1992 (1) TMI 32 - HC - Income Tax

Summary

Issues Involved:

1. Whether the Appellate Tribunal was right in law in cancelling the orders of the Income-tax Officer levying additional tax under section 104 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1973-74.
2. Whether 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.

Issue-Wise Detailed Analysis:

1. Issue: Cancellation of Additional Tax for Assessment Years 1972-73 and 1973-74

The court examined whether the Tribunal was correct in deleting the additional tax levied under section 104 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1973-74. The Income-tax Officer had determined that the assessee should have distributed 90% of its distributable income but had failed to do so, leading to the levy of additional tax. The Tribunal, however, deleted this levy.

Revenue's Argument:
The Revenue argued that the definition of "distributable income" under section 109(1) should consider only the total income of the relevant assessment year, not the arrears of tax. They contended that the assessee had adjusted carried-forward losses from earlier years, which should not be considered. The Revenue emphasized that the Income-tax Officer should take an overall view of the financial position and not just the smallness of profits or earlier losses.

Assessee's Argument:
The assessee argued that the tax liability of earlier years was debited to the profit and loss appropriation account, making the distributable income negligible. They contended that the Income-tax Officer should have considered the smallness of current year profits and earlier losses, not just the reserve position. The assessee maintained that the tax demand for earlier years had to be met from the current year's profits due to special circumstances.

Court's Analysis:
The court referenced several Supreme Court decisions, emphasizing that the reasonableness of dividend distribution should be judged by business considerations and not merely from the tax collector's standpoint. The court noted that the Income-tax Officer should consider factors like previous losses, present profits, and future requirements. The court found that the assessee had provided a reasonable explanation for adjusting earlier tax arrears in current profits. The court concluded that the Tribunal's decision to delete the additional tax for the assessment years 1972-73 and 1973-74 was correct.

Judgment:
The court answered the question in the affirmative and against the Revenue, upholding the Tribunal's decision to cancel the additional tax levied for the assessment years 1972-73 and 1973-74.

2. Issue: Upholding Additional Tax for Assessment Year 1974-75

The court examined whether the Tribunal was correct in upholding the Income-tax Officer's order under section 104 for the assessment year 1974-75. The Income-tax Officer had computed the distributable income and found that the assessee had distributed only 25% of the paid-up capital as dividend, which was deemed insufficient.

Assessee's Argument:
The assessee argued that the Department should have considered the additional tax liability while calculating the distributable income. They maintained that declaring a dividend of 25% of the paid-up capital was reasonable given their financial position.

Revenue's Argument:
The Revenue contended that the assessee had made significant profits and had transferred funds to the general reserve, indicating a sound financial position. They argued that the assessee should have distributed 90% of the distributable income as dividend.

Court's Analysis:
The court noted that the distributable income for the assessment year 1974-75 was substantial, and there were no unforeseen expenditures or extra tax demands. The court found that the assessee's financial position was sound, and there were no special circumstances justifying a lower dividend distribution. The court concluded that the Tribunal was correct in upholding the additional tax levy.

Judgment:
The court answered the question in the affirmative and against the assessee, upholding the Tribunal's decision to levy additional tax for the assessment year 1974-75.

Conclusion:
The court directed both parties to bear their own costs and affirmed the Tribunal's decisions for the assessment years in question.