COMMISSIONER OF INCOME TAX BOMBAY CITY I BOMBAY Vs. JUBILEE MILLS LTD

JUDGEMENT

(1.) This appeal is brought by certificate, from the judgment of the Bombay High Court dated May 3/4, 1963 in Income-tax Reference No. 40 of 1957.

(2.) The respondent-company is a limited liability company with a paid up capital of Rs. 15,25,000 as on June 30, 1947. Prior to 1930 the respondent-company had suffered large losses and in 1930 a debit balance of Rs. 12,75,000 in the profit and loss account of the respondent-company was adjusted by reducing the paid up capital. The face value of the Ordinary shares was reduced from Rs. 100 to Rs. 10 each and of Preference shares from Rs. 100 to Rs. 25 each after obtaining the sanction of the Bombay High Court. For the assessment year 1948-49 for which the relevant previous year was the year ended June 30, 1947, the respondent-company was assessed to a total income of Rs. 7,47,639. On that amount tax was calculated at Rs. 3,27,091, and the balance available of distribution by way of dividends for the purpose of S. 23A of the Income-tax Act. 1922 (hereinafter referred to as the 'Act') was, therefore, Rs. 4,20,548. Section 23A of the Act requires a company in which the public are not substantially interested to declare in the absence of certain special circumstances a dividend which would not be less than 60 per cent of the said balance. The respondent-company therefore was prima facie liable to declare a dividend of at least Rs. 2,52,358 in order to escape the penal consequences of non-compliance with the provisions of the said Section. The actual dividend which was declared by the respondent-company was only Rs. 24,750. The Income-tax Officer with the previous approval of the Inspecting Assistant Commissioner, therefore, applied the provisions of' Section 23A of the Act to the respondent-company and held that the company should be deemed to have declared a dividend of Rs. 3,9.95,798. The respondent-company appealed to the Appellate Assistant Commissioner of Income-tax against the order of the Income-tax Officer but the appeal was dismissed. The respondent-company thereafter filed a second appeal to the Income-tax Appellate Tribunal. By its order dated September 7, 1955 the Appellate Tribunal confirmed the order made under S. 23A of the Act and dismissed the appeal. It was contended before the Appellate Tribunal on behalf of the respondent-company that in view of the past losses suffered by it the non-declaration of a dividend larger than that actually declared was not unreasonable. It was argued that in view of the past losses of Rs. 12,75,000 it was not reasonable to expect the respondent-company to declare a larger dividend. The argument of the respondent-company was rejected by the Appellate Tribunal. It stated as follows in the course of its order:

(3.) At the instance of the respondent-company the Appellate Tribunal referred the following questions of law for the opinion of the Bombay High Court: