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

2. 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, 19553. The assesses 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. 1,61,089/- and taxes paid were Rs. 69,973/- leaving a distributable balance of Rs. 91,116/-. According to the Profit and Loss Account, however, the company suffered a net loss of Rupees 11.63,874/and this was due to the loss of Rs. 12,00,000/- on account of depreciation in the value of shares held by the company in Elphinstone Mills Ltd. of Bombay. The Income-tax authorities disallowed an amount of Rs. 11,88,000/- 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 Rupees 11,88,000/- was 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 23A (1) levied additional supertax at -/4/- per rupee on the distributable surplus of Rs. 91,116/-. In so doing he ignored the loss in the value of the shares in Elphinstone Mills Ltd4. For the assessment year 1956-57 the total income assessed was Rs. 1,07,429/- and the taxes payable thereon were Rs. 46,668/- leaving a distributable surplus of Rs. 60,761/-. 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 at-/4/- per rupee on the surplus of Rs. 60,761/-5. 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 profit 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)6. 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 years7. 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.

Reasoning: 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.