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1973 Supreme(Del) 177
High Court Of Delhi
COMMISSIONER OF INCOME TAX - Appellant
Versus
UTTAM SINGH DUGAL AND COMPANY LIMITED - Respondent
I.T.R. 5 of 1969
Decided On : 07/30/1973
B.Kirpal, K.R.BAJAJ, P.N.Mongia
The availability of surplus money and the reasonable requirements of the future are relevant factors in determining the reasonableness or otherwise of the dividend declared by a company.
Headnote:
INCOME TAX - Section 23A - Applicability - Smallness of profit - Determination - Availability of surplus money - Reasonable requirements of the future - Tribunal's finding that there was not enough profit left in the hands of the assessee to pay a higher dividend - Upheld.
Fact of the Case:
The assessee, a private limited company, declared a dividend of Rs. 1,86,300. The Income-tax Officer held that section 23A of the Income-tax Act, 1922, was applicable to the case and imposed super-tax on the undistributed balance. The assessee appealed to the Appellate Assistant Commissioner, who directed the Income-tax Officer to recalculate the tax payable under section 23A on the basis of the total income as reduced on appeal. The assessee then appealed to the Tribunal, which held that the provisions of section 23A were not applicable to the case.
Finding of the Court:
The Tribunal found that there was not enough profit left in the hands of the assessee to pay a higher dividend. The Tribunal also found that the assessee had kept certain amounts out of the books, but that these amounts were not available for distribution at the time of the declaration of dividend.
Issues: Whether the Tribunal was right in holding that the provisions of section 23A of the Income-tax Act, 1922 were not applicable to the case of the assessee.
Ratio Decidendi: The Income-tax Officer, while considering the applicability of section 23A, is required to put himself into the position of a director of the company and take an over-all picture of its financial position. Apart from other considerations, he has to look to the availability of "surplus money", for the company cannot be compelled to fall back "either upon its reserves or upon its capital" in order to distribute something by way of dividend. The reasonable requirements of the future is another factor which cannot be ignored. The reasonableness or otherwise of the dividend already declared by the company has thus to be judged in the light of such like considerations.
Final Decision: The answer to the question REFERRED TO to us is in the affirmative, viz. in favour of the assessee and against the Revenue.
( 1 ) THE following question has been REFERRED TO by the Income-tax Appellate Tribunal, Delhi Bench a , herein called the Tribunal , in compliance with the directions of this court in I. T. Case No. 9-D of 1962, at the instance of the Revenue.
"whether on the facts and in the circumstances of the case the Tribunal was right in holding that the provisions of section 23a (1) of the Income-tax Act, 1922 were not applicable to the case of Messrs Uttam Singh Duggal and Co. Private Limited, New Delhi, for the assessment year 1955-56. "
( 2 ) THE respondent company, Messrs Uttam Singh Duggal and Company Private Limited, New Delhi, herein called the assessee , is a private limited company carrying on business as a contractor. It maintains its accounts on mercantile basis. The assessment year concerned is 1955-56 and the relevant accounting year is the calendar year ending on December 31, 1954.
( 3 ) THE assessee filed a return showing an income of Rs. 4,65,756. 00, later on revised to Rs. 3,85,225. 00 and finally revised to Rs. 6,62,072. 00, thereby admitting practically, as stated by the Tribunal, that certain amounts had been kept outside the books. The total income, however, was assessed at Rs. 11,51,332. 00, but was revised twice under section 33, the last revision being on February 25, 1958, when it was computed at Rs. 10,90,552. 00. The Income-tax and Super-tax, payable worked out to Rs. 4,73,708. 00, leaving a balance of Rs. 6,15,844. 00. The distributable surplus at the statutory percentage of 60 per cent of the said balance, worked out to Rs. 3,70,106. 00. The assessee company declared a dividend amounting in all to Rs. 1,86,300. 00 only. On this, the Income-tax Officer, held that section 23a of the Income-tax Act, 1922, herein called the Act , was applicable to the case. He accordingly imposed super-tax on the undistributed balance, which he worked at Rs. 4,30,544. 00. The assessee, in appeal before the Appellate Assistant Commissioner, contended that declaration of a larger dividend would not be justified, because not only the total income computed by the Income-tax Officer had to be reduced, as done by the Appellate Assistant Commissioner, to Rs. 10,64,004. 00, but further reduced by amounts disallowed, including expenses which have been proved and a sum of Rs. 3,50,000. 00 paid to certain Americans but which remained unproved, as being not available with the company for the purposes of distribution by way of dividend. The Appellate Assistant Commissioner found that Rs. 3,50,000. 00 could not be said to have definitely gone out of the assessee s hands and as such was available for distribution; although expenses proved, but not allowed as business expenses, could be considered as not available for distribution while considering smallness of profits. Regarding Rs. 3,50,000. 00 the Appellate Assistant Commissioner further said, that if it were allowed as expenses the assessee still had sufficient funds to distribute higher dividend, which, in fact, had not been distributed because some funds had been kept out of the books and not because they were not available. The Income-tax Officer was directed to recalculate the tax payable under section 23a on the basis of the total income as reduced on appeal. The assessee s claim was accordingly rejected.
( 4 ) BEFORE the Tribunal, it was contended on behalf of the assessee that only commercial profit and not the assessable profit could be taken into account in ascertaining the smallness of profit; that expenses, although disallowed in the computation of income, could not be considered to be in the hands of the assessee available for distribution; Americans, having actually been spent away, also could not be taken Americans, having actually been spent away, also could not be taken into account as being available for distribution by way of dividend, merely because the assessee did not possess clinching evidence to establish the payment.
( 5 ) THE Tribunal agreed tha
