COMMISSIONER OF INCOME-TAX, WEST BENGAL CALCUTTA vs. GUNGADHAR BANERJEE AND CO. (P) LTD

CIVIL APPEAL No. 807/1963Supreme Court[1965] 3 S.C.R. 43922 March 1965Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI COMMISSIONER OF INCOME9 pages
AI SummaryDismissed

What were the facts?

The respondent company, Gungadhar Banerjee & Co. (P) Ltd., declared a dividend of 5.5% per share for the accounting year 1947-48, amounting to Rs. 44,000. The net profit for the year was Rs. 1,28,112.75, with a taxation reserve of Rs. 56,000, leaving Rs. 72,000. The Income-Tax Officer (ITO), with approval from the Inspecting Assistant Commissioner, invoked Section 23A of the Indian Income-Tax Act, 1922, deeming an additional Rs. 1,07,902 as distributed dividends. The ITO's reasoning was based on earlier years' profits and reserves, suggesting a larger dividend was not unreasonable. The Appellate Assistant Commissioner and the Income-Tax Appellate Tribunal affirmed this. The High Court, however, found the ITO's order unjustified due to the smallness of profits and answered the reference in favour of the assessee. The Revenue appealed this decision.

What did the Supreme Court hold?

The Supreme Court held that Section 23A of the Income-Tax Act is penal in nature, requiring strict compliance with its conditions by the Revenue. The burden of proof lies with the Revenue to demonstrate that these conditions were met. In this case, the Revenue failed to discharge this burden, and the facts indicated the ITO's order was unreasonable. The Court clarified that "smallness of profit" refers to actual accounting profits, distinct from assessable profits. The reasonableness of dividend distribution should be assessed from a businessman's perspective, considering various factors like past losses, present profits, and future needs, not solely on assessable income. The Court also noted that when tax has already been assessed, the actual tax, not an estimated tax, should be deducted to ascertain commercial profits. The balance sheet provides prima facie proof but is not conclusive. Given the net commercial profit was barely Rs. 4,000, it was unreasonable to deem an additional Rs. 64,000 as distributed dividends. Therefore, the High Court's order was correct.

What were the issues?

1. Whether the Revenue discharged its burden to prove that the conditions laid down in Section 23A of the Indian Income-Tax Act, 1922, were satisfied before the ITO passed the order deeming additional dividends. - Assessee's contention: The Revenue failed to discharge its burden, and the facts established the ITO's order as unreasonable. - Revenue's contention: Not recorded. 2. Whether the "smallness of profit" in Section 23A refers to actual accounting profits or assessable profits, and what circumstances are to be considered in judging the reasonableness of dividend distribution. - Assessee's contention: The "smallness of profit" refers to actual accounting profits in comparison with assessable profits, and reasonableness should be judged by business considerations including previous losses, present profits, availability of surplus money, and future requirements. The High Court's interpretation was correct. - Revenue's contention: The ITO can consider circumstances other than losses and smallness of profits, as indicated by the phrase "having regard to" in Section 23A. The High Court's conclusion that the order was not justified was incorrect.

Which sections of the Income-tax Act were involved?

Section 23A,Section 66(1)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME-TAX, WEST BENGAi., B c D E F G R CALCUTTA v. GUNGADHAR BANERJEE AND CO. (P) LTD.

March 22, 1965 IK. SUBBA RAo. J. C. SHAH AND S. M. SIKRI, JJ.J Indian Income-tax Act, 1922 (11 of 1922), s. 23A-Dividend-Dis- tribution-Burden of showing whether low-Circumstances to be con- sidered-"Smal!ness of profit"-Meaning of-"Accountino profits" and "assessable profits", distinction between.

As the dividend declared to be distributed by the respondent- company at its General" Body Meeting was below 60 per cent of the profits available for distribution, the Income-Tax Officer, with the previous approval of the Inspecting Assistant Commissioner, passed an order under s. 23-A of the Income-Tax Act directing that a certain higher amount shall be deemed to have been distributed as dividends as on the date of the annual general meeting"of the Company. He found that, having regard to the profits earned in the earlier years and the capital and taxation reserves, payment of larger dividend would not be unreasonable. This was affirmed, on assessee's appeals by the Ap- pellate Assistant Commissioner, and ihe Income-tax Appellate Tribu- nal. The Tribunal re

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 23A

All 45 judgments and leading authorities on Section 23A →

Recent GST High Court judgments

Search GST case law →