1982 (4) TMI 98 - AT - Income Tax

Issues Involved:
1. Applicability of Section 104 of the Income-tax Act, 1961.
2. Restrictions under the Companies (Temporary Restrictions on Dividends) Act, 1974.
3. Financial commitments and liquidity issues of the assessee.
4. Advances made to a firm in which a director was a partner.
5. Interpretation and application of Supreme Court decision in CIT v. Gangadhar Banerjee & Co. (P.) Ltd.

Detailed Analysis:

1. Applicability of Section 104 of the Income-tax Act, 1961:
The revenue appealed against the Commissioner (Appeals) who canceled the ITO's order under section 104 of the Income-tax Act, 1961, which levied additional tax for the assessee's failure to distribute dividends within the statutory time limit. The ITO rejected the assessee's explanation for not declaring dividends and levied additional income-tax at 25% on the shortfall of Rs. 5,90,654.

2. Restrictions under the Companies (Temporary Restrictions on Dividends) Act, 1974:
The Commissioner (Appeals) accepted the argument that the Companies (Temporary Restrictions on Dividends) Act, 1974, limited the assessee to declare dividends not exceeding one-third of the profits, conflicting with the requirement under section 104 to declare 45% of the profits. This legislative conflict was a significant factor in the Commissioner (Appeals) decision to cancel the ITO's order.

3. Financial commitments and liquidity issues of the assessee:
The Commissioner (Appeals) considered several financial constraints faced by the assessee:
- The necessity to shift the factory due to municipal corporation pressure, which required substantial funds.
- The curtailment of bill discounting facilities by the Central Bank of India.
- The impending gratuity liability due to the delay in the approval of the gratuity fund, which strained the assessee's financial liquidity.
The Commissioner (Appeals) found these factors significantly affected the assessee's liquidity and justified the non-declaration of dividends.

4. Advances made to a firm in which a director was a partner:
The revenue argued that the assessee advanced significant amounts to a firm where a director was a partner, suggesting misuse of distributable profits. However, the assessee clarified that these advances were for purchasing yarn, essential for its business operations, and not for unrelated purposes. The Commissioner (Appeals) accepted this explanation.

5. Interpretation and application of Supreme Court decision in CIT v. Gangadhar Banerjee & Co. (P.) Ltd.:
The Supreme Court's decision in Gangadhar Banerjee & Co. (P.) Ltd. was pivotal. It emphasized that section 104 is a penal provision and must be applied considering the overall financial position and reasonable business needs. The ITO must act as a prudent businessman, taking into account all relevant circumstances beyond just losses or smallness of profits. The Commissioner (Appeals) applied this principle, concluding that the assessee's financial constraints and statutory restrictions justified the non-declaration of dividends.

Conclusion:
The appellate tribunal upheld the Commissioner (Appeals) decision, dismissing the revenue's appeal. It agreed that the assessee's financial commitments, statutory restrictions, and prudent business considerations justified the non-declaration of dividends, aligning with the Supreme Court's guidance in Gangadhar Banerjee & Co. (P.) Ltd. The tribunal found no grounds to interfere with the Commissioner (Appeals) order, thereby supporting the assessee's position.

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