1987 (6) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee-company is a company whose business consists wholly or mainly in dealing in or holding of investments within the meaning of Explanation 2(i) to section 23A of the Indian Income-tax Act, 1922.
2. Whether it would be reasonable for the company to have paid a larger dividend than that declared by it.

Issue-wise Detailed Analysis:

Issue 1: Whether the assessee-company is a company whose business consists wholly or mainly in dealing in or holding of investments within the meaning of Explanation 2(i) to section 23A of the Indian Income-tax Act, 1922.

The Income-tax Officer initially classified the assessee as an investment company under section 23A of the Indian Income-tax Act, 1922, requiring it to distribute 90% of its distributable surplus by way of dividends. The assessee contested this classification, asserting that its business did not consist wholly or mainly of dealing in or holding investments. The Appellate Assistant Commissioner supported the assessee's claim, noting that while the assessee earned significant income from dividends and share dealings, it also had substantial income from other sources. Consequently, the Appellate Assistant Commissioner concluded that the assessee was not an investment company within the meaning of section 23A and was only required to distribute 60% of its distributable surplus.

The Revenue appealed to the Income-tax Appellate Tribunal, which upheld the findings of the Appellate Assistant Commissioner. The Tribunal relied on the Supreme Court decision in CIT v. Distributors (Baroda) Pvt. Ltd. [1972] 83 ITR 377, which interpreted "holding of investments" as a real, substantial, systematic, or organized course of activity aimed at earning profits. The Tribunal found that the assessee's business did not fit this description.

The Revenue cited several cases to argue that the assessee should be considered an investment company, including CIT v. Distributors (Baroda) P. Ltd., Nawn Estates (P) Ltd. v. CIT, CIT v. Coochbehar Trading Co. Pvt. Ltd., and CIT v. Mother India Fire & General Insurance Co. Ltd. These cases supported the notion that income from interest and rent should be considered income from investments. However, the Tribunal maintained that the assessee's business activities did not primarily involve dealing in or holding investments.

Issue 2: Whether it would be reasonable for the company to have paid a larger dividend than that declared by it.

The assessee argued that it had declared dividends in accordance with its commercial profits and business liabilities. The Appellate Assistant Commissioner found that the net profit as per the profit and loss account was Rs. 6,18,526, which, after adjustments and tax deductions, left the assessee with Rs. 2,17,428. Given that the assessee declared dividends totaling Rs. 2,75,000, it was concluded that the declared dividends were adequate and that the assessee could not have declared a higher dividend.

The Tribunal upheld this view, noting that additional tax demands from earlier assessment years were met from the available funds, and no extra funds were available for larger dividends. The Tribunal dismissed the Revenue's appeal, agreeing that the assessee could not have declared a larger dividend.

The High Court considered the Revenue's argument that the assessee could have paid a larger dividend, but found the assessee's computations and contentions persuasive. The Supreme Court's decision in CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 was cited, emphasizing that the reasonableness of dividend payments should be judged from the company's perspective, considering business considerations and financial position.

Judgment:

The High Court answered question No. 2 in the affirmative and in favor of the assessee, concluding that it would not be reasonable for the company to have paid a larger dividend than declared. Consequently, question No. 1 did not require an answer. The reference was disposed of accordingly, with no order as to costs.