Mahapatra, J.:— A statement of the case was called for from the Income-tax Appellate Tribunal, Patna Bench, for consideration of the following question under section 66, clause (2), of the Indian Income-tax Act, at the instance of the assessee, a banking company;

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that any profit should be deemed to have been distributed as dividends amongst the shareholders for the assessment year 1954-55 under section 23A of the Indian Income-tax Act, and, if so, what was the amount which was in law so deemed to have been distributed.”

2. The previous year of the assessee in relation to the assessment year 1954-55 was the calendar year 1953, during which the assessee-company had a paid up capital of Rs. 20,00,000, divided into 2,00,000 shares of ten rupees each. Twenty-five per cent, of the shares were not allotted to and beneficially held by the public at the end of the previous year. The assessee-company was, therefore, held to be one in which the public were not substantially interested. The total assessable income for the previous year of the assessee had been determined at Rs. 2,07,150; and the total amount of tax payable by the company was Rs. 89,981. The difference between the above two figures came to Rs. 1,17,169. As no dividend was declared by the company, the Income-tax Officer initiated action under section 23A of the Indian Income-tax Act (to be referred hereafter as the Act). There was no loss to the company in the earlier years. Since the Income-tax Officer found that the accumulated profit of over Rs. 7,44,000 was with the company in addition to the profits earned during the accounting year, he made an order to the effect that Rs. 1,17,169 (the assessable income reduced by the tax liability) would be deemed to have been distributed as dividends among the shareholders as on the 3rd May, 1954. Against that, the assessee-company went in appeal before the Appellate Assistant Commissioner of Income-tax, Patna without any success. When the case came before the Income-tax Appellate Tribunal, Patna Bench, at the.instance of the assessee, there was difference of opinion between the two Members of the Tribunal and the matter was referred under section 5A, clause (7), of the Act, to another Member, the result being that the action of the Income-tax Officer under section 23A of the Act was upheld. Thereupon, the assessee asked for a reference under section 66, clause (1), to this court; but when the Tribunal refused to accede to his request, an application was made to this court under clause (2) of that section. A rule was issued calling upon the Income-tax Appellate Tribunal to state the case for consideration of the question, as already stated.

3. It appears that the Appellate Tribunal ultimately took the view that as the accumulated profits of all the three years (1951, 1952 and 1953) put together came to Rs. 88,566, the company had funds in their hands to declare dividends of more than four per cent. Since no dividend was declared at all for the year 1953, it was considered unreasonable and justified the application of the provisions of section 23A. The above figure of Rs. 88,566 was arrived at by taking the profit for the year 1953 to be Rs. 54,909. In computation of that amount only Rs. 65,234 was deducted as estimated tax liability from the accounting profit of Rs. 1,50,187, whereas the actual tax liability which had already been assessed before proceedings under section 23A was Rs. 89,981, the whole of which should have been deducted from the profit. Thus, what the Tribunal took to be the profit for the year 1953 was wrong and should have been Rs. 30,163. The total figure of the accumulated profits of the three years (1951, 1952 and 1953) mentioned in the judgment would come to Rs. 63,819. Learned counsel on both sides agree to this figure.

4. The first point to be considered is if the Appellate Tribunal was justified in taking into account the accumulated profits of the three years with a view to determining the reasonableness or otherwise of the non-distribution of any dividend for the year 1953. Section 23A speaks of two things to be taken into consideration: losses incurred by the company in earlier years and the smallness of the profit made. The language is clear. While the period preceding the previous year is mentioned with reference to the losses, no such reference is given with regard to the profit. The disinction maintained by the legislature in respect of the losses and the profit is significant and can only be taken to mean that the extent of profit to be considered in that connection is confined to the previous year and not to any period preceding that. The distribution of dividend, ordinarily in the commercial world, is related to the profit earned during the year. Whether the amount of such profit will justify a distribution of dividend is to be judged while keeping in view the losses that may have been sustained by the company during the past. It is the overall financial position of a company that the management and the shareholders are to keep in view before deciding upon the desirability or otherwise of any distribution of dividend. That is the task which has been cast under section 23A upon the Income-tax Officer. The Tribunal could not have brought back the accumulated profits of the two preceding years which had not been distributed either in part or in whole as dividends to the shareholders, to their consideration with a view to finding whether the profit was small enough to justify the non-distribution of any dividend in the year 1953. In my view, the error committed by the Tribunal in this respect vitiates their ultimate conclusion against the assessee. In the case of Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 I.T.R 290; [1961] 2 S.C.R 493. their Lordships of the Supreme Court clearly laid down that:

“The test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question.”

5. It is now undisputedly settled that the Income-tax Officer's consideration under section 23A must be in regard to the commercial profit (and not the assessable income) of the company for the particular previous year and the losses incurred during the years preceding the previous year, although he has also to take into account other relevant matters connected with the company. His consideration is not limited only to the previous losses and the current commercial profit. In the case of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. their Lordships of the Supreme Court observed:

“The Income-tax Officer, acting under this section (section 23A) 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.”

6. The commercial profit, as arrived at for the year 1953, after deducting the actual tax liability and twenty per cent, of the amount transferred to the reserve under Section 17 of the Banking Companies Act, comes to Rs. 30,163, which is about 1 per cent, of the paid up capital ot Rs. 20,00,000. For the year 1952, such profit was Rs. 21,334 and the Tribunal decided that that was too small a profit to justify any distribution of dividend. The same view should apply for the year 1953 also, the difference between the profits of the two years being only Rs. 9,000. There was, of course, no loss incurred by the company during the earlier years. Yet, in view of the smallness of the profit, the penal provision under section 23A should not have been applied against the assessee.

7. Learned counsel for the revenue urged that the payment to the reserve fund should not be deducted from the accounting profit in which case it will be increased by a little over Rs. 30,000 and the profit will come to three per cent, of the paid up capital. Actually, the company transferred Rs. 75,000 to the reserve fund during the previous year. Section 17 of the Banking Companies Act provides that the company shall have to transfer to the reserve fund not less than twenty per cent, of their profit before distribution of any dividend till the reserve fund equals to the paid up capital. The transfer of Rs. 75,000 to the reserve was in accordance with that provision. The Tribunal deducted only Rs. 33,035, which was twenty per cent, of the profit, as that was the minimum prescribed under Section 17 of the Banking Companies Act. It will not be open to the revenue to agitate against that at this stage. Besides, such transfer of a portion of the profit being the statutory requirement shall have to be allowed before the consideration of smallness or otherwise of the net profit available for distribution as dividends. The question whether the entire amount that was actually transferred under Section 17 of the Banking Companies Act should have been allowed need not be examined in the present case though the assessee pressed that, in the view that I have taken that even allowing only twenty per cent, of the profit was transferred to the reserve fund, the net profit left for distribution was too small. I should mention here that by an amendment to section 23A, which came into force for the previous year 1955, the entire amount actually transferred under Section 17 of the Banking Companies Act has to be allowed before making an order as to the amount that should be deemed to have been distributed as dividends in a particular year. If the whole of such amount is also to be deducted from the accounting profit before arriving at the net profit available for distribution as dividends, the company was left with nothing for the year 1953, the tax liability and the actual transfer to the reserve being in excess of the accounting profit.

8. Another contention raised on behalf of the revenue was that on the capital structure of the assessee-company, even if a small dividend of about 1 per cent, should have been declared, the amount of dividend receivable by some of the shareholders would have been a substantial amount. No doubt, one of the shareholders held about 75 per cent, of the shares; but, in my view, that is not a relevant matter for consideration under section 23A. What will be the total amount by way of dividend, if distributed, with any particular shareholder is a matter relevant to only the tax liability of the shareholder but not to the reasonableness or otherwise of non-distribution of the dividend. It is noteworthy that the legislature wanted the Income-tax Officer to consider the extent of profit, which means the profit as it stood before the distribution. The smallness or otherwise of that amount has nothing to do with the amount of dividend that could be available to any particular shareholder. It is true that the commercial profit as evidenced by audited balance-sheet (which is a prima facie evidence) may be disputed by the revenue to show that it has been manipulated at a low figure. The burden of proof in that respect would be on them (revenue). It may be open to show that the inflated reserve was created by the company with a view to reducing the profit or that there were unreal bad debts written off. Things of that nature may go against the appellant's smallness of the profit. In the instant case, no such insinuation was made against the assessee. No surplus money has been shown by the department to be available otherwise to the company. In that view, the net commercial profit that could have been distributed by way of dividend, as it appears from the balance-sheet, had to be accepted and that figure undoubtedly appears to be too small to justify any distribution of dividends.

9. For the assessee it was urged that the order passed under section 23A, deeming Rs. 1,17,169 to be the net dividend distributed, compels the company to fall back upon its capital to meet it. They cannot take any money ouf of the reserve created under the Banking Companies Act. Whether the dividend deemed as distributed can be otherwise available to the company was a very pertinent and important matter that was not taken into account by the Tribunal. The overall financial position of the assessee-company had to be considered before the action under section 23A could be confirmed. For the reasons given above, the answer to the question framed for our consideration will be in the negative and in favour of the assessee; in other words, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was not right in holding that any profit should be deemed to have been distributed as dividends amongst the shareholders for the assessment year 1954-55. The other part of the question as to what was the amount which was in law so deemed to have been distributed does not arise. The reference is accordingly disposed of The assessee will be entitled to the costs of Rs. 100 from the opposite party, the Commissioner of Income-tax, Bihar and Orissa, as costs of this reference.

S.N.P Singh, J.:— I agree.

10. Question answered in favour of the assessee.