1984 (5) TMI 49 - AT - Income Tax

Additional Tax, Assessed Income, Assessment Year, Burden Of Proof, Capital Expenditure, Income Tax, Undistributed Profits

Issues Involved:
1. Jurisdiction of the Commissioner (Appeals) under section 104 of the Income-tax Act, 1961.
2. Liability to pay additional tax due to non-declaration of dividend.
3. Computation of distributable income, including deductions for gratuity liability and guest house expenses.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner (Appeals):
The assessee contended that the Commissioner (Appeals) exceeded his jurisdiction by reframing the entire order under section 104 of the Income-tax Act, 1961. The Commissioner (Appeals) confirmed the company's liability to pay additional tax and directed the ITO to modify his order to allow further deductions for gratuity liability and guest house expenses.

2. Liability to Pay Additional Tax:
The assessee, a limited company involved in manufacturing and selling chemicals and pharmaceuticals, did not declare any dividend for the assessment year 1977-78. The ITO issued a notice under section 104, asserting that the company should have distributed at least 45% of its distributable income, amounting to Rs. 8,98,200. The ITO levied additional tax at the rate of 25% on the shortfall of Rs. 19,96,018, amounting to Rs. 4,99,005. The Commissioner (Appeals) confirmed this penalty but allowed deductions for gratuity liability and guest house expenses.

The assessee argued that it was prevented from declaring any dividend due to smallness of profits and significant capital expenditure commitments. The Commissioner (Appeals) rejected these arguments, noting that the company's future expansion needs or recycling of profits did not constitute reasonable grounds for not declaring a dividend.

During the hearing, the assessee's counsel reiterated these arguments and provided detailed financial data, including capital commitments and cash-flow statements. The counsel argued that the additional tax was penal in nature, and the burden of proving willful default was on the revenue, which had not been met.

3. Computation of Distributable Income:
The assessee argued that certain expenditures disallowed by the ITO should have been considered while computing distributable income under section 109 of the Act. The Commissioner (Appeals) directed the ITO to allow deductions for gratuity liability of Rs. 83,036 and guest house expenses of Rs. 40,396.

The revenue's representative contended that the Commissioner (Appeals) erred in allowing these deductions. However, the assessee's counsel pointed out that the decision of the Calcutta High Court in CIT v. Jugantar (P.) Ltd. supported the deduction of gratuity liability.

Judgment:
The Tribunal accepted the assessee's submissions and deleted the additional tax levied. The Tribunal emphasized the importance of considering the decisions of the board of directors and the company's financial commitments. The Tribunal noted that the Government's philosophy of relying on internal accruals for expansion should be given weight. The Tribunal cited various judicial precedents supporting the assessee's position, including the principles that smallness of profits should be judged based on commercial principles and that the revenue must prove willful default when invoking penal provisions.

The Tribunal concluded that the assessee was justified in not declaring a dividend due to its financial commitments and the prevailing financial conditions. The Tribunal held that the additional tax under section 104 was not justifiably levied and that the revenue had not discharged its burden of proof. Consequently, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal.

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