K. Venkataswami, C.J.
1. These two references are before us by virtue of an order passed by this court under Section 256(2) of the Income-tax Act, 1961 (hereinafter to be called 'the Act'), on July 28, 1973. The assessee is the same in both the cases. The questions of law referred to this court are also common and only the assessment years are different, namely, 1972-73 and 1974-75.
2. The questions that have been referred to this court, as directed by an order of this court, read as follows :
'(1) Whether the Tribunal was correct in holding that for the purpose of computation of additional income-tax under Section 104(1) of the Income-tax Act, 1961, the distributable surplus should be calculated with reference to the profit as per profit and loss account
(2) Whether the Tribunal was correct in holding that the penalties levied under Section 271(1)(a), 273(c) and interest under Section 139 should be deducted from the distributable surplus for the purpose of calculating additional income-tax leviable under Section 104 of the Income-tax Act, 1961 ?'
3. The brief facts leading to the above references may now be noticed. The respondent-assessee is a private limited company. The Income-tax Officer after satisfying himself that for the assessment years in question the provisions of Section 104(1) of the Act are attracted, after completing the formalities required under that section, imposed additional tax for the said two years. The assessee, aggrieved by the imposition of additional tax under Section 104 of the Act, preferred appeals to the Commissioner of Income-tax (Appeals). The appellate authority upheld the decision of the Income-tax Officer that for the assessment years in question, additional income-tax under Section 104 of the Act was leviable. However, it held that in determining the distributable income, the amount of interest and penalties levied should be deducted and on the balance, additional income-tax should be calculated. Both the assessee as well as the Revenue felt aggrieved by the decision of the appellate authority as mentioned above. The assessee, therefore, preferred appeals before the Income-tax Appellate Tribunal challenging the decision of the appellate authority on the grounds that the provisions of Section 104 of the Act were invoked without considering the commercial profit and that the computation of the distributable income was not correct inasmuch as the validity of surplus fund, smallness of income, current requirement of the business and other relevant matters had not been considered, before confirming the orders of the Income-tax Officer that the assessee was liable to pay additional income-tax under Section 104 of the Act for the assessment years in question. The Revenue preferred likewise appeals before the Tribunal challenging the decision of the appellate authority that in determining the distributable income the amount of interest and penalties levied and collected should be deducted and on the balance additional income-tax should be calculated.
4. The Tribunal by a common order dated May 11, 1981, dismissed the appeals, namely, Income-tax Appeals Nos. 89 and 90/(Pat) of 1980 preferred
by the Revenue and partly allowed the appeals, namely, Income-tax Appeals Nos. 65 and 66/(Pat) of 1980 preferred by the assessee. In other words, the Tribunal, by the said common order, held that the assessee was liable to additional income-tax under Section 104(1) of the Act and further held that the amount of penalties will have to be deducted from the profit as per profit and loss account for the purpose of arriving at the distributable surplus.
5. Aggrieved by the orders of the Tribunal, the Revenue moved the Tribunal initially under Section 256(1) of the Act for referring the aforesaid two questions to this court. As the Tribunal declined to refer the matter, the Revenue further moved this court under Section 256(2) of the Act and got the questions referred to this court as mentioned above.
6. Regarding the first question referred to above, it is to be stated that it requires a slight modification in framing the question and, accordingly, we reframe the question by removing the word 'computation' and replacing the same by the word 'imposition'.
'(1) Whether the Tribunal was correct in holding that for the purpose of imposition of additional income-tax under Section 104(1) of the Income-tax Act, 1961, the distributable surplus should be calculated with reference to the profit as per profit and loss account.'
7. Learned counsel appearing for the Revenue has referred to a decision of the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co, (Private) Ltd. : [1965]57ITR176(SC) , which has been referred to and approved in CIT v. Asiatic Textiles Ltd. : [1971]82ITR816(SC) and further followed by the Calcutta High Court and the Allahabad High Court in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) and CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. : [1984]145ITR588(All) , respectively. Learned counsel appearing for the Revenue was not in a position to persuade us to answer the question in favour of the Revenue in view of the above decisions.
8. In the case of CIT v. Gangadhar Banerjee and Co, (Pvt.) Ltd. : [1965]57ITR176(SC) , the Supreme Court, while considering the scope of old Section 23A of the Indian Income-tax Act, 1922, observed as follows (headnote) :
'The Income-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 Indian Income-tax Act, 1922, does not assess any income to tax. He only does what the directors should have done putting himself in their 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 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 with a sympathetic and objective approach.'
9. The above principle was followed in several other cases. In view of the consistent view taken on the scope of Section 23A of the old Act corresponding to Section 104 of the new Act, we do not think that the view taken by the Tribunal in the light of the above decision can be successfully challenged.
10. Now, coming to the second question, it requires some more consideration. The Tribunal has followed and applied the decision of the Calcutta High Court in the case of Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) and has held as follows :
'We have heard both sides on the matter. We find from the case of Kkaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) , that their Lordships of the Calcutta High Court have held that from the commercial or prudent business point of view the liability for penalties under Sections 271(i)(a), 271(1)(C) and 221(1) of the said Act should be taken into consideration in determining the reasonableness of the distribution of dividend, which are, therefore, deductible in arriving at the distributable surplus, for the purpose of the imposition of additional supertax. In view of this ruling, we have to hold that the Commissioner of Income-tax (Appeals) was justified in directing the Income-tax Officer to take into account the penalties levied and collected for the relevant years. Under such circumstances, the assessee was justified in deducting the amounts of Rs. 24,593 and Rs. 23,963 out of the profits as per profit and loss account under Sections 271(1)(a) and 273(c) of the said Act and so the amounts have to be allowed as a deduction for calculating the distributable surplus. However, the Income-tax Officer will verify whether the amounts of Rs. 24,593 and Rs. 23,963 as penalties under Sections 271(1)(a) and 273(c) of the said Act as claimed by the assessee are correct and the penalty amounts will be deducted from the profits as shown by the assessee as per profit and loss account.'
11. Learned counsel appearing for the Revenue challenges the above conclusion of the Tribunal by drawing our attention to a decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT : [1961]42ITR57(SC) and another decision of the Calcutta High Court in the case of Hasimara Industries Ltd. v. CIT : [1993]200ITR659(Cal) . According to learned counsel appearing for the Revenue, the Tribunal has not properly understood the ratio laid down by the Calcutta High Court in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) . and has purported to apply that ratio to the facts of this case. He further invited our attention to the said decision of the Calcutta High Court in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) and submitted that the learned judges have expressed contrary view on this question, which has not been noticed by the Tribunal. In other words, the contention of learned counsel appearing for the Revenue was that in determining whether there was distributable surplus for the declaration of the dividends, it was necessary to consider the penalty and interest in view of the aforementioned decision reported in CIT v. Gangadhar Banerjee and Co. P. Ltd. : [1965]57ITR176(SC) . But in computing the additional tax, the penalties and interest are not to be deducted in view of the decision of the Supreme Court in the case reposed in Bhor Industries Ltd. v. CIT : [1961]42ITR57(SC) .
12. Learned counsel appearing for the assessee, however, submitted that the Tribunal has taken a correct view by correctly understanding the ratio laid down by the Calcutta High Court in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) and the contention of learned counsel for the Revenue is not correct. He also invited our attention to another decision of the Allahabad High Court in the case of CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. : [1984]145ITR588(All) which follows the ratio laid down in the case reported in CIT v. Gangadhar Banerjee and Co. P. Ltd. : [1965]57ITR176(SC) .
13. We have considered the rival submissions of learned counsel for the parties. We are of the view that learned counsel for the Revenue is well-founded in his submissions. In Bhor Industries Ltd. v. CIT : [1961]42ITR57(SC) , the Supreme Court has answered the following question in favour of the Revenue (at page 62) :
'Whether in making an order under Section 23A in respect of the profits and gains of the year 1946-47 the assessable income of that previous year is to be reduced not only by the amount of income-tax and super-tax payable by the company in respect thereof but also by the amount of interest charged to it in accordance with the provisions of Section 18A?'
14. While answering the above question, the Supreme Court has observed as follows (at page 66) :
'The words of the sub-section are clear to show that interest as interest is added to the tax as determined. There is nothing to show that it is to be treated as tax, and it thus retains its character of interest but is recoverable along with the tax. Indeed, Section 29 of the Income-tax Act makes a distinction between tax, penalty and interest. Since Section 23A speaks of deduction only of income-tax and super-tax, no deduction could be made in respect of this interest. Question No. 2 was thus correctly answered by the High Court.'
15. Further in the case reported in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) , which has been wrongly understood by the Tribunal, the learned judges of the Calcutta High Court, while declining to answer an identical question, have observed as follows (at page 715) :
'In view of the answer that we have given to question No. 1, question No. 3 must also be answered in the negative and in favour of the assessee. In the view we have taken, it is not necessary for us to consider question No. 4. Had it been independently, however, necessary to consider this, in view of the specific exclusion contemplated by Clauses (a), (b) and (c) of Section 23A(1) of the Act, it would have been difficult to accept the contention that the penalty was a tax which was to be deducted in making the mathematical calculation of available surplus but, in view of the fact that we have taken into consideration, in considering the distributable surplus for dividend, from the business viewpoint, this question need not be answered.'
16. From the above extracted portion, it is obvious that the Tribunal was not correct in following the decision reported in Khaitan Corporation (P.) Ltd. v. CIT : [1981]128ITR708(Cal) for arriving at the conclusion taken by it. Likewise, the decision relied upon by learned counsel for the assessee in the case reported in CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. : [1984]145ITR588(All) also is not really supporting the assessee. On the other hand, it supports the Revenue. In CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. : [1984]145ITR588(All) , the learned judges, while distinguishing the decision of the Supreme Court in Bhor Industries Ltd. v. CIT : [1961]42ITR57(SC) , observed as follows (at page 596) :
'The observation made by the Supreme Court merely brings out that for the purposes of the first part of Section 23A and for determining the extent of the amount on which the company would be required to
pay super-tax, in case other conditions laid down in the section are fulfilled, the amount paid by the company as penal interest under Section 18A is not to be taken into account. These observations have no bearing for the purpose of considering the question as to whether, as contemplated by the second part of the section, in view of the smallness of the profit, the payment of a dividend or a larger dividend than that declared by the company would be unreasonable. In Bhor Industries' case : [1961]42ITR57(SC) , the Supreme Court nowhere observed that while determining the smallness of profits under the second part of the section, also, the amount of interest part under Section 18A of the Indian Income-tax Act cannot be accounted for. The question with regard to the deductibility of the amount of penal interest under Section 18A of the Act has to be determined on the principles enunciated by the Supreme Court in the case of CIT v. Gangadhar Banerjee and Co. (P.) Ltd. : [1965]57ITR176(SC) . Applying the principles enunciated in that case, we are clearly of opinion that the Income-tax Appellate Tribunal was quite justified in holding that the amount of interest under Section 18A paid by the company in respect of the relevant year has to be taken into consideration while determining the smallness of the profit contemplated by the second part of Section 23A(1) of the Act.'
17. A reading of the above extracts will show that the decision in the case reported in CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. : [1984]145ITR588(All) will be useful for the assessee to support the view of the Tribunal on the first question referred to us and not on the second question referred to us.
18. From the discussions which we have made above, it will be clear that for the purpose of invoking Section 104 of the Act, may be, it is permissible to deduct penalty and interest paid and it is not permissible to deduct interest and penalty for the purpose of determining the extent of the amount on which the company will be required to pay additional income-tax.
19. As the second question referred to us relates to determination of the amount on which the additional income-tax is payable, the assessee is not entitled to deduct interest and penalty paid under the Act.
20. In the result, I answer the first question, as reframed, in the affirmative and in favour of the assessee and the second question in the negative in favour of the Revenue. In the circumstances of the case, there will be no order as to costs.
B.P. Singh, J.
21. I agree.