Kotval, C.J:— In this reference by the Income-tax Appellate Tribunal at Bombay the question for our decision is:

“Whether the inference of the Tribunal that, notwithstanding the fact that the assessee had valued its investments at cost in the past, with such over-valuation of Rs. 68,583 over the market price, there was a smallness of profit that justified the non-declaration of dividends in that year for purpose of section 23A is legal?”

2. The assessee is a private limited company which at one time was dealing in cotton, but in the year of account, Samvat year 2013, the finding is that it was carrying on the business of dealing in and holding of investments as its main business. It is also not in dispute that it is a company to which the provisions of section 23a apply. At the end of the accounting year the investments of this company were shown in the balance-sheet at their original cost. The market value on the same date was, however, less by Rs. 68,583. In order to arrive at the profit available for distribution after payment of taxes, the following computation was made by the Income-tax Officer:

Rs. Rs. Income assessed 40,524 Less: Charity & donations 2,500 Tax paid 20,870 23,370 Net Income 17,154

3. The assessee did not distribute any dividend in the year of account and the Income-tax Officer passed an order under section 23A in respect of the whole of the profit. In doing so, the Income-tax Officer added back Rs. 68,583, the difference between the cost and the market value of the shares. He merely stated: “the assessee's claim of Rs. 68,583 representing the difference between the cost and the market value of the shares claimed in the computation accompanying the return of income has been added back…” It was after adding back that difference in valuation that the income for Samvat 2013 was assessed at Rs. 40,524.

4. When the assessee took the matter in appeal to the Appellate Assistant Commissioner, one of the questions argued before that officer was whether the main business of the company was of investments. That was answered against the assessee. We are not here concerned with that answer. Another argument which was put forward was that the market value of the investments was lower than their cost and, therefore, if a revaluation had to be made, the reserve of Rs. 20,000, appearing in the balance-sheet as on 23rd October, 1957, would be converted into a deficit. To this the Appellate Assistant Commissioner replied by holding that the commercial profits of the company are to be determined by the method of accounting regularly employed by the assessee year after year and that the company did always value these investments at their cost. Therefore, it was not open to the company to claim the losses on investments by valuing the same at market rates for the purposes of declaration of dividends. He, therefore, declined to take into account the fall in valuation of the company's investments.

5. The assessee further went up in appeal to the Tribunal and the Tribunal has passed a rather summary order in paragraph 2 as follows:

“In respect of Samvat year 2013, the previous year for assessment year 1958–59, it is pointed out by Mr. Pandit, the learned counsel for the assessee, that Rs. 68,583 is over-valuation of the investments on the balance-sheet on the basis of cost as against their market values as on that day and accordingly to that extent the profit could not be distributed. This is, indeed, a special circumstance which can justifiably prevent the assessee from not declaring any dividend at all. The order for this year is accordingly cancelled.”

6. The appeal before the Tribunal was also concerned with the other years; but so far as the present reference is concerned, we are not concerned with the other years.

7. Now the question that falls to be determined in this reference is whether upon the facts and circumstances section 23A could be applied in the case of the assessee and the main difficulty that has arisen in the way of our answering that question is not so much any inherent difficulty in the question itself, but the extremely cryptic findings of the Tribunal which we have just quoted. Moreover, neither the Income-tax Officer nor the Appellate Assistant Commissioner has considered what it was that was required to be established having regard to the provisions of section 23a. They have merely answered certain points which were raised in the arguments. A considerable argument has been advanced before us as to what were the proper findings of the tax authorities and the Tribunal. We will presently indicate what they were in our opinion.

8. The operative part of section 23A(1) runs as follows:

“23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by—…

the Income-tax Officer shall, unless he is satisfied—(i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment…. 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,… on the undistributed balance of the total income of the previous year…”

9. It is not in dispute that the assessee is a company whose business consists mainly in the dealing in or holding of investments. It is also undisputed that this company under the provisions of Explanation 2 to the section would be liable to distribute as dividend 100% of the total income of the company of the previous year as computed under the section, and that this company has not declared any dividend at all. The short question that has been raised on behalf of the department upon the wording of section 23A is whether this company falls within the exception contemplated by the words “unless he is satisfied that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend…. would be unreasonable”

10. This court had at one time taken the view (See Sir Kasturchand Ltd. v. Commissioner of Income-tax [1949] 17 I.T.R 493.), that the reasonableness of the payment of a dividend has to be judged only upon the two factors mentioned in the words of the section quoted above, namely, (1) losses incurred by the company in earlier years, or (2) the smallness of the profit made in the previous year. That view is now no longer good law in view of the recent decision of the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. [1965] 57 I.T.R 176, 182 S.C. Dealing with the provisions of section 23a before its amendment in 1955 (and for the purposes of the reference before us the provisions of the amended section are not materially different), the Supreme Court laid down in that case three principles on the general construction of section 23A in regard to which the Supreme Court observed at page 181:

“This section was introduced to prevent exploitation of juristic personality of a private company by the members thereof for the purpose of evading higher taxation. To act under this section the Income-tax Officer has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage………If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or ‘the smallnes of the profit made’, the payment of a dividend or a larger dividend than that declared would be reasonable…. The Income-tax Officer, acting under this section, is not assessing any income to tax: that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. 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 yardstick is that of a prudent businessman. The reasonableness or the 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. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression ‘having regard to’ that precedes the said words.”

11. The Supreme Court quoted with approval a passage from the decision in Commissioner of Income-tax v. Williamson Diamonds Ltd., in construing section 21(1) of the Tanganyika Income-tax (Consolidation) Ordinance (27 of 1950)—a provision in pari materia with section 23A of our Act:

“The form of 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.”

12. Therefore, it is now settled law: (1) that having regard to the provisions of section 23A the Income-tax Officer has to judge the reasonableness or unreasonableness of the declaration of the dividend upon all the facts and circumstances before him and placing himself in the position of a prudent businessman or a prudent director of the company and that the two requirements expressly mentioned in the section are not the only requirements upon which he has to judge that reasonableness, namely, the losses in the past year or the profits in the previous year. (See page 183). (2) The other point settled was that the “smallness of profit” has to be adjudged in the light of commercial principles and not in the light of the total receipts actual or fictional and that “commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles”. Therefore, the words “smallness of profit” in the section refer to actual accounting profits, in comparison with the assessable profits of the year. (3) It was urged before the Supreme Court that the balance-sheet is final and the parties are precluded from questioning its correctness in any respect. The Supreme Court negatived the contention by saying at page 184:

“But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions. It does not also preclude the assessee from proving that the estimate in regard to certain items has turned out to be wrong and placing the actual figures before the Income-tax Officer.”

13. In the light of these principles we turn to consider what has been found in the present case. Now in the reference itself the Tribunal has given extracts from the findings of the Income-tax Officer and the Appellate Assistant Commissioner and its own findings. We have gone through the same and it does not seem to us that any of these authorities have given any clear-cut finding as to whether “smallness of profit” in the year of account justified the non-declaration of a dividend by the assessee. The issue before the Appellate Assistant Commissioner was considerably clouded by the contention of the assessee that their investments had been reduced because the market value at the end of the year of account was much less than their cost and that therefore that loss in the valuation of their investments should be taken into account. The Appellate Assistant Commissioner, as we have shown, answered it by saying that the method of accounting of the assessee had always been on the basis of cost of investments and therefore it was not open to the assessee to change the mode of accounting and the market value could therefore not be taken into account. When the matter came up before the Tribunal they took into account this fact that in the balance-sheet the valuation of the investments shown was over-valuation to the tune of Rs. 68,583 as it is the cost value and that the market value was much lower. Unfortunately, the order of the Tribunal does not in terms show why and for what reason that over-valuation could be taken into account. All that they stated was: “This is, indeed, a special circumstance which can justifiably prevent the assessee from not declaring any dividend at all”. It would have been better if the provisions of the section had been adverted to and a clear-cut finding given as to whether in the first place the smallness of profit justified the non-declaration of any dividend and secondly whether the overvaluation of the investments in the balance-sheet to the tune of Rs. 68,583 was a circumstance which can be taken into account.

14. However, we are satisfied, having regard to all the circumstances of the case, that those were the findings which the Tribunal intended to give. The assessee had raised the issue before the Tribunal that the Appellate Assistant Commissioner had “failed in not considering the point urged by your petitioner that the market value of investments was lower by Rs. 61,583 than shown in the balance-sheet…” as can be seen from their contenion mentioned in paragraph 7 of the reference. Therefore, the assessee was throughout saying both before the Appellate Assistant Commissioner and the Tribunal that the fall in the valuation of their investments was a circumstance which ought to be taken into account in deciding whether they were justified in not declaring any dividend at all. It also appears to us that it was alternatively put before the Tribunal at any rate that the smallness of profit of that year as computed itself must be taken into account, because in paragraph 9 of the reference the Tribunal has itself crystallised the issue before it by saying “The only dispute in the appeal was that the profits in the special circumstances were too small to justify a declaration”. As we have said, it would have been better if the Tribunal had separately stated both these contentions and dealt with them in greater detail giving reasons, but for the reason that it has been somewhat cryptic in its findings, we do not think that it can legitimately be argued that these issues were not at all present in their minds and not decided by the Tribunal. We have shown that both the issues were raised before the Tribunal, namely, (a) that the smallness of the profit justified the non-declaration of the dividend, and (b) that the circumstance that the investments of the company had fallen in value to the tune of Rs. 68,583 ought to be taken into account in determining the justification for the non-declaration of dividend.

15. We have already shown what are the requirements under section 23A and what is the interpretation placed by the Supreme Court upon the expression “smallness of profit”. We have also shown that it is a settled law that the figures mentioned by an assessee in the balance-sheet are not conclusive against the assessee and, lastly, that in deciding the question of reasonableness or unreasonableness of the dividend declared or the non-declaration of the dividend has to be judged in the light of what a prudent businessman would do in all the circumstances or a prudent director of the company would do.

16. Judged in the light of these principles, we have no manner of doubt that the decision which the Tribunal gave was a correct decision. We must accept the decision of the Tribunal that in view of the smallness of the profit the non-declaration of dividend by the assessee-company was justified. After all, the balance-sheet shows that the total subscribed capital of the company-was Rs. 5 lakhs and the profit even as assessed is only Rs. 17,154. That by-no standard having regard to the share capital of the company could be said to be a very high profit. It was definitely small and if dividends were to be paid out of that profit, the dividend itself would be infinitely small. Apart from that, there is the important fact that the assessee had been emphasising throughout that the value of its investments had gone down by Rs. 68,583. No doubt this circumstance may not fall for consideration under the clauses “losses incurred by the company in the earlier years” or “the smallness of the profits”, but as we have shown, upon a proper construction of section 23A what is to be judged is whether payment of a dividend would be reasonable and as pointed out by the Supreme Court in judging the reasonableness or unreasonableness of non-declaration of dividend, “an overall picture of the financial position of the business must be taken.”

17. Now it seems to us a very material consideration which any prudent businessman would take before declaring a dividend out of a small profit that its capital in the nature of circulating capital or stock-in-trade has considerably depreciated in value. Of course, all that is not for us to judge in this reference, but these circumstances were before the Tribunal and depreciation in value of its shares was a relevant circumstance to be taken into account. The Tribunal accepted it as a relevant circumstance and we can hardly say in the circumstances that the Tribunal made any error of law. On the contrary, we think that the circumstance was rightly taken into account by the Tribunal. Its conclusion was thus a correct conclusion to reach.

18. Having discussed the question actually referred we must advert to a point raised by the Tribunal in paragraph 9 of its order of reference—a point which was pressed before us by Mr. Joshi on behalf of the Commissioner. The Commissioner had required the following question to be referred:

“Whether, on the facts and in the circumstances of the case, the assessee is entitled to revalue the investments at market price for the purpose of determining the applicability of section 23A when its regular method of accounting was to value them at cost.”

19. The Tribunal declined to refer that question for the simple reason that before the Tribunal there was no dispute as to the mode of accounting and the Tribunal has remarked that it does not arise out of its order. Now we have already shown that the question was discussed at length in the order of the Appellate Assistant Commissioner and the Appellate Assistant Commissioner did come to the conclusion that the commercial profits of the company were to be determined only in accordance with the method of accounting regularly employed by the company year after year and that the company had always been valuing its investments at cost. Therefore it could not alter the valuation on the basis of market value. In the appeal before the Tribunal, however, this point does not appear to have been raised. At any rate, there is no reference to it in the order of the Tribunal. It may be that, upon a correct view of the provisions of section 23a being placed before the Tribunal, the point became not merely irrelevant but difficult to urge. As we have shown, upon the view taken by the Supreme Court the balance-sheet is not final or conclusive between the parties and that it is always open to the assessee to prove that “the estimate in regard to certain items has turned out to be wrong and placing the actual figures before the Income-tax Officer”. Upon that view it seems to us that the question of the mode of accounting employed in the balance-sheet would be clearly immaterial in considering the applicability of section 23A. Therefore, we think that the question posed by the Commissioner would not properly arise in the circumstances of this case and the question referred was the correct question, though no doubt it could have been better worded. Accordingly, we answer the question referred in the affirmative. The Commissioner shall pay the costs of the assessee. In view of what we have stated in the second last paragraph of this order, no order on the notice of motion.

20. Question answered in the affirmative.