Subba Rao, J. - (1.) This appeal by certificate raised the question of the construction of the provisions of S. 23A of the Indian Income tax Act, 1922, hereinafter called the Act, before it was amended by the Finance Act, 1955.
(2.) The relevant and undisputed facts may be briefly stated. M/s. Gangadhar Banerjee and 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. 1,28,1 12/ 7 / 5. The taxation reserve was Rs. 56,000. The profit left was Rs. 72,000. The Directors declared a dividend at the rate of 5 1/2 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 balalce-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.
(3.) The Income-tax Officer assessed the total income of the assessee for the year 1948-49 at Rs. 2,66,766. After deduction 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 Incometax, 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.;