Calcutta High Court
Commissioner Of Income-Tax vs Chemical Agents (P.) Ltd. on 30 July, 1986
Equivalent citations: [1987]167ITR387(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. It appears that the paper book prepared in this reference by the Revenue is incomplete. The order of the Income-tax Officer and the order of the Appellate Assistant Commissioner in appeal from the order of the Income-tax Officer in the proceedings under Section 104 of the Income-tax Act, 1961, in respect of which questions have been directed to be referred by this court have not been included in the paper book. It also appears that the order of the Tribunal rejecting the application of the Revenue under Section 256(1) of the Income-tax Act, 1961, as also the order of this court passed under Section 256(2) of the Act directing the Tribunal to refer the questions are also not included.
2. In spite of the aforesaid, learned advocate for the Revenue and Mr. R.N. Dutt, learned advocate, who was appointed by us as amicus curiae, as no one was appearing for the assessee, submitted that the question can be answered on the basis of the order of the Tribunal where the orders of the Income-tax Officer and the Appellate Assistant Commissioner had been dealt with.
3. Accordingly, we have taken up the hearing of this reference.
4. The material facts are, inter alia, that in the assessment year 1962-63, the relevant accounting year ending on April 12, 1962, M/s. Chemical Agents (P) Ltd. the assessee, was assessed to income-tax. The assessee had shown a loss of Rs. 2,975 in its return. The Income-tax Officer made an addition of Rs. 1,15,679 to the income of the assessee. Certain deposits appearing in the accounts of the assessee were claimed by the assessee to represent loans from managing directors of the assessee. The assessee had also claimed deduction of interest paid to creditors. The Income-tax Officer rejected the explanation of the assessee and treated the said deposits as income from undisclosed sources.
5. On appeal, the addition was sustained by the Appellate Assistant Commissioner.
6. Subsequent thereto the Income-tax Officer initiated proceedings under Section 104 of the Income-tax Act, 1961. It was contended that the said Rs. 1,15,679 was the commercial income of the assessee and should be taken into account in ascertaining the distributable surplus for the purpose of declaration of dividend. It was found that the assessee in the relevant assessment year did not distribute any dividend and, therefore, the Income-tax Officer levied additional super-tax of Rs. 22,586 under Section 104 of the Act.
7. Being aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner. It was contended on behalf of the assessee in the appeal that the addition did not represent the commercial income of the assessee and the same should not be taken into account in determining the distributable surplus for the purpose of declaration of dividend. The Appellate Assistant Commissioner rejected this contention of the assessee and affirmed the order of the Income-tax Officer.
8. Being aggrieved, the assessee went up in further appeal before the Income-tax Appellate Tribunal. It was reiterated before the Tribunal that the addition did not represent commercial income of the assessee and further that Section 104 of the Income-tax Act, 1961, being penal in nature it was for the Revenue to prove that the addition represented commercial income which the Revenue failed to do. It was contended further that, in fact, there was a commercial loss in the assessment year in question and the assessee was not required to distribute any dividend. The Tribunal accepted the contentions of the assessee. The Tribunal held that apart from the failure of the assessee to establish the genuineness of the loans, there was no material collected or produced by the Revenue to establish that the additions actually represented commercial income of the assessee. The Tribunal held that the Revenue was not entitled to treat the said amount as commercial income in the absence of proof. The appeal of the assessee was allowed and the additional super-tax imposed was cancelled.
9. On an application of the Revenue under Section 256(2) of the Income-tax Act, 1961, the Tribunal was directed to refer the following question, as a question of law arising out of its order, for the opinion of this court:
" Whether, on the facts and in the circumstances of the case, and having held that the sum of Rs. 1,15,679 had been rightly included in the total income as the assessee's income from undisclosed sources for the assessment year 1962-63, the Tribunal is right or justified in law in holding that the said sum could not be treated as a part of the commercial profits of the assessee-company and hence the imposition of additional super-tax under Section 104 was not called for. "
10. It appears to us that the controversy raised in the question is covered by three decisions of this court. The said decisions were brought to our notice by the amicus curiae.
(a) CIT v. Universal Fertiliser Co. (P.) Ltd. . In this case, a Division Bench of this court held that the failure of the assessee to prove the genuineness of a loan transaction may give the right to add back the amount to the income of the assessee for the purpose of assessment. It was further held that in a particular case, the facts and circumstances might also justify a finding that the amounts added back are available for distribution as dividend for the purpose of Section 23A of the Indian Income-tax Act, 1922 (which is in pari materia with Section 104 of the Income-tax Act, 1961), but where there was no other fact except that the assessee had failed to prove the genuineness of the loan transaction, the amount added back would not be available for the purpose of considering the distributable surplus and the provisions of Section 23A(1) of the Act of 1922 would not be attracted.
(b) CIT v. National Razors and Blades (P.) Ltd. . Here, another Division Bench of this court, following Universal Fertiliser Co. (P.) Ltd. , held that where there was no other fact except that the assessee had failed to prove the genuineness of certain loan transactions, it would not make the amounts added back available for the purpose of considering the distributable surplus under the provisions of Section 104 of the Income-tax Act, 1961.
(c) CIT v. Industry Side (P.) Ltd. [1985] 154 ITR 686. This is a judgment of another Division Bench of this court to which I was a party. It was held in this case also, following Universal Fertiliser Co, (P.) Ltd. , that the mere failure of the assessee to prove the genuineness of a loan transaction, while giving the Revenue a right to add back the amount to the income of the assessee for assessment, would not justify a finding that the amounts added back were available for distribution , as dividend for the purpose of Section 104 of the Income-tax Act, 1961.
11. The amicus curiae also drew our attention to a decision of the Supreme Court in CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176, where it was held by the Supreme Court that Section 23A of the Indian Income-tax Act, 1922, contained provisions of penal nature and, therefore, the Revenue had to comply with the conditions laid down in the said section strictly. The burden lay on the Revenue to prove the conditions laid down in the section. The decision of the Karnataka High Court in Somasundaram (P.) Ltd. v. CIT [1985] 152 ITR 664 was also shown to us for the proposition that where an assessee had entered into a settlement with the Revenue under Section 271(4A) of the Income-tax Act, 1961, and had admitted items of income and subsequently brought the same into the books, only then could the same be taken into consideration for determi-ing the available surplus.
12. The amicus curiae drew our attention to the orders of the Tribunal and the Appellate Assistant Commissioner passed in the assessment proceedings which have been enclosed in the paper book, recording that in the instant case, the managing director of the assessee had made a disclosure under Section 271(4A) of the Act on November 22, 1967, claiming the credit shown in the books of the company as his own money. The proceedings thereunder were still pending.
13. Learned advocate for the Revenue contended, on the other hand, that the amounts added back to the income of the assessee could lawfully be taken into account for determination of the distributable surplus in the hands of the assessee and there was no reason why the same should not be treated as commercial profits of the company. In support of his contentions he cited a number of decisions. We consider only the following ;
(a) Gobald Motor Service (P.) Ltd. v. CIT . This decision of the Supreme Court was cited for the proposition that if an item was deliberately omitted from the accounts, commercial principles did not prevent the same from being added to the profits in order to arrive at the real commercial or accounting profits.
(b) CIT v Bhowanipur Motor Accessories Agency (P.) Ltd. . In this case, an addition of Rs. 40,000 to the income of the assessee was sustained in the assessment proceedings. The Tribunal had held that for the purpose of Section 104 of the Act of 1961, the addition should be ignored and that proceedings under the said section on the basis of this addition was not justified. It was held by this court on a reference that the Tribunal ought to have considered and decided further whether the amount added represented a part of the commercial profits of the assessee and was available to the assessee for distribution by way of dividend. The matter was remanded to the Tribunal.
(c) CIT v. Sahibganj Electric Cables (P.) Ltd. . In this case, an addition was made to the income of the assessee as income from undisclosed sources as the assessee could not establish that the amounts represented valid and genuine loans.
14. On an appeal before the Tribunal, the assessee admitted that half of the amounts added represented loans which were not genuine. The addition of the admitted amount was sustained by the Tribunal.
15. Thereafter, proceedings were initiated under Section 23A of the Indian Income-tax Act, 1922. The Tribunal held that the said proceedings were not justified. This court found on the facts that the Tribunal has taken the tax liability resulting from the addition incorrectly and remanded the matter to the Tribunal to consider, after the tax liability had been correctly computed, whether there would be distributable surplus and whether the order passed under Section 23A of the Act would be justified.
16. The learned advocate for the Revenue also cited the decisions of other High Courts in Victory. Motor Transport (Nilgiris 1956) P. Ltd. v. CIT , Favre-Leuba & Co. Ltd: v. CIT [1983] 141 ITR 494 (Bom) and CIT v. Gulab Chand Keshari [1986] 158 ITR 714 (Pat). These decisions are not of any particular assistance in the instant case and need not be considered further.
17. In our view, the controversy raised in the question is directly covered by the three decisions of this court which have been brought to our notice by the amicus curiae. It cannot be disputed that, in the instant case, the addition made to the income of the assessee was treated as commercial profit in the hands of the assessee by the Income-tax Officer without any farther material to establish the nature of the amount added. The Appellate Assistant Commissioner without any other material brought on record by the Revenue held that the same was commercial profit.
18. The Tribunal, we note, took a correct view of the matter and decided in consonance with the decisions of this court noted before.
19. For the reasons as above and following the said decision of this court, we answer the question referred in the affirmative and in favour of the assessee.
20. The Revenue will pay the costs of this reference to the assessee for the negligent manner in which this paper book has been prepared and filed.
Monjula Bose, J.
21. I agree.