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Petitioner: BIRLA BROTHERS (PRIVATE) LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, CENTRAL, CALCUTTA
1980 P T D 138
1980 P T D 138
[Calcutta (India)]
Before Sankar Prasad Mitra and K. C. Sen, JJ
BIRLA BROTHERS (PRIVATE) LTD.
versus
COMMISSIONER OF INCOME‑TAX, CENTRAL, CALCUTTA
Income‑tax Reference No. 60 of 1960, decided on 18th July, 1963.
Income‑tax Act (XI of 1922)‑
--S. 23‑A‑Company‑Profits available for dividend‑Capital expendi ture‑held, not deductible for computation of "commercial profits".
Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 34 ; Banarsidac Jagannath: In re (1947) 15 I T R 185 ; Commissioner of Income‑tax v. Bipinehandra Maganlal & Co. Ltd. (1961) 41 I T R 290 ; Commissioner of Income‑tax v. Smith (F. L.) & Co. (Bombay) Ltd. 0959) 35 I T R 183 ; English Crown Speltex Co. Ltd. v. Baker (1908) 5 Tax Cas. 327 ; Ezra Proprietary Estates Ltd. v. Commissioner of Income‑tax (1950) 18 I T R 762 ; Gobald Motor Service Ltd. v. Commissioner of Income‑tax (1963) 47 1 T R 825 ; Indra Singh & Sons Ltd. v. Commissioner of Income‑tax (1958) 33 I T R 341 ; Kasturchand Ltd. v. Commissioner of Income‑tax (1949) 17 I T R 493 ; New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 423 and Sardar Beldev Singh v. Commissioner of Income‑tax (1961) 3 Taxation 53 (S C) ref.
STATEMENT OF CASE
These two applications are conveniently consolidated as the same question arises from similar sets of facts.
2. By these applications presented on 2nd May 1960, the assesee requires the Appellate Tribunal to refer to the High Court certain ques tions of law which are said to arise out of the order of the Appellate Tribunal in I. T. As. Nos. 7429 and 9161 of 1959‑60 dated 24th January 1960. Inasmuch as in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court under section 66(1) of the Indian Income tax Act.
3. The assessee is a private limited company. It closes its accounts on the Rath Jatra day every year and the accounting years in respect of the assess ment years 1953‑54 and 1954‑55 were years ending on 23rd June 1952 and 12th July 1953.
4. In the accounting year ending upon 23rd June 1952, the assessee's profit and loss account disclosed a profit of Rs. 2,38,570. In arriving at that profit, the following items of expenses were written off through the revenue accounts.
Rs.
(1)
Air‑conditioning
2,69,000
(2)
Furniture
1,65,000
(3)
Electric lift
29,089
(4)
Motor car
18,413
(5)
Sundry and other capital expenses
30,015
Total
5,11,517
In returning the income to the Income‑tax Officer, the assessee‑Company added these amounts to the disclosed profit and returned an income of Rs. 12,75,4".
5. In the accounting years ending upon 12th July 1953, the assessee's profit and loss account disclosed a profit of Rs. 8,17,017. This profit was arrived at by writing of': certain expenses under the following heads:
Rs.
(1)
Furniture
22,799
(2)
Motor car
14,655
(3)
Electric lift
32,728
(4)
Sundry and other capital expenses
23,760
Total
93,942
In this year also in returning the total income, the assessee added these amounts to the disclosed profit according to the account.
6. On a perusal of these two years' accounts, the Appellate Tribunal held that the correct revenue profit according to the assessee' account books would be as follows:‑
For the accounting year ending upon 23‑6‑1952.
Rs.
Profit as per assessee's accounts
2,38,570
Add capital expenses
4,11,518
7,50,088
Add provision for income‑tax
6,00,000
Total
13,50,088
For the accounting year ending upon 12‑7‑1953.
Rs.
Profits as per books
8,17,017
Add capital expenses
93,942
9,10,959
Add provision for income‑tax
7,25,959
Total
16,35,918
Thereafter, deducting the approximate tax payable on the income for the first accounting year, the Tribunal found that the balance of profit would be Rs. 7,50,088 and similarly, for the second accounting year, after deducting the approximate tax payable on the income, the balance of profit would be Rs. 9,10,959.
7‑ For the accounting year
ending upon 23rd June 1952, the assessee passed a resolution in the annual general meeting. The resolution runs as follows: ‑
Assessment year 1953‑54
That in respect of the profits for the accounting year 2008/2009 Samvat year (1951‑52) an amount equivalent to sixty per cent of the income of the company of that year assessable to income‑tax, but as reduced by the amount of income‑tax and super‑tax payable by the company in respect thereof, be distributed as dividend amongst the shareholders proportionately to the paid up amount of each share, and that pending the ascertainment of the assessable income by the Income‑tax Offices a sum of Rs. 3,30,003 be so distributed as interim dividend, as recommended by the directors, at the rate of Rs. 66 per ordinary share and at the rate of 21 % per annum per pre ference share, free of tax. 6 Similarly, in the annual general meeting in the same lines. In the first accounting year, however, the ascertained dividend declared was Rs. 3,30,003 whereas in the second accounting year, the ascertained dividend declared was Rs. 5,00,000.
8. The total income of the assessment year 193‑54 relevant for the first accounting year taken by the Income‑tax Officer at Rs. 24,17,831 and the tax determined was Rs. 9,41,187 leaving a surplus of Rs. 14,76,644. For the assessment year 1954‑55 relevant for the second accounting year, the Income‑tax Officer determined the total income at Rs. 20,75,535 and tax a' Rs. 9,47,907 leaving a balance of Rs. 11,27,628. Counting upon these sur pluses as the divisible profits, the Income‑tax Officer held that the assessee did not distribute a dividend of 60 % of the assessable income less tax and, therefore, he applied the provisions of section 23‑A of the Indian Income‑tai: Act in respect of the company's income. The balance‑sheets and profit and loss accounts for the years ending 23rd June 1952, and 12th July 1953, are made parts of this case. The assessee undertakes to produce the accounts before their Lordships of the High Court at the time of hearing of the case in the High Court. The annexure are marked "A".
9. When the matter was brought in appeal before the Appellate Assistant Commissioner, the assessee was successful and the Appellate Assistant Commissioner cancelled the order under section 23‑A. Being dissatisfie.1 with this order of the Appellate Assistant Commissioner, the Income‑tax officer came up in appeal before the Appellate Tribunal before the Tribu nal the assessee's contentions were: (i) Inasmuch as 60% of the assess able income had in fact been declared as dividend in terms of the resolution passed in the general meeting, the conditions laid down under sec tion 23‑A(1) had been satisfied and that no order under section 23‑A should have been passed ; (2) Capital expenses and the expenses disallowed by the Income‑tax Department and loss in speculation business could riot be regarded as money that was actually at the disposal of the company for distribution as dividend. The capital expenses in question had necessarily to be incurred for properly conducting the business of the company and in the circumstances; the amount spent therefor should have been treated reasonable not being available for distribution of dividends; (3) It is only the accountable profit after meeting other essential requirements of the company and not the assessable income composed partly of the accounting profits and partly of national income, coming in either as disallowed items of expenditure of as income computed on some artificial basis, should be the basis for consideration of reasonableness of dividend.
10. The Tribunal held by its order which is made a part off this case as Annexure "B", that the accounting profit as disclosed by the assessee in its accounts should be the basis for consideration whether the dividend had been paid to the extent of 60 %. It, however, held that the accounting profit disclosed by the assessee should be the revenue profit and that it should not be reduced by writing off the capital expenses and on this basis, it adjusted the divisible surplus in each of the accounting years relevant for the two assessment years under consideration and held that in the first accounting year, the divisible surplus should be Rs. 7,50,088 and in the second accounting year it should be Rs. 9,10,959. It further found that the assessee paid a sum of Rs. 3,30,003 in the first year as dividend and Rs. 5,00,000 in the second year as dividend. Therefore, it held that the divi dend had not been paid to the extent of 60 % of the divisible profit, viz., the accounting profit less tax thereon.
11. Regarding the assessee's contention that it had virtually paid 60% of the assessable profit, the Tribunal held that the first part of the resolution was very vague, it did not propose to declare any dividend for an exact amount and it only proposed that a particular amount of dividend would be payable depending upon the assessment result of the compay's income. It held that the dividend to be declared must be a precise sum of money and could not be an amount dependent upon the determination of the assessable income. It held that the actual dividend declared was Rs. 3,30,003 in the first year and Rs. 5,00,000 in the second year.
12. From the above facts and circumstances of the case, the following question of law arises:
Whether on the facts and in the circumstances of the case, the Income tax Officer was justified in passing an order under section 23‑A of the Indian Income-tax Act?
13. Copies of draft statement of the case were sent to the parties concerned. The Commissioner of Income‑tax has no suggestion. The assessee suggested a few alteration which do not appear to be of any consequence. It also suggested the referring of the fourth question framed by the assessee in the reference application. But in our mind the question now referred covers that the question. The draft statement is finalised.
M. E. Meyer' S. Roy and S. Sen for Appellant.
B. L. Pal and Dr. Pal for Respondent.
JUDGMENT
SANKAR PRASAD MITAR, J. ‑This is a reference under section 66(1) of the Indian Income‑tax Act. The assessee is a private limited company. It closes its account on the Rath Jatra day every year, and the accounting years in respect of the assessment years 1953‑54 and 1954‑55 were years ending on the 23rd June, 1952 and the 12th July, 1953.
In the year ending upon June 23, 1952, the assessee's profit and loss account disclosed a profit of Rs. 2,38,570. In arriving at that profit, the following items of expenses were written off through the revenue accounts:‑
Rs.
(1)
Air‑conditioning
2,69,000
(2)
Furniture
1,65,000
(3)
Electric lift
29,089
(4)
Motor‑car
18,413
(5)
Sundry and other capital expenses
30,015
Total
5,11,517
In returning the income to the Income-tax Officer, the assessee-Company added these amounts to the disclosed profit and returned an income of Rs. 12,75,466.
In the accounting year ending upon July 12, 1953, the assessee's profit and loss account disclosed a profit of Rs. 8,17,017. This profit was arrived at by writing off certain expenses under the following heads:
Rs.
(1)
Furniture
22,799
(2)
Motor‑car
14,655
(3)
Electric lift
32,728
(4)
Sundry and other capital expenses
23,760
Total
93,942
In this year also, in returning the total income, the assessee added these amounts to the disclosed profit according to the accounts.
The Appellate Tribunal held that the correct revenue profit, according to the assessee's account books, would be as follows:
For the accounting year ending upon June 23, 1952.
Rs.
Profit as per assessee's accounts
2,38,570
Add capital expenses
5,11,518
7,50,088
6,00,000
Add provision for income-tax
13,50,088
For the accounting year ending upon July 12, 1953.
Rs.
Profit as per books
8,17,017
Add capital expenses
93,942
Add provision for income-tax
7,25,000
16,35,959
Thereafter, deducting the approximate tax payable on the income for the first accounting year, the Tribunal found that the balance of profit would be Rs. 7,50,088 and similarly, for the second accounting year Rs. 9,10,959.
For the accounting year ending upon June 23, 1952, the assessee passed a resolution in the annual general meeting. The resolution runs as follows:-
"Assessment year 1953-54
That in respect of the profits for the accounting year 2008/2009 Samvat (1951-52) an amount equivalent to sixty per cent of the income of the company of that year assessable to Income-tax but as reduced by the amount of Income-tax and super-tax payable by the company in respect thereof, be distributed as dividend amongst the shareholders proportionately to the paid up amount of each share, and that pending the ascertainment of the assessable income by the Income-tax Officer a sum of Rs. 3,30,003 be so distributed as interim dividend, as recommended by the directors, at the rate of Rs. 66 per ordinary share and at the rate of 2 per cent. per annum per preference share, free of tax."
Similarly, in the accounting year ending upon July 12, 1953, a resolution was passed in the annual general meeting on the same lines. In the first accounting years, as stated above, the ascertained dividend declared was Rs. 3,30,003; and in the second accounting year Rs. 5,00,000.
The total income of the -assessment year 1953-54 relevant for the first accounting year was taken by the Income-tax Officer at Rs. 24,17,831 and the tax determined was Rs. 9,41,187 leaving a surplus of Rs. 14,76,644. For the assessment year 1954-55 relevant for the second accounting year, the Income-tax Officer determined the total income at Rs. 20,75,535 and tax at Rs. 9,47,907, leaving a balance of Rs. 11,27,628. Counting upon these surpluses as the divisible profits, the income-tax Officer held that the assessee did not distribute a dividend of sixty per cent of the assessable income less tax and, therefore, he applied the provisions of section 23-A of the Indian Income-tax Act in respect of the company's income.
The Appellate Assistant Commissioner cancelled the order of the Income-tax officer under section 23-A.
Before the Tribunal the assessee's contentions were, (1) inasmuch as 60 per cent of the assessable income had in tact been declared as dividend in terms of the resolution passed in the general meeting, the conditions laid down under section 23-A (1) had been satisfied and that no order under section 23-A should have been passed; (2) capital expenses and the expenses disallowed by the Income-tax Department and loss in speculation business could not be regarded as money that was actually at the disposal of the company for distribution as dividend. The capital expenses in question had necessarily to be incurred for properly conducting the business of the company and in the circumstances, the amount spent therefor should have been treated reasonably not being available for distribution of dividend; and (3) it is only the accountable profits after meeting other essential requirements of the company and not the assessable income composed partly of the accounting profits and partly of national income, coming in either as disallowed items of expenditure or as income computed on some artificial basis, that should be the basis for consideration of reasonableness of dividend.
The Tribunal held that the accounting profit as disclosed by the assessee in its accounts should be the basis for consideration whether dividend has paid to the extent of 60 per cent. It, however, held that the accounting profit disclosed by the assessee should be the revenue profit and it should not be reduced by writing off the capital expenses and on this basis it adjusted the divisible surplus in each of the accounting years relevant for the two assessment years under consideration and held that in the first accounting year, the divisible surplus should be Rs. 7,50,088 and in the second accounting year, Rs. 9,10,959. It further found that the assessee paid a sum of Rs. 3,30,003 in the first year as dividend and Rs. 5,00,000 in the second year as dividend. Therefore, it held that dividend had not been paid to the extent of sixty pr cent of the divisible profits, that is the accounting profits less tax thereon.
Regarding the, assessee's contention that it had virtually paid sixty per cent. of the assessable profits, the Tribunal held that the first part of the resolution was very vague; it did not propose to declare any dividend for an exact amount; and it only proposed that a particular amount of dividend would be payable depending upon the assessment result of the company's income. It held that the dividend to be declared must be a precise sum of money and it could not be an amount dependent upon the determination of the assessable income. It held that the actual dividend declared was Rs. 3,30,003 in the first year and Rs. 5,00,000 in the second year.
(So far as the Tribunal's construction of the assessee's resolutions is concerned, we pointed out to Mr. S. Roy, learned counsel for the applicant, that we were inclined to agree with the Tribunal. Mr. Roy did not advance any further arguments on this point). From the above facts and circumstances of the case, the following question of law has been referred to us for opinion).
"Whether on the facts and in the circumstances of the case the Income tax Officer was justified in passing an order under section 23‑A of the Indian Income‑tax Act?"
Strictly speaking, we are concerned not with the order of the Income‑tax Officer but with the order of the Appellate Tribunal.
Our answer to the question will be with reference to the Tribunal's order.
Now, the relevant portion of section 23‑A(1) at the material time was as follows:‑
"Where the Income‑tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any com pany up to the end of six months after its account for that previous year are laid before the company in general meeting are less than 60 per cent of the assessable income of the company of that previous year as reduced by the amount of Income‑tax or super tax payable by the company in respect thereof, he shall, unless he is satisfied hat having regard to the losses incurred by the company in earlier years or to the smallness of the profits made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make, with the previous approval of the Inspecting Assistant Commissioner, an order in writing that the undistributed portion of the assessable income of that previous year as computed for Income‑tax purposes and reduced by the amount of Income‑tax and super‑tax payable by the company in respect thereof, shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income."
Discussing the object of this section the Supreme Court in Sardar Balder Singh v. Commissioner of Income‑tax (1960) 40 I T R 605, has observed: ‑‑‑
"It is further quite clear that in the absence of a provision like section 23‑A, it is possible so to manipulate the affairs of a company of this kind as to prevent the undistributed profits from ever being taxed, and experience seems to have shown that this has often happened. The following passage from Simon's Income‑tax, 2nd edition, volume III, page 341, fully illustrates the situation 'Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate."
Various devices have been adopted from time to time to enable the indi vidual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a 'one‑man company'. The individual transferred his asset in exchange for shares to .a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income, which was so distributed remained with the company to form, in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings, he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the find in the character of capital by putting the company into liquidation.
The section prevents the evasion of tax by, amongst others, the means w4mtioned by Simon."
The effect of this section appears to be that a "company to which it applies should accumulate not more than 40 per cent. of its profits to build rip reserves or to lay out on capital expenditure, and after the reserves had reached a certain level, the company is not allowed to accumulate any part of its current profits. The scope for avoidance of super‑tax by using the cloak afforded cry company law is now very restricted, and the members of a private limited company are in a little more advantageous position than the partners of a firm: (vide Kanga and Palkhivala Law and Practice of Income tax, 1950 Edn., pp. 477 and 478).
The scheme of section 23‑A, therefore, is to prevent evasion of taxation in certain circumstances. The Supreme Court, in Commissioner of Income‑tax v. Bipin Chandra Magan Lal (1961) 41 I T R 290=(1961) 2 S C R 493, has explained the scope and applicability of section 23‑A at pages 294 and 296 in these words:
"Clearly, by section 23‑A, the Income‑tax Officer is required to pass an order directing that the undistributed portion‑of the assessable income of any company (in which the public are not substantially interested) shall be deemed to have been distributed as dividends amongst the shareholders if he is satisfied that (c) the company has not distributed 60 percent of its assessable income of the previous year reduced by the Income‑tax and super‑tax payable, (ii) unless payment of a dividend, or larger dividend than that declared, having regard to (a) losses incurred by the company :n the earlier years or (b) the smallness of the profits made in the previous' year be unreasonable
A company normally distributes dividends out of its business profits ant not out of its assessable income. There is no definable relation between the assessable income and the profits of a business concern in a Commercial sense. Computation of income for purposes of assessment of Income‑tax is based on variety of artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividend would be un reasonable, the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The Legislature has not provided in section 25‑A that in considering whether an order directing that the undistributed profits shall be deemed to be distributed, the smallness of the assessable income shall be taken into account. The test whether it would be un reasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question. Even though the assessable income of a company may be large, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do. For instance, in the case of companies re ceiving income from property, even though tax is levied under section 9 of the Act on the bona fide annual value of the property, the actual receipts may be considerably less than the annual value and if the test of reasonableness is the extent of the assessable income and not the commercial profits, there may frequently arise case in which companies may have to sell off their income producing assets. The Legislature has deliberately used the expression `smallness of profits' and not 'smallness of assessable income' and there is nothing in the context in which the expression 'smallness of profits' occurs which justifies equation of the expression 'profit' with `assessable income'. Smallness of the profit in section 23‑A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional."
The Supreme Court, it appears, has approved of the decisions of the Bombay High Court in Kasturchand Ltd. v. Commissioner of Income‑tax…
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