A HARVEY Vs. COMMISSIONER OF INCOME TAX MADRAS

JUDGEMENT

(1.) THE CHIEF JUSTICE. The question under reference is : Whether Section 23-A could be legally applied to this case, there being no finding that failure to distribute Rs. 36,180 was with a view to prevent the imposition of tax on any of the shareholders.

(2.) Sub-section 2 of Section 23-A which is the one in question reads as follows : Where the Income Tax Officer is satisfied that a company is under the control of not more than five of its members and that its profits and gains are allowed to accumulate beyond its reasonable needs, existing and contingent, having regard to the maintenance and development of its business, without being distributed to the members, or that a reasonable part of its profits and gains having regard to the said needs, has not been distributed to its members in such manner as to render the amount distributed liable to be included in their income, and that such accumulation or failure to distribute is for the purpose of preventing the imposition of tax upon any of the members in respect of their shares in the profits and gains so accumulated or not distributed, the Income Tax Officer, may, with the previous approval of the Assistant Commissioner, pass an order that the sum payable as income-tax by the company shall not be determined, and thereupon the proportionate share of each members in the profits and gains of the company, whether such profits and gains have been distributed to the members or not, shall be included in the total income of such member for the purpose of his assessment thereon.

(3.) The facts of the case are that the assessees in the three cases before us, which have been ordered to be consolidated, are the three shareholders of the Comorin Investment and Trading Company, Limited, Tuticorin. The company is a private limited company registered on the 9th January, 1926 under the Indian companies Act, its principal object being to acquire and hold stocks and shares in companies and other public bodies and distribute the income therefrom among its shareholders. The greater part of the income of the Company is derived by way of dividends from its large share holding in the Madura Mills Company, Limited. Year after year since 1926 the Company earned large profits. These profits were not distributed as dividends to its shareholders but were carried to the Reserve Fund. During the year 1929-1930 the profit so derived was Rs. 1,33,222 according to the profit and loss account. This with the balance in the profit and loss account brought forward from the previous year amounted to Rs. 2,98,680- 12-11. No part of it was distributed as dividends but the whole of it was disposed of as below :