NEW STAR INDUSTRIES PVT LTD Vs. COMMISSIONER OF INCOME TAX BOMBAY

JUDGEMENT

(1.) THE assessee is a private limited company, to which the provisions of section 23a are applicable. It trades in and exports castor oil and castor seeds. In the calendar year 1950, which was also the accounting year of the assessee, it had entered into contracts both for purchases and sales, for spot deliveries and forward by way of hedging. It had made a profit of Rs. 1,94,116 in castor seeds forward contracts, which had not been transferred by it to its profit and loss account but shown in the balance-sheet under the heading "castor Seeds Kothra Khand Forward Business Account". The said amount, however, was included in the assessment for the assessment year 1951-52 and the total assessable income computed at Rs. 1,65,663. Deducting therefrom the amount of tax paid, which was Rs. 71,960, there was a balance of Rs. 93,703 and 60% thereof was Rs. 56,222. The company, however, at its general meeting held on December 1, 1951, declared Rs. 8,000 as dividend. The Income-tax Officer commenced proceedings against the company under section 23a inasmuch as it had not declared as dividend an amount which was at least 60% of the assessable profits reduced by the amount of taxes paid. The assessee contended before the Income-tax Officer that the profit of Rs. 1,94,116 on the hedging transactions was not actual profit of the year available for dividend as there was loss in actual shipments and on deliveries in the year 1951. It was argued on behalf of the assessee that having found that the price of castor seeds was showing a tendency to rise after it had entered into contracts for shipments, it had entered into forward contracts for the purpose of guarding against anticipated losses. In the forward contracts it no doubt earned a profit of Rs. 1,94,116 but it was all swallowed by the losses suffered on the contracts of shipments which it had undertaken and had to execute during the course of the next year. The assessee argued that the profits on the hedging contracts had to be taken into consideration with the losses incurred in the export contracts and since at the time of the general meeting the company was faced with losses on the exports, it could not reasonably treat the profit to its shareholders. The Income-tax Officer rejected the arguments put forward on behalf of the assessee because, in this view, the only two provisions of section 23 A to a company which had not declared a dividend of 60% of the assessable profits reduced by the taxes paid, were, firstly, the losses suffered by it in previous years and, secondly, the smallness of the profits in the year of account. According to the Income-tax Officer, since there were no losses of the previous years and since the amount of Rs. 1,94,116 was a part of the actual profits received by the assessee during the year of account, its profit in that year could not be regarded as small. The Income-tax Officer made an order against the company under section 23a of the Act. The view taken by the Income-tax Officer was accepted by the Appellate Assistant Commissioner in appeal, and also by the Tribunal. The application of the assessee under section 66 (1) was rejected by the Tribunal but on a further application made by it to this court under section 66 (2), the Tribunal was directed to draw up a statement of the case and refer to this court the following two questions : " (1) Whether the sum of Rs. 1,95,000 was rightly included to arrive at the commercial or real profit of the year in question ?

(2.) IF not, whether the order under section 23 A for the assessment year 1951-52 was justified in law ?" on the question as framed, the second question would have to be answered only if the first question is answered in the negative and Mr. Joshi, learned counsel for the revenue, has argued that, inasmuch as there could be no doubt whatsoever that the amount of Rs. 1,95,000 was an actual profit received by the assessee during the account year and, therefore, a real profits of the year in question, the first question will have to be answered in the affirmative. In our opinion, however, although Mr. Joshi may be techincally right in this submission, the matter cannot be disposed of by answering the questions as suggested by him, viz. , answering the first question in the affirmative and stating further that in view of the answer to the first question, the second question does not require to be answered, because the real controversy between the parties, for the purpose of deciding which questions were asked to be framed by the assessee and were framed by this court, would still remain undecided. There can be no doubt that the controversy which was intended to be raised and which indeed arose on the order of the Tribunal was whether, on the facts and in the circumstances of the case, the order under section 23a was justified. In order to do away with the technical objection raised by Mr. Joshi, we will suitably reframe the question so as bring out the real controversy between the parties and accordingly treat the two question as reframed into the following question :

(3.) NOW, the view taken by the departmental authorities and the Tribunal that the application of section 23a could be avoided only on the existence of either or both these two conditions had the support of a decision of this court in Sir Kasturchand Ltd. v. Commissioner of Income-tax. It was held kin that case that the reasonableness or the unreasonablness of the payment of a dividend or a larger dividend has to be judged only with reference to two factors mentioned in the section, viz. , losses incurred by the company in earlier years or the smallness of the profits. Having regard to a recent decision of the Supreme Court, however, in Commissioner of Income-tax v. Gangadhar Banerjee and Co. he said view expressed by this court could not longer be regarded as good. In considering the question as to whether the satisfaction of the Income-tax Officer that the declaration of a larger dividend would be unreasonable was to depend only on the two circumstances, viz. , the losses incurred in the previous year and the smallness of the profits, their Lordships observed :