1983 (7) TMI 32 - HC - Income Tax

Issues Involved:

1. Entitlement of the assessee-company to a certificate under Section 197(3) of the Income Tax Act, 1961, for non-deduction of tax at source from dividends.
2. Determination of the company's entitlement to deductions under Section 80J.
3. Calculation of profits and gains attributable to deductions under Section 80J.
4. Appropriate proportion of dividends deductible under Section 80K.

Detailed Analysis:

1. Entitlement to Certificate under Section 197(3):

The primary issue is whether the assessee-company is entitled to a certificate under Section 197(3) of the Income Tax Act, 1961, stating that tax need not be deducted at source from the dividend. The petitioner-company claims this entitlement based on its benefits under Section 80J, which allows deductions for profits and gains from newly established industrial undertakings. The company argues that since it is entitled to these deductions, its shareholders should benefit from Section 80K, which provides for deductions from total income in respect of dividends attributable to such profits and gains.

2. Determination of Entitlement under Section 80J:

The petitioner-company asserts its entitlement to deductions under Section 80J for the assessment years starting from 1969-70. This section provides for deductions in respect of profits and gains from new industrial undertakings for five years. The company began production in 1967-68 and declared its first dividend in 1972. The Revenue, however, disputes the actual deductions obtained under Section 80J, which impacts the shareholders' entitlement to deductions under Section 80K.

3. Calculation of Profits and Gains Attributable to Section 80J:

The petitioner-company claims significant deductions under Section 80J, amounting to Rs. 10,46,59,377, which was later revised to Rs. 13,21,36,159 after orders from the Tribunal. The Revenue disputes these figures, arguing that the profits are not wholly attributable to deductions under Section 80J. The final determination of the company's entitlement to these deductions is crucial for issuing a certificate under Section 197(3).

4. Appropriate Proportion of Dividends Deductible under Section 80K:

Section 80K allows for deductions from the total income of a person in respect of dividends attributable to profits and gains from new industrial undertakings. The petitioner-company contends that its shareholders are entitled to this benefit, and thus, no tax should be deducted at source from the dividends. However, the Revenue argues that the company's entitlement to Section 80J benefits is under dispute, affecting the applicability of Section 80K.

Court's Decision:

The court held that the petitioner-company is entitled to apply for a determination under Section 197(3) to ascertain the appropriate proportion of the dividend deductible under Section 80K. The Income Tax Officer (ITO) is required to make this determination based on the company's entitlement to deductions under Section 80J and the shareholders' entitlement under Section 80K. The court emphasized that the ITO must act according to the current legal position until any contrary decision by the Supreme Court. The ITO's failure to make this determination constitutes a failure to exercise jurisdiction and perform statutory duties.

The court refrained from determining specific amounts of deductions under Section 80J and the attributable profits and gains, stating that these are matters for the income-tax authorities to decide. The court directed the ITO to ascertain all relevant facts and determine whether any tax is deductible from the dividends payable to the shareholders, and if so, the appropriate proportion.

The writ petitions were allowed to the extent indicated, with costs awarded to the petitioner-company. The ITO was directed to make the necessary determination under Section 197(3) in light of the court's judgment.

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