1990 (4) TMI 8 - HC - Income Tax

Summary

Issues:
Interpretation of section 104 of the Income-tax Act, 1961 regarding additional income-tax liability for assessment years 1971-72 and 1973-74 based on distributable surplus and business activities.

Analysis:
The judgment concerns an assessee, a limited company engaged in manufacturing tiles and clay products, facing additional income-tax liability for assessment years 1971-72 and 1973-74 due to unabsorbed depreciation and long-term capital gains resulting in substantial total income. The issue revolved around the applicability of section 104 of the Income-tax Act, 1961, requiring the distribution of 90% of distributable surplus as dividends. The assessee contended that its business activities fell under section 104(4)(a) of the Act, exempting it from additional income tax.

The Assessing Officer imposed additional income tax on the assessee for not distributing dividends as per section 104. However, the Appellate Assistant Commissioner, relying on Board's Circular No. 103, held that since the assessee's sole business was manufacturing tiles and clay products, section 104 did not apply. The Tribunal also supported this view, stating that the assessee's continuous engagement in manufacturing activities since 1946 placed it under section 104(4)(a) of the Act.

The court analyzed the relevant provisions of section 104, particularly section 104(4)(a) and the Explanation, which deems a company mainly engaged in manufacturing or processing goods if income from such activities constitutes over 51% of total income. The court emphasized that the term "mainly" in section 104(4)(a) did not exclude companies solely engaged in specified business activities. The Explanation aimed to clarify the applicability of section 104 to companies with multiple business activities.

Referring to a previous case, the court highlighted that the Explanation's purpose was to determine if a company was mainly engaged in specific business activities, with no need to fulfill the Explanation's requirements if the company's sole business activity aligned with section 104(4)(a). The court differentiated cases involving multiple business activities from the present case, where the assessee's only business was manufacturing tiles and clay products.

In conclusion, the court upheld the Tribunal's decision, ruling that the assessee fell under section 104(4)(a) and was not liable for additional income tax. The judgment emphasized that the Explanation did not restrict the scope of section 104(4)(a) and clarified its application to companies engaged solely in specified business activities. The court dismissed the Revenue's appeal and awarded costs to the assessee.