- (1.) THIS reference arises in the following circumstances. The assessee, Messrs. Bangodaya Cotton Mills limited, is a Company and there is no dispute that it was a Company in which the public were not substantially interested within the meaning of Explanation 1 to Section 23a (9) of the indian Income-tax Act, 1922 for the assessment years 1955-56 and 1956-57, the corresponding previous years of the company being the financial years ending on the 31st March, 1955 and the 31st march, 1956 respectively. There is also no dispute that for those two years, under the provisions of Section 23a as it then stood, the Company had to distribute 60 per cent, of its distributable surplus as determined under that section. The Income-tax Officer found that the co. 's assessed profits were Rs. 4,14,669 and rs. 5,34,366 respectively and after deduction of income tax and super tax payable thereon, the distributable surplus amounted to Rs. 2,23,491/ - and rs. 3,02,824/- respectively for the aforesaid two years. As the Company had mot declared any dividend within the statutcry period of 12 months from the end of the- respective previous years, the income tax Officer required the assessee to show cause why the provisions of Section 23a should not be applied to it in respect of these two years. The Company had declared dividends of two identical sums of Rs. 49,266/- for the aforesaid two assessment years on 5th of sept. 1956 and 31st of July 1957 respectively, that is, after the lapse of the statutory period of 12 months from the end of each of the relevant previous years. The Company submitted to the Incometax Officer that it had imported some spinning machinery during the financial year 1952-53 at heavy cost, thereby incurring debis to the extent of over rs. 11,00,000/. The Company had to borrow a large sum of money from lloyds Bank Limited, to whom a sum of Rs. 1,97, 354/- was paid as interest but was disallowed in the company's assessment. The Company had to borrow a further large sum from the Life insurance Corporation of India also at high interest and on condition of paying commission. It was, therefore, submitted that owing to the smallness of profits it was not reasonable for the company to have declared a larger dividend than that already declared. The Income-tax Officer was unable to accept this contention as, in his opinion, what was to be taken into account in considering the application of s. 23a was the commercial profits earned by the Company. In this case the Company's book profit for the assessment year 1955-56 was Rs. 81,945/ - and the amount brought forward from the profit and loss balance of the earlier year was Rs. 1,29,185/-thereby giving a book profit for this year of Rs. 2,11,130/ -. Similarly, the assessee's profits as per its profit and loss account for the assessment year 1956-57 were Rs. 3,17,033/ -. He held further that the debts incurred by the assessee for a capita] expenditure could not be taken into consideration in considering the smallness of profits under sec. 23a. The Income Tax Officer was of opinion that if the Company was in financial difficulties it should have approached the commissioner under Section 23a (3), seeking his sanction for either not distributing any dividends or for distributing a smaller amount of dividend. Accordingly, the Income-tax Officer charged super-tax on the Company on the entire distributable surplus for these two years. On the assessee's appeals against the aforesaid orders under Section 23a to the Appellate Assistant Commissioner, the same contentions were raised. In addition to the facts found by the Income-tax officer the Appellate Assistant Commissioner observed that in the year 1955-56 the assessee had the following reserves, namely, (a) Reserve for plant and machinery-Rs. 5,00,000/ ; (b) Investment reserve-Rs. 38,390/- ; (c) Contingent reserve-Rs. 60,000/- ; (d) Reserve for bad debt-Rs. 32,047/- and these reserves had, for the subsequent year, increased to Rs. 6,50,000j- Rs. 46,375/-, Rs. 60,000/-and Rs. 33. 918/- respectively. As there was not any loss incurred by the assessee in earlier years and as the book profits disclosed for the years under consideration could not be considered to be small, the Appellate Assistant Commissioner upheld the orders of the Income-tax officer and dismissed the ussessee's appeals.
(2.) DISSATISFIED with order of the appellate Assistant Commissioner, the assessee appealed to the Income-tax appellate Tribunal. Before the Tribunal the assessee submitted two statements purporting to show the surplus available to the assessee after deducting its liabilities from its assessed profits for these two years. The liabilities deducted were the assessee's incometax liabilities for the past years as well as the present year and its liabilities incurred in connection with the import of the spinning machinery. On the basis of these liabilities, the assessee showed a distributable surplus of Rs. 4,485/- for the first year and a nil surplus for the second. The same contentions were raised by the assessee before the Tribunal namely, that though it has suffered no loss in the past years and had sufficient profits in its profit and loss account for declaring a dividend, yet taking into consideration its heavy liabilities in respect of the import of spinning machinery, it should be considered that it was not reasonable for the assessee to have declared a dividend larger than that declared for these two years. The Tribunal accepted the assessee's contention and after considering an unreported decision of this Court in gangadhar Banerjee and Co. Ltd. v. The commissioner of Income Tax, made the following observations:- "in the present case, if we were not to look to the imperative commitments and the necessary outgoings which were facing the assessee, the simple position would be that according to the book results for the specific period of each of the two years in question, the assessee has the adequate profits in its books, and, therefore, it must declare the statutory percentage of its profits as dividends. But if the imperative commitments, in the shape of paying interest on the loans, the commission for the Life insurance Corporation Loan, and incometax liabilities for past years besides several other expenses which it was bound to meet, were also alongside to be worked at, the position would be that by declaring dividend to the extent of the statutory percentage of 60 percent, it would have been definitely unable to meet the other commitments. May be that it has not actually met such commitments during the particular periods, but all the same if it had paid out 60 per cent of its profits as dividend, it would not have been able to meet the other commitments. The question, therefore, arises, which action could be considered more reasonable from the commercial man's point of view-whether it would pay the dividend and be a lost person, or to restrict the payment of dividend to nil or to nominal amount and to have a chance of survival by being able to meet the other imperative demands on it?" And, again "the assessee, in our opinion, has naturally to look to the various necessary outgoings to judge the situation in its reality and not only to look to its business profits. In doing so, the assessee had necessarily not only to deduct the admissible and revenue expenses but also such commitments and outgoings, even though they may be of capital and inadmissible nature, to find out as to the amount, which it has been actually left with to be distributed as dividend. In the instant case the lassessee has placed before us its total commitments and expenses which it must have to incur. The commitments are so heavy that if the company be forced to pay it at once, all its capital and reserves would be hardly sufficient to meet the enforcement. Although the surplus disclosed by deducting a part of such commitments and expenses comes to a paltry sum of Rs. 4,485/- in the assessment year 1955-56, and to Nil in the assessment year 1956-57, the assessee had itself declared dividend to the tune of Rs. 49,256 (? ). Be that as it may, on a consideration of the entire facts and circumstances of the case and the necessary commitments which the assessee has to fulfil, we hold that the Company's profits were small within the meaning of the term 'smallness of profit' under Section 23a and any further declaration of dividend would be unreasonable". The Tribunal accordingly allowed the assessee's appeals.
(3.) AT the instance of the Commissioner, the Tribunal has referred the following question of law to this Court: "whether on the facts and in the circumstances of the case, the profits of the assessee Company for the assessment years 1955-57 and 1956-57 were small within the meaning of the expression "smallness of profits" in Section 23a of the Indian Income-tax Act, 1922, and that any further declaration of dividend than that declared by the assessee would be unreasonable. ";