Shah, J.:— The assessee is a private limited company. For the year of account 1949-1950 according to the balance-sheet a net profit of Rs. 3,367/- resulted in the business of the assessee. The assessee distributed Rs. 12,800/- as dividend to the shareholders. In the assessment proceedings the Income-tax Officer assessed the assessable income of the assessee at Rs. 1,37,693/-. The Income-tax Officer disallowed to the assessee Rs. 55,459/- included for excess provision for bonus for the year under reference, B.S 33,000/- for under-valuation of stock and Rs. 20,433/- for excess provision for bonus for 1947-1948 and 1948-1949. He also disallowed Rs. 45,020/- on charity account and Rs. 1,053/- on Diwali account and made a slight adjustment in respect of the claim for depreciation. Finding that the assessee had not distributed as dividend sixty per cent of the assessable income less the amount of income-tax and super-tax payable by the assessee, the Income Tax Officer passed an order under S. 23A of the Income-tax Act. Against that order an appeal was preferred to the Appellate Assistant Commissioner, and the matter was ultimately brought before the Tribunal. The Tribunal observed that in considering whether an order under S. 23A may be passed against the assessee the Income-tax Officer ought to have regard to the commercial profits and not the assessable profits. The Tribunal assessed the commercial profits of the assessees as at the date on which the amount of dividend was resolved to be distributed at Rs. 56,800/-. Computing on that amount a tax liability of Rs. 19,325/-, the Tribunal held that Rs. 37,475/- were the net commercial profits of the assessee for the year under reference and sixty per cent of that amount being Rs. 22,485/- and as the assessee had distributed as dividend only Rs. 12,800/-, an order under S. 23A of the Income-tax Act was properly passed by the income-tax authorities.

2. In this reference, Mr. Palkhivala for the assessee has contended firstly that the Tribunal was in error in estimating the tax liability of the assessee, while assessing the net commercial profits, at Rs. 19,325/-, and, secondly, that the Tribunal was in error in adding the amount of Rs. 20,433/- standing to the credit of the bonus provision account to the net profit of Rs. 3,367/- in ascertaining the profit available for declaration of dividend.

3. Section 23A of the Income-tax Act, as it stood before its amendment by the Finance Act, 1955, in so far as it is material, provided by the first sub-section:

“Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are Lald before the company in general meeting are less than sixty per cent of the assessable income of the company of that previous year, as reduced by the amount of income-tax and supertax payable by the company in respect thereof, he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make …. an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid……………….”

4. The object of the section is to prevent the avoidance of liability to pay super-tax by the shareholders of companies in which the public are not substantially interested. Income-tax paid by the company on its profits is by S. 49B of the Act deemed to be paid on behalf of the shareholders, but the shareholders have to pay super-tax on dividends received by them even if the company has paid super-tax out of its profits. The rates of super-tax applicable to companies are substantially lower than the rates applicable to other assessees. Lest by the expedient of not distributing the dividends and converting the accumulated profits with the company into capital and distributing the same as bonus shares, the higher rate of supertax may be avoided, the Legislature enacted this section. The provisions of the section are in terms (subject to an exception to be presently noticed) mandatory, if the condition that the profits and gain distributed as dividends are less than sixty per cent of the assessable income reduced by the income-tax and super-tax payable by the company is fulfilled. The Income-tax Officer has however, a discretion not to make an order if he is satisfied that, having regard to the losses incurred by the company in the earlier years, or to the smallness of the profits made, the payment of a larger dividend would be unreasonable.

5. It is undisputed that the Income-tax Officer assessed the total profits of the assessee at Rs. 1,37,693/-, and the tax payable in respect thereof was Rs. 49,689/-. Sixty per cent of the balance considerably exceeded the total dividend declared by the assessee, and Mr. Palkhivala for the assessee has not contended that the case is one in which the primary condition about the inadequate distribution of profits or income as dividends was not satisfied. But he contends that even if the primary condition is fulfilled, the Income-tax Officer had to consider whether, having regard to the smallness of the profits made, payment of a larger dividend than the one declared would be unreasonable. Mr. Palkhivala says that having regard to the smallness of the profits made by the assessee it would, in the circumstances of the present case, be unreasonable to declare a larger dividend.

6. It is now well settled that the expression “profit made” in S. 23A, sub-section (1), means commercial profits and not assessable profits. In Commissioner of Income-tax, Bombay City 1 v. F.L Smidth and Co. (Bombay) Ltd. (1959) 35 ITR 183 (Bom), a Division Bench of this Court (to which my learned brother was a party) held that in considering the smallness of the profits made by a company the profits that the Income-tax Officer had to consider were not the total income referred to in S. 23A(1) but the actual profits from a commercial point of view. The Income-tax Appellate Tribunal has (as it was bound to) followed that view, and has, in paragraph 6 of its judgment, proceeded to assess the commercial profits of the assessee at Rs. 56,800/-. But that was evidently the gross commercial profits of the assessee as at the date on which the general meeting for resolving upon the distribution of dividend was held. Out of this amount the Tribunal purported to deduct Rs. 19,325/-, which was the appropriate tax payable in respect of an income of Rs. 56,800/-. In our view, in making a deduction of Rs. 19,325/- only for tax liability the Tribunal was in error. The income-tax payable by an assessee does not bear any definite relation to his commercial profits. Even if the assessee has made payments which he is not entitled to deduct in ascertaining the assessable income, the commercial profits are to that extent depleted. It would, therefore, in our judgment, be an error to reduce merely the amount of tax computed on the commercial profits to ascertain the profits made. Before the Tribunal it was contended that out of the commercial profits the total amount of tax payable by the assessee should be deducted. The Tribunal was of the view that the assessee must adopt one of two methods, viz. (i) to deduct from the assessable income the amount of tax paid and thereafter to ask the Income-tax Officer to ascertain whether the profits were so small that an order under S. 23A(1) need not be passed, or (ii) to confine itself to the circumstances existing as at the date on which the general meeting was held and to take the commercial profits as the basis and to deduct therefrom the appropriate tax payable on the profits so ascertained. But the question is, in our judgment, not of any option vested in the assessee. The Income-tax Officer has to exercise his powers subject to the limitations prescribed by S. 23A. The first condition of which he must be satisfied is that the profits and gains distributed by the assessee as dividend amongst the shareholders is less than sixty per cent of the assessable income as reduced by the amount of income-tax and super-tax payable in respect thereof. Even if this condition is satisfied, if, having regard to the losses sustained in the previous years or to the smallness of the profits made, it would be unreasonable to distribute a dividend larger than the one declared, the Income-tax Officer will not pass the order that the undistributed portion of the assessable income shall be deemed to be distributed as dividends. It was therefore for the Income-tax Officer to ascertain, having regard to the commercial profits, the anticipated amount of tax which would have to be deducted to find out the net commercial profits, in the light of all the circumstances then present to its mind, and thereafter to relate the same to the amount of dividend declared. If, having regard to the net commercial profits so ascertained, it appeared to the Income-tax Officer that it would not be unreasonable to distribute sixty per cent of such income as dividend amongst the shareholders, an order under S. 23A of the Income-tax Act may properly be passed. In the present case, the Tribunal having proceeded to deduct only an amount of Rs. 19,325/-, which was the amount of tax payable on an income of Rs. 56,800/-, in our view, an error has been committed in confirming the order passed by the Income-tax Officer under S. 23A of the Act.

7. Mr. Palkhivala contends that even the commercial profits ascertained by the Tribunal were erroneously ascertained. According to him, the commercial profits of the assessee amounted to Rs. 36,367/- and no more, and the amount of Rs. 20,433/- under the head “bonus excess provision credited to the profit and loss account” was wrongly included in the commercial profits. This argument of Mr. Palkhivala we are unable to accept. In order to appreciate this argument, it may be necessary to state a few facts. The assessee had year after year been setting apart certain amounts towards liability likely to arise for payment of bonus to the labourers employed in its factory. Normally the assessee used to set apart every year an amount approximately equivalent to three months' salary payable to the employees. It appears, however, that in 1947-1948 the provision made on this account exceeded the amount actually paid as bonus by Rs. 218/5/6; in the year 1948-1949 it exceeded by Rs. 3,972/12/6 and in the year 1949-1950 the provision made on this account exceeded the actual liability by Rs. 16,241/12/3. At the commencement of the year 1950-1951 the assessee had an accumulated amount of Rs. 20,432/14/3 in the bonus provision account and it set apart an amount of Rs. 1,00,000/- towards the contingent liability for payment of bonus to its employees in that year. The employees had claimed an amount equivalent to four months' salary as bonus payable to them. The dispute was taken to the Industrial Court and ultimately by order, dated 28-2-1951, an award was made whereby the liability of the assessee to pay bonus to its employees for that year was restricted approximately to hall the amount set apart. But in assessing its commercial profits the assessee sought to deduct the entire-amount of Rs. 1,00,000/-. The Income-tax Appellate Tribunal held having regard to the claim made by the employees that the assessee did not act unreasonably in setting apart Rs. 1,00,000/- towards the contingent liability for bonus, but it was of the view that the assessee should have taken into consideration the accumulated amount of Rs. 20,432/- odd before setting aside a further amount to meet that contingent liability. The Tribunal, therefore, added the amount of Rs. 20,432/14/3 to the profits for the year under account and computed the commercial profits on that footing. In our view, the Tribunal was right in so doing. If there was an undisbursed residue of Rs. 20,432/14/3 in the bonus provision account, and the assessee was faced with a claim for bonus which was not defined but the extent whereof was estimated at Rs. 1,00,000/-, the assessee was bound to take into account the amount lying accumulated and to make a provision during the year under account only for the balance. Mr. Palkhivala contends that the amount of Rs. 20,432/14/3 did not represent the accumulated amounts of excess in the bonus provision account out of the sums set apart during the previous years, but that it represented amounts which were due and payable as bonus to the employees but which were for certain reasons not received by them. No such argument, however, appears to have been raised before the Tribunal, and we do not think we will be justified in allowing Mr. Palkhivala to raise this new plea for the first time before us.

8. Mr. Joshi for the Department contends in the first instance that the expression “profit made” occurring in S. 23A(1) of the Income-tax Act means the gross profits realised by the assessee without deducting the amount of tax payable by it. But evidently S. 23A is enacted with a view to prevent accumulation of large amounts of profits without distribution of adequate dividends; and dividends can only be distributed after deducting the amount of tax payable from the assessable income of the assessee. It is only after the tax payable by the assessee is deducted from the assessable income that there will be a net profit remaining with the assessee distributable as dividend amongst the shareholders. If the view contended for by Mr. Joshi were to be accepted, the assessee may have to pay dividend out of its reserve. We are, therefore, unable to accept the argument that the expression “profit made” occurring in S. 23A(1) is the gross commercial profit without deducting the amount of tax payable.

9. Mr. Joshi has then contended that the amount of tax deductible out of the commercial profits must be appropriate to its quantum. That argument also we are unable to accept. As we have already observed, the commercial profits bear no real relation to the assessable profits, and the tax is payable on the assessable profits and not on the commercial profits.

10. Mr. Joshi has finally contended that in any event the assessee may be entitled to deduct from the gross commercial profits only such amount as tax as he could, having regard to its transactions, have anticipated as likely to be imposed by the income-tax authorities and not the total amount of tax which may ultimately be assessed. That argument, in our judgment, has substance. If, with a view to provide for contingent liabilities, the assessee has appropriated a certain amount, evidently the tax which he must have anticipated as likely to be imposed on him will have to be computed after excluding from its gross profits the amount so set apart. The assessee cannot contend that in assessing the net commercial profits the whole of the amount so set apart for meeting contingent liabilities should be deducted whereas in assessing the tax which he must have reasonably expected as payable by him the total amount of tax assessed by the income-tax authorities should be deducted.

11. The Tribunal has held that the net commercial profits made by the assessee during the year under account amounted to Rs. 37,475/-. That, for reasons set out earlier, is erroneous. We are unable, on the materials before us, to ascertain the amount of tax which may have been reasonably anticipated by the assessee as likely to be assessed having regard to its transactions at the date on which the dividend was declared at the general meeting, viz., 25-7-1950. In that view of the case, we are unable to answer the question which has been framed by the Tribunal. We, therefore, remand the case to the Tribunal with a direction that the Tribunal do submit a supplementary statement of the case setting out the appropriate amount of income-tax which would be deductible out of the amount of Rs. 56,800/- and which the assessee may have reasonably anticipated as likely to be assessed after taking into consideration the profit made by it and the contingent liability for payment of bonus to the employees of its factory. The supplementary statement to be submitted before 31-12-1959.

LC/K.S.B

Case remanded for supplementary statement.