NEW MAHALAXMI SILK MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) (1) The assessee is a private limited company. For the year of account 1949-50 accordin g to the balancesheet of a net profit of Rs . 3,367/- resulted in the busiess of the assessee. The assessee distributed Rs. 12,800/- as dividend to the shareholders. In the assessment proceeding the In ome-tax officer diallowed in the assessee Rs. 55,459/- included for excess provision for bonus for the year under reference, Rs. 33,000/- for under-valuation of stock and Rs. 20433/- for excess provision for bonus for 1947-48 and 1948-49. He also diallowed Rs. 45,020/- on charity account and Rs. 1,053/- on Diwali account and made a slight adjustment in respect opf the claim for depreciation. Finding that the assessee had not distributed as dividend sity per cent of the assessable income less the amount of income-tax and super tax payable by the assessee, the income Tax Officer passed an order under S. 23A of the Income Tax Act. Against that order an appeal was preferred to the Appe6llate Assistant Commissioner, and the matter was ultimately brougbht before the Tribunal. The Tribunal observed that in considerating whether an order under S. 23A may be passed against the assessee the Income-tax officer ought to have regard to the commercial profits and not the assessable profits. The Tribunal assessed the commercial rofits of the assessee as at the datwe on which the amount of dividend was resolved to be distributed at Rs. 56, 800/-. Computing on that amopunt a tax liablity of Rs. 19325/-, the tribunal held that Rs. 37475/- were the net commrcial profits of the assessee for the year under reference and sixty percent of that amount being Rs. 22,485/- and as the assessee had distributed as dividend only Rs. 12,800/- an order S. 23A of the Income-tax Act was properly passed by the income tax authorities.

(2.) IN this reference, Mr. Palkhivala for the assessee has contended firstly that the Tribunal was in error in estimating the tax liability of the assessee, while assessing the net commercial profits, at Rs. 19,325/- and secondly, that the Tribunal was in error in adding the amount of Rs. 20,433/- standing to the credit of the bonus provsion account to the et profit of Rs. 3,367/- in ascertaining the profit available for declation of dividend.

(3.) IT is now well settled that the expression "profit made" in S. 23A, sub-section (1) meas commerical profits. In Commissioner of Income-tax, Bombay City 1 V. F. L. Smidth and Co. (Bombay) Ltd. (1959) 35 ITR 183 (Bom), a Division Bench of this Court (to which my learned brother was a party) held that in considering the smallness of the profits made by a company the profits that the Income-tax Officer had to consider were not the total income referred to in S. 23A(1) but the actual profits of the assessee at Rs. 56,800/-. But that was evidently the gross commercial profits of the assessee as at the date on which the general meeting for resolving upon the distribution of dividend was held. Out of this amount the Tribunal purported to deduct Rs. 19,325/-, which wasthe appropriate tax payable in respect of an income of Rs 56,800/-. In our view, in making a deduction of Rs. 19,325/- only for tax liability the Tribunal was in error. The income-tax payable by an assessee does not bear any definite relation to his commerical profits. Even if the assessee has made payments which he is not entitled to deduct in ascertaining the assessable income, the commercial profits are to that extent depleted. IT would, therefore,in our judgment, be an error to reduce merely the amount of tax computed on the commerical profits to ascertain the profits made. Before the Tribunal it was contended that out of the commerical profits the total amount of tax payable by the assessee should be deducted. The Tribunal was of the view that the assessee must adopt one of two methods, viz. (i) to deduct fromt he assesable income the amount of tax paid and thereafter to ask the Income-tax Officer to ascertain whether the profits were so small that an oder under S. 23A (1) need not be passed, or (ii) to confine itself tot he circumstances existing as at the dare on which the general meeting was held and to take the commerical profits as the basis and to deduct therfrom the appropriate tax payable on the profits so ascertained. But the question is, in our judgment, not of any option vested in the assessee. The Income-tax Officer has to exercise his powers subject to the limitations prescribed by S. 23A. The first condition of which he must be satisfied is that the profits andgains distributed by the assessee as dividend amongst the shareholders is less than sixty per cent of the assessable income as reduced by the amount of income-tax and super-tax payable in respect thereof. Even if this condition is satisfied, if, having regard tothelosses sustained in the priveous years or to the smallness of the profits made, it would be unreasonable to distribute a dividend larger than the one declared, the Income-tax Officer will not pass he order that the undistributed portion f the asessable income shall be deemed to be distributed as dividends. IT was therefore for the Income-tax Officer to ascertain, having regard to the commercial profits, the anticipated amount of tax which would have to be deducted to find out the net commerical profits, in the light of all the circumstances then present to its mind, and thereafter to relate the same to the amount of dividend declared. If, having regard to the net commercial profits so ascertained, it appeared tot he Income-tax Officer that it would not be unreasonable to adistribute sixty percent of such income as dividend amongst the shareholders, an order under S. 23A of the Income-tax Act may properly be passed. In the present case, the Tribunal having proceeded to deduct only an amount of Rs. 19,325/-, which was the amount of tax payable on an income of Rs. 56,800/-, in our view, an error has been committed in confirming the order passed by the Income-tax Officer under S. 23A of the Act.