Commissioner of Income-Tax, West
Bengal, Calcutta Vs. Gungadhar Banerjee and Co. (P) Ltd. [1965] INSC 78 (22
March 1965)
22/03/1965 SUBBARAO, K.
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION: 1965 AIR 1977 1965 SCR (3) 439
CITATOR INFO:
E 1968 SC 883 (6) R 1973 SC2323 (9) RF 1976
SC 255 (21) R 1990 SC1277 (29)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s.
23A-DividendDistribution-Burden of showing whether low-Circumstances to be
considered--"Smallness of profit"-Meaning of-"Accounting
profits" and "assessable profits", distinction between.
HEADNOTE:
As the dividend declared to be distributed by
the respondent company at its General Body Meeting was below 60 per cent of the
profits available for distribution, the Income-Tax Officer, with the previous
approval of the Inspecting Assistant Commissioner, passed an order under s.
23-A of the Income-Tax Act directing that a
certain higher amount shall be deemed to have been distributed as dividends as
on the date of the annual general meeting of the Company.
He found that, having regard to the profits
earned in the earlier years and the capital and taxation reserves, payment of
larger dividend would not be unreasonable. This was affirmed, on assessees
appeals by the Appellate Assistant Commissioner, and the Income-tax Appellate
Tribunal. The Tribunal referred the question to the High Court under sec.
66(1) of the Act, which concluded that having
regard to the smallness of the profits, the order of the Income-tax Officer was
not justified and answered the question in the assessee's favour. In appeal by
certificate.
HELD: Section 23A of the Income-tax Act is in
the nature of a penal provision. In the circumstances mentioned therein, the
entire undistributed portion of the assessable income of the company is deemed
to be distributed as dividends. Therefore, the Revenue has strictly to comply
with the conditions laid down there under. The burden therefore, was upon the
Revenue to prove that the conditions laid down there under were satisfied,
before the order was made.
Thomas Fattorini (Lancashire) Ltd. v. Inland
Revenue Commission L.R. [1942] A.C. 643 applied.
In the present case the Revenue failed to
discharge the said burden: indeed, the facts established stamp the order of the
Income-tax Officer as unreasonable.. [446F, G] Though the object of the section
is to prevent evasion of tax, the provision must be worked not from the stand
Point of the tax collector but from that of a businessman. The reasonableness
or the unreasonableness of the amount distributed as dividends is judged 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.
It is neither possible nor advisable to lay
down any decisive tests for the guidance of the Income-tax Officer.
It depends upon the facts of each case. The
only guidance is his capacity to put himself in the position of a prudent
businessman. It is difficult to say that the Income-tax Officer cannot take
into consideration any circumstances other than losses and smallness of
profits. This argument ignores the expression "having regard to" that
precedes the said words in s. 23A of the Act. [444B-E] 440 Commissioner of
Income-tax v. Williamson Diamond Ltd. L.R.
[1958] A.C. 41, applied.
Sir Kasturchand Ltd. v. Commissioner of
Income-tax, Bombay City, (1949) 17 I.T.R. 493, referred to.
The words "smallness of profit" in
s. 23A of the Act refer to actual accounting profits in comparison with the
assessable profits of the year. The two concepts "accounting profits"
and "assessable profits" are distinct.
In arriving at the assessable profits the
Income-tax Officer may disallow many expenses actually incurred by the
assessee; and in computing his income he may include many items on notional
basis. But the commercial or accounting profits are the actual profits earned
by an assessee calculated on commercial principles. [445F-H.] Commissioner of
Income-tax, Bombay City v. Bipinchandra Maganlal and Co. Ltd. (1961)41 I.T.R.
296, followed.
In a case where an Income-tax Officer takes
action under s. 23A of the Act before the tax for the relevant period is
assessed, only the estimated tax can be deducted; but, there is no reason why,
when the tax had already been assessed before he takes action under this
section. the estimated tax and not the real tax shall be deducted there from.
[445H446B] There is no provision in the Income-tax Act which makes the Balance
Sheet final for the purpose of s. 23A of the Act or even for the assessment. It
no doubt affords a prima facie proof of the financial position of the company
on the date when the dividend was declared. But nothing prevents the parties in
a suitable case to establish by cogent evidence that certain items were, either
by mistake or by design, inflated or deflated or that there were some
omissions.
[446B-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 807 of 1963.
Appeal from the judgment and order dated
September 4, 1961 of the Calcutta High Court Income-tax Reference No. 85 of
1956.
C.K. Daphtary, Attorney General, R. Ganapathy
Iyer and R. N. Sachthey, for the appellant.
A. V. Viswanatha Sastri and S. C. Muzumdar,
for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J. This appeal by certificate raises the question of the
construction of the provisions of s. 23A of the Indian Incometax Act, 1922,
hereinafter called the Act, before it was amended by the Finance Act, 1955.
The relevant and undisputed facts may be
briefly stated.
Messrs. Gungadhar Banerjee & Co.
(Private) Ltd., the respondent herein, is a private limited company. At the
General Body Meeting of the Company held on December 6, 1948, the Directors
declared a dividend at the rate of 5 1/2 per cent. per share. The said distribution
of dividends related to the accounting year 1947-48 which ended on April 13,
1948. According to the balance-sheet of the Company for that year the net
profit for the said year was Rs. 1,28,112/7/5. The taxation reserve was Rs.
56,000. The profit 441 left was Rs. 72,000. The Directors declared a dividend
at the rate of 51 per cent. per share thus making a total distribution of Rs.
44,000. On that basis the profit that was available for further distribution
was Rs. 28,000.
Though under the balance-sheet the estimated
tax was Rs. 66,000, the tax assessed for the year was Rs. 79,400. If the
difference between the tax assessed and the estimated tax was also deducted
from the profits, there would only be a sum of Rs. 4,000 that would remain as
undistributed profits.
The Income-tax Officer assessed the total
income of the assessee for the year 1948-49 at Rs. 2,66,766. After deducting
the tax payable under the two heads, namely, I.T.
of Rs. 81,517/13/0 and C.T. of Rs.
33,345/12/0, he held that a sum of Rs. 1,51,902/7/0 was available for
distribution to the shareholders as dividends. As the amount distributed by the
Company was below 60 per cent. of the profits available for distribution, the
Income-tax Officer, with the previous approval of the Inspecting Assistant
Commissioner of Income tax, passed an order under s. 23-A of the Act directing
that the amount of Rs 1,07,902 (i.e., Rs. 1,51,902 minus Rs.
44,000= Rs. 1,07,902) shall be deemed to have
been distributed as dividends as on the date of the annual general meeting of
the Company. He found that, having regard to the profits earned in the earlier
years and the capital and taxation reserves, payment of larger dividends would
not be unreasonable.
The assessee preferred an appeal to the
Appellate Assistant Commissioner against the order made by the Income-tax
Officer under s. 23A of the Act. By the time the appeal came to be disposed of,
in an appeal against the order of assessment the assessed income was reduced by
a sum of Rs.
80,926. Notwithstanding the said deduction,
as the amount of Rs. 44,000 distributed by the Company was less than 60 per
cent. of the balance of Rs. 1,64,440 arrived at on the basis of the revised
calculation, the Appellate Assistant Commissioner held that an action under s.
23A of the Act was justified. He further held that the assesee incurred no
losses in the previous years, that in almost all the past assessments the
assessee showed substantial profits, that the profits disclosed in the year of
account were not small and that, therefore, the direction to pay a higher
dividend was not unreasonable.
On a further appeal, the Income-tax Appellate
Tribunal held that the amount of profits should be judged only from the
balancesheet and that judged by the figures given thereunder a dividend to the
extent of Rs. 64,000 being 60 per cent. of the assessed profits less
income-tax. could be distributed and that such distribution was not
unreasonable.
The Tribunal referred the following question
under s. 66(1) of the Act for the decision of the High Court of Calcutta:
"Whether on the facts and in the
circumstances of the case any larger dividend than that declared by the company
could reasonably be distributed within the meaning 442 of Section 23A of the
Indian Income-tax Act and the application of Section 23A of the Indian
Income-tax Act was in accordance with law." The High Court held that the
Tribunal went wrong in taking into consideration the past profits instead of
the past losses, the taxation reserves without considering the past liabilities
for taxation, and the profits for the year in question disclosed in the
balance-sheet, ignoring the actual tax assessed for that year. It came to the
conclusion that, having regard to the smallness of the profits, the order of
the Income-tax Officer was not justified. In the result, it answered both parts
of the question referred to it in the negative. Hence the appeal.
Learned Attorney-General, appearing for the
Revenue, contended that the balance-sheet of a company on the basis of which
dividends were declared was final and the profits disclosed thereunder would be
the correct basis for the Income-tax Officer acting under s. 23A of the Act;
and, as the balance-sheet of the company for the relevant year showed a sum of
Rs. 1,05,950 as "capital reserve brought forward", a sum of Rs.
5,73,161 as taxation reserve, and a sum of Rs. 56,000 as estimated tax, the
Income-tax Officer rightly held that the financial condition of the Company was
sufficiently sound to warrant an order under s. 23A of the Act. Alternatively
he contended that if the respondent could be permitted to go behind the
balance-sheet to ascertain the real profit, the Department should also be
likewise allowed to go behind the balance-sheet to show that the commercial
profit was larger and the reserves were in excess of the past liabilities and
that in that event to remand the case for ascertaining the true state of facts.
Mr. A.V. Viswanatha Sastri, appearing for the
assessee-Company, contended that the burden lies on the Revenue to establish
that the dividend declared was not a reasonable one and that in the present
case it had not discharged that burden. Idle further argued that for the
purpose of "testing the smallness of the profit" the Income-tax
Officer had to take into consideration not the assessable Income but the
commercial profit of the Company and that in the present case, having regard to
the commercial profit, a declaration of a higher dividend would be
unreasonable. He pleaded that, should this Court hold that the Income-tax
Officer could establish that the reserves were more than the liabilities, the
assessee should also be permitted to prove what were its real, commercial
profits and that the reserves were far less than the demands.
The contentions of learned counsel turn upon
the provisions of s. 23A of the Act, before it was amended by the Finance Act
of 1955. The material part of that section reads:
"(1) 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 443 sixth month
after its accounts for that previous year are laid before the company in
general meeting are less than sixty per cent of the assessable income of the
company of that previous year, as reduced by the amount of incometax 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 amongst 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 section is
in three parts: the first part defines the scope of the jurisdiction of the
Income-tax Officer to act under s. 23A of the Act; the second part provides for
the exercise of the jurisdiction in the manner prescribed there under-, and the
third part provides for the assessment of the statutory dividends in the hands
of the shareholders. This section was introduced to prevent exploitation of
juristic personality of a private company by the members thereof for the
purpose of evading higher taxation. To act under this, section the Income-tax
Officer has to be satisfied that the dividends distributed by the Company
during the prescribed period are loss than the statutory percentage, i.e., 60
per cent., of the assessable income of the Company of the previous year less
the amount of Income-tax and super-tax payable by the Company in respect
thereof. Unless there is a deficiency in the statutory percentage, the
Income-tax Officer has no jurisdiction to take further action there under. If
that condition is complied with, he shall make an order declaring that the
undistributed portion of the assessable income less the said taxes shall be
deemed to have been distributed as dividends amongst the shareholders. But
before doing so, a duty is cast on him to satisfy himself that, having regard
to the losses incurred by the company in earlier years or "the smallness
of the profit made," the payment of a dividend or a larger dividend than
that declared would be reasonable. The argument mainly centered on this part of
the section. Would the satisfaction of the Income-tax Officer depend only on
the two circumstances, namely, losses and smallness of profit? Can he take into
consideration other relevant circumstances? What does the expression
"profit" mean? Does it mean only the assessable income or does it
mean commercial or 444 accounting profits? If the scope of the section is
properly appreciated the answer to the said questions would be apparent. The
Income tax Officer, acting under this section, is not assessing any income to
tax: that will be assessed in the hands of the shareholders. He only does what
the directors should have done. He puts himself in the place of the directors.
Though the object of the section is to prevent evasion of tax, the provision
must be worked not from the standpoint of the tax collector but from that of a
businessman. The yardstick is that of a prudent businessman. The reasonableness
or the unreasonableness of the amount distributed as dividends is judged 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.
He must take an overall picture of the
financial position of the business. It is neither possible nor advisable to lay
down any decisive tests for the guidance of the Income-tax Officer. It depends upon
the facts of each case. The only guidance is his capacity to put himself in the
position of a prudent businessman or the director of a company and his
sympathetic and objective approach to the difficult problem that arises in each
case. We find it difficult to accept the argument that the Income-tax Officer
cannot take into consideration any circumstances other than losses and
smallness of profits. This argument ignores the expression "having regard
to" that precedes the said words.
On the interpretation of the words
"having regard to" in s. 23A of the Act, the decision of a Division
Bench of the Bombay High Court, consisting of Chagla C. J., and Tendolkar J.,
in Sir Kasturchand Ltd. v. Commissioner of Income-tax, Bombay City(1) was
relied upon by the appellant. Chagla C.J., speaking for the Court, held in that
case that "the reasonableness or unreasonableness of the payment of a
dividend or a larger dividend has to be judged only with reference to the two
facts mentioned in the section, viz., losses incurred by the company in earlier
years and the smallness of the profit." To put the contrary construction,
the learned Chief Justice said, "would be to import into it words which
the Legislature did not think fit to insert in that section and to expand the
ambit of the discretion exercised by the Income-tax Officer." But the
learned Chief of Justice did not expressly consider the scope of the expression
"having regard to" found in the section. The Judicial Committee in
Commissioner of Income-tax v. Williamson Diamond Ltd.(2) had to consider the
scope of s. 21(1) of the Tanganyika Income-tax (Consolidation) Ordinance, 27 of
1950, which was pari materia with s. 23A of the Act. Adverting to the argument
based upon the words "having regard to", their Lordships observed:
"The form of words used no doubt lends
itself to the suggestion that regard should, be paid only to the two matters
mentioned, but it appears to their Lordships that it is (1) [1949] 17 I.T.R.
493.
(2) L.R. [1958] A.C. 41.49.
445 impossible to arrive at a conclusion as
to reasonableness by considering the two matters mentioned isolated from other
relevant factors. Moreover, the statute does not say "having regard
only" to losses previously incurred by the company and to the smallness of
the profits made. No answer, which can be said to be in any measure adequate,
can be given to the question of "unreasonableness" by considering
these two matters alone. Their Lordships are of the opinion that the statute by
the words used, while making sure that "losses and smallness of
profits" are never lost sight of, requires all matters relevant to the
question of unreasonableness to be considered. Capital losses, if established,
would be one of them." With great respect, we entirely agree with this
view. The contrary view unduly restricts the discretion of the Incometax
Officer and compels him to hold a particular dividend reasonable though in fact
it may be unreasonable.
The expression "smallness of
profit" came under the judicial scrutiny of this Court in Commissioner of
Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd.(1) Therein,
Shah, J., speaking for the Court observed thus:
"Smallness of the profit in section 23A
has to be adjudged in the light of commercial principles and not in the light
of total receipts, actual or fictional. This view appears to have been taken by
the High Courts in India without any dissentient opinion." The learned,
Judge laid down the following test: "Whether it would be unreasonable to
distribute a larger dividend is to be judged in the light of the profits of the
year in question." If the assessable income was the test and if the
commercial profits are small, the learned Judge pointed out, the company would
have to fall back either upon its reserves or upon its capital which in law it
could not do. This decision is binding on us and no further citation in this
regard is called for. These two concepts, "accounting profits" and
"assessable profits", are distinct. In arriving at the assessable profits
the Income-tax Officer may disallow many expenses actually incurred by the
assessee; and in computing his income, he may include many items on notional
basis. But the commercial or accounting profits are the actual profits earned
by an assessee calculated on commercial principles. Therefore, the words
"smallness of profit" in the section refer to actual accounting
profits in comparison with the assessable profits of the year.
Another incidental question is whether for
the purpose of ascertaining the net commercial profits the tax estimated or the
tax actually assessed shall be deducted. In a case where an Income-tax Officer
takes action under s. 23A of the Act before the tax for the relevant period is
assessed, only the estimated tax can be deducted (1) (1961) 41 T.T.R. 290, 296,
p(N)4SCI446 but, there is no reason why, when the tax had already been assessed
before he takes action under this section, the estimated tax and not the real
tax shall be deducted there from. In this view, in the present case to
ascertain the commercial profits what should be deducted is not the tax shown
in the balance-sheet but the actual tax assessed, on the income of the Company.
Another question raised is whether the
balance-sheet is final and both the parties are precluded from questioning its
correctness in any respect. There is no provision in the Income-tax Act which
makes the balance-sheet final for the purpose of s. 23A of the Act or even for
the assessment.
It no doubt affords a prima facie proof of
the financial position of the company on the date when the dividend was
declared. But nothing prevents the parties in a suitable case to establish by
cogent evidence that certain items were, either by mistake or by design,
inflated or deflated or that there were some omissions. It does not also
preclude the assessee from proving that the estimate in regard to certain items
has turned out to be wrong and placing the actual figures before the Income-tax
Officer.
But in this case no attempt was made before
the Tribunal to canvass the correctness of the figures either on the debit side
or on the credit side and we do not think we are justified to give another
opportunity to either of the parties in this regard. Before the Tribunal there
was no dispute that the actual tax assessed for the relevant year was much
higher than the estimated tax shown in the balance sheet.
Section 23A of the Act is in the nature of a
penal provision. In the circumstances mentioned therein the entire
undistributed portion of the assessable income of the Company is deemed to be
distributed as dividends.
Therefore, the Revenue has strictly to comply
with the conditions laid down there under. The burden, therefore, lies upon the
Revenue to prove that the conditions laid down there under were satisfied
before the order was made: see Thomas Fattorini (Lancashire) Ltd. v. Inland
Revenue Commissioners(1). In the present case the Revenue failed to discharge
the said burden: indeed, the facts established stamp the order of the
Income-tax Officer as unreasonable.
The assessment orders passed by the
Income-tax Officer are not before the Court. The balance-sheet shows a net
profit of Rs. 1,28,112/7/5 whereas the Income-tax Officer has computed the
assessable income at Rs. 2,66,766, which was later reduced in appeal by Rs.
80,925. There is no evidence on the record that the real commercial profits
were artificially reduced in the balance. sheet. Nor is there evidence to show
what part of the income assessed represents commercial profits, and what part
the notional income. In the circumstances it must be assumed that the amount
mentioned in the balance-sheet correctly represented the commercial profits.
(1) L.R. [1942] A.C.643.
447 From the figures already extracted at an
earlier stage it is manifest that the net commercial profit was barely Rs.
4,000 and it is not possible to hold that it was not unreasonable for the
Income-tax Officer to make an order to the effect that the additional sum of
Rs. 64,000 should be deemed, to have been distributed as dividends amongst the
shareholders.
In the result we hold that the order of the
High Court is correct and dismiss the appeal with costs.
Appeal dismissed.
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