Court rules capital gains distributable as dividends under Indian Income-tax Act

Factors Pvt. Limited Versus Commissioner Of Income-Tax, Madras

Factors Pvt. Limited Versus Commissioner Of Income-Tax, Madras - [1975] 98 ITR 105 Issues Involved:
1. Applicability of section 23A of the Indian Income-tax Act, 1922, to the assessee-company.
2. Whether capital gains can be treated as profits available for distribution as dividends under the Companies Act, 1956.
3. Interpretation of "smallness of profits" under section 23A in relation to commercial and accounting profits.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922, to the Assessee-Company:
The primary issue was whether the provisions of section 23A were applicable to the assessee-company, which had not declared any dividend despite having distributable surplus. The Income-tax Officer computed the total income including capital gains, resulting in a distributable surplus of Rs. 27,084. Since no dividend was declared, the Income-tax Officer invoked section 23A, leading to an additional super-tax levy of Rs. 10,021.08. The Appellate Assistant Commissioner and the Tribunal upheld this decision, noting that the company's financial position, as shown in its balance sheet, indicated that declaring a dividend would not have affected its capital.

2. Whether Capital Gains Can Be Treated as Profits Available for Distribution as Dividends:
The assessee argued that capital gains should not be treated as profits available for distribution under the Companies Act, 1956, citing that such distribution would be contrary to the Act. However, the court referred to general principles and various authoritative texts, including Halsbury's Laws of England and Gower's Principles of Modern Company Law, which state that profits realized from dealing with fixed capital can be distributed as dividends unless restricted by the company's articles of association. The court found no such restriction in the assessee's memorandum or articles of association. The court also cited English cases like Lubbock v. British Bank of South America and Cross v. Imperial Continental Gas Association, which supported the distribution of realized capital gains as dividends.

3. Interpretation of "Smallness of Profits" under Section 23A in Relation to Commercial and Accounting Profits:
The assessee contended that capital gains should not be included in commercial or accounting profits for the purpose of section 23A, arguing that they are notional or deemed income. The court referred to Supreme Court decisions, including Commissioner of Income-tax v. Bipinchandra Maganlal and Co. and Commissioner of Income-tax v. Gangadhar Banerjee and Co., which differentiate between accounting profits and assessable profits. The court concluded that capital gains are real profits and not fictional or notional, and thus can be considered in determining the commercial profits of the company. The court rejected the assessee's reliance on Commissioner of Income-tax v. Gannon Dunkerley & Co., noting that the facts of that case were distinguishable and did not support the exclusion of capital gains from commercial profits.

Conclusion:
The court answered the reference in the affirmative, holding that the provisions of section 23A were applicable to the assessee-company. The court concluded that capital gains are distributable as dividends unless restricted by the company's articles of association, which was not the case here. The court also clarified that capital gains form part of the commercial profits and should be considered in applying section 23A. The assessee's arguments were rejected, and the decision was made in favor of the revenue, with costs awarded against the assessee.