9911796707
TMI Blog1984 (4) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1962 soon after incorporation disputes started between the brothers and it is common ground that the business of the company was almost at a deadlock in December 1962. The company did not declare dividends for the assessment years 1961-62 and 1962-63. Ex parte assessment was framed against the company which was reopened later on a request to the ITO by the additional District Judge who was dealing with the company in liquidation. This is what he observed while making the request in his letter : Dated21-4-1976 " From Shri M.K. Chawla, Addl. Distt. Judge, Delhi. To The Income-tax Officer, Company Circle XV, New Delhi. Re. : Assessment of Ammonia Supplies Corpn. (P.) Ltd. (In Liquidation) Dear Sir, In the above noted winding-up case the official liquidator brought to the notice of this Court that you have decided the assessment to the best of your judgment for the year 1961-62 and further, assessment for the year 1962-63 are also pending ; And whereas the official liquidator has stated the facts that since the accounts are under audit with C.S. Bhatnagar Co. who are going through the accounts and they may require at least three months to submit their rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not call any general body meeting or transact any business or declare any dividend after the appointment of official liquidator by the Court. The official liquidator also cannot declare or distribute any dividend as such. On the liquidation or the company undistributed profits can no longer be distinguished from capital. The current and accumulated profits become merely the surplus assets in the hands of liquidator and what he distributes among the shareholders is the capital being their share in the property and assets of the company. The liquidator has to distribute the surplus with the necessary sanction of the liquidation Court. In the circumstances, the company, being legally incapable of declaring dividend, I am of the opinion that the ITO was not justified in invoking the provisions of section 104 in the facts and circumstances of the instant case. In this view of the matter, it is unnecessary for me to adjudicate upon the other objections raised by the appellant. In the result, the impugned orders under section 104 for the assessment years 1974-75 and 1976-77 are cancelled." 4. The departmental representative, on the other hand, submitted that when the profits were av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o observe that ' smallness of profit ' and brought forward losses were not only two criteria which will determine the applicability of section 23A of the 1922 Act or section 104 of the 1961 Act. But such other circumstances as may be covered in view of the language used in the section. The judgment of their Lordships of the Supreme Court, which we need not quote in extensive, has simply humarised the provisions of section 23A of the 1922 Act or section 104 of the 1961 Act, inasmuch as it has emphasized the scope of section 23A of the 1922 Act and section 104 of the 1961 Act to mean that the revenue authorities cannot be too technical in applying the provisions of section 23A or section 104 but should have the approach of reasonably prudent businessman more so in view of the fact that the provisions of section 23A of the 1922 Act and section 104 of the 1961 Act are penal provisions. As we find that the judgment of their Lordships of the Supreme Court fully cover the issue in favour of the assessee and against the revenue in view of the circumstances in which the company came to be placed, we have no hesitation in holding that the provisions of section 23A of the 1922 Act for the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend. By the time the matter was before the AAC, the assessable income was reduced by Rs. 80,926 but the AAC maintained the order under section 23A. On appeal, the Tribunal held that the dividend to the extent of Rs. 64,000 should be deemed to be distributed. The tax actually assessed on the income was Rs. 79,400. 4. The matter came up before their Lordships of the Supreme Court and it was held that as the company was actually assessed to tax in the sum of Rs. 79,400 and the company bad already distributed by way of dividends the sum of Rs. 44,000, there was only an amount of about Rs. 4,000 left which was available for distribution. The order under section 23A to the effect that an additional sum should have been distributed was not justifiable. 5. In coming to this conclusion, their Lordships had an occasion to consider the circumstances which the ITO should have taken into account while considering the reasonableness or unreasonableness of the amount distributed as dividends. And it was held that the ITO should put himself in the place of the director and he must work from the point of view of a businessman. The reasonableness or unreasonableness of the amount distributed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition for winding up of the company as submitted by Shri Guljari Lal Bhargava, one of the directors, the reasons were detailed at para 14 of the winding up petition as follows : " 14. The petitioner alleges that the other shareholder failed to carry out his part, inter alia, in the following matter--- (a) He refused to divide the profits of the business conducted under the joint sale system during the months of February and March 1960 according to the understanding between them. The arbitrators found the other shareholder liable to pay the petitioner a sum of Rs. 25,000 on account of his share of the profits for the business of this period but this amount has remained unpaid. (b) Instead of taking steps to demarcate the cylinders belonging to the individual shareholders, Shri M.L. Bhargava exchanged them with those of third parties making their identification rather difficult with the result that the demarcation was never carried out nor any rent was paid to the petitioner whose contribution in the number of cylinders far exceeded the other shareholder's. (c) Instead of handing over and closing his separate business, the other shareholder started a separate business of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to close the accounts and determine the profit as required under the Companies Act, 1956, as well as the 1961 Act. The learned counsel for the assessee before us contended that no meeting could be held and no accounts could be compiled which could determine the distributable surplus. The facts on record, however, reveal that no attempt was made by the assessee-company to get its accounts closed and determine the distributable profit as required under law. 11. As seen from the winding up petition extracted in the earlier paragraph, the dispute between the directors and the reason for winding up of the company was due to reasons other than the normal transaction of the business. As seen from the extract of para 14 of the winding up petition, the first dispute relates to profit of the business conducted under the joint sale system during the months of February and March 1960 not relevant for the years under consideration. The second reason was stated to be regarding the demarcation of the cylinders which also does not directly affect the day-to-day transaction of the business nor the distribution of the profits. The third reason was regarding the non-closing of the personal busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NewDelhi, we refer the matter to the President on the following two points : 1. Assessment year 1961-62 Whether, on the facts and in the circumstances of the case, the provisions of section 23A of the Indian Income-tax Act, 1922, were applicable ? 2. Assessment year 1962-63 Whether, on the facts and in the circumstances of the case, the provisions of section 104 of the Income-tax Act, 1961, were applicable ? THIRD MEMBER ORDER Per Shri T.D. Sugla, President --- The learned members, who heard these appeals originally have differed and have stated the points of difference as under : 1. Assessment year 1961-62 Whether, on the facts and in the circumstances of the case, the provisions of section 23A of the Indian Income-tax Act, 1922, were applicable 2. Assessment year 1962-63 Whether, on the facts and in the circumstances of the case, the provisions of section 104 of the Income-tax Act, 1961, were applicable ? Both these appeals have come up before me for disposal as per the provisions of section 255(4) of the 1961 Act. The assessee is a private limited company. The proceedings relate to its assessments for the assessment years 1961-62 and 1962-63. It is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The company being a juristic person is separate from the directors. I agree with the learned Judicial Member that irrespective of the reasons for their (directors) mutual differences, so far as the assessee-company was concerned, non-declaration and non-distribution of dividend was not motivated and was an act of sheer helplessness. 5. The next question that arises for consideration is when evidently the provisions of section 23A of the 1922 Act and section 104 of the 1961 Act are applicable, the fact that the assessee-company was helpless for the circumstances given above takes the assessee's case out of the purview of those sections. In this context, reference may usefully be made to sub-section (2) of section 104, which provides for the conditions necessary for taking a case out of the purview of section 104. It is common ground that the assessee's case will fall, if at all, under clause (i) of sub-section (2) of section 104, which is as under : " (i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared within the period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dends at a particular point of time. It was held that section 23A would not apply in such a case. The Bombay High Court decision, it may be stated, has been affirmed by the Supreme Court in CIT v. Godavari Sugar Mills Ltd. [1967] 63 ITR 310. However, the Madras High Court decision in Murlimal Santram Co. (Madras) (P.) Ltd.'s case has not been noticed by the Supreme Court and the said decision has also not been noticed by the Supreme Court in its decision in the case of Gangadhar Banerjee Co. (P.) Ltd. On the other hand, I find that the view that the losses of the earlier years and the profits for the previous year are not the only requirements upon which the ITO has to judge the reasonableness or unreasonableness of the dividends distributed has been taken by the Bombay High Court in a number of cases, viz.CIT v. Suleman Co. Ltd. [1968] 68 ITR 94 and New Star Industries (P.) Ltd. v. CIT [1968] 68 ITR 470 ; and also by the Patna High Court in Universal Bank of India Ltd. v. CIT [1967] 65 ITR 536, Having regard to the above discussion, I am inclined to agree with the learned Judicial Member that the conscientious of the judicial opinion can be stated to be that when the company ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
