1989 (12) TMI 88 - AT - Income Tax

Additional Tax, Additional Tax, Investment Company, Investment Company, Undistributed Profits

Summary

Issues:
1. Whether an order under section 104 for not distributing dividends by an Investment Company is justified.
2. Whether the company had valid reasons for not declaring dividends despite having profits.
3. Whether the company's financial position and loan conditions justified the non-declaration of dividends.
4. Whether the company's compliance with loan repayment conditions and utilization of funds were appropriate.
5. Whether the decision of the CIT(Appeals) to allow the appeal was correct.

Analysis:
1. The judgment revolves around the objection against the cancellation of an order under section 104 for an Investment Company that had dividend income as its sole source of income. The company had profits but did not declare any dividends. The assessment was completed with a final taxable income of Rs. 1,53,716 after deductions under section 80M.
2. The company explained that it had heavy borrowings and financial commitments towards interest and principal repayment, which led to the decision of not declaring dividends to meet loan payment obligations. The ITO imposed additional tax under section 104, but the CIT(Appeals) allowed the appeal considering the financial constraints faced by the company.
3. The tribunal examined the company's financial history, loan conditions, and utilization of funds. It found that the company had borrowed funds for investments and had to adhere to conditions set by the bank, prohibiting dividend declaration until loan repayment. The tribunal concluded that under such circumstances, it was not advisable for the company to declare dividends.
4. The tribunal assessed the company's compliance with loan repayment conditions and found that the company had utilized its funds to repay loans from banks. There was no evidence of fund diversion for other purposes, as reflected in the balance sheet.
5. The tribunal referred to a similar case where the failure to declare dividends was justified due to repayment liabilities. It dismissed the Departmental appeal, emphasizing that not every company can declare a moratorium on dividends, and such decisions must be based on the reasonableness of loan conditions. The tribunal upheld the decision of the CIT(Appeals) in favor of the company, considering its financial constraints and loan repayment obligations.