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Issues:
1. Interpretation of whether a sum added back as income from undisclosed sources can be treated as commercial profit for the purpose of declaring dividends under section 104 of the Income Tax Act, 1961. 2. Determining the burden of proof on the Department regarding the nature of the disputed sum as commercial income for dividend declaration under section 104. 3. Validity of the Tribunal's decision to cancel the order made by the Income Tax Officer under section 104 of the Income Tax Act, 1961. Analysis: The case involved a private limited company for the assessment year 1963-64, where the Income Tax Officer (ITO) added a sum of Rs. 40,000 as income from undisclosed sources to the assessee's total income. The ITO treated this sum as commercial profit and initiated penalty proceedings under section 104 of the Income Tax Act, 1961, against the assessee for not declaring any dividend despite the distributable surplus. The main issue was whether the sum of Rs. 40,000 could be considered as commercial profit for dividend declaration purposes. The Tribunal held that the burden of proof lies on the Department to establish that the undisclosed sum was the commercial income of the assessee. The Tribunal concluded that the sum of Rs. 40,000 could not be considered as commercial income in this case, as the ITO failed to prove it as the assessee's income, thereby upholding the assessee's position. In determining the burden of proof, the Tribunal relied on established legal principles. Referring to the case law of CIT v. Universal Fertilizer Co. Ltd., it was highlighted that the failure of the assessee to prove the genuineness of a transaction does not automatically justify the addition of the amount to the income for dividend distribution purposes. Additionally, the judgment in Banga Luxmi Hosiery Mills Pvt. Ltd. v. CIT was distinguished, emphasizing the difference in circumstances where an amount was added back due to failure in proving the nature and source of a loan. The Tribunal's decision was deemed appropriate as it aligned with legal precedents and the specific facts of the case. Ultimately, the High Court ruled in favor of the assessee on all three questions. Question one was answered negatively, stating that the sum of Rs. 40,000 could not be treated as commercial profit. Question two was decided in favor of the assessee, affirming that the burden of proof rested on the Department to establish the disputed sum as commercial income for dividend declaration. Question three was answered in the affirmative, supporting the Tribunal's decision to cancel the order made by the Income Tax Officer under section 104. No costs were awarded in this case. Both judges, SUHAS CHANDRA SEN and DIPAK KUMAR SEN, concurred with the judgment.
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