Case: The Commissioner of Income Tax, Calcutta Vs. Asiatic Textiles Limited

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 determined 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 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 a total income as reduced by the amounts, if any, referred to in cl. (a), clause (b) or clause (c) and the dividends actually distributed, if any." 9. 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 Commr. of Income-tax West Bengal v. Gangadhar Bannerjee and Co. (Pvt. ) Ltd., 57 ITR 176 = (AIR 1965 SC 1977 ) 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. 10. On the facts found by the Tribunal, there can be hardly any doubt that the assessee had suffered a capital loss of Rs. 12,00,000/-. In our opinion, in view of the said loss, any reasonable body of Directors of a company would have done just what the Directors of the assessee company did. We think, that the Income-tax Officer took an erroneous view of the scope of Section 23A (1). 11. 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 that Directors were naturally more interested in the stability of their concern rather than in increasing the tax payable to the Government. 12. Before the High Court, it appears to have been urged - 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 Commr. of Income-tax v. Williamson. Diamonds Ltd. (1959) 35 ITR 290 (PC). In that case their Lordships were considering 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 is directed to come to a decision upon the question whether "the payment of a dividend or a larger dividend than that declared" is unreasonable." The form of the words used no doubt lends itself to the suggestion that 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" by 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 requires 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]10. On the facts found by the Tribunal, there can be hardly any doubt that the assessee had suffered a capital loss of Rs. 12,00,000/-. In our opinion, in view of the said loss, any reasonable body of Directors of a company would have done just what the Directors of the assessee company did. We think, that the Income-tax Officer took an erroneous view of the scope of Section 23A (1)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 that Directors were naturally more interested in the stability of their concern rather than in increasing the tax payable to the Government12. Before the High Court, it appears to have been urged - 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 Commr. of Income-tax v. Williamson. Diamonds Ltd. (1959) 35 ITR 290 (PC). In that case their Lordships were considering 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 is directed to come to a decision upon the question whether "the payment of a dividend or a larger dividend than that declared" is unreasonable."The form of the words used no doubt lends itself to the suggestion that 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" by 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 requires 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.