1975 (5) TMI 9 - HC - Income Tax

Calcutta High Court: Dividends must be distributed from genuine commercial profits

The High Court of Calcutta, under Section 66(1) of the Indian Income-tax Act, 1922, ruled in favor of the assessee in a case involving the interpretation ... Distributable Surplus, Tax Liability Issues:1. Interpretation of Section 23A of the Indian Income-tax Act, 1922 regarding the requirement of a company to distribute dividends.2. Determination of distributable surplus for the assessment year 1958-59.3. Consideration of arrear taxes for the assessment years 1955-56 and 1956-57 in computing commercial profits.4. Assessment of whether the company had adequate surplus to declare dividends.5. Analysis of the Tribunal's decision to set aside the order under section 23A levying additional super-tax.Analysis:The judgment by the High Court of Calcutta under Section 66(1) of the Indian Income-tax Act, 1922, dealt with the interpretation of Section 23A regarding the obligation of a company to distribute dividends. The case involved a dispute over the distributable surplus for the assessment year 1958-59, where the Income-tax Officer calculated the surplus at Rs. 48,619 based on assessed income and taxes payable. The Appellate Assistant Commissioner rejected the assessee's claim regarding arrear taxes for 1955-56 and 1956-57, concluding that there was sufficient surplus to warrant dividend distribution and upheld the order under Section 23A.In subsequent appeals, the Tribunal recalculated commercial profits by adjusting for an under-statement of coal raisings and considering arrear taxes amounting to Rs. 52,450. The Tribunal emphasized that the state of the company's affairs within 12 months after the relevant previous year was crucial. It noted that the company had paid the arrear taxes during the previous year, even though the assessment orders were under appeal. The Tribunal disagreed with the Appellate Assistant Commissioner's computation, highlighting the valid tax liability of Rs. 52,450 paid during the relevant period.The judgment reiterated that dividends must be distributed from commercial profits, emphasizing that arrear taxes paid under lawful assessment orders, even if under appeal, must be considered in computing commercial profits. The court emphasized that funds expended on tax liabilities were not available for dividend distribution. The court upheld the Tribunal's decision, deeming it unreasonable to expect the company to declare dividends based on the possibility of appeal outcomes favoring the assessee.In conclusion, the High Court affirmed the Tribunal's decision to set aside the order under Section 23A, ruling in favor of the assessee. The judgment highlighted the importance of considering actual tax liabilities paid by the company in determining distributable surplus and reiterated the principle that dividends must be distributed from genuine commercial profits.