C.S.P.SINGH, J. - (1.) THE Tribunal, Allahabad, has at the instance of the CIT, Kanpur, referred the following question under S. 66(1) of the Indian IT Act, 1922, for our opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in considering the reasonableness or unreasonableness of the assessee's action in not distributing any dividend, the ITO should have taken into account the losses suffered up to the last day of the 12 months following the end of the previous year as distinct from up to the date of the general meeting ?"
(2.) THE relevant assessment year in the present case is the year 1956 -57. In this year, the income of the assessee -company was determined at Rs. 89,922. The previous year for this assessment year ended on November 12, 1955. The general meeting of the company was held on July 12, 1956. In this meeting no dividend was declared. Inasmuch as the assessee had not declared any dividend for the relevant assessment year, the ITO issued a notice under S. 23A of the Act, asking it to show cause as to why an order under S. 23A(1) be not passed. The assessee took up the stand that inasmuch as it had suffered losses in the year following, the declaration of dividend was not desirable in the circumstances. On an examination of the account books of the petitioner and other relevant material, the ITO found that the assessee had suffered a loss of Rs. 3,23,371 on sale of shares. He further found that this loss of Rs. 3,23,371 included a loss of Rs. 3,10,468 which was suffered in respect of sales of the shares of the British India Corporation. The shares of the British India Corporation in respect of which the loss was suffered had been purchased after the date of the general meeting, i.e., on 22nd September, 1956, and 25th October, 1956, and that the first sale in respect of the other shares in which the loss had been incurred had been effected on August 10, 1956, i.e., after the date of the general meeting which was held on July 18, 1956. In this view of the matter, the ITO came to the conclusion that the loss on sale of shares was not a circumstance which could have impelled the directors to make a decision not to distribute dividend inasmuch as, on the date of the general meeting, they could not have anticipated that the company would suffer a loss on the sale of shares. In this view of the matter, he repelled the assessee's contention, and imposed additional super -tax. The assessee filed an appeal before the AAC. The AAC came to the conclusion that on the date when the general meeting was held the assessee's financial position was sound and the directors on that date could not have contemplated that the sale of shares could result in a loss and that there was no justification for the company in not distributing any dividend out of its distributable profits. In view of these findings, the AAC dismissed the appeal. The assessee thereafter filed an appeal before the Tribunal. The Tribunal took the view that in proceedings under S. 23A, the ITO has not only to take into account circumstances existing as on the date of the general meeting but also the circumstances of the following year and inasmuch as in the subsequent years it was clear that the assessee had suffered huge losses, the order under S. 23A was not justified. In order to answer this question, it will be necessary to quote S. 23A of the Act as it then stood : "Where the ITO 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 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 income -tax and super - tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to the 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 IAC 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."
(3.) IT will be seen that the ITO can take action under S. 23A after the expiry of a period of six months from the date on which the accounts of the assessee of the previous year are laid before the company in its general meeting and further that less than 60 per cent. of the assessable income of the company of the previous year as reduced by the amount of income -tax and super - tax payable by the company has not been distributed among the shareholders. This by itself, however, does not entitle the ITO to pass an order under S. 23A, as he has thereafter to consider as to whether having regard to the losses incurred by the company in earlier years or to the profits made, the payment of dividend would be unreasonable. The question, however, is as to whether in considering as to whether it would have been reasonable for the company to declare dividend, the reasonableness or otherwise of the decision made by the directors on the date of the general meeting has to be adjudged with reference also to subsequent events or the question of reasonableness has to be adjudged with reference to facts as existing on the date of the general meeting. Reference to two decisions of the Supreme Court on the ambit and scope of proceedings under S. 23A of the Act may now be made. In CIT vs. Gangadhar Banerjee & Co. (P) Ltd. (1965) 57 ITR 176 (SC), their Lordships of the Supreme Court, on p. 181 of the report, observed as under : "The ITO, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. 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 ITO. 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 ITO 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 CIT vs. Asiatic Textiles Ltd. (1971) 82 ITR 816 (SC) their Lordships of the Supreme Court, on p. 819 of the report, observed as under : "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 reasonableness or 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. The ITO must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective approach." ;