{"id":44560,"date":"1971-08-09T00:00:00","date_gmt":"1971-08-08T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/c-i-t-central-calcutta-vs-asiatic-textile-ltd-on-9-august-1971"},"modified":"2018-04-02T12:51:19","modified_gmt":"2018-04-02T07:21:19","slug":"c-i-t-central-calcutta-vs-asiatic-textile-ltd-on-9-august-1971","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/c-i-t-central-calcutta-vs-asiatic-textile-ltd-on-9-august-1971","title":{"rendered":"C. I. T. (Central) Calcutta vs Asiatic Textile Ltd on 9 August, 1971"},"content":{"rendered":"
Supreme Court of India<\/div>\n
C. I. T. (Central) Calcutta vs Asiatic Textile Ltd on 9 August, 1971<\/div>\n
Equivalent citations: 1973 AIR 2323, \t\t 1972 SCR (1)\t 81<\/div>\n
Author: K Hegde<\/div>\n
Bench: Hegde, K.S.<\/div>\n
           PETITIONER:\nC. I. T. (CENTRAL) CALCUTTA\n\n\tVs.\n\nRESPONDENT:\nASIATIC TEXTILE LTD.\n\nDATE OF JUDGMENT09\/08\/1971\n\nBENCH:\nHEGDE, K.S.\nBENCH:\nHEGDE, K.S.\nGROVER, A.N.\n\nCITATION:\n 1973 AIR 2323\t\t  1972 SCR  (1)\t 81\n 1971 SCC  (3) 536\n\n\nACT:\nIncome-tax  Act,  1922,\t s.  23A  (1)-Direction\t of  Company\ndeciding  not  to distribute profit owing  to  huge  capital\nloss-Capital loss a relevant consideration-Reasonableness of\ndecision  has  to be looked at from view  point\t of  prudent\nbusiness man.\n\n\n\nHEADNOTE:\nThe assessee was a limited company doing business as selling\nagents\tof  a  Textile\tMill.\tDuring\tthe  previous  years\nrelevant  for the assessment years 1955-56 and\t1956-57\t the\ncompany had assessable profits but did not declare dividend,\nbecause\t capital loss far in excess of profits was  incurred\nby  it\tdue  to fall in value of  its  share-holdings.\t The\nIncome-tax  Officer  exercised his powers under s.  23A\t (1)\nand levied additional super-tax on the distributable surplus\nin   the   relevant   years.\tThe   Appellate\t   Assistant\nCommissioner, the Tribunal and the High Court however,\ttook\nthe opposite view, holding that in the circumstances it\t was\nnot  reasonable to expect the company to  declare  dividend.\nIn appeal to this Court by the Revenue,\nHELD  :\t Whether  in a particular year\tdividend  should  be\ndeclared or, not is a matter primarily for the Directors  of\na  company.   The Income-tax Officer can step  in  under  s.\n23A(1)\tonly  if the Directors\tunjustifiably  refrain\tfrom\ndeclaring  dividend.-  If  the Directors of  a\tcompany\t had\nreasonable grounds for not declaring any dividend, it is not\nopen  for the Income-tax Officer to constitute himself as  a\nsuper-Director.\t  Though  the object of the  section  is  to\nprevent\t evasion  of tax, the provision must be\t worked\t not\nfrom the standpoint of the tax-collector but from that of  a\nbusiness man. [85C-E]\nCommissioner  of  Income-tax,  West  Bengal  v.\t  Gangadliar\nBannerjee & Co. (P) Ltd. 57 1. T. R. 176, relied on.\nIn  the present case in view of the capital loss of  Rs.  12\nlacs  as  found\t by the Tribunal,  any\treasonable  body  of\nDirectors  of  a  company  would have  done  just  what\t the\nDirectors  of  the  Assessee company  did.   The  Income-tax\nOfficer took an erroneous view of s. 23A (1). [85H]\nThe fact that the company continued to hold the shares whose\nvalue  could  possible\tgo up  again  was  irrelevant.\t The\nDirectors of a company will be justified in taking things as\nthey stand and not be fool themselves in the wild hope\tthat\nthe value of the shares may come up again. [86C]\nIt  would  be incorrect to say that capital loss  cannot  be\ntaken  into consideration in the application of\t s.  23A(1).\n[86E-F]\nCommissioner  of Income-tax v. Williamson Diamonds  Ltd.  35\nI.T.R. 290, applied.\n82\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  1687\t and
\n1688 of 1968
\nAppeals\t from  the judgment and order dated August  29,\t 30,
\n1967 of the Calcutta High Court in Income-Tax Reference\t No.
\n16 of 1964.\n<\/p>\n
S.   Mitra,  R.\t N.  Sachthey  and B.  D.  Sharma,  for\t the
\nappellant (in both the appeals).\n<\/p>\n
M.   C. Chagla, S. M. Jain, B. P. Maheshwari and R.    K.
\nMaheshwari for the respondent (in both the appeals).
\nThe Judgment of the Court was delivered by
\nHegde,\tJ.-These  appeals  by  certificate  arise  from\t the
\ndecision of the Calcutta High Court in Income-tax  Reference
\nNo.  16\t of 1964 on its file.  Therein the High\t Court\twas
\nconsidering  a\treference made by the Income  Tax  Appellate
\nTribunal  ‘B’  Bench Calcutta under section 66\t(1)  of\t the
\nIndian Income Tax Act, 1922-to be hereinafter referred to as
\n‘the  Act’.  The question of law which was referred for\t the
\nopinion of the High Court reads thus :\n<\/p>\n
\t      “Whether on the facts and in the circumstances
\n\t      of  the  case, the Tribunal was  justified  in
\n\t      holding  that in view of the capital  loss  of
\n\t      Rs.  12,00,000\/- suffered by the\tassessee  on
\n\t      account  of depreciation in the value  of\t the
\n\t      shares  of  Messrs.   Elphinstone\t Mills\tLtd.
\n\t      payment  of any dividend at all during any  of
\n\t      the two relevant accounting years would  have
\n\t      been unreasonable ?”\n<\/p><\/blockquote>\n
The  assessment years with which we are concerned  in  these
\nappeals\t  are\t1955-56\t and  1956-57,\t the   corresponding
\naccounting years being the years ending on June 30, 1954 and
\nJune 30, 1955.\n<\/p>\n
The assessee is a limited company doing business as  selling
\nagents\tof a Textile Mill.  For the assessment year  1955-56
\nthe  assessee  was  assessed  on  a  total  income  of\t Rs.
\n1,61,089\/-  and\t taxes\tpaid were  Rs.\t69,973\/-  leaving  a
\ndistributable  balance\tof Rs. 91,116\/-.  According  to\t the
\nProfit\t& Loss Account, however, the company suffered a\t net
\nloss of Rs. 11,63,874\/- and this was due to the loss of\t Rs.
\n12,00,000\/- on account of depreciation in the value of
\n83<\/span>
\nshares\theld  by  the company in Elphinstone  Mill  Ltd.  of
\nBombay.\t The Income-tax authorities disallowed an amount  of
\nRs.  11,88,000\/\t out  of this loss on  the  ground  that  it
\nrelates\t to the price paid for the shares purchased for\t the
\nsake  of acquiring the managing agency of  the:\t Elphinstone
\nMills  Ltd.   The Tribunal upheld the  disallowance  on\t the
\nground that the amount of Rs. 11,88,COO\/was a loss  relating
\nto  shares held by the company in its,\tinvestment  account.
\nThe  company however, did not declare any dividend  for\t the
\nyear in question.  The Income-tax Officer in exercise of his
\npowers\tunder Section 23 A(1) levied additional super-tax  @\n<\/p>\n
-\/4\/-  per  rupee  on  the  distributable  surplus  of\t Rs.
\n91,116\/-.  In so doing be ignored. the loss in the value  of
\nthe, shares in Elphinstone Mills.  Ltd.\n<\/p>\n
For  the assessment year 1956-57 the total  income  assessed
\nwas  Rs. 1,07,429\/- and the taxes payable thereon  were\t Rs.
\n46,668\/- leaving a distributable surplus of Rs60,761\/-.\t  In
\nthis  year  also the company did not  declare  any  dividend
\nbecause\t of the loss referred to earlier.   The.  income-tax
\nOfficer,  however, again invoked the provisions\t of  Section
\n23A (1) and levied additional super-tax @ -\/4\/- per rupee on
\nthe surplus of Rs. 60,761\/-.\n<\/p>\n
In  appeal, the Asstt.\tCommissioner took the view that\t the
\nloss  incurred by the company was a capital loss.   But\t all
\nthe same as there was no commercial profits in the  relevant
\naccounting  years  it  was  not\t reasonable  to\t expect\t the
\nassessee company to declare any dividend in respect of those
\nyears  in  view\t of  the  capital  loss\t incurred  and\the,.
\ntherefore,  cancelled the orders of the\t Income-tax  Officer
\nunder section 23A (1).\n<\/p>\n
Aggrieved   by\t the  Order  of\t the   Appellate   Assistant
\nCommissioner,  the department appealed to the Tribunal.\t The
\nTribunal   agreed  with\t the  conclusions  reached  by\t the
\nAppellate  Assistant Commissioner.  It held that  under\t the
\ncircumstances the Directors were justified in ‘not declaring
\nany  dividend in respect of the profits that had accrued  in
\nthe accounting years.\n<\/p>\n
At the instance of the Commissioner, the Tribunal  submitted
\nto  the High, Court of Calcutta the question of law set\t out
\nby  us\tearlier.  The High Court answered that\tquestion  in
\nfavour of the assessee.\n<\/p>\n
8 4
\nThe  Tribunal-the final fact finding authority has ,come  to
\nthe conclusion that the assessee had incurred a capital loss
\nof  Rs. 12,00,000\/- as a result of the depreciation  of\t the
\nvalue of the shares of Elphinstone Mills Ltd.  The  question
\nis  whether  that  was\ta  relevant  circumstance  for\t not
\n‘declaring  any dividend.  The further ,question is  whether
\nthe  Directors\tof  the assessee company  acted\t as  prudent
\nbusinessmen  in\t refraining from  ,declaring  any  dividend.
\nSection 23A (1) of the Act reads :\n<\/p>\n
\t      ”\t Where the Income-tax Officer  is  satisfied
\n\t      that  in\trespect\t of any\t previous  year\t the
\n\t      profits and gains distributed as dividends  by
\n\t      any   company   within   the   twelve   months
\n\t      immediately  following  the  expiry  of\tthat
\n\t      previous\tyear  are less\tthan  the  statutory
\n\t      percentage of the total income of the  company
\n\t      of that previous year as reduced by-\n<\/p><\/blockquote>\n
\t      (a)   the\t amount of income-tax and  super-tax
\n\t      payable by the company in respect of its total
\n\t      income, but excluding the amount of any super-
\n\t      tax payable under this section\n<\/p><\/blockquote>\n
\t      (b)   the amount of any other tax levied under
\n\t      any  law\tfor the time being in force  on\t the
\n\t      company  by  the\tGovernment  or\tby  a  local
\n\t      authority\t in  excess of the amount,  if\tany,
\n\t      which has been allowed in computing the
\n\t      total income; and\n<\/p><\/blockquote>\n
\t      (c)   in\tthe case of a banking  company,\t the
\n\t      amount actually transferred to a reserve\tfund
\n\t      under section 17 of the Banking Companies Act,
\n\t      1949;\n<\/p><\/blockquote>\n
\t      the  Income-tax  Officer shall, unless  he  is
\n\t      satisfied\t that, having regard to\t the  losses
\n\t      incurred by the company in earlier years or to
\n\t      the  smallness  of  the profits  made  in\t the
\n\t      previous year, the payment of a dividend or  a
\n\t      larger  dividend than that declared  would  be
\n\t      unreasonable,  make an order in  writing\tthat
\n\t      the  company shall, apart from the sum  deter-
\n\t      mined  as\t payable by it on the basis  of\t the
\n\t      assessment under section 23, be liable to\t pay
\n\t      super-tax at the rate of fifty per cent in the
\n\t      case  of\ta company  whose  business  consists
\n\t      wholly or mainly in the
\n\t      85<\/span>
\n\t      dealing  in or holding of investments, and  at
\n\t      the rate of thirty-seven per cent in the\tcase
\n\t      of  any  other company  on  the  undistributed
\n\t      balance  of the total income of  the  previous
\n\t      year,  that is to say, on the total income  as
\n\t      reduced by the amounts, if any, referred to in
\n\t      clause  (a), clause (b) or clause (c) and\t the
\n\t      dividends actually distributed, if any.”\n<\/p><\/blockquote>\n
Whether in a particular year dividend should be declared  or
\nnot  is a matter primarily for the Directors of\t a  company.
\nThe  Income-tax\t Officer can step in under Section  23A\t (1)
\nonly  if the Directors unjustifiably refrain from  declaring
\ndividend.   If\tthe Directors of a  company  had  reasonable
\ngrounds\t for not declaring any dividend, it is not open\t for
\nthe  Income-tax\t Officer to constitute himself as  a  super-
\nDirector.   As\tobserved by this Court\tin  Commissioner  of
\nIncome-tax,  West  Bengal, v. Gangadliar Bannerjee  and\t Co.
\n(Pvt.) Ltd.’ the Income-tax Officer, in considering  whether
\nthe  payment  of a dividend or a larger dividend  than\tthat
\ndeclared  by  a\t company would be  unreasonable\t within\t the
\nmeaning of Section 23A of the Act does not assess any income
\nto  tax.  He only does what the directors should  have\tdone
\nputting\t himself in their place.  Though the object  of\t the
\nsection is to prevent evasion of tax, the provision must  be
\nworked not from the standpoint of the tax collector but from
\nthat\tof   a\t businessman.\t The\treasonableness\t  or
\nunreasonableness  of the amount distributed as dividends  is
\njudged\tby  business considerations, such  as  the  previous
\nlosses,\t the  present profits, the availability\t of  surplus
\nmoney  and  the reasonable requirements of  the\t future\t and
\nsimilar others.\t The Income-tax Officer must take an overall
\npicture\t of  the  financial position of\t the  business.\t  He
\nshould put himself in the position of a prudent\t businessman
\nor the director of a company and deal with the problem\twith
\na sympathetic and objective approach.\n<\/p>\n
On the facts found by the Tribunal, there can be hardly\t any
\ndoubt  that the assessee had suffered a capital loss of\t Rs.
\n12,00,000\/-.  In our opinion, in view of the the said  loss,
\nany  reasonable\t body of Directors of a company\t would\thave
\ndone just what the Directors of the
\n(1)  57 I.T.R., 176.\n<\/p>\n
86<\/span><\/p>\n
assessee company did.  We think, that the Income-tax officer
\ntook an erroneous view of the scope of Section 23A (1).
\nMr. Mitra, learned counsel for the department contended that
\nthe  assessee had not in fact incurred any loss\t though\t the
\nvalue  of  the shares had gone down in the market.   As\t the
\nassessee was still in possession of those shares, there\t was
\nstill a possibility of avoiding the anticipated loss.  Hence
\nthere  was no occasion to take note of the  depreciation  in
\nthe  value  of the shares in the matter\t of  declaration  of
\ndividends.    This  is\tan  unacceptable  contention.\t The
\nDirectors of a company will be justified in taking things as
\nthey  stand and not befool themselves in the wild hope\tthat
\nthe  value  of\tthe  shares may come  up  again.   They\t are
\nexpected  to act as hard headed businessmen.  They  are\t not
\nexpected  to  gamble with the future of\t the  concern.\t The
\nquestion  is not whether the value of the shares may not  go
\nup in future but whether the Directors were justified in not
\ndeclaring  dividends  in  view of the  loss  incurred.\t The
\nIncome-tax  Officer overlooked the fact the  Directors\twere
\nnaturally more interested in the stability of their  concern
\nrather than in increasing the tax payable to the Government.
\nBefore\tthe  High Court, it appears to have been  urge Mr.
\nMitra rightly did not press that plea that the loss incurred
\nbeing  a  capital  loss\t the  same  cannot  be\ttaken\tinto
\nconsideration  in the application of Section 23A (1).\tThis
\nvery  contention was examined and rejected by  the  Judicial
\nCommittee  in  Commissioner  of\t Income-tax  v.\t  Williamson
\nDiamonds  Ltd.(1).  In that case their Lordships  were\tcon-
\nsidering  the  scope  of  section  21  (1)  “(Consolidation)
\nOrdinance,  1950 of Tanganyika.” That provision\t corresponds
\nvery  closely to Section 23A (1) of the Act.   Dealing\twith
\nthe scope of that provision, their Lordships observed:\n<\/p>\n
\t      “It  does not follow from what has  been\tsaid
\n\t      that  capital losses should not be taken\tinto
\n\t      account by the Commissioner.  Two matters\t are
\n\t      mentioned specifically in the words which give
\n\t      him  a  direction the first  is  ‘losses’\t (as
\n\t      interpreted   above)   and   the\t second\t  is
\n\t      “smallness of profit.” The Commissioner
\n\t      (1)   35 I.T.R.. 290.\n<\/p><\/blockquote>\n
\t      87<\/span><\/p>\n
\t      is  directed  to come to a decision  upon\t the
\n\t      question whether “the payment of a dividend or
\n\t      a\t larger\t divdend than.\tthat  declared”\t his
\n\t      unreasonable.\n<\/p><\/blockquote>\n
“The  form  of the word used no doubt lends itself  to,\t the
\nsuggestion  than  regard  should be paid  only\tto  the\t two
\nmatters mentioned, but it appears to their Lordships that it
\nis impossible to arrive at a conclusion as to reasonableness
\nby considering the two matters mentioned isolated from other
\nrelevant  factors.   Moreover,\tthe  Statute  does  not\t say
\n‘having\t regard only’ to losses previously incurred  by\t the
\ncompany and to the smallness of the profits made.  No answer
\nwhich  can  be said to be in any measure  adequate,  can  be
\ngiven  to the question “unreasonableness” considering  these
\ntwo matters only.  Their Lordships are of the opinion  that
\nthe Statute by the words used while making sure that “losses
\nand smallness of profit” are never lost sight of require all
\nmatters\t relevant to the question of unreasonableness to  be
\nconsidered capital loss, if established is one of them.”  We
\nrespectfully agree with these observations.
\nFor the reasons mentioned above, these appeals fail and they
\nare dismissed with costs.  One hearing fee.\n<\/p>\n
G.C.\t\t\t\t\t  Appeals dismissed.\nM1245 Sup.  CI\/71\n88<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India C. I. T. (Central) Calcutta vs Asiatic Textile Ltd on 9 August, 1971 Equivalent citations: 1973 AIR 2323, 1972 SCR (1) 81 Author: K Hegde Bench: Hegde, K.S. 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: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-44560","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nC. I. T. 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