Law:

Section:

Section 104 of the Income-tax Act, 1961 [Corresponding to section 23A of the Indian Income-tax Act, 1922] – Additional income tax on undistributed profits of certain companies – Assessment year 1954-55 – Assessee-company declared dividend which was short of 60 per cent of distributable surplus and, therefore, tax officer took action under section 23A of 1922 Act – Whether anticipated tax liability arising to assessee-company as result of reopening of its assessment must be taken into consideration by tax officer while acting under section 23A of 1922 Act – Held, yes – Whether, therefore, payment of larger dividend than that declared by assessee would have been unreasonable and, as such, action taken against it under section 23A of 1922 Act was not justified – Held, yes FACTS During the assessment year in question, the assessee-company in the general meeting declared dividend short of 60 per cent of the distributable surplus. The tax officer initiated proceedings under section 23A of the 1922 Act against the assessee. In said proceedings, the assessee contended that no action should be taken against it because it would have been unreasonable for the assessee to declare a larger dividend in view of the anticipated tax liability as a result of the reopening of the assessment under section 34(1)(a) of the 1922 Act, initiated against the assessee by the tax officer for the assessment year 1946-47. The tax officer found that the estimated additional tax liability arising out of the reassessment proceedings could be paid out of the general reserve and in that view of the matter, he passed an order to the effect that the balance of distributable surplus, should be deemed to have been distributed as dividend amongst the shareholders as on the date of the said general meeting. The appeals filed by the assessee were dismissed by the appellate authorities. On reference: HELD It is well established that the tax officer must take into consideration all relevant factors while acting under section 23A of the 1922 Act. He must do what a prudent director should have done. The contention of the assessee at every stage of the proceedings was that the anticipated tax liability…

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