1986 (1) TMI 57 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 104 of the Income-tax Act, 1961 for assessment year 1974-75.
2. Inclusion of profits from the sale of properties in Malaysia for determining distributable profits for declaration of dividends.

Analysis:

Issue 1: Interpretation of section 104 of the Income-tax Act, 1961
The case involved the assessment of an investment company's gross total income for the year 1974-75 under section 109(ii) of the Income-tax Act, 1961. The Income-tax Officer levied additional income tax as the declared dividend was deemed less than the prescribed percentage. The assessee contended that capital gains from the sale of house property and rubber estate should not be considered for section 104 purposes, citing precedents from the Bombay and Calcutta High Courts. However, the Tribunal, following previous decisions, held that dividends declared from profits of property sales do not affect capital. The High Court, considering subsequent proceedings under sections 154 and 147(b) of the Income-tax Act, maintained that the initial order under section 104 remained effective, leading to the affirmation of the Tribunal's decision.

Issue 2: Inclusion of profits from the sale of properties for determining distributable profits
Regarding the inclusion of profits from the sale of properties in Malaysia for determining distributable profits, the assessee argued that the Tribunal did not consider restrictions in the articles of association regarding dividend distribution. Citing Bombay and Calcutta High Court decisions, the assessee contended that profits from capital gains should not be automatically available for dividend distribution. However, the High Court relied on its own decisions, stating that profits from capital asset sales could be distributed as dividends unless restricted by the articles of association. The High Court found that the profits from the sale of Penang properties were treated as commercial profits by the company, making them applicable for section 104 considerations. Consequently, both questions were answered in the affirmative against the assessee, and the assessee was directed to pay the costs of the reference.

This judgment clarifies the application of section 104 of the Income-tax Act, 1961, and the treatment of profits from the sale of properties in determining distributable profits for dividend declaration, emphasizing the importance of company articles in dividend distribution decisions.