Y.S.TAMBE J. - (1.)ON a requisition made by this Court under S. 66(2) of the IT Act (hereinafter referred to as the Act) the Tribunal drew up a statement of case and referred to this Court the following question of law :
"Whether, the sums of Rs. 1,00,200 (Rupees on lakh and two hundred) and Rs. 1,04,000 (Rupees one lakh and four thousand) being provisions for retiring gratuities and bonus to the employees should be excluded while determining the applicants' actual accounting profits for the purpose of deciding whether having regard to the smallness of the said profits an order under S. 23A of the Indian INCOME TAX ACT, 1922, ought to be made or not?"
It has been agreed between the parties that to bring out the real controversy the question should be reframed in the following manner :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the sums of Rs. 1,00,200 and Rs. 1,04,000 in determining the assessee's actual accounting profits for the purpose of deciding whether having regard to the smallness of the said profits an order under S. 23A of the Indian INCOME TAX ACT, 1922, ought to be made or not, on the ground that they are in the nature of reserves to meet future expenditure."

(2.)FACTS giving rise to this question may briefly be stated : We are concerned with the asst. year 1948 -49, the relevant accounting year being the calendar year 1947. The assessee is a private limited company coming under the purview of S. 23A of the Act. The business of the assessee company was engineering and manufacturing machinery. For the said assessment year the ITO computed its assessable income at Rs. 7,05,821. The tax payable thereon amounted to Rs. 3,08,797, leaving a balance of Rs. 3,97,024. Sixty per cent thereof amounted to Rs. 2,38,214. The dividend declared by the assessee company at its annual general meeting held on 2nd Sept., 1948, amounted to Rs. 1,10,000. As this amount was less than 60 per cent. of the said sum of Rs. 2,38,214, the ITO, after duly obtaining sanction of the IAC, passed an order under s. 23A(1) of the Act that the undistributed portion of the assessable income of the assessee company shall be deemed to have been distributed as dividend amongst the shareholders on the aforesaid date of the general meeting. The assessee challenged this order on various grounds. We are, however, here concerned only with the two items, which, according to the assessee, should have been excluded in determining its distributable profits. It appears that the employees of the assessee -company and three other allied companies had formed a union by name Greaves Cotton and Allied Companies Employees' Union. In October, 1946, the union made various demands including a demand for gratuity and payment of bonus for the year 1946. These demands were not conceded by the company. Consequently, there was a threat given by the employees to resort to strike. The dispute, however, was referred to the Industrial Court, Bombay, for adjudication on 11th Nov., 1947. As regards the gratuity the demand was that an employee should be entitled to get gratuity at the rate of half a month's salary (drawn by him at the time of payment of gratuity) for each year of service on completion of 10 years' service or in the case of disability or death, should it occur earlier. As regards the bonus, the demand was that at least two months' salary as bonus should be paid to all the employees every year. As already stated these demands were not conceded by the assessee and other companies. The industrial Court made its award on 18th March, 1948. The award granted gratuity to all the monthly paid workers according to the Bank's Award with the alteration that it should be paid at the rate of half a month's salary for each year of service as demanded. The award further directed the assessee company to give bonus equivalent to 1 1/2 months' salary for the year 1946. From its profits of the year 1947, the assessee has set apart a sum of Rs. 1,00,200, which, according to the assessee, represents the amount of gratuity calculated up to the end of the calendar year 1947, in accordance with the scale mentioned in the award. It has further set apart a sum of Rs. 1,04,000 to meet its alleged liability of paying bonus to its workers for the year 1947. Before the Tribunal the assessee contended that these two sums should be excluded in determining the assessee's distributable profits for the purpose of deciding whether, having regard to the smallness of the said profits, an order under S. 23A of the Act should be made or not. The argument advanced was that, although these two sums were correctly added back in computing, the assessable income of the assessee company, they did not, form part of the accounting profits in a commercial sense from which dividend could be distributed. The Tribunal rejected this contention of the assessee and the reasons given by the Tribunal are :
"The provisions made are in the nature of reserves and it is not disputed that they would be allowed as deduction as and when the sums are expended, i. e., paid as gratuity to retiring employees or bonus to the employees. That had been the practice in the past and it is not also disputed that in the subsequent assessments the Departmental Officers were allowing deduction of actual payment irrespective of the provisions made in prior years. Therefore, the provisions during the year under dispute are nothing but reserves. The section also is perfectly clear. It does not allow for future payments. It reads : "...the ITO shall, unless he is satisfied ... that having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable ........" There is no provision for future expenditure at all. The AAC, in our opinion, has given the finding in clear terms. We do not see any substance in the appeal. The result is that the appeal is dismissed."

On a requisition made by this Court under S. 66(2) of the Act the Tribunal has drawn up a statement of case and referred the question of law to this Court, which we have now reframed as stated above.

(3.)THE short question that arises is whether the Tribunal was right in refusing to take into account these two sums in considering the question whether, having regard to the smallness of the profits of the company, an order under S. 23A of the Act should have been made or not on the sole ground that the sums set apart are in the nature of reserves to meet future expenditure. We find it difficult to accept the contention of the Department that the said sums set apart by the assessee can be termed as reserves built up to meet future expenditure. We are not here concerned with the determination of the taxable income of the assessee -company or whether these two sums should be allowed as deductions in determining the taxable income of the assessee company. But, on the other hand, we are here concerned with determining the question about the reasonableness or otherwise of the company in declaring the dividends it has declared, having regard to its business profits. In this connection the following observations of their Lordships of the Supreme Court in CIT vs. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC); (1961) 2 SCR 493 afford useful guidance :
"In considering whether a larger distribution of dividend by a company would be unreasonable, for the purpose of deciding whether a distribution order should be made under S. 23A of the IT Act in respect of the company the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The legislature has not provided in S. 23A that in considering whether an order directing that the undistributed profits shall be deemed to be distributed, the smallness of the assessable income shall be taken into account. The test whether it would be unreasonable to distribute a larger dividend has to be adJudged in the light of the profit of the year in question. Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do. . . . The legislature has deliberately used the expression 'smallness of profit' and not 'smallness of assessable income' and there is nothing in the context in which the expression 'smallness of profit' occurs which justifies the equation of the expression 'profit' with ' assessable income'. Smallness of the profit in S. 23A has to be adJudged in the light of commercial principles and not in the light of total receipts, actual or fictional."