1989 (10) TMI 93 - AT - Income Tax

Assessment Year, Capital Redemption Reserve, General Reserve, Income Tax On Undistributed Income, Preference Shares

Summary

Issues:
- Appeal against order confirming tax demand on undistributed profits under section 104(1) of the Income Tax Act.

Analysis:

The appeal before the Appellate Tribunal ITAT DELHI-D involved a limited company challenging the order of the CIT(A) confirming the tax demand on undistributed profits under section 104(1) of the Income Tax Act. The company, an investment company, had profits of Rs. 1,46,529 after taxation for the year in question. It had set aside Rs. 58,779 for redemption reserve and Rs. 14,653 for the general reserve account as required by the Company Law. The company argued that compliance with the Companies Act provisions for appropriation of profits was mandatory before declaring dividends. The Tribunal considered the provisions of the Companies Act, specifically section 80, which mandates the creation of a capital redemption reserve for redeemable preference shares. The Tribunal noted that the company had followed the provisions of the Companies Act by transferring funds to the redemption reserve account. The Tribunal also analyzed the provisions of the Income Tax Act, particularly section 109, which outlines the calculation of distributable income. It observed that while the Companies Act mandates certain appropriations, the Income Tax Act does not provide for similar deductions. The Tribunal emphasized the need for an equitable and harmonious construction of statutes to avoid conflicts. It concluded that the amount transferred to the capital redemption reserve account should be excluded from the distributable surplus for dividend distribution calculations. As a result, the Tribunal allowed the appeal, stating that there was no shortfall in dividend distribution, rendering the tax demand under section 104(1) unjustified. The decision highlighted the importance of aligning the requirements of both the Companies Act and the Income Tax Act for fair treatment of companies in profit appropriation and dividend distribution.