# C. I. T. (CENTRAL) CALCUTTA v. ASIATIC TEXTILE LTD

- **Citation:** [1972] 1 S.C.R. 81
- **Court:** Supreme Court of India
- **Decided:** 1971-08-09
- **Case number:** Civil Appeals Nos. A 1687 and 1688 of 1968
- **Bench:** K. S. Hegde, A.N Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/c-i-t-central-calcutta-v-asiatic-textile-ltd-5470
- **Pages:** 7

## Headnote

Income-tax Act, 1922, s. 23A (!)-Direction of Company
deciding not to distribute profit owing to huge capital lossCapital loss a relevant consideration-Reasonableness of decision
has to be I ooked at from view point of prudent business man.
81
The assessee was a limited company doing business as selling agents
of a Textile Mill. During the previous years relevant for the assessment
years 1955-56 and 1956-57 the company had assessable profits but did not
declare dividend, because capital loss far in excess of profits was incurred
by it due to fall in value of its share-holdings. The Income-tax Officer
exercised his powers under s. 23A ( 1) and levied additional super-tax 011
the distributable surplus in the relevant years. The Appellate Assistant
Commissioner, the Tribunal and the High Court however, took the
opposite view. holding that in the circumstances it was not reasonable
to expect the company to declare dividend. In appeal to this Court by
the Revenue,
HELD : Whether in a particular year dividend should be declared
or not is a matter primarily for the Directors of a company. The Incometax Officer can step in under s. 23A(I) only if the Directors unjustifiably
refrain from declaring dividend. If the Directors of a company had .
reasonable grounds for not declaring any dividend, it is not open for the
Income-tax Officer to constitute himself as a super-Director. 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 business man. [85C-E]
Commissioner of Income-tax, West Bengal v. Gangadhar Bannerjee
& Co. (P) ltd. 57 I. T. R. 176, relied on.
In the present case in view of the capital loss of Rs. 12 lacs as found
by the Tribunal, any resasonable body of Directors of a company would
have done just what the Directors of the Assessee company did. The
Income'tax Officer took an erroneous view of s. 23A (I). [85H]
G
The fact that the company continued to hold the shares whose
value could possible go up again was irrelevant.
The Directors of a
company will be justified in taking things as they stand and. not befool
themselves in the wild hope that the value of the shares may come up
again.
[86C]
It would be incorrect to say that capital loss cannot be taken into
H
consideration in the application of s. 23A(l). [86E·F]
Commissioner of Income-tax v. Williamson Diamonds Ltd. 35 I.T.R.
290, applied.
82
SUPREME COURT REPORTS
[1972) l S.C.R
CtVIL APPELLATE
JURISDICTION: Civil Appeals Nos.
A
1687 and 1688 of 1968
Appeals from the judgment and order _f;}ated August
29, 30, 1967 of the Calcutta High Court iii Income-Tax
Reference No. 16 of 1964.
S. }tlfitra, R. N. Sachthey and B. D. Sharma, for the
appellant (in both th appeals).
M. C. Chagla, S. M. Jain, B. P. Maheshirari and
R. K Maheshwari for the respondent (in both the appeals).

## Text

-
A
B
c
D
E
F
C. I. T. (CENTRAL) CALCUTTA
v.
ASIATIC TEXTILE LTD.
August 9, 1971
(K. S. HEGDE AND A.N GROVER, JJ.]
Income-tax Act, 1922, s. 23A (!)-Direction of Company
deciding not to distribute profit owing to huge capital lossCapital loss a relevant consideration-Reasonableness of decision
has to be I ooked at from view point of prudent business man.
81
The assessee was a limited company doing business as selling agents
of a Textile Mill. During the previous years relevant for the assessment
years 1955-56 and 1956-57 the company had assessable profits but did not
declare dividend, because capital loss far in excess of profits was incurred
by it due to fall in value of its share-holdings. The Income-tax Officer
exercised his powers under s. 23A ( 1) and levied additional super-tax 011
the distributable surplus in the relevant years. The Appellate Assistant
Commissioner, the Tribunal and the High Court however, took the
opposite view. holding that in the circumstances it was not reasonable
to expect the company to declare dividend. In appeal to this Court by
the Revenue,
HELD : Whether in a particular year dividend should be declared
or not is a matter primarily for the Directors of a company. The Incometax Officer can step in under s. 23A(I) only if the Directors unjustifiably
refrain from declaring dividend. If the Directors of a company had .
reasonable grounds for not declaring any dividend, it is not open for the
Income-tax Officer to constitute himself as a super-Director. 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 business man. [85C-E]
Commissioner of Income-tax, West Bengal v. Gangadhar Bannerjee
& Co. (P) ltd. 57 I. T. R. 176, relied on.
In the present case in view of the capital loss of Rs. 12 lacs as found
by the Tribunal, any resasonable body of Directors of a company would
have done just what the Directors of the Assessee company did. The
Income'tax Officer took an erroneous view of s. 23A (I). [85H]
G
The fact that the company continued to hold the shares whose
value could possible go up again was irrelevant.
The Directors of a
company will be justified in taking things as they stand and. not befool
themselves in the wild hope that the value of the shares may come up
again.
[86C]
It would be incorrect to say that capital loss cannot be taken into
H
consideration in the application of s. 23A(l). [86E·F]
Commissioner of Income-tax v. Williamson Diamonds Ltd. 35 I.T.R.
290, applied.
82
SUPREME COURT REPORTS
[1972) l S.C.R
CtVIL APPELLATE
JURISDICTION: Civil Appeals Nos.
A
1687 and 1688 of 1968
Appeals from the judgment and order _f;}ated August
29, 30, 1967 of the Calcutta High Court iii Income-Tax
Reference No. 16 of 1964.
S. }tlfitra, R. N. Sachthey and B. D. Sharma, for the
appellant (in both th appeals).
M. C. Chagla, S. M. Jain, B. P. Maheshirari and
R. K Maheshwari for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Hegde, J.-These appeals by certificate arise froff
B
c
the decision of the Calcutta High Court in Income-ta-.;
Reference No. 16 of 1964 on its file.
Therein the Hi!!h
Court was considering a reference made by the Tnco1ne
Tax Appellate Tribunal "B' Bench Calcutta under section
D
66 (l) of the Indian Income Tax Act, 1922-to be hereinafter referred to
as "the Act'.
The question of law
which was referred for the opinion of the High Court
reads thus :
"'Whether on the facts and in the circumstances of the case, the Tribunal was justified in
holding that in view
of the capital loss of
Rs. 12,00,000/- suffered by the assessee on account
of depreciation in the value of the shares of Messrs.
Elphinstone :Mills Ltd. payment of any dividend
at all during any of the two relevant accounting
years would have been unreasonable '?"
The assessment years with which we are concerned
111 these appeals are 1955-56 and 1956-57, the corresponding accounting years being the years ending on
F
June 30, 1954 and June 30, 1955.
G
The assessee is ,a limited company doing business as
selling agents of a Textile Mill.
For the assessment year
1955-56 the assessee was assessed on a total income of
Rs. 1,61,089/- and taxes paid were Rs. 69,973/-
leaving
a distributable balance of Rs. 9l,1 l 6/-.
According to the
Profit & Loss Account. however, the company suffered a
H
net loss of Rs. 11,63,874/- and this was due to the loss of
Rs. 12,00,00ll/- on account of depreciation in the value of
I
A
C.I.T. v. ASIATIC TEXTILE
LTD. (Hegde, J.)
83
shares held by the company in Elphinstone Mill Ltd. of
Bombay. The
Income-tax
authorities disallowed an
amount of Rs. 11,88,000/- out of this loss on the ground
that it relates to the price paid for the shares purchased
for the sake of acquiring the managing agency of the
n Elphinstone Mills
Ltd. The Tribunal upheld the disallowance on the ground that the amount of Rs. 1 I ,88,COO/-
was a loss relating to shares held by the company in its
investment account. The company however, did not
declare any dividend for the year in question. The Jncometax Officer in exercise of his powers under Section 23 A(l)
c levied additional super-tax @ -/4/- per rupee on the distributable surplus of Rs. 91,116/-. Jn so doing he ignored
the loss in the value of the shares in Elphinstone Mills
Ltd.
For the assessment year 1956-57 the total income
assessed was Rs. 1,07,429/- and the taxes payable tl1ereon
D were Rs. 46,668/- leaving a distributable surplus of Rs.
60,761/-. In this ye~r also the company did not declare
any dividend because of the loss referred to earlier.
The
Income-tax Officer, however, again invoked the provisions
of Section 23A (!) and levied additional super-tax @
E
-/4/- per rupee on the surplus of Rs. 60,761/-.
In appeal, the Asstt. Commissioner took the view
that the loss incurred by the company was a capital loss.
But all the same as there was no commercial profits in the
relevant accounting years it was not reasonable to expect
the assessee company to declare any dividend in respect
F of those years in view of the capital loss incurred and he,
therefore, cancelled the orders of the Income-tax Officer
under section 23A (1 ).
Aggrieved by the Order of the Appellate Assistant
Commissioner, the department appealed to the Tribunal.
G The Tribunal agreed with the conclusions reached by the
Appellate
Assistant
Commissioner. It
held
that
under the circumstances the Directors were justified in
not declaring any dividend in respect of the profits that
had accrued in the accounting years.
H
At the instance of the Commissioner, the Tribunal
'
submitted to the High Court 'of Calcutta the question of
law set out by us earlier. The High Court answered that
question in favour of the assessee.
,.84
SUPREME ,COURT REPORTS
[1972] I S.C.R.
The Tribunal-the final fact finding authority has
A
come to the conclusion that the assessee had incurred a
capital loss of Rs. 12,00,000/- as
a result of the depreciation of the value of the shares of Elphinstone Mills
Ltd. The question is whether that was a relevant circumstance for not declaring any dividend. The further
·question is whether the Directors of the assessee-comB
pany acted as prudent businessmen in refraining from
declaring any dividend. Section 23A (!) of the Act
reads :
"Where the Ip.come-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-·
(a) the amount of income-tax and super-tax
payable by the. company in respect of its
total income, but excluding the am'ount of
any super-tax payable under this section;
(b) the amount of any other tax levied under
any law for the time being in force on the
company by the Government or by a local
authority in excess of the amount, if any,
which has been allowed in computing the
total income; and
(c) in th,e case ofa banking company, the amount actually transferred to a reserve fund
under section 17 of the Banking Companies Act, 1949;
the Income-tax
Officer shall,
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 or a larger dividend than that declared
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 m~inly in t,he
c
D
E
F
G
H
A
B
L.!.T. v. ASIATIC TEXTILE
LTD. (Hegde, J.)
85
dealing in or holding of investments, and at the rate
of thirty-seven per cent in the case of any other
company on the undistributed balance of the total
income of the previous year, that is to say, on the
total jncome as reduced by the amounts, if any,
referred to in clause (a), clause (b) or clause (c)
and the dividends actually distributed, if any."
Whether in a particular year dividend should be declared or not is a matter primarily for the Directors of a
company. The lncome-tax Officer can
step in
under
c Section 23A (I) only if the Directors unjustifiably refrain
from declaring dividend. If the Directors of a company
had reasonable grounds for not declaring any dividend, it
is not open for the focomectax Officer to constitute himself as a super-Director. As observed by this Court in
Commissioner of Income-tax, West Bengal, v. Gangadhar
o
Bannerjee and Co. (Pl't.) Ltd. 1 the lncome-tax Officer, in
considering whether the payment of a dividend or a larger
dividend than that declared by a company would be unreasonable within the meaning of Section 23A of the Act
does not assess any income to tax.
He only does what
the directors should havt: done putting himself in their
E
place.
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 reasonableness or unreasonableness
of the amount distributed as dividends is judged by
business considerations, such as the previous losses, the
F
present profits, the availability of surplus money and the
reasonable requirements of the future
and
similar
others. The Income-tax
Officer must take an overall
picture of the financial position of the business. He
should put himself in the position of a prudent businessman
or the director of a company and deal with the problem
G with a sympathetic and objective approach.
On the facts found by the Tribunal, there can
be
hardly any doubt that the assessee had suffered a capital
loss of Rs. 12,00,000/-.
In our opinion, in view of the
the said loss, any reasonable body of Directors of a comH
pany would have done just what the Directors of the
(I) 57 l.T.R .. 176.
86.
.SUPREME COURT REPORTS
[1972] I S.C.R
assessee company did. We think, that the Income-tax A
Officer took an erroneous view of the scope of Section
23A (1).
Mr. Mitra, learned counsel for the department contended that the assessee had not in fact incurred any loss
though the value of the shares had gone down in the market.
B
As the assessee was still in possession of those shares,
there was still a possibility of avoiding the anticipated loss.
Hence there was no occasion to take note of the depreciation in the value of the shares in the matter of declaration
J
of dividends. This is an unacceptable contention. The
Directors of a company will be justified in taking things as c
they stand and not befool themselves in the wild hope
that the valu.e of the shares may come up again. They are
expected
to act as hard headed businessmen. They
are not expected to gamble with the future of the concern.
The question is not whether the value of the shares may
D
not go up in future but whether the Directors were justified in not declaring dividends in view of the loss inc.urred.
The Income-tax Officer overlooked the fact the Directors
were naturally more interested ·in the stability of their
concern rather than in · increasing the tax payable to the
Government.
E
Before the High Court, it appears to have been urged--
Mr. Mitra rightly did not press that plea-that the loss
incurred being a capital loss the same cannot be taken into
consideration in the application of Section 23A (l ). This
very contention was examined and rejected by the Judicial F ·
Committee in Commissioner of -Income-tax v. Williamson
Diamonds Ltd.(1). In that case their Lordships were considering the scope of section 21 (1) "(Consolidation)
Ordinance, 1950 of Tanganyika." That provision corresponds very closely to Section 23A (1) of the Act. Dealing
with the scope of that provision, their Lordships observed:
G
"It does not follow from what has b~en said
that capital losses should not be taken into account
by the Commissioner. Two matters are mentioned
specifically in the words which give him a direction
the first is 'losses' (as interpreted above) and the
H
second is "smallness of profit." The Commissioner
(1) 35 l.T.R., 2!)(). __ _
' '
A
B
c
D
C.I.T. v. ASIATIC TEXTILES LTD. (Hegde, !.)
87
is directed to come to a decision upon the question
whether "the payment of a dividend or a larger
divdend than that declared" is unreasonable.
"The form of the word used no doubt lends itself to
the suggestion than 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. No answer which can be said to be
in any measure adequate, can be given to the question
"unreasonableness" considering these two matters only.
Their Lordships are of the opinion that the Statute by the
words used while making sure that "losses and smallness
of profit" are never lost sight of require all matters relevant to the question of unreasonableness to be considered
capital loss, if established is one of them." We respectfully agree with these observations.
For the reasons mentioned above, these appeals fail
and they are dismissed with costs. One hearing fee.
G.C.
Appeals disn:issed.
7-Ml245 Sup. CI/71