9911796707
TMI Blog2003 (3) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77, for its failure to distribute the required statutory percentage of dividend during the concerned previous years ending on March 31, 1973, March 31, 1974 and March 31, 1975, respectively. The figures of total income-tax assessed and the distributable surplus as computed by the Income-tax Officer for the assessment years 1974-75 and 1975-76 are as under Assessment year 1974-75 (Rs.) 1975-76 (Rs.) 1. Total income assessed 3,22,580 72,130 2. Less : taxes payable thereon 2,20,160 49,228 3. Distributable surplus 1,02,420 22,902 4. Dividends that ought to have been declared by the company, i.e., 90 per cent. 92,223 20,612 5. Dividend declared by the assessee-company Nil Nil 6. Debit balance in the profit and loss account 91,472 20,508 7. Capital reserve shown in the balance-sheet 7,45,109 7,45,109 The petitioner's business of agricultural activities had resulted in losses year after year and the accumulated losses at the commencement of the year 1974-75 was Rs. 3,93,610 and for the year 1975-76 the loss was Rs. 91,47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital reserve of Rs. 7,45,109. He also held that such a huge capital reserve was not required by the company for the purpose of any business requirement. Consequently, the Income-tax Officer held that the appellant was liable to additional income-tax of 50 per cent. of the profit available, which was fixed at Rs. 51,210 for the year 1974-75 and Rs. 11,451 for the year 1975-76. The appeals filed by the appellant before the Appellate Commissioner of Income-tax were rejected by upholding the orders of the Income-tax Officer. Further appeals to the Income-tax Appellate Tribunal resulted in full relief to the appellant as the Tribunal agreed with the contentions of the appellant and held that the provisions of section 104 of the Act could not be invoked by the Income-tax Officer in both the assessment years, i.e., 1974-75 and 1975-76. At the instance of Revenue a reference was made under section 256(1) of the Income-tax Act, 1961, to the High Court of the following questions of law: "1. Whether, on the facts, and in the circumstances of the case, the Tribunal was right in law in holding that the capital gains of Rs. 7,45,109 could not be considered for purposes of computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt under section 11." The statutory percentage of dividend distributable, is prescribed at different rates in clause (iii) of section 109 of the Act. The expression "gross total income" is defined in clause (iv) of section 109 as "total income as computed in accordance with provisions of the Act". Section 2(45) of the Act defines "total income" as the total amount of income referred to in section 5, computed in the manner laid down in the Act. There is no doubt that capital gains falling within section 45 of the Act would be chargeable to income-tax under the head "Capital gains" and in the manner indicated in the fasciculus of sections 45 to 55A. Learned counsel for the appellant urged the following contentions in support of the appeal: (a) That the sale proceeds of agricultural land are totally exempt from the charge of tax under section 45 of the Act by reason of section 47(viii); hence, the capital gains accruing as a result of the compensation paid could never have formed part of the "total income" of the appellant-assessee; (b) That capital gains are not commercial or business profits, nor are they income in the true sense of the term, although by legislative f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains and not part of the "gross income" or the distributable income for the purpose of section 104 of the Act. The High Court rejected the contention of the appellant-assessee by emphasising that the capital gain was part of assessable income of the assessee, following the view taken by other High Courts as in Cardamom Marketing Company (Travancore) Ltd. v. CIT [1986] 158 ITR 621 (Ker) and CIT v. South India Corporation P. Ltd. [1990] 183 ITR 361 (Ker). The High Court was persuaded to hold that if such losses as are referred to in clause (d) are deductible from the gross total income, there is no scope for entertaining a doubt that the capital gains form part of the gross total income of the company within the meaning of section 109 of the Act. We are afraid that the point has been entirely missed. In neither judgment of the Kerala High Court relied upon was there advertence as to what would happen if the capital asset transferred was agricultural land. In Cardamom case [1986] 158 ITR 621 (Ker), the only argument urged was that the capital gains were not part of the business profits, and therefore, could not be taken into account in reckoning the distributable income. This con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s put back in the profit and loss account, and thereafter if only a part of such gains is distributed as dividend, it would be open to the Income-tax Officer to go into the question whether a greater proportion of such gains should have been distributed. This would be an exceptional case. But, where the entire surplus is channeled into reserves it is not for the Income-tax Officer to lay down that it should have been treated as profits." In Factors (P.) Ltd. v. CIT [1975] 98 ITR 105 (Mad), a case arising under section 23A of the Act of 1922, it was held by the Madras High Court that whether the capital gain in a particular case is to be treated as profits available for distribution under section 23A or as a capital return would depend on the facts and circumstances of each case. In certain cases capital gain would be in the nature of return of capital itself and in those cases they would not be considered for exceptional cases, it was held that the Revenue would be justified in considering the amounts received by way of capital gains as forming part of the profits of an assessee while exercising the powers under section 23A of the 1922 Act. In our view, there is really no confl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a company normally distributes dividends out of its business profits and not out of its assessable income. There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. In CIT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176, this court, while dealing with the corresponding provision under the 1922 Act, held: "The Income-tax Officer, acting under this section, is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business." The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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