act, deeming an additional Rs. 96,668/- as undistributed profits to be included in the shareholders' income. The appellate assistant commissioner and the Tribunal found in favor of the assessee, considering the company's commercial profits and tax liability.
Finding of the Court:
The court held that section 23A(1) is attracted when the dividends distributed are less than 60% of the assessable income minus the tax payable, unless the Income Tax Officer finds it unreasonable to distribute more considering losses in earlier years or the smallness of the profit made.
Issues: 1. Whether the Income Tax Officer was justified in applying section 23A(1) to the assessee company for the assessment year 1952-53. 2. Interpretation of the expression "smallness of the profit made" in section 23A(1).
Ratio Decidendi: 1. In determining the smallness of the profit made, the Income Tax Officer must consider the distributable profits, deduct the tax liability, and assess the reasonableness of the distribution in the specific circumstances. 2. The court rejected the argument that reserves accumulated in earlier years should be considered when assessing the reasonableness of the distribution, as the section specifically mentions only losses and smallness of profit.
Final Decision: The court answered the referred question in the negative, holding that the Income Tax Officer was not justified in applying section 23A(1) to the assessee company for the assessment year 1952-53.
1. THE question referred to this Court under section 66 (1) of the Income Tax is :
"whether on the facts and in the circumstances of the case the Income Tax Officer was justified in applying the provisions of section 23a (1) of the Income Tax Act to the assessee company for the assessment year 1952-53. "
The facts are as follows: For the relevant assessment year 1952-53 the corresponding previous year of the assessee was the one ending on March 30, 1952. The company showed in its return a total income of Rs. 1,49,935/ -. At a general meeting of the shareholders held on May 27, 1953 dividends totaling Rs. 62,500/- were declared. At first the company was assessed at an income of Rs. 2,79,635/-The Income Tax Officer passed an order under section 23a (1) declaring that a further sum of Rs. 96,668/- out of the undistributed profits shall be deemed to have been declared as dividends and proportionate share thereof attributable to each shareholder shall be included in his total income. On appeal the appellate assistant commissioner held that two sums of Rs. 52,577/- and Rs. 60,939/-included by the Income Tax Officer in the assessment were notional and unrealistic income and should therefore be left out in considering the applicability of section 23a. Eliminating; these two amounts the appellate assistant commissioner found that the assessable income was Rs. 1,66,119/-, income-tax and super-tax liability thereon was Rs. 1,21,467/- and hence the dividend declared was more than 60 per cent of the distributable income and section 23a was not applicable. The Tribunal did not accept the decision of the appellate assistant commissioner but still found in favour of the assessee, reasoning as follows : According to the Tribunal the assessee's accounting profit or commercial profit for the year of account was Rs. 1,06,461/ -. No reserve had been set apart for the tax liability on this income which was approximately rs. 46,000/ -. Deducting this sum from the commercial profit the balance of the divisible profit was Rs. 60,461/-and the assessee having declared dividends in excess of the amount was not within the mischief of section 23a (1).
2. IT was admitted by counsel appearing before us that the above figures are not quite correct in view of the revision of the assessment. The revised figures are: (1) Assessable income Rs. 2,15,200/- (2) Tax liability thereon Rs. 93,719/ -. (3) Commercial profits Rs. 1,06,461/ -. (4) Tax paid in advance Rs. 25,128/ -. (5) Tax liability on the commercial profits Rs. 46,000/ -. The material portion of section time provided as follows :- 23a (1) as it stood at the relevant time provided 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 60 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 larger 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 among the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. "
The sub-section is not to apply to
