1974 (9) TMI 5 - HC - Income Tax

Summary

Issues:
Validity of order under section 104 of the Income-tax Act, 1961 for the assessment year 1962-63.

Detailed Analysis:

Issue 1:
The primary issue in this case is the validity of the order made under section 104 of the Income-tax Act, 1961 for the assessment year 1962-63. The assessee, a private limited company engaged in contract execution, had its total income computed at Rs. 6,380 for the year. The Income-tax Officer made the assessment based on estimates under section 145 of the Act, resulting in a distributable surplus of Rs. 3,190. The contention arose regarding the necessity of declaring a dividend of Rs. 1,914, representing 60% of the distributable surplus. The Appellate Assistant Commissioner held that there was no commercial profit for distribution as dividend, leading to the cancellation of the Income-tax Officer's order under section 104. The Tribunal upheld this decision, emphasizing that the method of maintaining accounts on a completed contract basis was valid and that the directors' approach was reasonable. The Tribunal concluded that the distribution of dividend in such circumstances would not be proper. The High Court concurred with the Tribunal's decision, emphasizing that in proceedings under section 104, the focus should be on whether the profit is real or commercial, not on the correctness of the profit determination or accounting method used.

Issue 2:
The second issue pertains to the reasonableness of the payment of dividend by the assessee-company under section 104 of the Income-tax Act, 1961. The Tribunal, supported by the High Court, held that the payment of dividend would be unreasonable within the meaning of the Act. The decision was influenced by the fact that the assessee had maintained accounts properly, as audited by the company's auditors and approved by the shareholders. The Tribunal found that the directors' decision not to bring into account the estimated profit of partially completed contracts until final completion was justifiable and did not warrant dividend distribution. The High Court, in alignment with the Tribunal's reasoning, answered this question in the negative and in favor of the revenue.

In conclusion, the High Court upheld the Tribunal's decision on both issues, emphasizing the importance of focusing on real or commercial profits in section 104 proceedings and the reasonableness of dividend distribution based on proper accounting practices.