- Bookmark
- Share
- CaseIQ
Indra Singh & Sons Ltd. v. Commissioner Of Income-Tax, West Bengal
Factual and Procedural Background
The assessee, Indra Singh & Sons Ltd., a private limited company, was assessed for the year 1948–49. The company's profit and loss account for the relevant accounting year showed a net profit of Rs. 8,32,487. That accounting profit included business income (assessable under section 10), interest on securities (section 8), income from property (section 9) and dividend income (section 12).
The Income-tax Officer determined the company's assessable income at Rs. 14,58,954 (a breakdown is given in the statement of the case: Rs. 4,65,141 under section 10, Rs. 12,647 under section 8, Rs. 21,994 under section 9 and Rs. 9,59,172 under section 12). The company had not declared any dividend. The Income-tax Officer applied section 23A(1) and made an order deeming the undistributed portion of the assessable income, reduced by tax payable, to have been distributed as dividend. The formal order declared an assessable income figure of Rs. 14,54,727 reduced by taxes of Rs. 6,36,443 as deemed distributed; the opinion notes that the discrepancy between the two assessable-income figures remains unexplained.
The company contended before the Income-tax Officer that the phrase “smallness of the profit made” in section 23A(1) referred only to profit derived from business (assessable under section 10), and not to the company's entire profits from all sources. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal rejected that contention, holding that “profit” in the phrase meant the company's whole profit. The assessee sought a reference to this Court on the question stated below.
Legal Issues Presented
- Whether the expression “smallness of the profit made” occurring in section 23A(1) means only trading or business profit assessable under section 10 of the Income-tax Act, or whether it also includes income from interest on securities assessable under section 8, income from property assessable under section 9, and income from dividend assessable under section 12.
Arguments of the Parties
Assessee's Arguments (Mr. Mitra)
- The section uses three different expressions: “profits and gains”, “assessable income” and “profit”. This variation in language is significant. The word “profit” in the phrase “smallness of the profit made” should be read as referring to business or trading profit under section 10, not to total income from all sources.
- The additional use of the word “made” reinforces that the Legislature intended to refer to profit actually derived from trading/business activity (i.e., the profit "made" by the business).
- If “profit” were limited to business profit, then in this case the business profit would be small enough to justify the company's not declaring a dividend.
Revenue / Income-tax Officer and Tribunal Position
- The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal held that the word “profit” in the expression “smallness of the profit made” is not limited to profits derived from business but covers the entire amount of the profit made by the company (i.e., profits from all sources).
- The Tribunal relied upon this Court's decision in Kilburn Properties Limited v. Commissioner of Income-Tax, Bengal as supporting the view that section 23A(1) applies even if a company's whole income is from property (section 9).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kilburn Properties Limited v. Commissioner Of Income-Tax, Bengal [1949] 17 I.T.R. 134 | Held that section 23A(1) would apply to a company even if the whole of its income was derived from property assessable under section 9 (i.e., a non-trading/property-owning company). | The Tribunal relied on this decision to support the view that “profit” could not be limited to business profit. The Court observed that Kilburn Properties did not directly decide the precise meaning of the word “profit” in the phrase “smallness of the profit made,” and therefore it was not decisive on the question before the Court, though it created a difficulty for the assessee's argument. |
| Ezra Proprietary Estates, Ltd. v. Commissioner Of Income-Tax, West Bengal | The decision addressed whether an order under section 23A(1) was supported by evidence where the company had in fact distributed the whole of its profits; the expression “smallness of the profit made” was not construed in that case. | The Court held that Ezra was of no assistance on the substantive question before it because that case turned on the factual point that the company had distributed its entire profits, so there was no evidence to support an order that profits were unreasonably withheld. The present Court therefore did not treat Ezra as decisive on the meaning of “smallness of the profit made.” |
Court's Reasoning and Analysis
The Court began by noting the purpose of section 23A(1): to check the "evil" of unreasonable withholding of profits from distribution as dividends when money for distribution is available. The Court emphasized that the phrase “smallness of the profit made” must be read in the statutory context: the Income-tax Officer must determine whether a company, having sufficient profits available for distribution, had nonetheless distributed less than sixty per cent of its assessable income (as reduced by tax). If less than sixty per cent was distributed, the officer must then consider whether that omission was caused by losses in earlier years or by the smallness of the profit made.
The Court made several key analytical points:
- Only accountable (distributable) profits are relevant when considering whether a company's failure to distribute dividends was reasonable; notional or artificial items of income (items that produce assessable income but do not represent distributable cash) cannot be treated as available for distribution.
- Dividends are generally declared out of profits, and in determining the fund available for distribution the relevant consideration is the whole fund available for distribution. That fund comprises profits derived from all sources, not merely business/trading profits.
- Given that all profits derived from whatever source contribute to the distributable fund, the Income-tax Officer, when judging whether the company's distribution was reasonable, must take into account the whole of the profits distributable as dividend rather than profits from a particular source alone.
- The Court reviewed the earlier authorities (Kilburn Properties and Ezra) and concluded that neither decided the precise issue of the meaning of “smallness of the profit made”; Kilburn did not determine the precise meaning and Ezra turned on a factual point (that the company had distributed all its profits) and therefore did not assist on the linguistic construction sought by the assessee.
After applying these principles to the wording and scheme of section 23A(1), the Court concluded that the phrase “smallness of the profit made” is not limited to business profit under section 10 but comprises the whole of the company's profits distributable as dividend.
Holding and Implications
Holding: The Court answered the reference by holding that the expression “smallness of the profit made” in section 23A(1) is not limited to trading or business profit assessable under section 10, but includes income from interest on securities (section 8), income from property (section 9) and income from dividends (section 12), insofar as those amounts form part of the company's distributable profits.
Consequences and immediate effects:
- The Commissioner of Income-tax, West Bengal was awarded the costs of the reference (the Commissioner will have costs).
- For the parties in this matter, the effect is that the Income-tax Officer was entitled to consider the company's entire distributable profits from all sources when assessing whether the omission to declare dividends was caused by the smallness of the profit made; accordingly, section 23A(1) may be applied on that basis.
- The opinion does not discuss broader policy implications beyond this statutory construction; the Court framed and decided the question narrowly as referred and did not purport to announce wider principles beyond the construction of the phrase in section 23A(1) and the limitation that only accountable/distributable profits (not notional items) are relevant to the enquiry.
The Judgment of the Court was delivered by
Chakravartti, C.J:— The short point involved in this reference has been shortly put and I think I can dispose of it by a short judgment.
2. The assessee, Indra Singh & Sons Ltd., is a private limited company and the year of assessment with which we are concerned is 1948–49. The company's profit and loss account for the relative accounting year showed a net profit of Rs. 8,32,487. All that profit was, however, not profits and gains of business. It included undoubtedly income from business assessable under section 10, but it also included income from interest on securities assessable under section 8, income from property assessable under section 9 and income from dividends assessable under section 12.
3. The Income-tax Officer determined the assessable income of the company at Rs. 14,58,954. That amount was made up of Rs. 4,65,141 assessed under section 10 as business income, Rs. 12,647 assessed under section 8 as interest on securities, Rs. 21,994 assessed under section 9 as income from property and Rs. 9,59,172 assessed under section 12 as dividend income. The company, however, did not make any declaration of dividend. The Income-tax Officer thought that this was a case where section 23A(1) applied and since it could not be said that the omission to declare a dividend had been caused either by losses incurred by the company in earlier years or by the smallness of the profit made, the undistributed portion of the assessable income, as computed for income-tax purposes and reduced by the amount of income-tax and super tax payable should be deemed to have been distributed as dividend among the shareholders. The actual order made by the Income-tax Officer was that the assessable income of Rs. 14,54,727 reduced by Rs. 6,36,443 the same being the taxes payable in respect thereof, should be deemed to have been distributed as dividend at the date of the relevant general meeting. The discrepancy between the figure of Rs. 14,58,954 given in the statement of the case as the assessable income determined by the Income-tax Officer and the figure of Rs. 14,54,727 mentioned as the assessable income in the order under section 23A remains unexplained.
4. The contention raised before the Income-tax Officer was that no order under section 23A(1) ought to be made, because the profit, contemplated by the expression “smallness of the profit made” in section 23A(1) was only the profit derived from business and assessable under section 10 of the Act and not the entire profits of the company from whatever source derived. The next branch of the argument was that if only the profits derived from business and assessed under section 10 were to be recorded, the profits in this case were really small enough to justify the action of the company in not declaring a dividend. The Income-tax Officer and after him the Appellate Assistant Commissioner and finally the Tribunal all held that the word “profit” as occurring in the expression “smallness of the profit made” in section 23A(1) was not limited to profit derived from business, but covered the entire amount of the profit made by the company. The assessee not being satisfied with that decision asked for a reference to this court and the question in controversy has been referred in the following terms:
“Whether the expression ‘smallness of the profit made’ occurring in section 23A(1) means only trading or business profit assessable under section 10 of the Income-tax Act or it also includes income from interest on securities assessable under section 8, income from property assessable under section 9, and income from dividend assessable under section 12.”
5. The Tribunal in their appellate order answered the question against the assessee by relying upon the decision of this court in the case of Kilburn Properties Limited v. Commissioner Of Income-Tax, Bengal [1949] 17 I.T.R 134.. They did not overlook the fact that the true meaning of the word “profit” did not fall to be considered in the case relied on but they held that since the decision was that section 23A(1) would apply to a company even if the whole of its income was derived from property assessable under section 9, the word “profit” in the expression “smallness of the profit made” could not exclude such income or indeed could not be said to exclude all income other than income from business. I do not think that the case referred to by the Tribunal does really answer the question raised in the case. It certainly creates a difficulty in the way of the assessee, because if section 23A(1) applies to all companies and if there be a company which is either a property-owning company or an investment company and thus a non-trading company, so that it has no income derived from business at all, it would be impossible to apply the section and consider whether the profit made was small or large, if the word “profit” did not cover any profit other than profit from business. Even so, however, it seems to me that the question raised by the present case did not arise directly for decision and what was held in the case cannot be said to be decisive on the question. Nor, it seems to me, is the case of Ezra Proprietary Estates, Ltd. v. Commissioner Of Income-Tax, West Bengal*, cited before us, of any assistance, because the expression “smallness of the profit made” did not fall to be construed even in that case. It would appear that practically the whole of the income of the assessee company in that case was income from property assessable under section 9 and only a negligible amount was derived as interest on deposits. In each of the two assessment years in question the whole of the profits had been distributed by the company as dividend but the Income-tax Officer had yet made an order under section 23A(1). In those circumstances, the only question which really arose for decision and the only question which the court really decided was whether the case could at all be taken as a case where an unreasonable proportion of the profits had been withheld from distribution as dividend or, to put it in another way, whether there was any evidence in support of the Income-tax Officer's finding that smallness of the profit made could not be said to be a reason for the company not distributing as dividend at least sixty per cent. of its assessable income. The court naturally held that since the company had, in fact, distributed the entire amount of the profits of each of the two years, it had no other money available for distribution and, therefore, there could be no possible reason for saying that the smallness of the profit made had not prevented the company from declaring a larger dividend or distributing a larger amount. The whole of the decision rests on that single point and it appears to me that no assistance can be derived from it so far as the question before us is concerned.
6. I may pause here to point out that there can be no doubt that whatever else the word “profit” in the expression “smallness of the profit made” may mean and whatever may be the sources of that profit, it is only the accountable profits of the company which are contemplated and not the assessable income composed partly of the accounting profits and partly of notional income, coming in either as disallowed items of expenditure or as income computed on some artificial basis. The evil which the section aims at checking is unreasonable withholding of profits from distribution as dividend in spite of money for distribution being available. Obviously, notional income cannot be distributed and, therefore, in judging the reasonableness or otherwise of a company's action in distributing dividend at the rate at which it actually made the distribution or in making no distribution at all, one must pay regard only to the money that was actually at the disposal of the company and not money of which it might be deemed to be possessed. That obviously was the reason why it was held in the second of the cases cited before us that the order of the Income-tax Officer was supported by no evidence at all.
7. Turning now to the question before us it will be convenient to read at this stage the section where the word calling for construction occurs. The section is section 23A(1) of the Act as it stood in 1948–49 and it reads as follows:
“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 laid 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 super-tax 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 with the previous approval of the Inspecting Assistant Commissioner 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, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income.”
8. Mr. Mitra who appears for the assessee pointed out that the section used three expressions, namely, “profits and gains”, “assessable income” and “profit”. He argued that the use of the three different expressions was not without significance and that the use of the word “profit” in the expression “smallness of the profit made” pointed clearly to section 10 of the Act and that that implication of the section was emphasised further by the use of the word “made”. According to him, if the Legislature had in contemplation the whole income of the company, from whatever source derived, there was no reason why it should have used the expression “profit” in speaking of the smallness of the profit made and not repeated the larger expression “profits and gains” which had been used in the earlier part of the section.
9. I do not think that the argument of Mr. Mitra can be accepted. To my mind, the meaning of the section is perfectly plain. What the section requires the Income-tax Officer to consider is whether; a company having at its disposal sufficient profits which could in law be distributed as dividend, had yet distributed less than sixty per cent. of its assessable income. If he finds that less than sixty per cent. of the assessable income was distributed, he does not become entitled to make an order straightaway under section 23A(1). He has to consider whether the failure or omission to distribute as dividend at least sixty per cent. of the assessable income was caused by the “smallness of the profit made”. I leave out the other alternative, losses incurred in earlier years, which is not relevant in the present case. At that point of time, what he has to pay regard to is the profit which was available to the company for distribution as dividend or to put it in other words, the size of the distributable fund which the company had in its hands. It is undoubtedly true that a company can distribute dividend only out of its profits, although capital profits also may, in certain cases, be distributable as dividend. But, broadly speaking, dividends are declared out of what we may call the revenue profits. But if dividend is distributable only out of profits, it is equally the law that all profits derived from whatever source shall contribute to the fund out of which the dividend may be declared or to put in other and simpler words the profits which are distributable as dividend are profits derived from all sources. If that be so, and if the Income-tax Officer has to judge under section 23A(1) whether in view of the funds at its disposal the company concerned had acted reasonably in not distributing a larger dividend, he has obviously to consider the whole fund available for distribution and not merely a portion of that fund contributed by a particular source. In my view, having regard to the scheme of section 23A(1) and the relation which the size of the profit at the disposal of the company bears to the question which the Income-tax Officer is to decide, there can be no doubt that the profit contemplated is not limited to profit from business or profit from any particular source at all, but it comprises the whole of the profits of the company distributable as dividend. I can see no answer to this construction of the phrase and Mr. Mitra at the end very fairly conceded that he was unable to find any reason for disagreeing.
10. For the reasons given above, the answer to the first part of the question referred must be in the negative and the second part in the affirmative. The Commissioner of Income-tax, West Bengal, will have the costs of this reference.
Guha, J.:— I agree.
11. Reference answered accordingly.
Alert