PETITIONER: C. I. T. (CENTRAL) CALCUTTA Vs. RESPONDENT: ASIATIC TEXTILE LTD. DATE OF JUDGMENT09/08/1971 BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N. CITATION: 1973 AIR 2323 1972 SCR (1) 81 1971 SCC (3) 536 ACT: Income-tax Act, 1922, s. 23A (1)-Direction of Company deciding not to distribute profit owing to huge capital loss-Capital loss a relevant consideration-Reasonableness of decision has to be looked at from view point of prudent business man. HEADNOTE: The assessee was a limited company doing business as selling agents of a Textile Mill. During the previous years relevant for the assessment years 1955-56 and 1956-57 the company had assessable profits but did not declare dividend, because capital loss far in excess of profits was incurred by it due to fall in value of its share-holdings. The Income-tax Officer exercised his powers under s. 23A (1) and levied additional super-tax on the distributable surplus in the relevant years. The Appellate Assistant Commissioner, the Tribunal and the High Court however, took the opposite view, holding that in the circumstances it was not reasonable to expect the company to declare dividend. In appeal to this Court by the Revenue, HELD : Whether in a particular year dividend should be declared or, not is a matter primarily for the Directors of a company. The Income-tax Officer can step in under s. 23A(1) only if the Directors unjustifiably refrain from declaring dividend.- If the Directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-Director. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax-collector but from that of a business man. [85C-E] Commissioner of Income-tax, West Bengal v. Gangadliar Bannerjee & Co. (P) Ltd. 57 1. T. R. 176, relied on. In the present case in view of the capital loss of Rs. 12 lacs as found by the Tribunal, any reasonable body of Directors of a company would have done just what the Directors of the Assessee company did. The Income-tax Officer took an erroneous view of s. 23A (1). [85H] The fact that the company continued to hold the shares whose value could possible go up again was irrelevant. The Directors of a company will be justified in taking things as they stand and not be fool themselves in the wild hope that the value of the shares may come up again. [86C] It would be incorrect to say that capital loss cannot be taken into consideration in the application of s. 23A(1). [86E-F] Commissioner of Income-tax v. Williamson Diamonds Ltd. 35 I.T.R. 290, applied. 82 JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1687 and
1688 of 1968
Appeals from the judgment and order dated August 29, 30,
1967 of the Calcutta High Court in Income-Tax Reference No.
16 of 1964.
S. Mitra, R. N. Sachthey and B. D. Sharma, for the
appellant (in both the appeals).
M. C. Chagla, S. M. Jain, B. P. Maheshwari and R. K.
Maheshwari for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Hegde, J.-These appeals by certificate arise from the
decision of the Calcutta High Court in Income-tax Reference
No. 16 of 1964 on its file. Therein the High Court was
considering a reference made by the Income Tax Appellate
Tribunal ‘B’ Bench Calcutta under section 66 (1) of the
Indian Income Tax Act, 1922-to be hereinafter referred to as
‘the Act’. The question of law which was referred for the
opinion of the High Court reads thus :
“Whether on the facts and in the circumstances
of the case, the Tribunal was justified in
holding that in view of the capital loss of
Rs. 12,00,000/- suffered by the assessee on
account of depreciation in the value of the
shares of Messrs. Elphinstone Mills Ltd.
payment of any dividend at all during any of
the two relevant accounting years would have
been unreasonable ?”
The assessment years with which we are concerned in these
appeals are 1955-56 and 1956-57, the corresponding
accounting years being the years ending on June 30, 1954 and
June 30, 1955.
The assessee is a limited company doing business as selling
agents of a Textile Mill. For the assessment year 1955-56
the assessee was assessed on a total income of Rs.
1,61,089/- and taxes paid were Rs. 69,973/- leaving a
distributable balance of Rs. 91,116/-. According to the
Profit & Loss Account, however, the company suffered a net
loss of Rs. 11,63,874/- and this was due to the loss of Rs.
12,00,000/- on account of depreciation in the value of
83
shares held by the company in Elphinstone Mill Ltd. of
Bombay. The Income-tax authorities disallowed an amount of
Rs. 11,88,000/ out of this loss on the ground that it
relates to the price paid for the shares purchased for the
sake of acquiring the managing agency of the: Elphinstone
Mills Ltd. The Tribunal upheld the disallowance on the
ground that the amount of Rs. 11,88,COO/was a loss relating
to shares held by the company in its, investment account.
The company however, did not declare any dividend for the
year in question. The Income-tax Officer in exercise of his
powers under Section 23 A(1) levied additional super-tax @
-/4/- per rupee on the distributable surplus of Rs.
91,116/-. In so doing be ignored. the loss in the value of
the, shares in Elphinstone Mills. Ltd.
For the assessment year 1956-57 the total income assessed
was Rs. 1,07,429/- and the taxes payable thereon were Rs.
46,668/- leaving a distributable surplus of Rs60,761/-. In
this year also the company did not declare any dividend
because of the loss referred to earlier. The. income-tax
Officer, however, again invoked the provisions of Section
23A (1) and levied additional super-tax @ -/4/- per rupee on
the surplus of Rs. 60,761/-.
In appeal, the Asstt. Commissioner took the view that the
loss incurred by the company was a capital loss. But all
the same as there was no commercial profits in the relevant
accounting years it was not reasonable to expect the
assessee company to declare any dividend in respect of those
years in view of the capital loss incurred and he,.
therefore, cancelled the orders of the Income-tax Officer
under section 23A (1).
Aggrieved by the Order of the Appellate Assistant
Commissioner, the department appealed to the Tribunal. The
Tribunal agreed with the conclusions reached by the
Appellate Assistant Commissioner. It held that under the
circumstances the Directors were justified in ‘not declaring
any dividend in respect of the profits that had accrued in
the accounting years.
At the instance of the Commissioner, the Tribunal submitted
to the High, Court of Calcutta the question of law set out
by us earlier. The High Court answered that question in
favour of the assessee.
8 4
The Tribunal-the final fact finding authority has ,come to
the conclusion that the assessee had incurred a capital loss
of Rs. 12,00,000/- as a result of the depreciation of the
value of the shares of Elphinstone Mills Ltd. The question
is whether that was a relevant circumstance for not
‘declaring any dividend. The further ,question is whether
the Directors of the assessee company acted as prudent
businessmen in refraining from ,declaring any dividend.
Section 23A (1) of the Act reads :
” Where the Income-tax Officer is satisfied
that in respect of any previous year the
profits and gains distributed as dividends by
any company within the twelve months
immediately following the expiry of that
previous year are less than the statutory
percentage of the total income of the company
of that previous year as reduced by-
(a) the amount of income-tax and super-tax
payable by the company in respect of its total
income, but excluding the amount of any super-
tax payable under this section
(b) the amount of any other tax levied under
any law for the time being in force on the
company by the Government or by a local
authority in excess of the amount, if any,
which has been allowed in computing the
total income; and
(c) in the case of a banking company, the
amount actually transferred to a reserve fund
under section 17 of the Banking Companies Act,
1949;
the Income-tax Officer shall, unless he is
satisfied that, having regard to the losses
incurred by the company in earlier years or to
the smallness of the profits made in the
previous year, the payment of a dividend or a
larger dividend than that declared would be
unreasonable, make an order in writing that
the company shall, apart from the sum deter-
mined as payable by it on the basis of the
assessment under section 23, be liable to pay
super-tax at the rate of fifty per cent in the
case of a company whose business consists
wholly or mainly in the
85
dealing in or holding of investments, and at
the rate of thirty-seven per cent in the case
of any other company on the undistributed
balance of the total income of the previous
year, that is to say, on the total income as
reduced by the amounts, if any, referred to in
clause (a), clause (b) or clause (c) and the
dividends actually distributed, if any.”
Whether in a particular year dividend should be declared or
not is a matter primarily for the Directors of a company.
The Income-tax Officer can step in under Section 23A (1)
only if the Directors unjustifiably refrain from declaring
dividend. If the Directors of a company had reasonable
grounds for not declaring any dividend, it is not open for
the Income-tax Officer to constitute himself as a super-
Director. As observed by this Court in Commissioner of
Income-tax, West Bengal, v. Gangadliar Bannerjee and Co.
(Pvt.) Ltd.’ the Income-tax Officer, in considering whether
the payment of a dividend or a larger dividend than that
declared by a company would be unreasonable within the
meaning of Section 23A of the Act does not assess any income
to tax. He only does what the directors should have done
putting himself in their place. Though the object of the
section is to prevent evasion of tax, the provision must be
worked not from the standpoint of the tax collector but from
that of a businessman. The reasonableness or
unreasonableness of the amount distributed as dividends is
judged by business considerations, such as the previous
losses, the present profits, the availability of surplus
money and the reasonable requirements of the future and
similar others. The Income-tax Officer must take an overall
picture of the financial position of the business. He
should put himself in the position of a prudent businessman
or the director of a company and deal with the problem with
a sympathetic and objective approach.
On the facts found by the Tribunal, there can be hardly any
doubt that the assessee had suffered a capital loss of Rs.
12,00,000/-. In our opinion, in view of the the said loss,
any reasonable body of Directors of a company would have
done just what the Directors of the
(1) 57 I.T.R., 176.
86
assessee company did. We think, that the Income-tax officer
took an erroneous view of the scope of Section 23A (1).
Mr. Mitra, learned counsel for the department contended that
the assessee had not in fact incurred any loss though the
value of the shares had gone down in the market. As the
assessee was still in possession of those shares, there was
still a possibility of avoiding the anticipated loss. Hence
there was no occasion to take note of the depreciation in
the value of the shares in the matter of declaration of
dividends. This is an unacceptable contention. The
Directors of a company will be justified in taking things as
they stand and not befool themselves in the wild hope that
the value of the shares may come up again. They are
expected to act as hard headed businessmen. They are not
expected to gamble with the future of the concern. The
question is not whether the value of the shares may not go
up in future but whether the Directors were justified in not
declaring dividends in view of the loss incurred. The
Income-tax Officer overlooked the fact the Directors were
naturally more interested in the stability of their concern
rather than in increasing the tax payable to the Government.
Before the High Court, it appears to have been urge Mr.
Mitra rightly did not press that plea that the loss incurred
being a capital loss the same cannot be taken into
consideration in the application of Section 23A (1). This
very contention was examined and rejected by the Judicial
Committee in Commissioner of Income-tax v. Williamson
Diamonds Ltd.(1). In that case their Lordships were con-
sidering the scope of section 21 (1) “(Consolidation)
Ordinance, 1950 of Tanganyika.” That provision corresponds
very closely to Section 23A (1) of the Act. Dealing with
the scope of that provision, their Lordships observed:
“It does not follow from what has been said
that capital losses should not be taken into
account by the Commissioner. Two matters are
mentioned specifically in the words which give
him a direction the first is ‘losses’ (as
interpreted above) and the second is
“smallness of profit.” The Commissioner
(1) 35 I.T.R.. 290.
87
is directed to come to a decision upon the
question whether “the payment of a dividend or
a larger divdend than. that declared” his
unreasonable.
“The form of the word used no doubt lends itself to, the
suggestion than regard should be paid only to the two
matters mentioned, but it appears to their Lordships that it
is impossible to arrive at a conclusion as to reasonableness
by considering the two matters mentioned isolated from other
relevant factors. Moreover, the Statute does not say
‘having regard only’ to losses previously incurred by the
company and to the smallness of the profits made. No answer
which can be said to be in any measure adequate, can be
given to the question “unreasonableness” considering these
two matters only. Their Lordships are of the opinion that
the Statute by the words used while making sure that “losses
and smallness of profit” are never lost sight of require all
matters relevant to the question of unreasonableness to be
considered capital loss, if established is one of them.” We
respectfully agree with these observations.
For the reasons mentioned above, these appeals fail and they
are dismissed with costs. One hearing fee.
G.C. Appeals dismissed.
M1245 Sup. CI/71
88