Judgment :- THANIKKACHALAM, J. In these tax case references at the instance of the Revenue as well as the assessee, under section 256(1) of the Incometax Act, 1961 (hereinafter referred to as, "the Act the following questions of law have been referred to this court for its opinion Question referred at the instance of the Revenue" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the orders of the Incometax Officer levying additional tax under section 104 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1973-74 ? Question referred at the instance of the assessee, "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the Income-tax Officer's order under section 104 of the Income-tax Act, 1961, for the assessment year 1974-75 ?" The assessee is a company in which the public are not substantially interested and for the assessment year 1972-73, the Income-tax Officer found that the total income of the assessee as computed came to Rs. 8, 47, 894 and deducting the taxes, bonus, etc., the distributable income arrived at was at Rs. 6, 50, 322. The assessee should have distributed 90 per cent. out of the distributable income, which came to Rs. 5, 85, 228, but it distributed in the assessment year 1972-73 only Rs. 1, 20, 000 and the Income-tax Officer took proceedings under section 104 of the Act and after obtaining the approval of the Inspecting Assistant Commissioner, levied a sum of Rs. 2, 32, 644 as additional tax. For the assessment year 1973-74, the assessee's income was arrived at Rs. 8, 29, 496 and the distributable income at Rs. 4, 85, 896 and the assessee should have distributed 90 per cent. of it, which came to Rs. 4, 37, 310, but had distributed only Rs. 40, 000 within twelve months immediately following the previous year and there was thus a shortfall of Rs. 3, 97, 310, which led to initiation of proceedings under section 104 of the Act, resulting in the levy of additional income-tax of Rs. of it, which came to Rs. 4, 37, 310, but had distributed only Rs. 40, 000 within twelve months immediately following the previous year and there was thus a shortfall of Rs. 3, 97, 310, which led to initiation of proceedings under section 104 of the Act, resulting in the levy of additional income-tax of Rs. 1, 98, 655 by the Income-tax OfficerAggrieved by this, the assessee preferred appeals before the Appellate Assistant Commissioner in respect of both the assessment years and the Appellate Assistant Commissioner ultimately dismissed the appeals and on further appeal by the assessee before the Tribunal, the Tribunal deleted the levy of additional income-tax on the assessee in respect of the two assessment years in question. That is how the question of law has come to be referred at the instance of the Revenue. In regard to the assessment year 1974-75, the Income-tax Officer computed the distributable income at Rs. 9, 89, 275, out of which the assessee should have distributed Rs. 8, 90, 343, but distributed only Rs. 2, 50, 000. The assessee took the stand that it had actually distributed 25 per cent. of the paid-up capital and the declaration of a higher dividend was not possible, but the Income-tax Officer was not satisfied with this and he levied additional income-tax of Rs. 3, 20.171 under section 104 of the Act. On appeal by the assessee, the Appellate Assistant Commissioner as well as the Tribunal affirmed the order of the Income-tax Officer and that has given rise to the question set out earlier, at the instance of the assessee, in respect of the assessment year 1974-75. Learned counsel for the Revenue, Mr. C. V. Rajan, submitted as follows : The definition of "distributable income" occurring in section 109(1) of the Act would take into account only the total income of the relevant assessment year and not the arrears of tax and the dispute related to the calculation of distributable income and the difference between the figure arrived at by the Department and that furnished by the assessee, apart from certain adjustments, was due to the fact that the assessee adjusted the carried forward loss from earlier years amounting to Rs. 6, 87, 169 in the assessment year 1972-73. 6, 87, 169 in the assessment year 1972-73. According to learned counsel, in the earlier years, this amount was shown as a deduction in the general reserve and the entry was subsequently reversed and the amount was debited to the profit and loss appropriation account, which actually represented the provision for taxation made in the earlier year and carried forward to the current year. Learned counsel further pointed out that under section 104(2) of the Act, the Income-tax Officer should have regard to the losses incurred by the company in the earlier years or to the smallness of the profits made in the previous year ; but those are not the, only two factors to be considered, which would mean that the Income-tax Officer should take an overall view of the financial position of the company and decide on the reasonableness of the dividend. It was also further contended that in the profit and loss appropriation account, the assessee had deducted Rs. 6.87 lakhs representing the provision for taxation made in the earlier years and had carried forward the same to the current year and the assessee had an amount of Rs. 11 lakhs in the general reserve. The deficit of Rs. 6.87 lakhs carried from the earlier years, according to counsel, related to the provision for taxation and ordinarily taxes raised in a particular year are expected to be paid out of the profits of the year, though there may be some exceptional cases in which the outstanding demand of tax in respect of the earlier years will be relevant, if the assessee established that due to special circumstances, the tax demand in respect of the earlier years had to be made out of the profits of the year in question, but that, in the present case, the assessee had not shown the existence of any such special circumstances and, therefore, it was for the assessee to establish that the current year's profits should be burdened with the tax liability pertaining to the earlier years for purposes of section 104 of the Act and as no material whatever was placed by the assessee to say that its case was an exceptional one, though there is a debit in the profit and loss appropriation account, to the extent of Rs. 6.87 lakhs, that need not enter into consideration for the purpose of calculating the distributable income under section 104 of the Act in respect of the assessment years in question. Attention was also drawn to the circumstances that the assessee had reserves to the extent of Rs. 11 lakhs in the assessment year and against the debit of Rs. 6.87 lakhs for taxation, reserves of more than Rs. 7 lakhs were available and that established that the financial position of the company was indeed very sound and that was a criterion to be considered while applying section 104 of the Act for the assessment year 1972-73. With regard to the assessment year 1973-74, the assessee, according to counsel, should have declared 90 per cent. of the distributable income, viz., Rs. 4, 37, 310, but had distributed only Rs. 40, 000 resulting in a shortfall of Rs. 3, 97, 310. Referring to the working furnished, learned counsel pointed out that Rs. 5.85 lakhs related to the provision for income-tax of the earlier years, while the balance-sheet as on September 30, 1972, showed the availability of general reserve of Rs. 10.75 lakhs and, therefore, the assessee should have debited the provision for earlier taxes to the general reserves, instead of burdening the profits of the previous year relevant to the assessment year 1973-74 and the claim of non-availability of commercial profit by the assessee was farthest from the real situation. Learned counsel also drew attention to the failure of the assessee to prove exceptional circumstances to burden the current year's profits with arrears of tax liability and that the overall financial position of the company in this assessment year was also sound warranting action under section 104 of the ActOn the other hand, learned counsel for the assessee, contended that in respect of the assessment year 1972-73, the tax liability of Rs. 6.87 lakhs pertaining to earlier years was debited to the profit and loss appropriation account and taking that into account, the distributable income was negligible and there was thus no case made out for levying additional income-tax under section 104 of the Act. 6.87 lakhs pertaining to earlier years was debited to the profit and loss appropriation account and taking that into account, the distributable income was negligible and there was thus no case made out for levying additional income-tax under section 104 of the Act. It was also contended that before applying section 104 of the Act, the Income-tax Officer should have taken into account the smallness of the profits of the current year, loss of the earlier years and should not look into the reserve position and that though, to comply with the provisions of the Companies Act, for purposes of preparation of the balance-sheet, in the earlier years, a provision for taxation was shown as a deduction under general reserve, no entries as such were made in the books of account and the Income-tax Officer should have taken an overall view of the financial position of the company to decide on the reasonableness or otherwise of the dividend. Learned counsel also pointed out that the payment of outstanding demand of tax in respect of the earlier years would be relevant in determining the distributable profits of the current year, especially when the arrears are attributable to disallowance of certain expenditure as capital in nature and the assessee, a I according to counsel, had established the circumstances under which the tax demand in the earlier years had to be provided in the current year's profits. The availability of reserve to the extent of Rs. 11, 00, 000 was not, according to counsel, a material factor for considering the applicability of section 104 of the Act and it was stated that the assessee had huge reserves, as it had offered security to allied concerns for the loans taken by them and the existence of a sizable amount of reserve was to boost up the financial position of the company in the market. The assessee had to make provision for demand raised against it for the earlier year ended on September 30, 1970, and, there was a loss to be carried forward to the year under consideration amounting to Rs. 6.87 lakhs and that did not leave any amount for declaration of dividend after making provision for taxation in the year under reference, according to counsel. It was also stated that the declaration of dividend at 12 per cent. amounting to Rs. 6.87 lakhs and that did not leave any amount for declaration of dividend after making provision for taxation in the year under reference, according to counsel. It was also stated that the declaration of dividend at 12 per cent. amounting to Rs. 1, 20, 000 during the year 1972-73 out of the general reserve was sufficient for no; calling for application of section 104 of the Act. In respect of the assessment year 1973-74, learned counsel submitted that the assessee had to make provision for income-tax of Rs. 5, 85, 418 and if that is taken into account, there was only a deficit and no distributable income, but in spite of it, the assessee had declared a dividend of Rs. 40, 000 which was quite reasonable. Learned counsel, therefore, maintained that though there was no surplus to declare a dividend in the year 1973-74, the assessee had declared a dividend of Rs. 40, 000 and the assessee could not have declared a dividend without either discharging or providing for the liabilities as a prudent business act and there was thus no case for levying any additional tax under section 104 of the Act in respect of this assessment year as well. Counsel on both sides relied upon several decisions in support of their respective contentions, which will be noticed later in the course of this judgmentThe main question that arises for consideration is whether the Tribunal was right in deleting the additional tax levied under section 104 of the Act in respect of the assessment years 1972-73 and 1973-74. Though sections 104 to 109 ( section 23A of Indian Income-tax Act, 1922 ) were deleted by the Finance Act, 1987, with effect from April 1, 1988, these sections would be applicable to cases arising for the assessment years prior to 1988-89. Though sections 104 to 109 ( section 23A of Indian Income-tax Act, 1922 ) were deleted by the Finance Act, 1987, with effect from April 1, 1988, these sections would be applicable to cases arising for the assessment years prior to 1988-89. The object behind section 104 of the Act is to prevent avoidance of tax by the shareholders of the company in which public are not substantially interested and, for that purpose, the Income-tax Officer has to ascertain how much of the income of the previous year has been distributed as dividend by the company within twelve months immediately following the expiry of that previous year and if the sum so distributed as dividend amongst all the classes of the shareholders aggregated to less than the statutory percentage of 90 of the distributable income of the company in the previous year, the provisions of section 104 would stand attracted, unless the assessee established certain special circumstances, to escape from the rigour of this provision. "Distributable -income" and "statutory percentage" are defined respectively by clauses (i) and (iii) of section 109 of the Act. However, if the Income-tax Officer is satisfied that the payment of a dividend or a larger dividend than that declared within the period of 12 months would be unreasonable, having regard to the losses incurred by the company in the earlier years or, to the smallness of the profits made in the previous year, then, no action can be taken under section 104 of the Act. The approach to be adopted before levying additional tax under section 104 of the Act had been succinctly stated in the decision of the Supreme Court in CIT v. Gangadhar Banerjee and Co. (Private) Ltd. It was pointed out that the provision must be worked out not from the standpoint of the tax collector, but from that of a businessman and that the Income-tax Officer should have a sympathetic and objective approach placing himself in the position of a director acting as a prudent businessman. (Private) Ltd. It was pointed out that the provision must be worked out not from the standpoint of the tax collector, but from that of a businessman and that the Income-tax Officer should have a sympathetic and objective approach placing himself in the position of a director acting as a prudent businessman. It was also laid down that the reasonableness or otherwise of the amount distributed as dividend should be judged by business considerations, such as previous losses, present profits, availability of surplus money and the reasonable requirement of surplus money and the reasonable requirement of the future and others and for this purpose, the balance-sheet would be prima facie proof of the financial position of the company but it was open to the company as well as the Department to prove on the strength of materials that certain adjustments to it were called for. This view was reiterated by the Supreme Court in CIT v. Asiatic Textile Ltd. While considering the reasonableness of the dividend distributed factors, depreciation in the value of investments shown at cost in the accounts the company's rehabilitation or expansion programme, borrowings, the need to create a reserve for bad and doubtful debts, the general financial position of the company, the advisability of creating a reserve to meet a contingent liability or other contingencies of business and the reasonable anticipation of losses in the subsequent year, etc. In ascertaining the profits, the Department must take into account the smallness of the profits made by the company, meaning commercial profits in contra-distinction to assessable or total income of the assessee and deemed income may form part of the commercial profits. Distribution of dividend can be out of the actual profits and not out of capital and the necessity of a reserve to safeguard the future of the company would also be a relevant factor to be taken into account. Distributable commercial profits should be arrived at after deduction of tax and the tax to be deducted is not that appropriate to commercial profits but that which the company could, on the date of declaration of dividend, have reasonably anticipated as is likely to become payable. Distributable commercial profits should be arrived at after deduction of tax and the tax to be deducted is not that appropriate to commercial profits but that which the company could, on the date of declaration of dividend, have reasonably anticipated as is likely to become payable. Even arrears of tax of earlier years and anticipated tax liability on the reopening of a past assessment, have to be taken into account in determining the distributable commercial profits, The loss incurred in the earlier years, should also be taken into account even if there are past accumulated reserves or the company had adjusted the loss by reducing its paid-up capital or had declared dividends during the past years despite losses. It is pertinent in this connection to note that the Supreme Court in CIT v. Jubilee Mills Ltd. laid down that a company which had overcome its losses for some years and made a profit in the subsequent year might theoretically be in a position to distribute the whole of the profits for that year, but it could not be said to have acted unreasonably, if it chose not to do so and retained a portion of the profits for the purpose of building up a capital reserve: Under section 104(2) of the Act, the Income-tax Officer should have regard to the losses incurred in the earlier years or to the smallness of the profits made in the previous year, but this is not to be understood as if these are the only two factors to be taken into account. The Income-tax Officer has, therefore, to take an over all view of the financial position of the company and decide the reasonableness of the dividend. In Gobald Motor Service Ltd v. CIT, this court pointed out that the Income-tax Officer has got wide discretion to find out whether the dividend declared is reasonable in the given circumstances and the Income-tax Officer must exercise his discretion judiciously and a failure to do so, would vitiate the order passed by him under section 23A of the Indian Income-tax Act, 1922 in this case, in the profit and loss appropriation account, the assesseecompany had deducted the amount and this represents the provision for taxation made in the earlier years and carried forward to the current year. It is the case of the Department that taxes levied in a particular year are expected to be paid from out of the profits of that year and support for this is sought to be drawn from the decision in CIT v. R. N. Bagchi and Bros. This view, however, had been dissented from in Reform Flour Mills (P) Ltd. v. CIT. Even in the decision in CIT V. R. N. Bagchi and Bros., the court pointed out (at page 654), "It may well be that in some exceptional cases the payment of the outstanding demand of tax in respect of the earlier years will be relevant if it can be shown by the assessee-company that due to some special circumstances the tax demand for the earlier year had to be met out of the profits of the year in question. In the present case, the assessee had put forward the special circumstances to meet the tax demand of the earlier years from the current year's profits by stating that though the assessee used to make provision for income-tax from year to year, such provision could not be exactly equal to the actual amount of tax to be paid and the excess payable by the assessee had to be disbursed or provided for in the profit and loss appropriation account, only in the later year, when the actual demand was known to the assessee. Likewise, with reference to the liability for income-tax, for the purpose of deduction from the profit and loss account, such income-tax for the purpose of working out the distributable income, has, therefore, to be deducted as a provision of the year to the extent it is provided and further provision for income-tax liability has to be made to the required extent, when it is known after receipt of the demand notice, etc. The extra liability to tax in these cases pertained to the earlier years and not owing to any unforeseen circumstances and the liability arose owing to the disallowance of certain items of expenditure. For the assessment year 1972-73, after deduction of the provision for tax, taking into account the demand made on the assessee for Rs. 12, 46, 833 the assessee was left with only a sum of Rs. 95, 000 for declaration of dividend. Drawing a sum of Rs. 25, 000 from the general reserve, the assessee had declared a dividend of Rs. 12, 46, 833 the assessee was left with only a sum of Rs. 95, 000 for declaration of dividend. Drawing a sum of Rs. 25, 000 from the general reserve, the assessee had declared a dividend of Rs. 1, 20, 000. In the assessment year 1973-74, in declaring a dividend of Rs. 30, 000 against the available amount of Rs. 28, 318, the assessee had withdrawn amounts from the general reserve. It is the case of the assessee that in making provision for income-tax for any year, sometimes deficit may occur and the deficit had to be made good and paid as and when the actual demands were made and on account of this, income of the year stood reduced. When accounts were maintained on the basis of the mercantile system, in the case of expenditure like bonus or payment of electricity bills or commission based on turnover, etc., the assessee could at best make a provision on a bona fide basis. It is only thereafter when the amounts get crystallised and the amounts are known definitely that the excess, over and above the provision made already in the earlier years, has to be treated as an expenditure of the year in which the payment is made or it has to be provided for in the profit and loss appropriation account only in the later year when the actual amount demanded is known. The assessee had been following this in the course of its prudent business activity. In C. P. Syndicate P. Ltd. v. CIT, the court pointed out". The question whether the loss of the previous year should be adjusted against the profits of the current year or it should be adjusted against the reserve is for the businessman to consider. It is not for the Income-tax Officer to direct the businessman in regard to the manner in which he should conduct his business. If the businessman chooses to adjust the loss of the previous year against the profits of the current year, he is within his rights to do so and that has to be taken into consideration in deciding whether an order under section 23A should be made. If the businessman chooses to adjust the loss of the previous year against the profits of the current year, he is within his rights to do so and that has to be taken into consideration in deciding whether an order under section 23A should be made. Contingent liabilities can also be taken into account in considering whether or not the provisions of section 23A should be applied." The case of the Department is that the tax liability of the earlier years should be adjusted against the general reserve of the company before deciding whether it was reasonable to expect the assessee to declare dividend. However, in Bombay Cycle Stores Co. (P) Ltd. v. CIT and in CIT v. Union Company Ltd., it was pointed out that reserves of the company would not be taken into account in determining whether an order under section 23A could be passed. In CIT v. Associated Drug Co. (P.) Ltd., this court held that a company is entitled to set apart a sum towards its anticipated liability towards tax before arriving at a decision with regard to distribution of dividend and the fact that ultimately when an assessment is made, the entire amount set apart towards taxes might not be paid would not justify an order under section 23A. Further, in CIT v. Meccano Floorings(P) Ltd., the assessable profit was Rs. 25, 841 and, after deduction of taxes, there was a distributable balance of Rs. 12, 533 out of the assessable income, but the company did not declare a dividend And it was pointed out by the Revenue that a sum of Rs. 12, 600 was available under the dividend equalisation reserve and if the amounts were properly worked out, there would be sufficient profit for distribution as dividend. In dealing with this contention, this court, following the decision of the Supreme Court in CIT v. Bipinchandra Maganlal and Co. Ltd., held that it is not open to the Income-tax Officer to take the dividend equalisation reserve and to add it to the profit earned during the year and hold that the non-distribution of a larger dividend was unreasonable. In the case of Indo-Ceylon Dental and Surgical Co. Ltd., held that it is not open to the Income-tax Officer to take the dividend equalisation reserve and to add it to the profit earned during the year and hold that the non-distribution of a larger dividend was unreasonable. In the case of Indo-Ceylon Dental and Surgical Co. Ltd. v. CIT, the assessee did not place any material to support the stand that the non-declaration of a larger dividend was for the purpose of future development of the company and this was held sufficient to justify the application of section 23A of the Act. This decision will not, therefore, be of any assistance to the Revenue. In Webb's Sales and Services Ltd. v. CIT, relied on by counsel for the Revenue, the Karnataka High Court held that having regard to the substantial reserves accumulated by the assessee, it would be unreasonable to deduct the tax liability of the past years and there is no good reason to shift the tax burden of a particular year to another year's profit when the assessee had suffered no losses in the earlier years. This would appear to support the contention of learned counsel for the Department, but on a careful consideration of the facts, it would be seen that the principle of that decision cannot be made applicable here. In that case, during the assessment year 1972-73, the assessee-company had not distributed any dividend and had also not offered any explanation for deducting the arrears of tax of the earlier years of Rs. 6, 610 in the current year's profits. Further, the decisions noticed earlier on this subject were also not brought to the notice of the Karnataka High Court. On the other hand, in this case, we find that the assessee-company had offered an explanation as to why it became necessary for it to adjust the earlier tax arrears in the current year's profits and in view of that, the decision of the Karnataka High Court cannot apply. CIT v. Gangadhar Banerjee and Co. P. Ltd., relied on by learned counsel for the Revenue, would not assist him to contend that when the company had surplus available from the earlier year's profits, that would have to be taken into account in considering the reasonableness of the distribution. CIT v. Gangadhar Banerjee and Co. P. Ltd., relied on by learned counsel for the Revenue, would not assist him to contend that when the company had surplus available from the earlier year's profits, that would have to be taken into account in considering the reasonableness of the distribution. We may observe that this line of argument was not accepted by this court in the decision in CIT v. Amalgamations (P) Ltd. After taking into account the decisions of the Supreme Court in Gangadhar Banerjee and Co. P. Ltd. v. CIT and Bipinchandra Maganlal and Co. Ltd., this court in CIT v. Amalgamations (P.) Ltd., pointed out (at page 122)The section does not bring in for consideration either the existence of reserves or accumulated profits of earlier years for the purpose of finding out whether the assessee is attempting to avoid payment of appropriate tax by the shareholders by not making any distribution or making an unreasonable distribution of dividends. Similarly, in Alavai Industries P. Ltd. v. CIT, this court, while considering the provisions of section 23A of the Indian Incometax Act, 1922, pointed out that the view that creation of reserves amounted only to appropriation and cannot have any relevance in determining the applicability of section 23A cannot be applied to a nascent company which in the second year of its operation created some reserves for its future preservation and for its future good, and the profits were diverted only for essential commercial reasons. In CIT v. McDill (R.) and Co. (P) Ltd., it was pointed out that the onus of proving that the assessee had not distributed the requisite percentage of dividend under section 23A of the Indian Income-tax Act, 1922, is on the Department and in the absence of material to show that the real commercial profits were artificially reduced in the balance-sheet or to indicate what part of the income represented commercial profits, it has to be assumed that the net profits shown in the balance-sheet correctly represented the commercial profits. In the present case also, apart from pointing out that the tax arrears of the earlier years cannot be carried forward and adjusted in the current year's profits, when the general reserves are available and that has also to be taken into account to find out whether the dividend distributed by the assessee is reasonable or not, no other material was brought to the notice of the court to conclude that the decision of the Tribunal on this aspect in regard to the two assessment years under consideration is in any manner erroneous, In the light of the principles laid down in the decisions referred to above and on a careful consideration of the facts and the circumstances of the case, we answer the question referred to us at the instance of the Revenue for the assessment years 1972-73 and 1973-74 in the affirmative and against the RevenueWith regard to the question referred at the instance of the assessee in respect of the assessment year 1974-75, learned counsel for the assessee contended that the Department should have taken into account the additional tax liability of Rs. 1, 05, 514.50 while calculating the distributable income and that the declaration of a dividend of Rs. 2, 50, 000 representing 25 per cent. of the paid-up capital was very reasonable. On the other hand, learned counsel for the Revenue pointed out that the assessee made profit of approximately Rs. 15 lakhs and the assessee had also transferred to the general reserve a sum of Rs. 2 lakhs and the balance in the general reserve was Rs. 12.35 lakhs and 90 per cent. instead of 25 per cent. should have been distributed as income during this year. The distributable income for the assessment year 1974-75 was ascertained at Rs. 9, 89, 275 and there was no extra burden or unforeseen expenditure or disallowed expenditure or extra demand of tax, in this year. The assessee had also transferred a sum of Rs. 2 lakhs to the general reserve. We are unable to accept the contention of the assessee that the dividend distributed at 25 per cent. is not only reasonable but also high, for, when the current year's profits are available without being in any manner burdened by other outgoings, the assessee cannot be heard to say that only 25 per cent. of the distributable income could be declared as dividend. is not only reasonable but also high, for, when the current year's profits are available without being in any manner burdened by other outgoings, the assessee cannot be heard to say that only 25 per cent. of the distributable income could be declared as dividend. This cannot be supported on any principle or precedent. With reference to the assessment year 1974-75, the assessee was having capital of Rs. 10 lakhs and the reserve was much more than that, and the financial position of the company was safe and sound and the assessee had not shown any special circumstances for declaring a lesser percentage of dividend than that provided under the Act. Under those circumstances, the Tribunal was quite correct in upholding the action of the authorities below under section 104 of the Act and in levying additional tax. We, therefore, answer the question referred to us at the instance of the assessee in the affirmative and against the assessee. We direct the parties to bear their own costs.