1991 (4) TMI 36 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 104 of the Income-tax Act, 1961 regarding additional income-tax on undistributed dividend attributable to secret commission.
2. Consideration of secret commission as a deductible expenditure for determining distributable income under section 104.
3. Validity of the order made under section 104 of the Act.

Analysis:
The High Court of Bombay addressed a departmental reference under section 256(2) of the Income-tax Act, 1961, concerning the assessment year 1962-63. The primary issue revolved around whether additional income-tax is payable under section 104 for undistributed dividend linked to a secret commission paid by the assessee. The assessee claimed to have paid a secret commission to an individual, which was disallowed in the assessment proceedings. The Tribunal considered whether this secret commission should be factored in while applying section 104. The court analyzed section 109(i)(g)(4) which allows deduction of expenditures not allowed in computing taxable income but related to business. The court concluded that the secret commission, though disallowed, was a business-related expenditure and should be deducted to determine distributable income under section 104, thereby eliminating any liability under the said section.

The court referred to the Supreme Court's judgment in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176, emphasizing that unless proven otherwise, amounts in financial statements represent commercial profits. In this case, as no evidence suggested the secret commission was fictitious or not incurred for business purposes, the court upheld the deductibility of the secret commission for calculating distributable income. Consequently, the court answered the referred questions affirmatively in favor of the assessee, confirming the deductibility of the secret commission and the excess dividend distribution under section 104, while deeming the order made under section 104 as valid.

In conclusion, the judgment clarifies the treatment of disallowed business expenditures like secret commissions for determining distributable income under section 104 of the Income-tax Act, 1961. It underscores the importance of proving the non-business nature of such expenditures to disallow their deduction. The court's reliance on established legal principles and precedents ensures consistency in interpreting tax laws and upholding the rights of taxpayers within the statutory framework.