Sabyasachi Mukhakji, J. - (1.) In this reference we are concerned with two relevant assessment years being assessment year 1961-62 for which reference has been made under Section 66(1) of the Indian Income-tax Act, 1922, and the assessment year 1962-63 for which reference has been made under Section 256(1) of the Income-tax Act, 1961. In this combined reference two questions have been referred to this court, namely : "(1) Whether, on the facts and in the circumstances of the case, the profit of the assessee-company for the assessment years 1961-62 and 1962-63 was small within the meaning of the expression ' smallness of profits' in Section 23A of the Indian Income-tax Act, 1922, or Section 104 of the Income-tax Act, 1961, as the case may be, and that any further declaration of dividend than that declared by the assessee would be unreasonable? (2) Whether, on the facts and in the circumstances of the case, any larger dividend than that declared by the company could reasonably be distributed within the meaning of Section 23A of the Indian Income-tax Act, 1922, or Section 104 of the Income-tax Act, 1961, as the case may be, and the application of Section 23A of the Indian Income-tax Act, 1922, and Section 104 of the Income-tax Act, 1961, was in accordance with law?"
(2.) As mentioned hereinbefore we are concerned with two assessment years being assessment year 1961-62 for which the relevant previous year ended on 30th September, 1960, and the assessment year 1962-63 for which the relevant previous year ended on 30th September, 1961. There is no dispute that this was a case of a company in which provision of Section 23A of the Indian Income-tax Act, 1922, and/or provisions of Section 104 of the Income-tax Act, 1961, would apply. There is no dispute also as to the distributable income for these two years. The distributable income for the assessment year 1961-62 was Rs. 1,47,351 and for the assessment year 1962-63 was Rs. 1,32,795. For the assessment year 1961-62 the statutory percentage at 50% would have been Rs. 73,676 and for the assessment year 1962-63, Rs. 66,398. The profits actually distributed for the first year was Rs. 30,000 and for the second year Rs. 30,005, respectively. The Income-tax Officer proposed to take action under Section 23A and Section 104 of the relevant Acts because the dividend distributed was, according to him, inadequate. The assessee was asked to show cause. The assessee contended that no levy of additional super-tax under the provisions of the said section should be made having regard, to, (1) the need for setting apart some amounts as reserve, and (2) providing for the payment of taxes for which no provision had been made. The Income-tax Officer did not accept this explanation and passed orders under Section 23A for the assessment year 1961-62 and under Section 104 for the assessment year 1962-63. There was an appeal before the Appellate Assistant Commissioner who upheld the orders of the Income-tax Officer and dismissed the appeal. There was a further appeal to the Tribunal. The Tribunal came to the conclusion that the amount set apart for reserve and provision made for taxes were not what a prudent businessman would have necessarily made in the circumstances of the case and as such dismissed the appeal. In the aforesaid circumstances the aforesaid two questions have been referred to this court.
(3.) In order to appreciate the controversy in this case, it would be necessary to refer to the position of the account. It was claimed by the assessee after making provisions, for transferring to the reserve fund and for payment of taxes as was done under the "profit and loss appropriation account", the amounts available out of the profits were Rs. 28,910 for the assessment year 1961-62 and Rs. 29,564 for the assessment year 1962-63 and dividend declared for each of these two years being about Rs. 30,000 was in excess of the amount which, according to the assessee, was possible by drawing on the balance brought forward from the preceding years. In order to appreciate the position it would be relevant to refer to certain facts.;