LexCOMMISSIONER OF INCOME-TAX, BOMBAY CITY I, BOMBAY versus JUBILEE MILLS LTD. BOMBAY
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A COMMISSIONER OF INCOME-TAX, BOMBAY CITY I, BOMBAY B c D E v. JUBILEE MILLS LTD. BOMBAY December 5, 1967 [J. C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.J Income Tax Act, 1922, s. 23-A-Company reconstructing capital to write off· accumulated losses and reducing capital-Whether losses prior to reconstruction relevant for determining reasonableness of company not declaring dividend in subsequent year as prescribed by s. 23-A-S. 66(5) -Procedure to be followed by Tribunal after High Court deciding ques- tion against the view taken by Tribunal. The respondent company had suffered large losses in the years prior to 1930 aIJd in that year it reconstructed its capital by adjusting a debit balance of Rs. 12,75,000 in the profit and loss account against the paid up capital and reducing the face value of its shares. For the accounting year relative to the assessment year 1948-49, the respondent Company declared a dividend amounting only to Rs. 24,750 although in terms of s. 23-A of the Income-tax Act, 1922, it was prima facie liable to declare a much largeT dividend. The Income-tax Officer therefore held that the company should be deemed to have declared a dividend of Rs. 3,98,798. The respondent's appeals against this order to the Appellate Assistant Commissioner and the Appellate Tribunal were dismissed. The Tribunal rejected the respondent's contention that in view of th'e past losses suffered by the cempany, it was not reasonable to expect it to dectaie a larger dividend. It held that after the reconstruction of its capital the company emerged in a new cloak of reduced capital and for the purposes of deter• mining the applicability of s. 23-A the reconstructed capital alone had tQ be taken into account and not the original capital, a great portion of which had been wiped out by debiting losses. The High Court, upon a reference, held that thi: loss of Rs. 12,75,000 incurred by the company prior to its reconstruction in 1930 could be taken into consideration for the purposes of the applicability of s. 23-A. F On appeal to this Court, HELD : (i) The view taken by the Appellate Tribunal was erroneous in law and the High Court had rightly answered the question referred to it in favour of the respondP.nt-company. Th<Te is nothing in the language or context of s. 23-A(l) of the Act to suggest that the expre~:;ion "Josses incurred in the earlier years" should be construed so as to exclude losses incurred prior to the reconstruction G , "and to include only unadjusted or carried forward losses still outstanding in the books of the company, The section requires the Income-tax Officer to take into consideration "the losses incurred by the company in the ear- lier years'' or the "sma1Jness of profits made" It is well-established that the profits which are to be considered under s .. 23-A (I) are the commercial or the accounting profits and not the assessable income or the assessable profits of the company, because it is the commercial or the actual account- H ing profits which arc to form the source from which the diVidend is to be distributed and not the assessable income or assessable profits which may have no relation to the commercia1 or accounting profits and which arc not the actual source out of which the dividend could be paid. [544 G-H: 545 A-CJ 540 SUPREME COURT RBPOJ.TS [1968] 2 S.C.R. C.l.T. West Bengal v. Gangadliar Ranerju, ~1 J.T.R. 176, referred to. A If a c.omp~ny v.·~ich has got over its losses for ~ome year.. by adjusting them against lls capnal anJ rc(fucing its capi1al males a profit in the 11ub- scq~1t::nt y~ar it may the0rctic:11ly be in a P<'Sition to di;\tribute the whole of .11s prollls 'or that ycJ.r but it cannot he said to have ac:ed unreasonably !f it t..:hosc not to do sn and n:taincd a portion of the profits for the pUr- posc of builJin~ up a capitJI reserve wh!ch in cour~e or time \\'ould enable :he company to regain ib origin;il strength of capital. It may he- th.at even 8 ~1ftcr 1:ak.ing iat;.) co;isideration IOS'>~ prior to a reconstructi:l:J it i~ µossible to come to the cono:Ju..,ion 1hat t}ie companv y,.·as not justified in not dcclar· iog a larger di\':dcnd than that actually de..:lared. Hut in the preiirot case the Tribun;,il !:at! rni'ldl;ccted itsc!f in law in holdint! that lo\!c~ incurred prior h .. the recon~tru:;tion ;i.rc irrelevant for the purPosc of applic.11tion of s. 23-A in suhsequent yea". [545 E-G; 546
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