JUBILEE MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference there were three questions raised by the Income -tax Appellate Tribunal. The reference was heard by this court on the 13th of March, 1958, when it answered two out of the three question and in view of the answer which it had given to the second question, it did not find it necessary to answer the third question. The first question was answered in favour of the department and against the assessee and the second question in favour of the assessee and against the department. The department obtained leave from this court to go to the Supreme Court in appeal and in the said appeal the Supreme Court decided the second question in favour of the department and against the assessee. In view of the answer given by the Supreme Court to the second question, it became necessary to consider and decide the third question, which on the earlier occasion this court had not considered. The Supreme Court therefore, remanded the reference back to this court for the consideration of question No. 3 and it has accordingly come before us for giving our answer to the said third question, which is as follows : 'Whether the loss of Rs. 12,75,000 incurred by the company prior to its reconstruction in 1930, could be taken into consideration for purposes of the applicability of section 23A (1) of the Act ?'

(2.) THE assessee -company is a limited liability company with a paid up capital of Rs. 15,25,000 as on the 30th of June, 1947. For the assessment year 1948 -49 for which the relevant previous year was the year ended 30th June, 1947, the company was assessed on a total income of Rs. 7,47,639. The tax which was payable on the said income amounted to Rs. 3,27,091. The balance available for distribution, therefore, was Rs. 4,20,548. It section 23A was applicable to the company, it was under an obligation to declare a dividend, which would not be less than 60 per cent. of the said balance and, therefore, to declare a dividend of at least Rs. 2,52,328. The actual dividend, however, which was declared by the company was only Rs. 24,750. The Income -tax Officer with the previous approval of the Inspecting Assistant Commissioner, therefore, applied the provisions of section 23A of the Act and held that the company should be deemed to have declared a dividend of Rs. 3,95,798. The company appealed against the said order to the Appellate Assistant Commissioner, but the appeal was dismissed. It then took a second appeal to the Income -tax Appellate Tribunal, but the Tribunal also dismissed the appeal. Before the income -tax authorities and the Tribunal the company contended that in the first place the Income -tax Officer was incompetent to pass an order under section 23A against the company because he had already granted it a rebate of one anna under proviso (a) to paragraph (B) of Part 1 of the Schedule of the Finance Act, 1948, and since this rebates was granted to those companies to which the provisions of section 23A were not applicable, the Income -tax Officer must be deemed to have held impliedly that section 23A was not applicable to the assessee -company. Secondly, it was contended that the assessee -company was not a company to which the provisions of section 23A applied, because it was a company in which the public were substantially interested and, lastly, it was contended that even if the provisions of section 23A were applicable to the assessee -company, having regard to the loss, which the company had suffered in earlier years, it would not have been reasonable to expect it to declare a dividend larger than what it had declared and, consequently, an order under section 23A ought not to have been passed against it. All these contentions were negatived by the income -tax authorities and the Tribunal. At the instance of the assessee the Tribunal had then drawn up a statement of the case and referred to this court three questions under section 66(1) of the Income -tax Act. The questions referred to were : '1. Whether, on the facts and in the circumstances of the case, the Income -tax Officer was competent to pass an order under section 23A (1) of the Act after having allowed a rebate of one anna per rupees in the assessment under proviso (a) to paragraph (B) of Part 1 of the Second Schedule of the Finance Act, 1948 ? 2. If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee -company is a company in which the public are substantially interested for the purposes of section 23A of the Act ?

(3.) NOW , the Income -tax Officer, in dealing with the point involved in this question, took the view that the losses in earlier years, which were required to be taken into consideration under the provisions of section 23A, were book losses as shown in the balance -sheet of the company as at the relevant date. According to him, the losses incurred by the company in the year 1930, which it had set off against its paid up capital by reducing its capital, did not survive as book losses thereafter and, consequently, did not come within the expression 'losses in earlier years' as used in section 23A. He further took the view that even if losses which had been wiped out by being adjusted against capital did remain to be considered for the purposes of section 23A, the financial position of the company as reflected in its balance -sheet as on the 30th June, 1947, showed that it had completely got over the adverse effects of the said losses in the earlier years and was in a sound financial position so as to afford to distribute a larger dividend than what it had distributed. He, therefore, took the view that an order under section 23A could justifiably be passed against the company.