1991 (6) TMI 96 - AT - Income Tax

Summary

Issues Involved:

1. Applicability of Section 104 of the Income Tax Act.
2. Classification of the assessee as a "Trading Company" or "Industrial Company."
3. Determination of distributable income and additional tax.
4. Interpretation of "processing" versus "manufacturing" activities.
5. Bifurcation of profits between manufacturing and trading activities.

Detailed Analysis:

1. Applicability of Section 104 of the Income Tax Act:

The assessee contested the order passed by the IAC under section 104 of the Act, which raised additional tax of Rs. 8,01,524 due to the declaration of a dividend less than 60% of the distributable income. The IAC considered the assessee as a "Trading Company" and applied Section 104, which mandates a higher dividend distribution. The assessee argued that it was engaged in manufacturing/processing activities, which would exempt it from Section 104 under sub-section (4).

2. Classification of the Assessee as a "Trading Company" or "Industrial Company":

The IAC classified the assessee as a "Trading Company" based on the observation that the purchase of finished products was shown in the manufacturing account, indicating that trading activities constituted more than 51% of the business. The assessee argued that it was engaged in processing activities, as it further processed purchased dyes to meet customer specifications. The CIT(A) upheld the IAC's classification, noting that the assessee's activities did not involve significant transformation to qualify as manufacturing.

3. Determination of Distributable Income and Additional Tax:

The IAC issued a notice to the assessee to show cause why Section 104 should not apply, resulting in an additional tax demand. The assessee contended that even if considered a trading company, the dividend declared was more than the statutory requirement when considering the profits from processed dyes. The CIT(A) and IAC disagreed, leading to the appeal before the Tribunal.

4. Interpretation of "Processing" versus "Manufacturing" Activities:

The assessee claimed that its activities constituted "processing," citing the Supreme Court's decision in Chowgule & Co. Ltd. and other high court rulings, which recognized blending and mixing as processing activities. The CIT(A) and IAC argued that the activities did not change the chemical composition of the dyes and thus did not qualify as manufacturing. The Tribunal found merit in the assessee's argument, noting that the activities involved significant processing to meet customer specifications.

5. Bifurcation of Profits Between Manufacturing and Trading Activities:

The Tribunal accepted the assessee's bifurcation of profits, showing that 79.62% of profits were attributable to manufacturing activities. Under Section 109(3), the assessee was required to distribute 60% of the profits attributable to trading activities, which was Rs. 2,53,130. Since the assessee declared a dividend of Rs. 6,00,000, the Tribunal concluded that Section 104 was not applicable.

Conclusion:

The Tribunal found in favor of the assessee, determining that the activities constituted "processing" and thus exempt from Section 104 under sub-section (4). Even if considered a trading company, the dividend declared exceeded the statutory requirement for trading profits. The orders of the IT authorities were set aside, and the appeal was allowed.