SIKRI - (1.) JUDGMENT The judgment of the court was delivered by
(2.) THIS appeal by special leave is directed against the judgment of the High court of Judicature at Madras in a reference made to it by the Income-tax Appellate tribunal under section 66(1) of the Income-tax Act, 1922, hereinafter referred to as the Act. The following question of law was referred: " Whether, on the facts and in the circumstances of the case, section 23A was properly applied ? " The relevant facts and circumstances are as follows : The Income-tax Officer, in his order dated 13/02/1957, passed under section 23A, found that the appellant, Gobald Motor Service, hereinafter referred to as the assessee, was a private limited company which ran a fleet of buses and lorries from Mettupalayam in the accounting year relevant to the assessment year 1952-53. He arrived at the following figures in respect of the total income, taxes paid, dividend, etc. : Rs. Total income as finally determined ... 2,04,222 Taxes paid ... 81,529 Balances available for distribution ... 1,22,693 60 per cent. thereof ... 73,617 Dividends declared ... 45,000.00 On the scrutiny of these figures he came to the conclusion that section 23A of the Act was applicable because the dividend declared was less than 60% of the profits available for distribution. He then considered the point whether having regard to the profits made, i.e., profits as distinct from assessable income, the assessee could or could not have reasonably declared a larger dividend. For this purpose, he extracted the following relevant figures: Rs. Book profit before appropriation of income-tax, etc. ... 1,01,902 Less : Taxes actually payable on total income as finally determined on appeal ... 81,529 Profits available for distribution ... 20,373 Dividends declared by the company ... 45,000.00 He felt that these figures showed that the assessee could not reasonably have declared dividend of more than Rs. 20,373.00, but he observed : 419 " In the case of banking companies or companies with income from property, the computation of income for purposes of the Income-tax Act may in some cases be different from that adopted by the companies themselves. Hence, there may be variation between the ' assessable income ' and ' profits made '. In such cases, if the companies are asked to declare dividends on the basis of ' assessable income ', the companies may be forced to declare dividends out of capital which is prohibited under the Companies Act. In this case the difference between the ' assessable income ' and ' profits made ' is not due to any such variation on the basis of any different statutory "computation, but due to the addition of Rs. 20,000.00 made on account of luggage collections and to the addition of Rs. 25,000.00 on account of spare parts, etc. These additions have been sustained by the Appellate Assistant Commissioner. This clearly shows that the books are not so properly maintained as to deduce the distributable income from the assessee company's book profits. Moreover if the additions of Rs. 45,000.00 are made to the profits of Rs. 20,373.00 available for distribution, the company could very well have declared a larger dividend than what has been actually declared by it. I, therefore, apply the provisions of section 23A." Accordingly, he held that " the company is deemed to have declared the dividend of Rs. 38,840.00 to each of the two shareholders as under : JUDGEMENT_417_ITR60_1966Html1.htm This order was modified by him as he found that there were six shareholders during the relevant-period, and he accordingly revised the allocations amongst the six shareholders. We have set out the order of the Income-tax Officer in detail because of the argument addressed to us by Mr. K. Srinivasan, the learned counsel for the assessee. One of his contentions before us was that the Income-tax Officer had not considered the question of reasonableness or unreasonableness of the amount distributed as dividend from the standpoint of business considerations such as previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future, etc. It is true that the Income-tax Officer does not appear to have borne these 420 considerations in mind, but it may be that the assessee did not bring this aspect to the notice of the Income-tax Officer. Be that as it may, we find that the assessee did not take this point before the Appellate Assistant Commissioner and the Income-tax Appellate tribunal.
(3.) THE Appellate Assistant Commissioner found on analysis that the difference of nearly a lakh of rupees between the total income as finally determined, namely, Rs. 2,04,222.00 and the book profits amounting to Rs. 1,01,902.00 was principally due to the following additions made in the assessment: JUDGEMENT_417_ITR60_1966Html2.htm The Appellate Assistant Commissioner held that the expenditure on spare parts had probably been inflated and the luggage collections of Rs. 15,000.00 had entirely been kept out of accounts. He further observed that " at the time the accounts were made up the directors must have been aware that the profits as per books were very much less than the real profits, as the book profits had been shown at a lesser figure by inflation of the first and the third items and suppression of the second item." In view of these considerations, the Appellate Assistant Commissioner held that the Income-tax Officer was justified in rejecting the appellant's contention regarding the adequacy of dividends declared and in applying the provisions of section 23A. The Appellate tribunal, on appeal, confirmed the order of the Income-tax Officer The High court first held that on the figures the dividend declared was less than 60% of the assessable income minus, the taxes, and the first condition relevant to the application of section 23A was, therefore, satisfied. Then the High court considered the question whether, on account of the smallness of the profits made, the payment of any larger dividend than Rs. 45,000.00 would have been reasonable. In this connection the High court repelled the contention of the assessee that the profits displayed by the assessee in its books of account were the only profits which could come in for consideration. It held that the concealed profits totalling nearly Rs. 40,000.00 had to be added to the book profits in order to arrive at the correct figure of the profits of the assessee. The High court concluded t hat the Income-tax Officer certainly had material before him on the basis of which he was entitled to conclude that it would not have been unreasonable for the assessee to have declared a dividend larger than that which had actually been declared. ;