CHANDURKAR,J. - (1.) THE assessee company, M/s Indian Express Newspapers (Bombay) Ltd., Bombay, though it was incorporated on 20th October, 1949, and it was formed mainly with the object of taking over the publication of daily and weekly newspapers, did not have any transactions till 30th April, 1959, and its accounts were closed for the first time on 30th April, 1960. The relevant assessment year for the purposes of this reference is 1961 62 and the corresponding previous year was from 1st May, 1959, to 30th April, 1960. In respect of the asst. year 1961 62, the P&L a/c of the assessee disclosed a net profit of Rs. 2,32,802.95 after making allowance for S. 1,95,000 by way of provision for taxation. The ITO, however, assessed the total income of the assessee at Rs. 5,79,569. The tax payable thereon came to Rs. 2,53,407. In respect of the year in question, the assessee company had declared a total dividend of Rs. 67,200. The ITO took the view that the amount declared as dividend being less than the statutory percentage of 65per cent of the distributable surplus which, according to the ITO, came to Rs. 3,26,172, and according to the assessee, came to Rs. 1,74,396, made an order under S. 23A(1) of the Indian IT Act, 1922, levying additional super tax on the undistributed balance of Rs. 2,21,963. This order was confirmed by the AAC while dismissing the appeal filed by the assessee company. The assessee company, therefore, preferred an appeal before the Tribunal.
(2.) THE Tribunal first directed its attention to the question as to whether the primary condition for taking action under S. 23A was satisfied, the condition being that the assessee should have declared as dividend an amount less than the prescribed percentage of the amount of difference between the total income assessed and the tax payable thereon. The Tribunal then directed its attention to the question as to whether it would be unreasonable for the company to declare the balance of Rs. 1,07,000 as the dividend, this amount being the difference between the net commercial profits of Rs. 1,74,396 taken on the basis of the profit and loss account and Rs. 67,200, being the dividend declared by the company. It was positively urged before the Tribunal that the assessee company had an expansion programme and machinery worth Rs. 5 lakhs was already under orders of purchase and the company's liability to the outsiders had increased by about Rs. 10 lakhs round about the date of the general meeting. The annual general meeting was held on 24th August, 1960. The Tribunal, however, took the view that these were normal development expenses which would not justify the withholding of any dividend. The Tribunal, therefore, took the view that the super tax under S. 23A(1) was properly charged and dismissed the appeal. A reference has, therefore, now been made to this Court at the instance of the assessee and the question referred is as follows : "Whether, on the facts and in the circumstances of the case, the provisions of S. 23A(1) could be invoked against the company for the asst. year 1961 62 - Mr. Colah appearing on behalf of the assessee company has urged that the entire approach not only of the IT authorities but of the Tribunal also is contrary to the decision of the Supreme Court in CIT vs. Gangadhar Banerjee & Co. (P) Ltd. (1965) 57 ITR 176 (SC). According to the learned counsel, even the Tribunal was in error in ignoring the fact that the assessee company had undertaken an expansion programme and that it had certain liabilities to meet which were to the tune of about Rs. 10 lakhs. These circumstances, according to the learned counsel, were very relevant for determining as to whether it would be unreasonable to declare a dividend larger than the one declared by the company.
(3.) NOW , there can be no doubt that one of the pre conditions that is to be satisfied before the ITO decides to assess a company to super tax is that the profits and gains distributed as dividends by the company within the 12 months immediately following the expiry of the previous year should be less than the statutory percentage of the total income of the company of the previous year as reduced by the amount of income tax and super tax payable by the company in respect of its total income and the amount of any other tax levied on the company under any law for the time being in force by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income. But it must be remembered that this is not the only condition which is required to be satisfied and merely because an amount lesser than the statutory percentage as contemplated by S. 23A(1) of the Indian IT Act, 1922, has been declared as dividend, the ITO cannot as a matter of course proceed to assess the company to super tax. The ITO has to be further satisfied as provided in cl. (i) that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable. We are not concerned with cls. (ii) and (iii) in S. 23A(1). The provisions of S. 23A(1), are therefore, clear that before the ITO proceeds to assess a company to super tax, he must apply his mind to the question as to whether the payment of a dividend larger than that declared would be unreasonable having regard to the smallness of the profits made in the previous year. When the ITO decides to take action under S. 23A(1), it is for the Revenue to show that it would not be unreasonable if a dividend larger than the one declared by the company would be paid. This has to be decided on the basis of the smallness of the profits made by the company in the relevant previous year. When S. 23A(1) refers to smallness of the profits, the profits to be considered are not on the basis of the assessed income, but they are the commercial profits which have to be considered as disclosed in the P&L a/c. When the section refers to the smallness of the profits, the smallness is not to be determined merely by the quantum of the profits but it has to be determined after taking into account several circumstances which a businessman would take into account. When the ITO proceeds to determine the smallness of the profits or the question as to whether a larger dividend should be declared or not, it has now been held that he is doing what is normally done by the directors of the company. Future requirements of a company, which has an expansion programme, would clearly be a circumstance which would be relevant in determining whether the profits in the relevant year are small or high having regard to the financial implications of the expansion of the company. What should be the approach in a proceeding under S. 23A(1) of the Indian IT Act, 1922, is now well settled by the decision of the Supreme Court in CIT vs. Gangadhar Banerjee & Co. (P) Ltd. (supra). It is rather surprising that the Tribunal did not find it necessary even to notice the approach which is now an accepted and well settled principle in respect of a case dealing with S. 23A(1) of the Act. The following observations of the Supreme Court are instructive : "Unless there is a deficiency in the statutory percentage, the ITO has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or 'the smallness of the profit made' the payment of a dividend or a larger dividend than that declared would be reasonable. The argument mainly centred on this part of the section. Would the satisfaction of the ITO depend only on the two circumstances, namely, losses and smallness of profit ? Can he take into consideration other relevant circumstances ? What does the expression 'profit' mean ? Does it mean only the assessable income or does it mean commercial or accounting profits ? If the scope of the section is properly appreciated the answer to the said question would be apparent. 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 yard stick 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." ;