1988 (4) TMI 105 - AT - Income Tax

Earned Income Income From Other Sources Income Tax Investment Company Manufacture Or Processing Of Goods Set Off Undistributed Profits

Summary

Issues Involved:
1. Classification of the assessee-company as either a manufacturing company or an investment company.
2. Applicability of Section 104 of the Income-tax Act.
3. Computation of distributable income and the rate of tax applicable.
4. Adequacy of profits and reserves for declaring dividends.

Detailed Analysis:

1. Classification of the Assessee-Company:
The primary issue is whether the assessee-company can be classified as a company engaged in the manufacture or processing of goods or as an investment company. The Income-tax Officer classified the assessee as an investment company because the income from manufacturing activities was reduced to nil due to the set-off of brought forward losses. The assessee contended that it should be regarded as a manufacturing company since its substantial income was from manufacturing activities, even though this income was not taxed due to set-offs.

2. Applicability of Section 104 of the Income-tax Act:
Section 104(1) of the Income-tax Act mandates that if the profits distributed as dividends are less than the statutory percentage of the distributable income, the company is liable to pay income-tax at 50% in the case of an investment company. However, sub-section (4) excludes companies engaged mainly in manufacturing, processing of goods, or mining from this provision, provided that the income from these activities constitutes at least 51% of the gross total income. The Explanation to sub-section (4) clarifies that the gross total income must include income attributable to manufacturing or processing activities.

3. Computation of Distributable Income and Rate of Tax:
The Income-tax Officer computed the distributable income as Rs. 1,07,381 and levied a tax of Rs. 46,430. The computation included:
- Gross total income: Rs. 2,43,425
- Less: Tax payable: Rs. 55,786 and expenses allowed: Rs. 81,258
- Balance distributable income: Rs. 1,07,381
The Commissioner (A) confirmed this assessment, stating that the gross total income of Rs. 2,16,230 consisted only of income from other sources, not manufacturing activities. The Tribunal held that the definition of gross total income includes income computed in accordance with the Act before deductions under Chapter VI-A. Therefore, the income from manufacturing activities must be a positive amount and more than 51% of the total income to qualify for the exemption under sub-section (4).

4. Adequacy of Profits and Reserves for Declaring Dividends:
The assessee argued that it could not declare dividends due to the smallness of profits and past losses. However, the Commissioner (A) noted that the general reserve of the company was Rs. 25 lakhs, indicating sufficient resources to declare dividends. The Tribunal agreed, stating that the liquid position of the company was not weak, and the profit and loss account did not show a debit balance. Therefore, the company could not claim inadequacy of profits as a reason for not declaring dividends.

Conclusion:
The Tribunal concluded that the authorities correctly applied the provisions of Section 104, but the rate of tax applicable should be 25% instead of 50%, as the company could not be classified as an investment company solely based on the income from other sources. The appeal was allowed in part.