1997 (4) TMI 99 - AT - Income Tax

Assessment Year, Assessment Year, Income Tax, Reasonable Cause, Reasonable Cause, Undistributed Profits, Undistributed Profits

Issues Involved:

1. Assessment of distributable income and additional income-tax liability for assessment years 1978-79, 1980-81, 1981-82, and 1983-84.
2. Validity of the agreement between the assessee and Bank of Baroda restricting dividend declaration.
3. Applicability of section 104 of the Income-tax Act and whether the assessee had reasonable cause for not declaring dividends.

Detailed Analysis:

Assessment Year 1978-79:
The assessee filed a return showing an income of Rs. 4,08,407, which included a loss from two steel divisions amounting to Rs. 17,82,947. The Assessing Officer (AO) computed the total income at Rs. 12,79,370 under section 143(3) read with section 147A, resulting in a distributable income of Rs. 5,77,972 after deductions. The AO issued a show-cause notice, and the assessee argued that the profit was only Rs. 4,08,407 and that current liabilities exceeded current assets. The AO contended that the assessee should have applied for a reduction in the minimum distribution amount under section 107A, and ruled that the private agreement with the Bank of Baroda could not override the Income-tax Act. The AO assessed additional income-tax at 37% on the distributable income.

Assessment Year 1980-81:
The AO computed the total income at Rs. 9,21,312, resulting in a distributable income of Rs. 4,68,125. The objections raised by the assessee were similar to those in the previous year and were overruled. The AO directed the payment of additional income-tax of Rs. 1,03,923 at 37% on 60% of the distributable income.

Assessment Year 1981-82:
The distributable income was computed at Rs. 6,85,421, from which a preference dividend of Rs. 40,360 was deducted. Additional income-tax was charged at 37% on the balance.

Assessment Year 1983-84:
The distributable income was computed at Rs. 15,38,218, with a preference dividend deduction of Rs. 40,360, resulting in a distributable income of Rs. 14,79,858. Additional income-tax amounting to Rs. 5,54,207 at 37% was charged.

Validity of Agreement with Bank of Baroda:
The CIT(A) disagreed with the AO, holding that the assessee could not declare dividends due to restrictions imposed by the Bank of Baroda. The CIT(A) noted that financial institutions often impose conditions to ensure loan recovery, which are lawful unless proven otherwise. The CIT(A) also observed that the assessee had taken a loan for another capital venture and cancelled the additional income-tax orders for all four years.

Applicability of Section 104 and Reasonable Cause:
The Department argued that the agreement with the Bank was a private one and could not override the Income-tax Act. The Department also contended that the assessee's financial position was sound enough to declare dividends. The assessee countered that the manufacturing division was incurring losses and the agreement with the Bank was necessary for business expansion. The assessee attempted to persuade the Bank to allow dividend declaration but was refused.

The Tribunal held that the CIT(A) was justified in cancelling the additional income-tax, noting that section 104 is penal in nature. The Tribunal found that the assessee's decision not to declare dividends was a prudent business decision influenced by the Bank's conditions. The Tribunal emphasized that the Bank's restrictions were lawful and necessary for the assessee's business survival and expansion. The Tribunal also noted that the assessee made bona fide attempts to declare dividends but was constrained by the Bank's conditions.

The Tribunal concluded that the assessee had a reasonable cause for not declaring dividends, and no additional income-tax, which is penal in nature, could be charged. The Tribunal cited various court decisions supporting the view that the provisions of section 104 should be applied from a business standpoint, not from that of a tax collector.

Conclusion:
The Tribunal dismissed the departmental appeals, affirming the CIT(A)'s decision to cancel the additional income-tax charges for all four assessment years. The Tribunal recognized the assessee's reasonable cause for not declaring dividends due to the Bank's restrictions and the need for business expansion.

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