INDO CEYLON DENTAL AND SURGICAL COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company in which the public are not substantially interested. It carries on business in the purchase and sale of dental goods. On October 10, 1957, due to restriction in imports, the directors decided to start a dental industry and the managing agents were authorised to negotiate with the foreign manufacturers for the purchase of machinery and raw materials for the manufacture of plastic tooth, and to utilise the general reserve available with the company for the said purpose. It also decided to apply to the Director of Industries, Madras, for permission to import the requisite machinery and also for the allotment of a factory unit in the Government Industrial Estate.

(2.) THE paid up capital of the company was Rs. 52,150 as on March 31, 1960. THE accumulated profits and reserve including amounts capitalised from the earlier reserve amounted to Rs. 51,759 as on March 31, 1960. In the year ending on March 31, I960, it made a profit of Rs. 30,897. THE Income-tax Officer, however, assessed the company on a total income of Rs. 31,261. THE income-tax and super-tax, payable thereon amounted to Rs. 14,067. This left a balance of Rs. 17,194. THE company declared a dividend of only Rs. 5,930, while under Section 23A of the Indian Income-tax Act, 1922, the company should have declared a dividend of Rs. 11,176. THE Income-tax Officer, therefore, issued a notice proposing to invoke Section 23A. In reply, the company explained that due to smallness of profit, it could not declare a larger dividend. THE Income-tax Officer was not satisfied with that explanation. He, therefore, levied an additional super tax of Rs. 4,167.68 by invoking Section 23A.

(3.) THE learned counsel for the assessee referred to the decision in Alavai Industries Pvt. Ltd. v. Commissioner of Income-tax, 1970 76 ITR 310, to which one of us was a party. In that case, it was held that the declaration of dividends by a company is essentially a matter to be dealt with by the board of directors and ultimately by the general body and what percentage out of its profits should be made available to the shareholders and what portion thereof should be reserved for future enterprises, expansion and benefit of the company are exclusively matters for the consideration of the board of directors, and that Section 23A of the Indian Income-tax Act, 1922, being penal in nature, the jurisdiction of the Income-tax Officer under that section could be exercised only if the ingredients and the circumstances set out in that section are established. That decision will help the assessee only if it is shown that the board of directors or the general body decided to declare a lesser dividend with a view to create a reserve for the future development of the company. From the mere declaration of a lesser dividend, it cannot be automatically inferred that the directors wanted to create a reserve for the future expansion of the company. We are, therefor of the view that, on facts, the principle laid down in that decision cannot apply. In our view, the Tribunal has rightly held that Section 23A is applicable.