1971 (3) TMI 12 - HC - Income Tax

Jurisdiction Of High Court - case involves the interpretation of section 205 of the Companies Act 1956 - revenue raised a preliminary objection that this writ petition should not be entertained in view of the pendency of the appeal which gives an adequate remedy to the company - held that HC could not interfere in the matter under article 226 and the assessee should have pursued the remedy of appeal

Summary

Issues:
1. Interpretation of Section 205 of the Companies Act, 1956, in relation to the Income-tax Act, 1961.
2. Validity of the impugned order of assessment under Section 104(1) of the Income-tax Act.
3. Application of Section 104(2) of the Income-tax Act in determining the reasonableness of dividend distribution.

Analysis:

The judgment involves a private limited investment company assessed for income-tax for the year 1963-64. The company's main income source is house property, with a net loss shown in the audited accounts. The Income-tax Officer assessed additional super-tax under Section 104 of the Income-tax Act, leading to a writ petition to challenge the assessment.

1. The petitioner argued that Section 205 of the Companies Act, prohibiting dividend declaration without providing for depreciation, affects the liability under Section 104 of the Income-tax Act. The court disagreed, stating that the income-tax authorities must follow the provisions of the Income-tax Act in such matters, not the Companies Act.

2. The validity of the assessment under Section 104(1) was challenged on two grounds. Firstly, it was argued that liability arises only when dividends are distributed, which was deemed an absurd interpretation by the court. Secondly, it was contended that the tax is penal and not applicable due to the prohibition on dividend distribution by the Companies Act. The court did not decide on this issue, leaving it to the Income-tax authorities.

3. The company also raised a point under Section 104(2), claiming that the Income-tax Officer should consider various factors, including commercial profits and legal restrictions on dividend distribution. The court cited a Supreme Court decision supporting this argument but declined to interfere, stating that it involves factual considerations and discretion under the Income-tax Act.

In conclusion, the court dismissed the writ petition, emphasizing that the issues raised require proper adjudication by the revenue authorities under the Income-tax Act. The judgment highlights the complex interplay between the Companies Act and the Income-tax Act in assessing taxation liabilities for companies, especially concerning dividend distribution and profit considerations.