S.K.DESAI, J. - (1.) THE assessee company is admittedly a S. 23A company. In this reference, we are concerned with the asst. year 1956 57, the relevant accounting year being the year ended March 31, 1956. The assessed profits of the assessee company after deducting the profit under S. 10(2)(vii) came to Rs. 7,23,630. The tax on this amount was worked out at Rs. 3,08,755 and when the amount of tax so worked out was deducted from the amount of profit earlier indicated, the ITO worked out the distributable balance at Rs. 4,14,875. Against this, the company had declared dividends on preference shares of only Rs. 1,29,062. Before the ITO, the assessee company had pleaded that in the preceding year the CIT had not insisted upon full distribution in view of the requirements of the company for rehabilitation. The rehabilitation programme had continued during the year under consideration before the ITO and it was urged that for the same reason the distribution of dividends actually made should be considered to be sufficient and reasonable. It appeared that even for this year the company had made an application to the CIT under S. 23A(3) but the same had been rejected by the CIT as being belated. The ITO was of the opinion that since for the material year the assessee's application under S. 23A(3) had been rejected, the question whether funds were required for rehabilitation could not be taken into consideration. The ITO, accordingly, passed the order under S. 23A(1) levying additional super tax in the amount of Rs. 1,07,764.
(2.) THE company thereafter appealed to the AAC, but was unsuccessful. The matter was thereafter carried in appeal to the Tribunal. Before the Tribunal, it was urged that the order under S. 23A(1) was ab initio void since it was not passed within the time prescribed in S. 34(3). This contention was decided against the assessee as the Tribunal followed the decision of the Supreme Court in M. M. Parikh, ITO vs. Navanagar Transport & Industries Ltd. (1967) 63 ITR 663 (SC). The Tribunal, however, held that, on merits, the company was entitled to succeed. The company had a big rehabilitation programme and had acquired new machinery in the material year as well as in the year following, out of borrowings. It was in view of this rehabilitation programme that the CIT had allowed the assessee's application under S. 23A(3) for the preceding assessment year. For the material year also, the company had applied for a similar order, but the application was time barred and there was no provision for condonation of delay in S. 23A(3). The Tribunal accepted the company's contention that the requirements for rehabilitation should be considered before applying s. 23A(1) and it was not only under S. 23A(3) that such requirements should be taken into account. The Tribunal accepted the submissions made on behalf of the assessee applying the Supreme Court decision in CIT vs. Gangadhar Banerjee & Co. (P) Ltd. (1965) 57 ITR 176 (SC) and the decision of the Madras High Court in Indian Commerce & Industries Co. Ltd. vs. CIT (1966) 60 ITR 229 (Mad). The Tribunal observed that in the case, which it was deciding, the funds were actually required for immediate expenditure on rehabilitation. It also emphasised the fact that in the past the company had not taken any loans, but had in the year under considertion to take a cash credit loan from the Bank of India of Rs. 15 lakhs for business requirements. It also considered the cash balance available to the company. Ultimately, it expressed satisfaction that the company had not acted unreasonably in declaring only the amount of dividends which it actually did. The following two questions are referred to us : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the order under S. 23A(1) levying additional super tax for the asst. year 1956 57 ? (2) Whether an order under S. 23A of the Indian IT Act, 1922, after its amendment by the Finance Act, 1955, is an order of assessment to which the period of limitation prescribed by S. 34(3) applies ?" As far as question No. 2 is concerned, Mr. Palkhivala, on behalf of the assessee, has stated that this question is concluded against him as a result of the decision of the Supreme Court in M. M. Parikh vs. Navanagar Transport & Industries Ltd. (supra), and that, accordingly, the question will be required to be answered in the negative and against the assessee. As far as question No. 1 is concerned, it becomes necessary to turn to the decision of the Supreme Court on which the Tribunal has relied to elicit the proper principles as ought to be applied to such cases. In CIT vs. Gangadhar Banerjee & Co. (P) Ltd. (supra), it has been held as follows (headnote) : "The ITO, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of S. 23A of the Indian IT Act, 1922, does not assess any income to tax. He only does what the directors should have done putting himself in their place. 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.
(3.) IN deciding whether the payment of a dividend or a larger dividend than that declared by the company would be unreasonable, the ITO can take into consideration circumstances other than losses and smallness of profit. The statute, by the words used, while making sure that 'losses and smallness of profits' are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered. Capital losses, if established, would be one of them.";