Ramaswami, J. - (1.) This appeal is brought by certificate, from the judgment of the Bombay High Court dated May 3/4, 1963 in Income-tax Reference No. 40 of 1957.
(2.) The respondent-company is a limited liability company with a paid up capital of Rs. 15,25,000 as on June 30, 1947. Prior to 1930 the respondent-company had suffered large losses and in 1930 a debit balance of Rs. 12,75,000 in the profit and loss account of the respondent-company was adjusted by reducing the paid up capital. The face value of the Ordinary shares was reduced from Rs. 100 to Rs. 10 each and of Preference shares from Rs. 100 to Rs. 25 each after obtaining the sanction of the Bombay High Court. For the assessment year 1948-49 for which the relevant previous year was the year ended June 30, 1947, the respondent-company was assessed to a total income of Rs. 7,47,639. On that amount tax was calculated at Rs. 3,27,091, and the balance available of distribution by way of dividends for the purpose of S. 23A of the Income-tax Act. 1922 (hereinafter referred to as the 'Act') was, therefore, Rs. 4,20,548. Section 23A of the Act requires a company in which the public are not substantially interested to declare in the absence of certain special circumstances a dividend which would not be less than 60 per cent of the said balance. The respondent-company therefore was prima facie liable to declare a dividend of at least Rs. 2,52,358 in order to escape the penal consequences of non-compliance with the provisions of the said Section. The actual dividend which was declared by the respondent-company was only Rs. 24,750. The Income-tax Officer with the previous approval of the Inspecting Assistant Commissioner, therefore, applied the provisions of' Section 23A of the Act to the respondent-company and held that the company should be deemed to have declared a dividend of Rs. 3,9.95,798. The respondent-company appealed to the Appellate Assistant Commissioner of Income-tax against the order of the Income-tax Officer but the appeal was dismissed. The respondent-company thereafter filed a second appeal to the Income-tax Appellate Tribunal. By its order dated September 7, 1955 the Appellate Tribunal confirmed the order made under S. 23A of the Act and dismissed the appeal. It was contended before the Appellate Tribunal on behalf of the respondent-company that in view of the past losses suffered by it the non-declaration of a dividend larger than that actually declared was not unreasonable. It was argued that in view of the past losses of Rs. 12,75,000 it was not reasonable to expect the respondent-company to declare a larger dividend. The argument of the respondent-company was rejected by the Appellate Tribunal. It stated as follows in the course of its order: "It is true that company incurred large losses in past years. But it reconstructed its capital in 1930. In that year, the debit balance in the profit and loss account had been set off against the paid-up capital thereby reducing the paid-up capital of the company. After the reconstruction, the company emerged in a new cloak of reduced capital. For the purpose of determining the applicability of provision of Section 28A, in our view, the reconstructed capital alone has to be taken into account and not the original capital, a great portion of which had been wiped out by debating losses. Those prior losses had already been wiped out by writing off against the paid up capital. They cannot now be taken for consideration."
(3.) At the instance of the respondent-company the Appellate Tribunal referred the following questions of law for the opinion of the Bombay High Court: "1. Whether on the facts and in the circumstances of the case the Income-tax Officer was competent to pass an order under Section 23 (1) of the Act after having allowed a rebate of one anna per rupee in the assessment under the provision, (a) to paragraph (B) of Part I of the Second Schedule of the Finance Act, 1948 2. If the answer to question No. 1 is in the affirmative whether on the facts and in the circumstances of the case, the assessee company is a company in which the public are substantially' interested for the purposes of Section 23A of the Act and 3. Whether the loss of Rs. 12,75,000 incurred by the company prior to its reconstruction in 1930, could-he taken into consideration for purposes of the applicability of Section 93A(1) of the Act - By its judgment dated March 13, 1958 the High Court answered the first question is the affirmative, holding that the Income-tax Officer was competent to pass an order under S. 23A(1) and he was not precluded from doing so by reason of his having granted rebate to the respondent-company. On the second question also the High Court gave its answer in the affirmative, holding that the respondent-company was a company in which the public was substantially interested for the purpose of S. 23A of the Act In view of the answer to the second question the provisions of S. 23A of the Act would not be applicable to the respondent-company and the third question became academic, and the High Court declined to answer it. The Commissioner of Income-tax took the matter in appeal to this Court which reversed the answer which the High Court had given to question No. 2 and held that the respondent company was a company in which the public were not substantially interested for the purpose of S. 23A of the Act. In view of the decision of this Court of the second question it became necessary for the High Court to consider the third question and this Court therefore remanded the reference to the High Court or consideration of the third question. After the remand the High Court heard the reference again and by its judgment dated May 3/4, 1963 answered the third question in the affirmative and in favour of the respondent-company It was held by the High Court that the losses prior to reconstruction of the respondent-company in 1980 which were set off against the paid-up capital could be taken into consideration for the purpose of application of S. 23A of the Act.;