Income Tax Appellate Tribunal - Chandigarh
Thakur Devi Investments (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 28 October, 1994
Equivalent citations: [1995]52ITD440(CHD)
ORDER
N.K. Agrawal, Member
1. In this appeal by the assessee for assessment year 1984-85, the only substantive ground Is against the levy of tax under Section 104 of the Income-tax Act, 1961, at Rs. 23,050.
2. Assessment was completed on an income of Rs. 2,66,060 on 27-2-1987. Thereafter, the Assessing Officer proceeded under Section 104 on the ground that the assessee had failed to declare any dividend within a period of 12 months from the end of the previous year' relevant to the assessment year under consideration. The assessee pleaded that there were losses in earlier years and the income assessed could not, therefore, be treated to the sufficient for declaration of any dividend. The assessee, in its reply filed before the Assessing Officer, put forth three reasons for not declaring any dividend. It was claimed that the funds were required for the repayment of unsecured loans and that there were past losses. Third reason assigned was that the balance left in the profit and loss account was very small for declaring any dividend. The Assessing Officer declined to accept any of the three reasons and levied penalty for not declaring any dividend in accordance with the provisions of Section 104.
3. The assessee went in appeal inviting again the attention of the CIT(A) to its explanation furnished for not declaring any dividend in this year. It was claimed that the assessee had to adjust past losses and on that account the balance profit left was not sufficient for declaring any dividend. Certain provision for tax was also made and for this reason also the amount available could not be said to be sufficient for declaring any dividend. The appeal, however, failed.
4. The Id. counsel has, at the outset, challenged the order passed under Section 104 on the ground that the Assessing Officer passed his order on 25-3-1988 whereas the previous approval of the of the IAC had actually not been obtained by the that time. Our attention has been drawn to the notice given by the IAC to the assessee (copy placed at page 15 of the compilation). In that notice, the assessee was required to appear on 28-3-1988 but that date of hearing was scored and a fresh date 25-3-1988 was written by hand. The Id. counsel has submitted that the date of hearing had been changed in the notice so as to conceal the violation of the provision of law contained in Section 107. Section 107 required that no order shall be made by the Assessing Officer under Section 104 unless the previous approval of the IAC was obtained. It further required the IAC to give his approval to any order proposed to be made by the ITO only after the company concerned had been given an opportunity of being heard. It is pointed out by the Id. counsel that the Assessing Officer was supposed to make an order under Section 104 only after obtaining previous approval of the IAC under Section 107. Since the IAC required the assessee to appear on 25-3-1988, it would mean that previous approval from the IAC was not available with the Assessing Officer when he passed the order under Section 104 on 25-3-1988. The Id. counsel has contended that it was also a case of violation of natural justice and, therefore, the order passed under Section 104 was not valid. Reliance has been placed on the decision of the Supreme Court in the case of R.B. Shreeram Dwga Prasad and Fatechand Nursing Das v. Settlement Commission [1989] 176 ITR 169.
5. The Id. D.R. has, in reply, submitted that the notice given by the IAC to the assessee under Section 107 might have required him to put in appearance for the purpose of hearing on 25-3-1988 and the order under Section 104 was also passed by the Assessing Officer on the same day but this by itself will not give rise to any presumption that the order under Section 104 was passed without obtaining the previous approval of the IAC. There was no bar against the grant of approval by the IAC and the passing of the order by the Assessing Officer on the same day.
6. We have considered the rival contentions. We asked Sh. Subhash Agarwal, Id. counsel to specifically state whether the assessee was not afforded any opportunity of hearing on 25-3-1988 by the IAC. The Id. counsel could not give any categorical statement and simply said that he would only challenge the order of the Assessing Officer on the ground that it was passed on the same day on which approval was given by the IAC and so the only inference that could be drawn was that order was passed without prior approval.
7. We, however, do not find any defect in the proceedings whereby the IAC required the assessee to appear for hearing on 25-3-1988. Since the Id. counsel has not admitted that the opportunity of hearing was denied by the IAC or by the Assessing Officer, we find no force in the argument of the Id. counsel that the orders under Sections 104 and 107 were not valid because both the orders were passed on the same day. Only because both the previous approval under Section 107 and the order under Section 104 happened to have been given and passed on the same day, it will not give rise to any presumption that the previous approval was not obtained by the Assessing Officer, as required by law.
8. The Id. counsel has next submitted that the assessee had shown loss of Rs. 65,846 in the preceding assessment year. That loss was required to be adjusted against current year's profit. During the course of hearing before us, the Id. counsel has admitted that the loss shown by the assessee in the preceding assessment year was not accepted by the Assessing Officer and assessment was made on a positive income. In this light, we find no force in the argument of the Id. counsel that the past losses were required to be adjusted and the assessee was not in a position to declare any dividend on account of meagre profit balance. The Id. counsel has further pointed out that the amount of profit taken at Rs. 3,96,540 was not the correct amount to be adopted for the purposes of Section 104. Our attention has been drawn to the amount of Rs. 3,07,952 shown as commercial profit in the books of account for assessment year under consideration! The amount of Rs. 3,07,952 only had been carried as net profit to the profit and loss appropriation account. On that basis, the Id. counsel has submitted that the amount available as net profit was Rs. 3,07,952 only and not Rs. 3,96,540 and the revenue authorities have not actually applied their mind to the facts of the case. It is next contended that the assessee had actually purchased certain land for Rs. 1,50,000 in this year and for that reason also the liquidity of funds was disturbed. Our attention has also been drawn to the schedule of fixed assets (page 9 of the compilation) wherein purchase of land at Rs. 1,50,000 has been shown. The Id. counsel has contended that the amount invested by the assessee in the purchase of land had also debarred it from declaring any dividend. It is stated that the assessee had a scheme to make investment in future also and that also impelled the assessee not to declare any dividend. Our attention has been drawn to the investment of Rs. 28,15,000 made in the assessment year 1986-87 (page 12 of the compilation). It appears that the assessee gave an amount of Rs. 28,15,000 by way of advance to M/s Munjal Showa Ltd. during the period 3-9-1985 to 15-2-1986. As per the Id. counsel, the assessee kept in view the future plans regarding the prospective investments and, therefore, did not find it appropriate to declare any dividend this year. It is also pointed out that a provision for tax was made at Rs. 1,81,993 which was also deductible from income. The Id. counsel has submitted that as per the details of calculation contained in the assessee's reply dated 17-3-1988 filed before the Assessing Officer in the proceedings under Section 104 (copy at page 13 of the compilation), the assessee had shown the distributable income at Rs. 1,51,162 only. On that basis, it was submitted that whatever liability had to be discharged that was deductible from the business income.
9. The Id. D.R. has, in reply, submitted that the plea regarding past losses was not based on any evidence inasmuch as the assessee's claim regarding losses was not accepted by the Assessing Officer in the preceding assessment year and, therefore, this plea must fall. The assessee was not able to show as to how the plea of loss in the preceding year could be accepted when ultimately assessment was made on a positive income. As regards the investments made in M/s Munjal Showa Ltd., it is submitted by the Id. D.R. that advances have been made by the assessee to that company during the previous year' relevant to assessment year 1986-87. It could not be accepted that the assessee refrained from declaring any dividend for the assessment year 1984-85, under appeal, in view of the likely investments which were to be made after about two years. As regards the provision for tax made at Rs. 1,81,993, it is stated by the Id. D. R. that it is not clear if the amount was finally held to be payable at the appellate stage. The Id. D.R. has, therefore, contended that the reasons given by the assessee were not plausible and acceptable at all.
10. We have considered the rival contentions and we find that the plea taken by the assessee regarding adjustment of past losses has no legs to stand because the plea of losses was not accepted in the preceding year and the assessment was made at a positive income. As regards the plea that the assessee was required to retain funds for the repayment of unsecured loans, we again notice that the plea has no sound basis. It is seen that in the balance-sheet for the assessment year 1984-85 (page 5 of the compilation) unsecured loans have been shown at Rs. 3,50,380 as on 31-3-1984 as against the sum of Rs. 4,07,667 as on 31-3-1983. On the assets side, current assets, loans and advances have been shown at Rs. 12,30,498. It is thus clear that the assessee had not only to repay certain loans but also had to receive back the repayments of certain advances. Therefore, looking to the nature of unsecured loans as well as loans and advances shown on the assets side of the balance-sheet, it does not appear to be a sufficient ground for not declaring dividend. It is also not clear as to when loans were required to be repaid. As regards the plea that the profit left with the assessee was very small, we do not find any substance therein because, as we have seen, net profit carried to the profit and loss appropriation account amounted to Rs. 3,07,952, which cannot be said to be a meagre amount for the purposes of declaring dividend.
11. The Id. counsel for the assessee has also raised a legal plea that Section 104 was not applicable in the assessee's case inasmuch as the said section required levy of tax only where a company failed to distribute its profits and gains by way of dividend to the extent of statutory percentage of the distributable income of the company of that previous year. In other words, Section 104 would come into play where a dividend less than the statutory limit was declared and not when no dividend was distributed. Subsections (1) and (2) of Section 104 read as under :-
104(1) Subject to the provisions of this section and of Sections 105, 106, 107 and 107A, where the ITO is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the ITO shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or 144, be liable to pay income-tax at the rate of -
(a) fifty per cent, in the case of an investment company,
(b) thirty-seven per cent, in the case of a trading company, and
(c) twenty-five per cent, in the case of any other company, on the distributable income as reduced by the amount of dividends actually distributed if any, within the said period of twelve months.
(2) The ITO shall not make an order under Sub-section (1), if he is satisfied-
(i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared within the period of twelve months referred to in Sub-section (i) would be unreasonable; or
(ii) that the payment of a dividend or a larger dividend than that declared within the period of twelve months referred to in Sub-section (1) would not have resulted in a benefit to the revenue; or
(iii) that at least seventy-five per cent of the share capital of the company is throughout the previous year beneficilly held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under Section 11.
The Id. counsel has argued that since the assessee's case did not fall within the ambit of Section 104(1), the said section is not attracted at all. The Id. D.R. has, in reply, submitted that the assessee's case was worse inasmuch as no dividend was at all declared. Therefore, the assessee cannot be given an advantageous position for not declaring any dividend at all. We agree that Section 104 contains a provision requiring every company to declare and distribute dividend up to a certain minimum limit. If the assessee's plea is accepted, it would mean that a company not declaring any dividend shall not attract the levy of tax whereas a copy declaring less dividend would be inviting such levy of tax under Section 104. We, therefore, do not find any force in the argument of Id. counsel.
12. The Id. counsel has placed reliance on a decision of the Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57ITR 176. It was held in that case that the object of the provision contained in Section 23A of the Indian Income-tax Act, 1922, was to prevent evasion of tax and the provision must be worked not from the standpoint of tax collector but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as dividend 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 ITO must take an overall picture of the financial position of the business. The Id. counsel has submitted that the present Section 104 was pan materia with Section 23A of the old Act. Therefore, the ratio of the said decision is said to be applicable to the facts of the assessee's case. Reliance has also been placed on the decision of the Calcutta High Court in the case of Panama (P.) Ltd. v. CIT( 1978] 290. That was also a case under Section 23A of the old Act. It was held therein that the available commercial profits are to be computed after taking into account the entire financial performance of the company for the year. The ultimate question which will have to be gone into is whether there was enough money in the till of the company justifying distribution of any or higher dividend.
13. We have considered the case law applied by the Id. counsel and we find that the plea regarding the amount of profit being at Rs. 3,07,952 is acceptable in view of the decision of the Calcutta High Court in Panama (P.) Ltd. 's case (supra) because that was the amount which was commercial profit and which was carried to the profit and loss appropriation account. We have already seen that the case of loss is not at all established nor the case of any other requirement of funds like repayment of loans. We have also seen that the investments made by the assessee in land and the advances made in future to M/s Munjal Showa Ltd. do not justify the retention of profit by the assessee.
14. We, therefore, reject the assessee's plea that no tax was leviable under Section 104. We hold that the assessee was required in law to distribute its profit by way of dividend, which was not done.
15. In the result, the appeal stands rejected.