Tulzapurkar, J.
1. The question of law that has been referred to us by the Tribunal under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee, for our determination runs as follows :
'Whether, on the facts and in the circumstances of the case, the provisions of section 23A(1) were applicable to the company for the assessment year 1954-55.'
2. The assessee is a private limited company doing business in fertilizers. The assessment year in question is 1954-55, the corresponding previous year was one which ended on March 31, 1954. The accounts of the company are maintained according to mercantile system of accounting. For the accounting year ended on March 31, 1954, its profit and loss account showed a profit of Rs. 8,500. There was a loss of the earlier year of the Rs. 8,212 so that the balance to the credit of the profit and loss account in the balance-sheet as on March 31, 1954, was Rs. 283. The annual general meeting of the company was held on December 20,1954, but no dividend was declared at the meeting. For the assessment year 1954-55, the company was assessed on a total income of Rs. 4,44,854. This total income was subsequently reduced in appeal to Rs. 1,35,449 and the tax payable by the company was computed on Rs. 58,836. In this reference, we are concerned with the inclusion of the amount of Rs. 1,01,189 which had been omitted by the company to be shown in its income and the resultant order passed under section 23A of the Act. It is not disputed that the Government of Bombay had appointed the assessee as its agent for the distribution of fertilizers like ammonium sulfate, etc., in the year 1950, and that during the relevant accounting year the assessee had acted as such and in respect of this work that was done by the assessee, it became entitled to receive storage charges, supervision charges and transport or clearing expenses. The total amounts receivable by the assessee-company from the Government of Bombay were as follows :
Rs.(1) Godown rent 93,576(2) Storage charges 2,770(3) Transport charges 60,624-------------Total 1,56,970-------------
3. The assessee claimed a deduction of Rs. 55,781, on account of interest against the aforesaid aggregate sum, which was allowed by the Appellate Assistant Commissioner in appeal, with the result that the income receivable by the assessee in connection with the aforesaid 3 items, viz., godown rent, storage charges and transport charges in connection with the work done by the assessee during the accounting year as the agent of the Bombay Government came to Rs. 1,01,189. Some time, in June 1956, the Government of Bombay found that the assessee-company had not accounted for the value of 6,800 tons of fertilizer handled by it, and after protracted negotiations it was agreed between the company and the Government that the amount of Rs. 1,34,770 was recoverable from the assessee. Therefore, by its letter dated June 21,1956, addressed to the assessee, the Government proposed that as against the sum of Rs. 1,56,970 that was payable to the assessee-company by way of godown rent, supervision charges and transport charges, the aforesaid sum of Rs. 1,34,770 should be adjusted and credit for the balance of Rs. 22,199 would be given to the assessee-company. Subsequently, since adjustment of accounts suggested by the Government was not accepted by the assessee-company, the Government by its letter dated July 4,1958, canceled the same and the Government informed the assessee that, in respect of the amount that was due and payable by the assessee to the Government, the Government had decided to proceed with the recoveries in accordance with the remedies available to them. Since the aforesaid dues of Rs. 1,56,970 that were receivable by the assessee-company from the Government were in dispute and for which protracted correspondence was going on, the assessee-company had not shown this item of income in their balance-sheet and profit and loss account. The Income-tax Officer rejected the contention of the assessee-company that the same had been properly excluded because it was the subject-matter of dispute and took the view that since the accounts of the company were maintained according to mercantile system of accounting, this item of income ought to have been included as it arose or accrued to the assessee during the year of account and he proceeded to make his assessment order under section 23(2) accordingly. Since the company had not declared any dividends and since, according to the Income-tax Officer's view, after making provision for tax liability there was distributable surplus available with the assessee-company, he passed an order under section 23A of the Act. Initially by his order dated March 24, 1960, the Income-tax Officer passed an order to the effect that the un distributable portion of the assessable income amounting to Rs. 3,08,183 shall be deemed to have been distributed amongst the shareholders as on December 20,1954. Then the total income assessed revised order on March 14,1962, to the effect that the un distributable portion of the assessable income amounting to Rs. 76,613 shall be deemed to have been distributed amongst the shareholders as on December 20,1954. The assessee preferred an appeal to the Appellate Assistant Commissioner but the latter officer confirmed the order of the Income-tax Officer, on October 30,1962. It was contended on behalf of the assessee before the Appellate Assistant Commissioner that the company did not have the necessary commercial profits for declaration of dividend and that the sum of Rs. 1,01,189 had been wrongly included in the total income though no such income was actually received by the assessee. These contentions were negatived by the Appellate Assistant Commissioner who took the view that since the accounts were maintained by the assessee-company on mercantile system of accounting, it was not necessary that the income should have been received in cash for the purpose of ascertaining the commercial profits of the assessee-company. He felt that the mere fact that the dues of the Government to the assessee were adjusted against the assessee's claim was no ground for saying that the income ceased to be commercial profit in the hands of the assessee-company. In other words, he felt that the assessee was making a mistake in identifying income with cash receipts and that this can never be the consideration for determining the commercial profits of the company. Since he was of the view that the sum of Rs. 1,01,189 represented income of the assessee-company having accrued to it during the accounting year, the same was rightly considered for the purpose of section 23A and that, therefore, the action of the Income-tax Officer in applying the provisions of section 23A was justified.
4. On further appeal that was preferred by the assessee to the Tribunal, it was contended on behalf of the assessee that the provisions of section 23A(1) of the Act could not be applied to the company for the assessment year 1954-55, because commercial profits, which were the profits that could be available for the purpose of distribution, were nil for the accounting year in question. It was further contended that the amounts receivable from the Government of Bombay were not at all the profits of the assessee-company, that the whole amount was in dispute, that the Government wanted to adjust its counter-claim against the amounts due to the assessee-company, and that, even according to the lowest claim of the Government, the assessee-company was entitled to only Rs. 22,000 or so. It was further pointed out that in the result nothing had been received by the company and later on the Government had repudiated its liability. It was further submitted that the smallness of profits must be judged according to the profits reflected in the books which alone could show the funds available for distribution. The Tribunal, however, rejected all the submissions that were put forward on behalf of the assessee. It took the view that the commercial profits, in the light of which the smallness of profits had to be measured, were commercial profits according to the mercantile system which was followed by the assessee-company, profits could be crystallized not only in cash but also in debts receivable from outside parties and that in omitting to take into account the dues from the Government in respect of handling charges for the year 1953-54, the company had definitely understated its commercial profits and the Income-tax Officer was entitled to take into account the item omitted to get the correct idea of the commercial profits. In this behalf the Tribunal relied upon the decision of the Madras High Court in the case of Gobald Motor Service Ltd. v. Commissioner of Income-tax The Tribunal further took the view that on the assessee's own admission, the profit of about Rs. 1 lakh was not reflected in the books and this had to be taken into account while considering the commercial profits and even if, for the sake of argument, set-off claimed by the Government was adjusted towards the dues payable to the assessee-company, there would still be a clear income of Rs. 22,000 from which a reasonable dividend could have been declared after meeting tax liabilities, there was little scope for such set-off because the counter-claim was made long after March 31, 1954, and in judging the applicability of section 23A(1) the Tribunal had to consider the position as it prevailed before March 31, 1954, in regard to the commercial profits. In this view of the matter, the Tribunal confirmed the view taken by the two taxing authorities below that the case attracted thee provisions of section 23A(1) of the Act. At the instance of the assessee the aforesaid question has been referred to us for our determination.
5. Mr. Shah, appearing for the assessee, principally raised two contentions before us. In the first place, he contended that having regard to the material that was available on record, particularly the correspondence consisting of 3 letters dated June 20,1956, June 21,1965, and July 4, 1958, all addressed by the Government to the assessee-company, it cannot be said that the income of Rs. 1,01,189 had ever arisen or accrued to the assessee-company in the accounting year which ended on March 31,1954, and if that position was clear on the correspondence on which he relied, the inclusion of that income for the purposes of assessment would be wrong, much more so for the purpose of attracting the provision of section 23A of the Act. Secondly, he contended that even if it were assumed for the purpose of argument that the income of Rs. 1,01,189 had arisen or accrued to the assessee-company during the accounting year and was properly includable in the income of the assessee-company in that year, even so, the position of the company disclosed by the balance-sheet and profit and loss account for the year ended on March 31, 1954, was such that the Income-tax Officer after placing himself in the position of a prudent director of a company could not have come to the conclusion that non-declaration of dividend by the assessee-company for the relevant year was unreasonable and, therefore, on the facts and circumstances of the case, the question referred to this court will have to be answered in favour of the assessee.
6. Having regard to the view which we are taking about the second contention urged by Mr. Shah, it seems to us unnecessary to deal with his first contention at great length. However, we shall briefly indicate the nature of the correspondence which Mr. Shah relied upon for the purpose of canvassing the first contention before us, for, in our view, from the correspondence a circumstance emerges which would have a bearing on the second contention urged by him. Out of 3 letters, which have been annexed to the statement of the case as annexure 'B', 'C' and 'D', Mr. Shah laid considerable emphasis on two letters being annexure 'C' and 'D' in support of his first contention. Annexure 'C' is a copy of the letter dated June 21, 1956, addressed by the Government of Bombay to the assessee-company on the subject-matter 'Ammonium Sulphate/Charges on account of storage contract in the year 1953 in respect of...........' and the relevant portion of that letter runs as follows :
'Sirs,
With reference to the correspondence resting with your letter No. 6319/55, dated the April 26, 1955, on the above subject, I am directed to say that Government have after very careful consideration of the case decided that your firm should be paid charges for storage work of ammonium sulphate performed during the year 1953 at the following rates......'
7. The letter then goes on to indicate that the godown rent at the enhanced rate of annas twelve per ton per month for quantities of ammonium sulphate stored on behalf of the Government would be paid to the assessee, that the supervision charges at the rate of Rs. 2 per release order issued by Government on stocks stored by the assessee would be paid and that the transport charges from the docks to the Godowns at the rate of Rs. 3 per ton for such quantity as was actually transported from the docks to the godown on behalf of the Government would be paid to the assessee and in paragraph 5 of this very letter the total amount payable on account of the aforesaid three items has been particularized as follows :-
Rs.Godown rent 93,576.2.0Supervision charges 2,770.0.0Transport charges 60,624.0.0-----------------1,56,970.2.0-------------------
8. It may also be stated that by this very letter the Government informed the assessee that the aforesaid dues payable to the assessee should be adjusted towards the dues receivable from the assessee-company by the Government on account of certain quantum of ammonium sulphate which had been unauthorisedly disposed of by the assessee without obtaining the Government's permission in that behalf and that such dues receivable from the assessee-company amounted to Rs. 1,34,770-13-3. Towards the end of the letter the Government informed the assessee as follows :
'Thus after deducting the amount (meaning Rs. 1,34,770-13-3) from Rs. 1,56,970-2-0 mentioned in paragraph 5 above an amount of Rs. 22,299-4-9 remains only payable to you. Due credit for this amount is given to you in the account of the unacquainted for quantity which is being furnished to you separately.'
9. Then comes the letter, annexure 'D', which is dated July 4,1958, addressed by the Government to the assessee and after referring to the previous letter dated June 21, 1956, as also the earlier correspondence, the Government informed the assessee categorically that since the adjustment of accounts made in the Government letters of June 20,1956, and June 21,1956, was not accepted by the assessee-firm, the Government had decided to cancel the same and in view of this altered position, the various dues payable by the assessee to the Government were reiterated and at the end of the letter the Government informed the assessee that as the assessee had failed to remit payment of the aforesaid amounts which were due for a considerably long time, the Government had decided to proceed with the recoveries in accordance with the remedies available to it. It was urged by Mr. Shah that having regard to the contents of these two letters a reasonable inference should be drawn that storage charges, supervision charges and transport charges had really accrued to the assessee-company in June, 1956, when for the first time by its letter dated June 21, 1956, the Government categorically stated that after very careful consideration of the case it had decided that the assessee-firm 'should be paid charges for storage work of ammonium sulphate performed during the year 1953 at the following rates'. His contention was that not merely were the rates and the resultant quantum of charges decided by the Government by its letter dated June 21, 1956, but even the liability to pay such charges to the assessee-company was for the first time accepted by the Government by this very letter and, therefore, in the year of account which ended on March 31, 1954, no income could be said to have arisen or accrued to the assessee-company under the headings 'storage charges', 'supervision charges' and 'transport charges'. In the absence of proper material being put before the court, it may not be possible to accept Mr. Shah's contention, though we are not in a position to reject it outright. It is possible to take a view that since the assessee-company had undertaken to act as Distributing Agent of the Government in respect of fertilizers the work done by the assessee-company, namely, to store fertilizers, to supervise the same and to transport the same from the docks to godowns, could be said to have been undertaken by the assessee-company since the commencement of the agency and, therefore, no sooner the work was actually done the liability on the part of Government arose to pay storage charges, supervision charges and transport charges to the assessee-company, though, of course, the crystallization of dues under these heads could not be said to have taken place until the quantum thereof was either determined by agreement of parties or by a decree of the court. However, in this very letter dated June 21, 1956, it has been stated by the Government towards the end of para. 1 that formal execution of the agreement previously forwarded to the assessee was then considered unnecessary as the work for which the agreement was to be executed had already been carried out. This statement which was required to be executed by the assessee-company had been previously forwarded by the Government to the assessee-company for its execution and that the execution thereof was then considered unnecessary by the Government because the work for which the agreement was to be executed had already been carried out. No copy of that agreement that had been forwarded to the assessee-company has been brought on record to payment of such storage charges, supervision charges and transport charges, for ought one knows, the charges, particularised in this letter for these three types of work undertaken by the assessee might be a repetition or reiteration of the rates of charges that might have been incorporated in the formal agreement which was forwarded by the Government to the assessee-company or it may be that the rates of the charges specified in this letter might be a variation of the rates incorporated in the formal agreement that was forwarded by the Government to the assessee-company. In the absence of proper material being placed on record, it would not be possible for us to accept Mr. Shah's contention that it was by the letter dated June 21, 1956, that for the first time the Government had accepted the liability to pay the said storage charges, supervision charges and transport charges to the assessee-company or that both liability as well as quantum thereof was for the first time accepted by this letter. From the paucity of material on record, therefore, it may not be possible to accept Mr. Shah's contention. However, as we have said at the outset, in the view which we are taking about the second contention urged by Mr. Shah, it is really unnecessary for us to pronounce our opinion upon this first contention raised by him.
10. As stated earlier, according to Mr. Shah, even if we were to proceed on the assumption that the income of Rs. 1,01,189 ought to have been included in the total income of the assessee in the relevant accounting year in view of mercantile system of accounting that was adopted by the company for the purpose of maintaining its accounts and even assuming that this item was properly includable in the total income of the assessee in the relevant year, the provision of section 23A could not be said to be attracted to the case having regard to the facts and circumstance of the case, particularly having regard to the position that emerged from the balance-sheet and profit and loss account of the assessee-company for the relevant year. Before we consider this contention, it will be considerable to set out the relevant provision of section 23A under which the impugned orders, which have been confirmed by the Tribunal, have been passed. Section 23A to its amendment by the Finance Act of 1955, which would be relevant, runs as follows :
'23A. Power to asses individual members of certain companies -
(1) Where the Income-tax Officer is satisfied that in respect of any provision year the profit and gains distributed as dividends by any company up to the end of the sixth month after its account for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholders shall be included in the income of such shareholder for the purpose of assessing his total income.'
11. The above provisions of secession 23A have come up for consideration before several courts including the Supreme Court and we would like to refer to some of the decisions to which our attention was drawn by Mr. Shah for the assessee. In the case of Commissioner of Income-tax v. Gangadhar Banerjee & Co. (P) Ltd. the nature, scope and object of this section have been indicated. The Supreme Court has stated that 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 off secession 23A of the Act, 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 attacks collector but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as divided in judge by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the further and similar other 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. It was further observed that in deciding whether the payment of the dividend or a larger dividend than that declared by the company would been unreasonable, the Income-tax Officer can take into consideration circumstances other than losses and smallness of profits. The statute, by the words used, while making sure that 'losses and smallness of profits' are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered. Capital losses, if established, would be one of them. The words 'smallness of profit' in section 23A refer to actual accounting profits and not the assessable profits of the year. In arriving at the assessable profit the Income-Officer may disallow many expenses actually incurred by the assessee, and in computing his income, he may include many items on notional basis. But the commercial or accounting profits are the actual profits earned by the assessee calculated on commercial principles. It has also observed further that section 23A is in the nature of a penal provision and, therefore, the revenue has strictly to comply with the conditions laid down thereunder. The broaden lies upon the revenue has strictly to comply with the conditions laid down thereunder. The burden lies upon the revenue to prove that the conditions laid down thereunder were satisfied before the order was made.
12. In J. P. Srivastava and Sons (Bhopal) Private Ltd. v. Commissioner of Income-tax the assessee-company acted as the managing agents of the New Bhopal Textile Ltd. Both the companies adopted the financial year as their accounting period. In the agreement between them the managing against commission become due and payable to the assessee-company every year immediately on the passing of the audited account of the managed company by the shareholders at the general meeting. In respect of the accounting period ending March 31, 1952, the managed company had debited the sum of Rs. 41, 842 in its account towards managing agency commission and that sum was allowed by the Income-tax Officer as a deduction in computing its profits for that period. The assessee-company, however, credited that sum in its accounts only in the year ending March 31, 1953, as the relevant general meeting was held in that year. The Income-tax Officer, in the assessment of the assessee-company for the accounting period ending March 31, 1952, added the managing agency commission of Rs. 41,842, and determined the assessable income at Rs. 58,503. The tax on that assessable income was Rs. 23,950. As the assessee-company had declared dividends only of Rs. 9,516, the Income-tax Officer applied section 23A and passed an order holding that the balance of Rs. 25,037 should be deemed to have been distributed as dividend. The Supreme Court held that under the managing agency agreement the assessee-company did not have any right to receive the commission till the general meeting of the managed company was held. Therefore, the commission could not from part of the accounting profits of the assessee-company for the year ending March 31, 1952, which profits the Income-tax Officer had to consider in determining whether a larger dividend than that declared would be unreasonable. The managing agency commission which was not due in the accounting period did not become part of the accounting profits because the Income-tax Officer erroneously treated it in the assessment order to be due in that period. After approving certain observation in Gangadhar Banerjee and Co.'s case the Supreme Court at pages 628 has observed as follows.
'It follows that the Income-tax Officer, in proceeding under section 23A, must determine commercial profits. In proceedings under section 23 he is not concerned with this. There he is concerned with assessable income or profits. Therefore, it is difficult to appreciate who a finding in the assessment order that a particular income is assessable income or profits necessarily means that the assessable income must from part of the accounting profits.'
13. In other words, the Supreme Court clearly laid down the proposition that the finding in the assessment order that a particular income is assessable income or profits does not necessarily mean that the assessable income must from part of the accounting profits with which the Income-tax Officer is concern while acting under section 23A. In the context of the present case, therefore, the mere fact that the item of Rs. 1,01,189 was considered as includable in the total income of the assess-company for the accounting period ending March 31, 1954, would not necessarily mean that that item of income would form part of accounting profits for the relevant period, which would be the basis on which the provision of secession 23A could be considered. That there is a clear distinction between the assessable income under section 23A of the Act and the distributable profits under section 23A has been reiterated in another decision of the Calcutta High Court in the case of Ezra Proprietary Estates Ltd v. Commissioner of Income-tax. In that case the assessee was a private limited company whose main source of income was income from property assessable under section 9 of the Indian Income-tax Act, 1922. During the two accounting years, 1938 and 1939, the company made a profit of Rs. 30,000 and Rs. 15,000, respectively, and the whole of the profit was distributed among the shareholders as dividends. The assessable income of the company during these two years computed by the income-tax authorities at Rs. 1,26,581 and Rs. 1,24,787, respectively. the income-tax authorities applied section 23A(1) on the ground that the company had not distributed by way of dividends amongst its shareholders 60 per cent. of its assessable income. The Tribunal found that the account submitted by the company were properly kept and were accurate and that the profit shown in the profit and loss account was the true profit earned by the company. The court held that the assessee-company could not have distributed as dividends more than it did and had it distributed sums equal to its assessable income, it could only have done so by drawing on its capital and distributing the same which was prohibited by law. It further held that on the facts of the case the provisions of section 23A(1) were not attracted, inasmuch as the Income-tax Officer was bound to be satisfied that the payment of a larger dividend would have been not only unreasonable but impossible having regard to the smallness of the profits made by the company. The court also observed that whether the payment of a larger dividend than that declared would be unreasonable by reason of losses in earlier years or the smallness of the profit for that particular year is a question of fact and if the Income-tax Officer was satisfied in this case that a larger divided could have been reasonably paid, then his satisfaction was based on no evidence. This decision clearly takes the view that of the position as reflected by the balance-sheet and profit and loss account clearly indicates that distribution of dividends larger than that declared by the company would result in the company drawing on its capital and thereby would be distributing the same in contravention of the provisions of law, the provisions of section 23A could not be attracted. In Alavai Industries Private Ltd. v. Commissioner of Income-tax the court took the view that section 23A of the Income-tax Act, 1922, being penal in nature, the jurisdiction which the revenue could exercise under that section is exercisable only if the ingredients and the circumstances set out in the section is exercisable only if the ingredients and the circumstances set out in the section are clearly brought out and established. One of the mandates set out in the section is that a larger dividend than that declared would be unreasonable. The declaration of a dividend by a company is essentially a matter to be dealt with by the board of directors and ultimately by the general body. It is one amongst many events which are interrelated or laced with domestic or indoor management of a company. When a company declares a dividend at a meeting of its general body, it may bee expected that the body of shareholders are conscious and aware as to what funds are available for such dividends, what percentage out of it should be made available to the shareholders are conscious and aware as to what funds are available for such dividends, what percentage out of it should be reserved for future enterprises, expansion and benefits of the company. It is therefore that the 'armchair principle' has been invoked to find out whether the decision or act of the company is unreasonable from the commercial point of view and whether such a decision would not satisfy the test of reasonableness.
14. The question posed before us will have to be considered in the light of the aforesaid decisions and the relevant observations made by the courts in those decisions. It was undoubtedly the courts in those decisions. It was undoubtedly the contention of the assessee-company before the taxing authorities and the Tribunal that the inclusion of the item of Rs. 1,01,189 in the total assessable income of the assess-company was itself not justifiable, firstly, because the income had not accrued to the company during the year of account, and, secondly, that income was very much in dispute and ultimately the Government had repudiated its liability to pay those charges to the assessee-company. Mr. Shah contended before us that even if it were assumed for the sake of argument that this income had accrued to the assessee-company during the year of account and of account, still. having regard to the position which emerged from the consideration of the balance-sheet and profit and loss account of the company placed before the general meeting of the shareholders of the company on December 20,1954, it could not be said that the act on the part of directors in not declaring any dividend was unreasonable and according to Mr. Shah, if the relevant aspects which emerged from the consideration of the balance-sheet and the profit and loss account of the company were taken into account, no Income-tax Officer, after putting himself in the armchair of the director could have come to any contrary conclusion. For this purpose he invited our attention to the balance-sheet of the assessee-company as on March 31,1954, and the profit and loss account fourth year ended on March 31,1954, copies whereof have been annexed as annexure 'A' to the statement of the case. According to the statement of profit and loss account, the net profit for the relevant period which was carried to the balance-sheet was Rs. 8,500 but since in the previous year as per last balance-sheet the assessee-company has suffered loss to the tune of Rs. 8,212, the balance-sheet the assessee-company had suffered loss to the tune of Rs. 8,212, the balance-sheet as on March 31,1954, disclosed a profit of only Rs. 288. It is true that the item off income of Rs. 1,01,477, . Mr. Shah has contended that it would not be proper to take the entire amount of Rs. 1,01,189 for the purpose of considering the question of distributable profit under section 23A, for if the said sum is regarded as income having been earned by the assessee-company during the accounting period, that would be subject to payment of tax and if the liability of tax on that amount is deducted, the net amount that could be added for determining the distributable profit would be to the tune of Rs. 42,000 or so. The contention is undoubtedly well-found but we will ignore this aspect for the moment and proceed on the basis that the entire amount of Rs. 1,01,189 is available for being included so as to represent new surplus of assets over liabilities for the relevant accounting year. Even so, in our view, on a cursory glance at the balance-sheet, three or four aspects emerge very clear on record. In the first place, the paid-up capital of the assessee-company is Rs. 1,96,000, that is to say, less than Rs. 2 lakhs and on the side of the 'capital and liabilities' the balance-sheet disclose unsecured loans to the tune of Rs. 8,43,844 and other liabilities are to the tune of Rs. 38 lakhs, with the result that the equity-debt ratio as disclosed by these figures works out to 1 : 19 and this by no standard can be regarded as a happy position for the company. On the side of 'property and assets', in the first place there are several items of assets the valuation whereof have been shown at certain figures; for instance, assets like goodwill valued at Rs. 3,000, furniture, fixtures and fittings valued at Rs. 27,854, bicycle valued at Rs. 271, road carts valued at Rs. 829. Now, though the valuation of these assets has been made at figures which appear against each of these items, it is clear that these assets are of such a nature that if these assets were to be sold in the market, they would not fetch price anywhere near what is shown against each in the balance-sheet. Besides, out of the total book debts shown on the credit side debts due from sundry customers for the goods supplied to the tune of Rs. 34,261 have been stated to be doubtful debts; similarly, out of advances and deposits, advance to the tune of Rs. 16,750 for business on joint venture are considered doubtful and advances against goods to be supplied to the tune of Rs. 68,626 are also considered doubtful; out of unsecured loans given, loans of Rs. 99,440 are stated to be doubtful; similarly, investment made for the purchase of business of New Cure International to the tune of Rs. 9,200 is also shown as doubtful; total of these 5 items which are shown on the credit side of the balance-sheet as doubtful of recovery comes to Rs. 2,28,277. If these debts, loans or investment to the tune of Rs. 2,28,277 are considered as doubtful of recovery, it is obvious that even the entire paid-up capital could be said to have been eaten away. It is in the light of these aspects which emerge very clearly from the reading of the balance-sheet and profit and loss account of the assessee-company for the relevant year that we will have to consider the question as to whether declaration of any dividend even to the extent of quarter percent. could be said to have been reasonable. With the equity-debt ratio as indicated above and the items of book debts, loans and investment which are considered to be doubtful to the extent of Rs. 2,28,277, it seems to be clear that with the outstanding indebtedness of Rs. 35 lakhs any declaration of dividend by the company would have been at the cost of the creditors. In fact the equity-debt ratio clearly brings out the fact that the company is carrying on business not with its own assets but on borrowings made from outside parties. In the face of these facts, which emerge clear for the reading of the balance-sheet and profit and loss account of the company, it would be difficult to say that the Income-tax Officer placed in the position of a director of the company having a sense of responsibility could ever think of declaring any dividend to it's shareholders and this is on the basis that the whole of the omitted item of income Rs. 1,01,189 is regarded as includable item in the total assessable income of the assessee-company for the purposes of determining the distributable surplus. The position will become still worse if the tax payable on this amount of Rs. 1,01,189 is taken into account, for, in that event, hardly a sum of Rs. 42,000 and odd could be regarded as being includable in the total income of the assessee-company.
15. Mr. Hajarnavis, appearing for the revenue, invited our attention to a couple of other items which appear on the credit side of the balance-sheet. For instance, he invited our attention to the stock-in-trade which has been valued at Rs. 14,85,095, say Rs. 15 lakhs, as also to the item of Rs. 25,482 being advances made to directors and the item 1,10,764, being the amount due to the head office from the branches of the company at Calcutta and Cochin. He also invited our attention to the fact that according to the balance-sheet, the total cash and other balance that were available to the assessee-company as on March 31,1954, were to the tune of Rs. 1,93,942 and according to him, in view of the assets which were available to the assessee-company as disclosed by the balance-sheet, it could not be said that there was no cash available to the company for declaring dividends. But it must be mentioned that it is on a consideration of these items which have been pointed out by Mr. Hajarnavis that the net result as disclosed in the balance-sheet was that there was a surplus of Rs. 288 of assets over liabilities and to this net surplus we have to add the item of income of Rs. 1,01,189 and it is after taking into account all these factors that we have to consider the question as to whether it would have been prudent on the part of directors of the company to declare any dividend to the shareholders in the relevant accounting year. We may observe that except for the non-inclusion of the item of Rs. 1,01,189 the rest of the accounts of the company culminating in the balance-sheet and profit and loss account for the relevant year were accepted as correct by the department. Therefore, having regard to the foresaid three or four aspects which emerge very from the balance-sheet and profit and loss account of the company for the relevant period, we are clearly of the view that any declaration of dividend by the company to its shareholders would have been very unreasonable. In fact, it would have been an imprudent, if not criminal, act on the part of the directors to have declared any dividend at the cost of the creditors of the company.
16. Apart from the aforesaid consideration, there is also another aspect which emerges from the correspondence on which reliance has been placed by Mr. Shah and it is this that initially the Government had proposed adjustment of the cross dues-dues payable by the Government to the assessee-company and dues payable by the assessee-company to the Government. That adjustment was cancelled by the Government by its letter dated July 4,1958, and though in terms the liability had not been disowned by the Government, in its said letter it had been clearly stated that the proposal for adjustment having been withdrawn, the Government had decided to proceed with the recoveries in accordance with the remedies available to it but so far as the dues recoverable from the Government were concerned, a civil action by the company had possibly become time-barred. In any case, since the item of income was very much in doubt as on March 31,1954, having regard to the position disclosed by the balance-sheet and profit and loss account, it cannot be said that the decision of the directors not to declare any dividend was unreasonable.
17. In this view of the matter, we are fully satisfied that this was not a case where the provisions of section 23A were attracted. The question that has been referred to us is, therefore, answered in the negative and against the department.
18. Revenue will pay the costs of the reference to the assessee-company.
19. Question answered in the negative.