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
section Mitra R N Sachthey and B D Sharma for the appellant in both the appeals
M C Chagla section 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 1200000 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 161089 and taxes paid were Rs 69973 leaving a distributable balance of Rs 91116 
According to the Profit  Loss Account however the company suffered a net loss of Rs 1163874 and this was due to the loss of Rs 1200000 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 1188000 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 1188COOwas 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 A1 levied additional super tax  4 per rupee on the distributable surplus of Rs 91116 
In so doing be ignored
the loss in the value of the shares in Elphinstone Mills
Ltd For the assessment year 1956 57 the total income assessed was Rs 107429 and the taxes payable thereon were Rs 46668 leaving a distributable surplus of Rs60761 
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 60761 
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 1200000 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 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 vs 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 1200000 
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 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 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 vs Williamson Diamonds Ltd1
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 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
GC Appeals dismissed


Summary:
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 section 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 section 23A1 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 vs Gangadliar Bannerjee  Co P Ltd 57  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 section 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 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 section 23A1
86E F Commissioner of Income tax vs Williamson Diamonds Ltd  applied 82