COMMISSIONER OF INCOME TAX Vs. JANANAMANDAL LIMITED

JUDGEMENT

(1.) AT the instance of the Commissioner of Income-tax the Income-tax Appellate Tribunal has made a consolidated reference in respect of three assessment years, viz., 1961-62, 1962-63 and 1963-64, under Section 66(1) of the Indian Income-tax Act, 1922.

(2.) BRIEFLY stated the facts as they emerge from the statement of the case are that in the previous years relevant to the three assessment years in question, the assessee-company's distributable surplus under Section 23A of the Indian Income-tax Act, 1922, were found to be Rs. 24,378, Rs. 89,941 and Rs. 90,110, respectively. The company did not pay any dividend to its shareholders. Accordingly, the Income-tax Officer computed the super-tax payable by the assessee, as required by Section 23A of the Act. The assessee filed an appeal before the Appellate Assistant Commissioner and contended that under the provisions of the Working Journalists Act, 1955, the company had to make provision for payment of gratuity to its workmen which could not be done so far because of lack of funds. It had also to arrange for funds amounting to Rs. 10,00,000 for purchasing a rotary machine and for constructing a part of the factory building. If these requirements were kept in view, the distributable surplus would be very much less than the assessee's future requirements. Accordingly, having regard to the smallness of the profits made in the relevant previous years, payment of dividend would not have been reasonable, and as required by Section 23A(1) no order requiring the company to pay super-tax should have been made. The Appellate Assistant Commissioner of Income-tax rejected the submissions made on behalf of the assessee and dismissed the appeal.

(3.) SRI Deokinandan, learned counsel for the department, urged that in determining whether it was reasonable for the assessee to declare dividend from out of its distributable surplus, it was not open to the Tribunal to take into consideration capital expenses, which the assessee proposed to incur in future years. In this connection he relied upon the case of Birla Brothers (P.) Ltd. v. Commissioner of Income-tax [1964] 54 ITR 344 (Cal), wherein the Calcutta High Court has observed that in considering the small-ness of profits for the purposes of Section 23A(1) of the Indian Income-tax Act, 1922, the Income-tax Officer must look to the business profits adjudged in the light of commercial principles. In other words, he has to look to the actual profits from the commercial point of view, that is, the accountable profits of the company actually at its disposal. A company cannot deduct capital expenditure from its profits as shown in the profit and Joss account and the department would be justified in adding to the profits shown in the profit and loss account the capital expenditure of the company during the relevant accounting year, for the purposes of determining its business profits or actual profits from out of which the dividend had to be declared. In our opinion the decision relied upon by the learned counsel merely lays down that while determining the amount of commercial profits, from out of which the company is required to pay dividend and for determining the distributable surplus, the Income-tax Officer is not to take into consideration expenses of capital nature. This case is no authority for the proposition that after the distributable surplus has been determined by applying correct criteria, the Income-tax Officer while considering the reasonableness of the assessee's action in not declaring dividend, cannot take into account its object in not distributing dividend, if it happens to be to appropriate the profits for expenses of capital nature. If a company legitimately requires funds for incurring expenses of capital nature its action in diverting its profits for meeting those expenses instead of declaring dividend to its shareholders cannot necessarily be said to be unreasonable.