1974 (6) TMI 8 - HC - Income Tax

Assessee's Small Profit Justifies Reasonable Dividend Declaration

The court found that the profit of the assessee-company was small within the meaning of 'smallness of profits' under relevant tax laws and that the ... Burden Of Proof, Income Tax Dues, Provision For Payment Issues Involved:1. Smallness of profits and reasonableness of dividend declaration under section 23A of the Indian Income-tax Act, 1922, and section 104 of the Income-tax Act, 1961.2. Reasonableness of distributing a larger dividend under section 23A of the Indian Income-tax Act, 1922, and section 104 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Smallness of Profits and Reasonableness of Dividend DeclarationThe court examined whether the profit of the assessee-company for the assessment years 1961-62 and 1962-63 was small within the meaning of 'smallness of profits' under section 23A of the Indian Income-tax Act, 1922, and section 104 of the Income-tax Act, 1961, and whether any further declaration of dividend than that declared by the assessee would be unreasonable.The distributable income for the assessment year 1961-62 was Rs. 1,47,351, and for 1962-63, it was Rs. 1,32,795. The statutory percentage for these years would have been Rs. 73,676 and Rs. 66,398, respectively. The actual profits distributed were Rs. 30,000 and Rs. 30,005, respectively. The Income-tax Officer proposed action under the relevant sections, deeming the dividend distributed as inadequate. The assessee argued against additional super-tax, citing the need for reserves and tax provisions, which the Income-tax Officer rejected. The Tribunal upheld the Income-tax Officer's decision, finding the reserves and tax provisions not necessarily prudent.The court referred to the Supreme Court's principles in Commissioner of Income-tax v. Gangadhar Banerjee & Co. Pvt. Ltd., which emphasized that the reasonableness of the dividend should be judged from a business perspective, considering previous losses, current profits, surplus availability, and future requirements.The court concluded that the reserves of Rs. 40,000 and Rs. 50,000 for the respective years were not excessive. The company had historically low reserves, and the profits in these years were relatively high. The dividends declared were about 25% of the invested capital, which was reasonable. The court found that the Tribunal had approached the issue incorrectly by focusing on the article of association rather than the business prudence.Issue 2: Reasonableness of Distributing a Larger DividendThe court examined whether a larger dividend than that declared by the company could reasonably be distributed within the meaning of section 23A of the Indian Income-tax Act, 1922, and section 104 of the Income-tax Act, 1961.The company had a tax liability from prior years, which was initially debited to the shareholders' accounts but later reversed and taken as the company's liability. The Tribunal noted that the company had made provisions for taxes each year since 1954, which were not shown to be inadequate. However, the provisions were not meant to cover the earlier liability.The court found that the company's decision to write off the tax liability in years of substantial profit was not unreasonable. The company did not have sufficient funds to write off the liability earlier. The court held that the directors' decision not to declare a larger dividend was reasonable and commercially prudent.Conclusion:The court answered question No. 1 in the affirmative, stating that the profit was small and the dividend declared was reasonable. Question No. 2 was answered in the negative, indicating that a larger dividend was not reasonable. Both answers were in favor of the assessee, with each party bearing its own costs.