R.N.Pyne, J. - (1.) In this reference under Section 66(1) of the Indian Income-tax Act, 1922, we are concerned with the assessment year 1960-61. The assessee is a private limited company to which the provisions of Section 23A are applicable. For the said year the income assessed under Section 23(3) was Rs. 15,56,405 and the tax payable thereon was Rs. 7,00,382. The Income-tax Officer, therefore, arrived at the distributable surplus at Rs. 8,56,023. The assessee had declared a dividend of Rs. 3,71,000 only. The statutory percentage applicable to tbe assessee was 50% and, therefore, as the dividend declared by the assessee fell short of the statutory percentage, the Income-tax Officer issued a notice calling upon the assessee to show cause why additional super-tax should not be levied. In response to this, the assessee urged that if past losses were considered and the estimated past tax liabilities were deducted from the available distributable surplus the dividend declared was adequate. The Income-tax Officer, however, held that the existence of past Josses could not be substantiated as they were neither considered in the profit and loss account filed in the assessment made. As according to the Income-tax Officer tax liabilities were neither ascertained nor admitted by the assessee, argument in that behalf was not tenable. He further observed that the net profit shown by the assessee in the return after making various adjustments was Rs. 14,77,737 and even from the point of view of the returned profit the dividend distributed would fall short of the statutory percentage as the tax payable thereon would be Rs. 6,64,970 and there would be a surplus of Rs. 8,12,767. In these circumstances, he did not accept the plea of the assessee and levied additional super-tax at 37% amounting to Rs. 1,79,458. Being aggrieved by the order of the Income-tax Officer the assessee appealed therefrom to the Appellate Assistant Commissioner. It was urged before the Appellate Assistant Commissioner that on appeal in regard to the quantum of assessment there was a reduction and the assessed profit was Rs. 15,49,323 and the tax payable thereon, Rs. 6,97,196, and the distributable surplus would work out at Rs. 8,62,127. While admitting that even on the basis of the revised figures, prima facie Section 23A was applicable, it was urged on behalf of the assessee that the Income-tax Officer had ignored the outstanding income-tax liabilities of Rs. 7,28,557 and thus computed a wrong figure in regard to distributable surplus. On this basis a calculation was filed before the Appellate Assistant Commissioner as follows : JUDGEMENT_852_ITR111_1978Html1.htm
(2.) It was accordingly submitted that as the company had declared dividend of Rs. 3,71,000 there could not be any scope for applying the provisions of Section 23A as the assessee did not have sufficient funds for declaring a larger dividend. The Appellate Assistant Commissioner while observing that income-tax liability outstanding on the relevant date was surely one of the circumstances to be taken into consideration in determining whether it was unreasonable to declare a larger dividend, went on to observe that the taxes of Rs. 7,28,557 related to the assessment years 1944- 45 to 1954-55. On scrutinising those assessments he found that the Income-tax Officer had disallowed certain amounts as fictitious payment of commission and brokerage to certain parties aggregating to Rs. 13,68,000. He also referred in this behalf to the orders of the Tribunal on appeals for the years 1952-53, 1953-54 and 1954-55 wherein the disallowance of payments of commission was confirmed. The Appellate Assistant Commissioner observed that the fictitious payments of commission had been kept out by the company and was nowhere to be found in its account books or balance-sheet and by claiming fictitious payments of brokerage and commission the company had artificially reduced its income. He took the view that if the claim of outstanding taxes relating to the years 1944-45 to 1954-55 had to be taken into account in ascertaining the commercial profits, the brokerage and commission fictitiously taken out of the account books would also have to be taken into account. He further observed that if the brokerage and commission was treated as a part and parcel of commercial profits, the company would be left with a huge surplus and had commercial profits to declare a larger dividend than declared. The Appellate Assistant Commissioner, therefore, confirmed the action of the Income-tax Officer. The Appellate Assistant Commissioner in his order observed that: "Now, coming back to the appellant's case, it has been established beyond doubt that the company has deliberately claimed fictitious payments of brokerage and commission and thus artificially reduced its income. This income has gone out of the account books and is not reflected in the balance-sheets at all. If the appellant's counsel claims that the outstanding taxes relating to the years 1944-45 to 1954-55 have to be taken into account in ascertaining the commercial profits, the brokerage and commission fictitiously taken out of the account books will also have to be taken into account. If the brokerage and commission is treated as a part of the commercial profits, the company would be left with a huge surplus available with it for the declaration of dividends. Viewing the extent of the commercial profits from this angle also, it is clear that the appellant-company had sufficient commercial profits to declare a larger dividend than it has declared. The appellant's contention, therefore, fails in this respect. The figures reproduced above will clearly show that the appellant had sufficient profits available with it for a larger distribution of dividends than declared and, hence, the company was not justified in not declaring the requisite percentage of dividends. In the circumstances, the provisions of Section 23A are clearly applicable to the present case and I do not see any reason to upset the order of the Income-tax Officer."'
(3.) From the order of the Appellate Assistant Commissioner there was a second appeal by the assessee to the Tribunal. Before the Tribunal, it was contended by the assessee that the tax liabilities of the earlier years should be taken into consideration and in view of these liabilities a distribution of a larger dividend would be unreasonable. It was further urged by the assessee that there was no basis for holding that the payments of commission were fictitious and the assessee had not accepted the finding of the Tribunal in that behalf and the matter was being taken up before the Supreme Court and the commercial profits disclosed by the profit and loss account of the assessee should be the guideline. The Tribunal, however, referred to the order of the Tribunal in the quantum appeal relating to 1953-54 in I.T.A. No. 4108 of 1959-60 and also of later years and observed that: "It is abundantly clear from the above facts that the payment was not genuine and rightly dubbed as fictitious payment routed through the firm of M/s. Bimal Kumar Nirmal Kumar to the appellant.";