1994 (11) TMI 98 - HC - Income Tax

Issues Involved:
1. Computation of distributable surplus for the imposition of additional income-tax under section 104(1) of the Income-tax Act, 1961.
2. Deductibility of penalties and interest from the distributable surplus for calculating additional income-tax under section 104 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Computation of Distributable Surplus for Imposition of Additional Income-Tax

The first question addressed whether the Tribunal was correct in holding that for the purpose of imposition of additional income-tax under section 104(1) of the Income-tax Act, 1961, the distributable surplus should be calculated with reference to the profit as per the profit and loss account. The court referenced the Supreme Court decision in CIT v. Gangadhar Banerjee and Co. (Private) Ltd. [1965] 57 ITR 176, which emphasized that the Income-tax Officer must consider the reasonableness of dividend distribution from a business standpoint, considering factors such as previous losses, present profits, availability of surplus money, and future requirements. The court noted that this principle had been consistently followed in other cases and concluded that the Tribunal's view was in line with these precedents. Therefore, the court affirmed the Tribunal's decision on this issue, answering the question in the affirmative and in favor of the assessee.

Issue 2: Deductibility of Penalties and Interest from Distributable Surplus

The second question involved whether penalties levied under sections 271(1)(a), 273(c), and interest under section 139 should be deducted from the distributable surplus for calculating additional income-tax under section 104 of the Income-tax Act, 1961. The Tribunal had followed the decision of the Calcutta High Court in Khaitan Corporation (P.) Ltd. v. CIT [1981] 128 ITR 708, which allowed the deduction of penalties from the distributable surplus from a commercial or prudent business perspective. However, the Revenue challenged this conclusion, citing the Supreme Court's decision in Bhor Industries Ltd. v. CIT [1961] 42 ITR 57, which distinguished between tax, penalty, and interest, and held that penalties and interest should not be treated as tax for deduction purposes.

The court agreed with the Revenue's argument, noting that the Tribunal had misinterpreted the Calcutta High Court's decision in Khaitan Corporation. The court also referenced the Allahabad High Court's decision in CIT v. Ramchand and Sons Sugar Mills (P.) Ltd. [1984] 145 ITR 588, which supported the view that penalties and interest should not be deducted when determining the amount on which additional income-tax is payable. Consequently, the court answered the second question in the negative and in favor of the Revenue, concluding that the assessee was not entitled to deduct penalties and interest for the purpose of calculating additional income-tax under section 104.

Conclusion:

In summary, the court held that for the purpose of imposing additional income-tax under section 104(1) of the Income-tax Act, 1961, the distributable surplus should be calculated with reference to the profit as per the profit and loss account, affirming the Tribunal's decision on this issue. However, the court ruled that penalties and interest should not be deducted from the distributable surplus for calculating additional income-tax, answering this question in favor of the Revenue.

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