1984 (2) TMI 50 - HC - Income Tax

Issues Involved:
1. Applicability of Section 104 of the Income-tax Act, 1961.
2. Determination of statutory percentage of dividend.
3. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961.
4. Relevance of Explanation to Section 109(iii)(3) in determining statutory dividend.
5. Refund of tax paid under Section 104.

Detailed Analysis:

1. Applicability of Section 104 of the Income-tax Act, 1961:
Section 104 of the Income-tax Act, 1961, comes into operation if the Income-tax Officer (ITO) is satisfied that the dividend distributed by a company is less than the statutory percentage of the distributable income. If the dividend declared is less, the company becomes liable to pay income-tax as provided in that section.

2. Determination of Statutory Percentage of Dividend:
The petitioners, a public limited company, were assessed for the assessment year 1972-73 with a gross total income of Rs. 1,13,40,162 and a distributable income of Rs. 29,56,751. The income from manufacturing activities was Rs. 10,93,996 (37% of distributable income), and the income from trading activities was Rs. 18,62,755 (63%). Under Section 109(iii)(3), the company was not liable to declare any dividend for the income from manufacturing activities but was required to declare 90% of the income from trading activities, amounting to Rs. 16,76,479. The company declared a dividend of Rs. 17 lakhs.

3. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961:
The Commissioner revised the ITO's order under Section 263 on the grounds that the computation of income-tax under Section 104 was incorrect. The Commissioner computed the tax payable as Rs. 4,64,998. However, the Tribunal held that the Commissioner had no jurisdiction to pass an order under Section 263 as no prejudice was caused to the Revenue by the ITO's order. The Tribunal found no shortfall in the declaration of dividend, and thus, the petitioners were not liable to pay additional income-tax under Section 104.

4. Relevance of Explanation to Section 109(iii)(3) in Determining Statutory Dividend:
The Explanation to Section 109(iii)(3) applies to companies with composite income from manufacturing and non-manufacturing activities. It specifies that for the purpose of Section 104, the dividend "actually distributed" is deemed to be proportional to the remaining gross total income. However, the Explanation is relevant only for determining income-tax payable under Section 104 and not for determining whether the statutory percentage of dividend has been declared. The court held that the ITO and the Commissioner wrongly applied this Explanation to determine the statutory dividend, leading to their orders being set aside.

5. Refund of Tax Paid under Section 104:
The petitioners paid Rs. 4,64,998 as tax under Section 104 pursuant to the Commissioner's decision. Since the court found that no tax under Section 104 was payable by the petitioners for the relevant assessment year, the respondents were directed to refund the said amount to the petitioners. The rule was made absolute, and the respondents were ordered to pay the petitioners' costs of the reference.

Conclusion:
The court concluded that the ITO and the Commissioner erred in applying the provisions of the Explanation to Section 109(iii)(3) to determine whether the statutory dividend was declared. Since the company declared more than the statutory percentage of dividend, Section 104 did not apply. The orders of the ITO and the Commissioner were set aside, and the petitioners were entitled to a refund of the tax paid. The Tribunal's decision that the Commissioner had no jurisdiction under Section 263 was upheld, and the Income-tax Application No. 64 of 1983 was discharged with costs.

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