Delhi High Court
General Talkies Ltd. vs Income-Tax Officer, Company Circle-X, ... on 1 August, 1986
Equivalent citations: [1986]162ITR136(DELHI)
JUDGMENT N.N. Goswamy, J.
1. The challenge in this petition is to the orders passed by the Central Board of Direct Taxes dated May 24, 1969, under section 107A of the Income-tax Act, 1961 (hereinafter called "the Act"), and the order dated March 16, 1973, passed by the Income-tax Officer, Company circle, New Delhi, under section 104 of the act.
2. The petitioner is is a company incorporated under the Indian Companies Act, 1956, and is carrying on the business of distribution as well as exhibition of films. The petitioner-company is controlling certain cinemas in Delhi and in Uttar Pradesh. Its only business is exhibition of motion pictures and is not engaged in any trading or manufacturing activity.jThe assessment for the relevant assessment year 1967-68 was finalised on an income of Rs. 6,41,473. By virtue of section 109 of the Act, the assessed was required to distribute 90% of its distributable income as dividend. The distributable income according to the petitioner being Rs. 2,18,016, the assessed had to distribute at least Rs. 1,96,215. However, it distributed only Rs. 1,69,964. The distribution, therefore, fell short by Rs. 26,251. The Income-tax Officer issued a notice under section 104 of the Act, asking the assessed to explain as to why the requisite amount of dividend had not been declared.
3. Before the receipt of the aforesaid notice under section 104 of the Act, the petitioner-company made an application dated November 28, 1968, in the prescribed Form 44A to the Central Board of Direct Taxes (hereinafter called "the Board"). In the said application, the petitioner had furnished the full particulars of its income and expenditure in connection with the distributable income. It was further stated that having regard to the current requirements for development of the petitioner's business, it would not be possible or advisable able to declare or pay a dividend of more than Rs. 1,68,493.80, i.e., 23% on equity and 9.30% on preference shares. The requirements, as mentioned, were described in the annexure enclosed to the petition. The Board was thus requested to reduce the amount of minimum distribution required of the petitioner under Chapter XID of the Act by an amount equal to 20% of the statutory percentage of the distributable income. In support of the application, the petitioner had enclosed the profit and loss account for the ending March 31, 1967, the statement of actual expenditure incurred on different projects by the company till date and a copy of the Board's resolution authorising the renovations. The Board, however, rejected the application by its order dated May 24, 1969. It was merely observed that the Board did not see any force in the grounds pressed to reduce the minimum distribution as required under section 104 of the Act. The application for review filed before the Board was also dismissed by order dated May 1, 1970.
4. In response to the notice received from the Income-tax Officer under section 104 of the Act, it was brought to the notice of the Income-tax Officer that the petitioner had applied for a reduction in the minimum distribution of income under section 107A of the Act. The Income-tax Officer was requested to take into consideration the law laid down by their Lordships of the Supreme Court in CIT v. Gangadhar Banerjee & Co. [1965] 57 ITR 176. It was mentioned that the Income-tax Officer could take into consideration the reasonableness of the amount distributed taking into consideration the previous losses, the present activities and the availability of the surplus money and the reasonable requirements of the future. The Income-tax Officer, however, did not consider the reasons to be satisfactory and levied additional tax under section 104 at the rate of 37% of Rs. 48,052 which was considered to be the difference between Rs. 2,18,016 and Rs. 1,69,964.
5. The aforesaid order of the Income-tax Officer has been challenged by this petition under article 226 of the Constitution of India. The petition has remained pending in this court for over 13 years and in spite of that, no counter-affidavit has been filed by the Department. The contention of Shri G. C. Sharma., the learned counsel for the petitioner, was that section 104 being in the nature of a penal provision, the burden lies on the Revenue to establish that the dividend declared was not a reasonable one and in the present case,the Revenue had miserably failed to discharge the said burden. He further contended that the Income-tax Officer had to take into consideration not the assessable income but the commercial profits of the company and in the present care having regard to the commercial profits, the dividend declared by the company should have been held to be reasonable and proper. In the petition, it has been pleaded that all the cinemas by the petitioner company were of old style and design. The board of directors of the petitioner-company, vide their resolution dated May 14, 1965, decided that suitable renovation and remodeling thereof be carried out which be commercially advantageous to the company. Accordingly, the renovation of Nigar Talkies at Kanpur was taken up during the previous year relevant to the assessment year 1967-68 and a sum of Rs. 1,34,654,51 had to be spent on that account. Renovation of the stage and furniture of Majestic and Jubilee cinema was also taken up during the said previous year and sums of Rs. 49,722,83 and Rs. 52,475 respectively were spent up to March 31, 1967. These figures have been supported by the annexures annexed to the petition. It has further been pleaded that the false ceiling in the auditorium of Nishat Talkies in Lucknow was changed at a cost of Rs. 13,388.34 as shown in annexure 'C' to the petition. The sanitation arrangements at all the cinemas were also improved upon. It is further pleaded that during the previous year, petitioner-company had also embarked upon concrete and definite plans for increasing and developing its business for which a new cinema hall in the name of Brij Cinema at Muzaffarnagar was actually commissioned on June 21, 1967, on which a sum of Rs. 4,47,353,90 had been spent up to March 31, 1967. Besides theses renovations, it is stated that the petitioner-company had decided to construct a cinema house at Ghaziabad. For the said purpose, it had entered into an agreement on November 18, 1966, for the purchase of a plot of land measuring 4,600 sq. yds. for a sum of Rs. 3,90,000 and had also advanced a sum of Rs. 15,000 to M/s. Jai Prakash, Ved Prakash and Jagat Prakash of Ghaziabad. It is pleaded that from the facts stated above, it is clear that huge funds were required for all these projects. In the circumstances, it was not possible for the petitioner-company to declare higher dividends. It was also stated that the grounds for this year were the same as were in respect of the years 1965-66 and 1966-67 for which the Board had already approved the request of the petitioner-company to declare lesser dividends.
6. The Supreme Court had occasion to consider similar questions in CIT v. Gangadhar Banerjee & Co. (Private) Ltd. [1965] 57 ITR 176. That case was concerned with the interpretation of section 23A of the Indian Income-tax Act, 1922, which is similar to section section 23A of the Indian Income-tax Act, 1922, of the Income-tax Act, 1961. The Supreme Court noticed an earlier decision of the Division Bench of the Bombay High Court in Sir Kasturchand Ltd. v. CIT [1949] 17 ITR 493. In that case, it was held that case, it was held that the reasonableness of the payment of dividend or a larger dividend has to be adjudged only with reference to the factors mentioned in that case vis-a-vis loss incurred by the company in earlier years or profits. The Supreme Court, however, did not accept the said decision and held at pages 181 and 182 of 57 ITR :
"The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. They yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the prevent profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression 'having regard to' that precedes the said words."
7. This judgment was again cited with approval in CIT v. Asiatic Tax tiles Ltd. [1971] 82 ITR (SC). In the latter case, it was held (at page 819) :
"Whether, in a particular year, dividend should be declared or not is a matter primarily for the directors of a company. The Income-tax Officer can step in under section 23A(1) only if the directors unjustifiably refrain from declaring dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the Income-tax Officer to constitute himself as a super-director."
8. In both the aforesaid decisions, it has been held that the provisions being penal provisions, the burden is on the Department to prove that a large dividend could be declared by the assessed. Applying the principles laid down, it appears that the Income-tax Officer has completely ignored the same and has passed a non-speaking order. It is not possible for this court to come to the conclusion that the Income-tax Officer has applied his mind or has discharged the burden which lay heavily on the Department.
9. The contention of the learned counsel for the Department was that the petition under article 226 is not maintainable inasmuch as the petitioner had not availed of the remedy of an appeal before the Appellate Assistant Commissioner. This argument has no force the for the reason that the appeal is barred by sub-section(9) of section 107A of the Act. The assessed had filed a petition before the Board which had been dismissed under section 107A and sub-section(9) clearly bars an appeal against the order of the Income-tax Officer under section 104 in a case where a decision has been given by the Board. The only other contention of the learned counsel for the Department was that no such material as has been placed in the writ petition was placed before the Income-tax Officer. This contention has also no merit, firstly, for the reason that no counter-affidavit to the writ petition has been filed in spite of the fact that the petition remained pending for 13 years and opportunities were granted to the Department to file a counter-affidavit. Even after the arguments in this case had concluded, I had permitted the Department to place to records of the Income-tax Officer before this court to show whether the material as stated by the petitioner existed on the file or not. In spite of an opportunity having been given, the learned counsel stated in my chamber that the records were not traceable and as such he could not place the same before me. In the circumstances, it has to be taken that full material was available before the Income-tax Officer and in any case, the Income-tax Officer could ask for any further particular from the assessed in response to the reply to the show-cause notice wherein basic facts were pleaded. It appears that no oral hearing was given to the assessed and no further records were looked into. The Income-tax Officer does not even seem to have looked into balance-sheet or profit and loss account. No reason has been assigned as to why there was a departure from the years 1965-66 and 1966-67 in which this benefit was granted to the petitioner company. In the circumstances, there is no reason to hold that the Income-tax Officer had applied his mind to the the facts of the case or the law laid down by their Lordships of the Supreme Court in the judgments mentioned above.
10. For the reasons recorded above, the rule is made absolute and the impugned orders passed by the Board and the Income-tax Officer are hereby quashed. In the circumstances, the parties are left to bear their own costs.