Law:

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Section 104 of the Income-tax Act, 1961 (Corresponding to section 23A of Indian Income-tax Act, 1922) - Additional income-tax on undistributed profits of certain companies - Assessment year 1951-52 - Assessee-company distributed less dividend on ground that hedging contracts were entered into only to safeguard against future loss and there was loss of more than that amount in exports in next year, before date of declaration of dividend - ITO made an order under section 23A of 1922 Act taking view that only two matters, losses of previous years and smallness of profits of current year, were to be considered - AAC as well as Tribunal upheld ITO's order - Whether reasonableness or unreasonableness in declaration of dividend has to be judged by business considerations such as previous losses, present profits, availability of surplus money and reasonable requirements of future and similar other factors - Held, yes - Whether having regard to this principle and having regard to facts and circumstances of case, although a profit on hedging transactions had been made in year 1950, company was threatened with an imminent loss in subsequent year and by time it came to consider question of declaration of dividend, threat had materialised into an actuality, it could not be said that company could be reasonably expected to have declared a larger dividend - Held, yes - Whether therefore, ITO's order under section 23A of 1922 Act was not justified - Held, yes FACTS For the assessment year 1951-52, the assessee-company in the proceeding under section 23A. A contended that the profit made on forward hedging contracts was not an actual profit of that year available for dividend as there were losses in the actual shipments and on deliveries in the subsequent year; even after adjustment of the aforesaid profit in that year, there were still huge losses left over. The ITO, however, passed an order under section 23A, holding that the profit assessed in the assessment order was substantial whereas in considering the application under section 23A it was not permissible to take into consideration anticipated losses of future years. On second appeal, the Tribunal upheld the order under…

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