2009 (7) TMI 28 - HC - Income Tax

Statutory rate of tax - Linked with declaration of Dividend Section 104(2) of Income Tax Act, 1961 - Assessing Officer resorted to provision of Section 104(1) of the Act and applied the statutory rate of tax stipulated thereunder on the ground that the assessee did not declare the dividend, as required. Justification put forth by the assessee for not declaring the dividend was found not acceptable. Statutory rate of tax held to be applicable.

Summary

Issues:
1. Applicability of Section 104 of the Income Tax Act to a company not declaring any dividend.
2. Determination of whether the profits of the assessee-company were small within the meaning of 'Smallness of profits' in Section 104(2) of the IT Act and if the declaration of dividend would have been reasonable.

Analysis:
Issue 1: The Assessing Officer invoked Section 104(1) of the Income Tax Act and applied the statutory rate of tax due to the company not declaring dividends. The assessee's justifications for not declaring dividends were deemed unacceptable, including the need for funds for loan repayment, land purchase, and future investments. The Assessing Officer's decision was upheld by the CIT(A) and the Tribunal, emphasizing the statutory requirement for dividend declaration under Section 104.
Issue 2: The Tribunal found that the assessee's reasons for not declaring dividends, such as past losses and fund retention for loan repayment, were not valid. The Tribunal noted the financial position of the company, highlighting the net profit available for dividend distribution. The Tribunal concluded that the company's profits were not small enough to justify the non-declaration of dividends, as the net profit carried to the profit and loss appropriation account was considered substantial.
Conclusion: The Tribunal's decision was based on the provisions of Section 104 of the Act, which allow for the imposition of the statutory rate of tax when dividends are not declared as required. As the case did not fall under the exceptions outlined in Section 104(2), the Tribunal ruled in favor of the revenue, emphasizing the importance of complying with dividend declaration requirements under the Act.