C. I. T. (CENTRAL) CALCUTTA versus ASIATIC TEXTILE LTD.

A

B

c

D

E

F

G

81

C. I. T. (CENTRAL) CALCUTTA

v. ASIATIC TEXTILE LTD.

August 9, 1971

(K. S. HEGDE AND A.N GROVER, JJ.]

Income-tax Act, 1922, s. 23A (!)-Direction of Company deciding not to distribute profit owing to huge capital loss Capital loss a relevant consideration-Reasonableness of decision has to be I ooked at from view point of prudent business man.

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 011 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(I) 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. Gangadhar Bannerjee

& Co. (P) ltd. 57 I. 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 resasonable 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 (I). [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 befool 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

H consideration in the application of s. 23A(l).

[86E·F]

Commissioner of Income-tax v. Williamson Diamonds Ltd. 35 I.T.R.

290, applied.

-

82

SUPREME COURT REPORTS

[1972) l S.C.R

CtVIL APPELLATE

JURISDICTION: Civil Appeals Nos. A

1687 and 1688 of 1968

Appeals from the judgment and order _f;}ated August 29, 30, 1967 of the Calcutta High Court iii Income-Tax Reference No. 16 of 1964.

S. }tlfitra, R. N. Sachthey and B. D. Sharma, for the

appellant (in both th appeals).

B

M. C. Chagla, S. M. Jain, B. P. Maheshirari and

R. K Maheshwari for the respondent (in both the appeals).

c

The Judgment of the Court was delivered by Hegde, J.-These appeals by certificate arise froff the decision of the Calcutta High Court in Income-ta-.; Reference No. 16 of 1964 on its file. Therein the Hi!!h Court was considering a reference made by the Tnco1ne Tax Appellate Tribunal "B' Bench Calcutta under section D 66 (l) of the Indian Income Tax Act, 1922-to be herein after referred to law the opinion of the High Court which was referred for reads thus :

The question of

as "the Act'.

of the capital

"'Whether on the facts and in the circums- tances of the case, the Tribunal was justified in loss of holding that in view 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 these appeals are 1955-56 and 1956-57, the corres 111 ponding accounting years being the years ending on June 30, 1954 and June 30, 1955.

F

G

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 leaving a distributable balance of Rs. 9l,1 l 6/-. According to the Profit & Loss Account. however, the company suffered a H net loss of Rs. 11,63,874/- and this was due to the loss of Rs. 12,00,00ll/- on account of depreciation in the value of

taxes paid were Rs. 69,973/-

C.I.T. v. ASIATIC TEXTILE LTD. (Hegde, J.)

83

A

Income-tax

shares held by the company in Elphinstone Mill Ltd. of Bombay. The 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 n Elphinstone Mills Ltd. The Tribunal upheld the dis allowance on the ground that the amount of Rs. 1 I ,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 Jncome tax Officer in exercise of his powers under Section 23 A(l) levied additional super-tax @ -/4/- per rupee on the dis tributable surplus of Rs. 91,116/-. Jn so doing he ignored the loss in the value of the shares in Elphinstone Mills Ltd.

c

I

For the assessment year 1956-57 the total income assessed was Rs. 1,07,429/- and the taxes payable tl1ereon D were Rs. 46,668/- leaving a distributable surplus of Rs. 60,761/-. In this ye~r also the company did not declare any dividend because of the loss referred to earlier. The Income-tax Officer, however, again invoked the provisions levied additional super-tax @ of Section 23A (!) and -/4/- per rupee on the surplus of Rs. 60,761/-.

E

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 F 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. G The Tribunal agreed with the conclusions reached by the Appellate Assistant Commissioner. 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.

held

It

'

H

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.

,.84

SUPREME ,COURT REPORTS

[1972] I S.C.R.

The Tribunal-the

final fact finding authority has A

come to the conclusion that the assessee had incurred a capital loss of Rs. 12,00,000/- as a result of the depre ciation of the value of the shares of Elphinstone Mills Ltd. The question is whether that was a relevant cir cumstance for not declaring any dividend. The further ·question is whether the Directors of pany acted as prudent businessmen in refraining from declaring any dividend. Section 23A (!) of the Act reads :

the assessee-com- B

"Where the Ip.come-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 am'ount 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 th,e case ofa banking company, the amo unt actually transferred to a reserve fund under section 17 of the Banking Com- panies Act, 1949;

is the Income-tax Officer shall, unless he 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 assess ment 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 m~inly in t,he

c

D

E

F

G

H

L.!.T. v. ASIATIC TEXTILE LTD. (Hegde, J.)

85

A

B

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 jncome 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 dec lared or not is a matter primarily for the Directors of a step in under company. The lncome-tax Officer can c Section 23A (I) only if the Directors unjustifiably refrain If the Directors of a company from declaring dividend. had reasonable grounds for not declaring any dividend, it is not open for the focomectax Officer to constitute him self as a super-Director. As observed by this Court in Commissioner of Income-tax, West Bengal, v. Gangadhar o Bannerjee and Co. (Pl't.) Ltd. 1 the lncome-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be un reasonable within the meaning of Section 23A of the Act does not assess any income to tax. He only does what the directors should havt: done putting himself in their 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 judged by business considerations, such as the previous losses, the F present profits, the availability of surplus money and the similar reasonable 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

requirements of

future and

E place.

the

is

G 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 com- the

H pany would have done just what the Directors of

(I) 57 l.T.R .. 176.

J

86.

.SUPREME COURT REPORTS

[1972] I S.C.R

assessee company did. We think, that the Income-tax A Officer took an erroneous view of the scope of Section 23A (1).

Mr. Mitra, learned counsel for the department con tended that the assessee had not in fact incurred any loss though the value of the shares had gone down in the market. B 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 deprecia- tion 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 c they stand and not befool themselves in the wild hope that the valu.e 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 D not go up in future but whether the Directors were justi- fied in not declaring dividends in view of the loss inc.urred. 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.

E

Before the High Court, it appears to have been urged- 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 (l ). This very contention was examined and rejected by the Judicial F · 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 corres ponds very closely to Section 23A (1) of the Act. Dealing with the scope of that provision, their Lordships observed:

G

"It does not follow from what has b~en 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

H

(1) 35 l.T.R., 2!)(). __ _

C.I.T. v. ASIATIC TEXTILES LTD. (Hegde, !.)

87

A

B

c

D

is directed to come to a decision upon the question whether "the payment of a dividend or a larger divdend than that declared" is 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 pre viously 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 rele vant to the question of unreasonableness to be considered capital loss, if established is one of them." We respect fully agree with these observations.

' '

For the reasons mentioned above, these appeals fail

and they are dismissed with costs. One hearing fee.

G.C.

Appeals disn:issed.

7-Ml245 Sup. CI/71