1981 (9) TMI 155 - AT - Income Tax

Summary

Issues:
- Appeal against the order passed under section 104 for the assessment year 1976-77.
- Whether it was reasonable for the assessee to not declare any dividends for the year 1975 in light of the profits and financial resources available.

Analysis:
The judgment by the Appellate Tribunal ITAT BOMBAY-B pertains to an appeal challenging the order passed under section 104 for the assessment year 1976-77. The assessee, a company incorporated in 1973 for manufacturing and selling chemicals, had made trading profits in 1973 before commencing production in 1974. Despite profits, no dividends were declared for the years 1973 and 1974 to support the company's manufacturing program. Previous orders under section 104 for the years 1974-75 and 1975-76 were cancelled, considering the small profits in relation to the company's expansion needs and financial resources. The appeal under consideration relates to the year 1975-76, where again no dividends were declared. The contention was that retaining earnings was necessary for the company's needs.

The Tribunal considered the plea of the assessee, emphasizing the small profits concerning the expansion program and financial requirements. The Directors' report highlighted the need to retain earnings for the company's benefit. The department argued based on the cash balance and profits/reserves, but it was noted that the company consistently invested in fixed assets. The Tribunal emphasized that the profitability assessment should consider the Directors' perspective and the company's financial demands for expansion. In this context, it was deemed unreasonable to expect the assessee to declare dividends for the year 1975, leading to the cancellation of the order under section 104.

In conclusion, the Tribunal allowed the appeal, holding that it was not reasonable for the assessee to declare dividends for the year 1975 based on the available profits and the company's expansion needs. The order under section 104 was consequently cancelled, favoring the assessee in this instance.