1978 (8) TMI 17 - HC - Income Tax

Summary

Issues Involved:

1. Applicability of Section 104 of the Income Tax Act, 1961.
2. Justification for not declaring dividends.
3. Consideration of subsequent events and financial position in determining the reasonableness of not declaring dividends.
4. Interpretation of "reasonable requirements of the future" and "commercial profits."

Detailed Analysis:

1. Applicability of Section 104 of the Income Tax Act, 1961:

The assessee, a company to which Section 104 of the Income Tax Act, 1961, applies, was assessed to tax on a total income of Rs. 4,31,200, with a tax of Rs. 2,14,661 levied. Despite having a balance of Rs. 2,16,539 after tax, the company did not declare any dividend for the assessment year 1966-67. The Income Tax Officer (ITO) levied an additional tax of Rs. 50,565 under Section 104 due to the non-declaration of dividends. The Tribunal upheld this decision, stating that the capital gains included in the assessed income were not liable to be excluded from consideration in determining the distributable surplus.

2. Justification for not declaring dividends:

The assessee argued that due to the Indo-Pak war, which began on September 5, 1965, and resulted in the seizure of the company's fleet in East Pakistan, it was financially imprudent to declare dividends. The directors' report highlighted that the company's fleet worth Rs. 8,00,000 was detained, leading to a loss of income and uncertainty about the fleet's release. The Tribunal, however, rejected this contention, stating that the financial position at the end of the relevant accounting year did not justify the non-declaration of dividends.

3. Consideration of subsequent events and financial position:

The Tribunal dismissed the argument that subsequent events, such as the Indo-Pak war, should influence the decision on dividend declaration. The Tribunal emphasized that the financial position and commercial profits at the end of the accounting year were the primary considerations. However, the High Court disagreed, citing the Supreme Court's ruling in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176, which stated that the ITO should adopt a "sympathetic and objective approach" and consider the overall financial position, including future uncertainties.

4. Interpretation of "reasonable requirements of the future" and "commercial profits":

The High Court noted that the authorities below did not ascertain the amount of commercial profits made by the assessee for the relevant accounting year. The Court emphasized that the term "reasonable requirements of the future" should include any reasonable future needs, not just future business extensions. The Court also referenced the Gujarat High Court's decision in CIT v. Ramji Dayawala & Sons Pvt. Ltd. [1972] 85 ITR 37, which supported considering subsequent losses as relevant evidence for determining the reasonableness of not declaring dividends.

Conclusion:

The High Court concluded that the Tribunal erred in ignoring the significant impact of the Indo-Pak war on the assessee's financial position and future uncertainties. The Court held that the prudent directors of the assessee were justified in not declaring dividends given the circumstances. The question was answered in the negative, in favor of the assessee, with each party bearing its own costs.