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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

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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

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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

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             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

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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