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TMI Blog1972 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... have been a higher percentage of dividend declared - - - - - Dated:- 16-6-1972 - Judge(s) : P. GOVINDAN NAIR., K. SADASIVAN. JUDGMENT The judgment of the court was delivered by GOVINDAN NAIR J.-A common question arose in relation to the assessments for the years 1962-63 and 1963-64 of M/s. Kerala Balers Ltd., Alleppey. This was disposed of by a common order by the Income-tax Appellate Tribunal, Cochin Bench, and that Tribunal has referred the following question to this court : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the payment of a larger dividend would be unreasonable and in cancelling the Income-tax Officer's orders under section 104 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate higher than 6 per cent. This limitation was later altered to 10 per cent. From December 31, 1950, to December 31, 1957, the company was consistently incurring losses. Things, however, brightened for the company from the year that ended on December 31, 1958. By December 31, 1960, the losses and unabsorbed depreciation were absorbed by the profits. There was a small profit of Rs. 3,140 for the year that ended on December 31, 1960. The profit for the period that ended on December 31, 1961, which is related to the assessment year 1962-63 as per the account books of the company was Rs. 89,768 and the assessee declared dividend of Rs. 24,000 being 6 per cent. on the paid up capital of Rs. 4 lakhs. The income computed for the purpose of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was, therefore, the contention of the assessee before the Income-tax Officer that there was no justification for applying section 104 of the Act even in relation to the year 1963-64. The Tribunal accepted the contentions of the assessee and held that it is, unreasonable to insist that the assessee should have distributed higher amounts than Rs. 28,000 and Rs. 48,000 actually distributed by way of dividends for the two years 1962-63 and 1963-64. The question is whether the view of the Tribunal is erroneous at law. It is now well settled that, in determining the question arising under section 104(2)(i) of the Act, it is not merely the smallness of the profits made in the previous year, or the losses incurred by the company in earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a larger dividend would be unreasonable. A study of the balance-sheet of the company would show that the business is ran wholly on borrowed money. As against a paid-up capital of Rs. 4,00,000 the money borrowed from the Kerala Finance Corporation amounted to Rs. 2,58,965 as on December 31, 1961. Therefore, it was highly essential that the company's resources had to be conserved. The attitude of the management in not declaring a larger dividend has come out of ordinary business prudence. There is no question of trying to avoid any tax. It was a compelling necessity in the circumstances of the case. Though the restriction in the mortgage deed in respect of the rate of dividend to be declared cannot over-ride a statutory provision, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1963-64, the available surplus after taking the reserve for bad and doubtful debts and advances at Rs. 55,000 works out to Rs. 27,840. The assessee had distributed Rs. 48,000. We consider that, in the circumstances already set out earlier, the payment of larger dividend would be unreasonable. The order passed under section 104 cannot be supported and is hereby cancelled. The view taken by the Tribunal is in consonance with the well-established principles that we have referred to. It is unreasonable to reckon available surplus for distribution as dividend ignoring bad and doubtful debts and advances made. If these are also taken into account, the dividend distributed satisfies even the percentage provided in section 109(4). In any view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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