1992 (10) TMI 79 - HC - Income Tax

Issues Involved:
1. Applicability of section 107A of the Income-tax Act, 1961, as a defense against the application of section 104(1) for non-declaration of dividends.
2. The procedural requirements and implications of section 107A.
3. Reasonableness and justification of non-declaration of dividends under section 104(2).

Detailed Analysis:

1. Applicability of Section 107A as a Defense Against Section 104(1):
The primary issue was whether the explanation by the assessee that dividends were not declared due to the company's expansion program could be a valid defense against the application of section 104(1) of the Income-tax Act, 1961, in light of section 107A. The assessee had not declared any dividends during the relevant assessment years (1981-82, 1982-83, and 1983-84), citing the need to conserve funds for setting up a distillery plant. The Revenue contended that the assessee should have sought relief under section 107A, which provides a mechanism for companies to apply to the Board for a reduction in the minimum distribution of dividends.

2. Procedural Requirements and Implications of Section 107A:
Section 107A allows a company to apply to the Board for a reduction in the minimum distribution of dividends if it considers that declaring a larger dividend would not be possible or advisable due to current business development requirements. The section outlines the application process, including the form, verification, and fee requirements. The Board has the discretion to reduce the minimum distribution by up to 20% of the statutory percentage of distributable income. However, the provision is directory, not mandatory, as indicated by the use of "may" instead of "shall."

The Court noted that section 107A is procedural and provides an optional route for the assessee. The assessee can choose to explain the non-declaration of dividends directly to the Income-tax Officer under section 104(2), which allows for an appeal process, rather than approaching the Board under section 107A, which limits further appeal options.

3. Reasonableness and Justification of Non-Declaration of Dividends Under Section 104(2):
Section 104 is a penal provision aimed at compelling companies to declare dividends. The additional tax under section 104(1) is not automatic and requires the Income-tax Officer to be satisfied that the non-declaration or lower declaration of dividends was unreasonable. The Tribunal found that the assessee had indeed taken steps for its expansion program, incurring significant expenses for setting up a distillery plant, which justified the non-declaration of dividends.

The Court highlighted that the Income-tax Officer must consider the reasonableness of the company's decision from a business perspective, taking into account factors like previous losses, current profits, and future financial requirements. The Supreme Court's ruling in CIT v. Gangadhar Banerjee and Co. (Private) Ltd. was cited, emphasizing that the provision must be applied from the standpoint of a prudent businessman.

The Court concluded that section 107A is not a mandatory prerequisite for justifying non-declaration of dividends under section 104(2). The assessee's explanation for conserving funds for business expansion was deemed reasonable, and the Tribunal's decision was upheld.

Conclusion:
The question referred was answered in the affirmative and against the Revenue. The Court held that section 107A is a procedural option and not a mandatory requirement for justifying non-declaration of dividends under section 104(2). The assessee's explanation for non-declaration due to business expansion was considered reasonable and valid.

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