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TMI Blog2004 (3) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... . Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in coming to the conclusion that the provisions of section 104 were rightly invoked by the assessing authority and hence additional tax levied under section 104 was justified? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in concluding that adequate dividends were not distributed due to excess provisions made for taxes? 3. Whether the order of the Tribunal confirming levy of additional tax is reasonable, it having ignored along with the other facts and relevant case law, the material fact that the provision for income-tax was made on the basis of assessed figure available at the time of paying advance tax, though subsequently reduced due to rectification order passed for the assessment year 1976-77?" The assessee is a company in which the public are not substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The total income assessed (before deductions under Chapter VI) was Rs. 4,01,497. The assessee had made provision to the tune of Rs. 3,30,000 for income tax and Rs. 20,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the last ten years, the dividend distributed by the assessee was reasonable as the reasonableness or unreasonableness of the amount distributed as dividend had to be judged by business considerations. The Commissioner of Income-tax (Appeals) accordingly allowed the assessee's appeal. The Department went in appeal before the Tribunal. The Tribunal held that due to excess provision made for taxes, adequate dividends were not distributed in the instant case and, therefore, the action of the Income-tax Officer in invoking section 104 was justified. The assessee had also filed cross-objection contending that it was a trading company and not an investment company and, therefore, the statutory percentage for distribution of profits should have been adopted at 60 per cent, instead of 90 per cent, as done by the Income-tax Officer. On this issue, the Tribunal remitted the matter to the Commissioner of Income-tax (Appeals) for his consideration and decision. In the present reference, all the three questions relate to justification on the part of the Income-tax Officer in invoking the provisions of section 104 and not the quantum of tax imposed under sub-section (1) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay income-tax at the rate of fifty per cent, in the case of an investment company, thirty-seven per cent, in the case of a trading company and twenty-five per cent, in the case of any other company on the distributable surplus." Clause (i) of sub-section (2), however, requires that the Income-tax Officer shall not make any such order under sub-section (1) if he is satisfied 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 divided than that declared within the period of twelve months referred to in sub-section (1) would be unreasonable." In CIT v. Gangadhar Banerjee and Co. (Pvt.) Ltd. [1965] 57 ITR 176, the Supreme Court considered similar provisions contained in section 23A of the Indian Income-tax Act, 1922. There is no dispute about the fact that the provisions of section 23A of the 1922 Act were similar to the provisions of section 104 of the 1961 Act. The apex court laid down the following principles in the above case: "The Income-tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r remained as unadjusted losses or carried forward losses but it did not mean that they ceased to have any impact on the financial position of the respondent in subsequent years. Even if the respondent resorted to the method of wiping out the losses by adjusting them against its capital, the procedure resulted in crippling its finances and the company might in future years reasonably take steps for improving its crippled financial position. If a company which had got over its losses for some years by adjusting them against its capital and reducing its capital, made a profit in the subsequent year, it might theoretically be in a position to distribute the whole of its profits for that year but it could not be said to have acted unreasonably if it chose not to do so and retained a portion of the profits for the purpose of building up a capital reserve which in course of time would enable the company to regain its original strength of capital which had been crippled by the adjustment of losses at the time of reconstruction. The Appellate Tribunal misdirected itself in law in holding that the losses incurred prior to the reconstruction of the respondent-company were irrelevant for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of sub-section (2) of section 104 which is quoted hereinabove. The statute does not put any limit on the number of "earlier years". The following chart at annexure "L" in the paper book sets out the amounts of losses and profits for the last ten years: ---------------------------------------------------------------------- Account year Assessment Book profit Loss Net ending year ---------------------------------------------------------------------- Rs. Rs. Rs. ---------------------------------------------------------------------- 30-6-1973 1974-75 -- 1,783 30-6-1974 1975-76 -- 65,139 30-6-1975 1976-77 -- 1,83,823 30-6-1976 1977-78 -- 2,52,406 30-6-1977 1978-79 -- 1,16,008 30-6-1978 1979-80 1,12,940 -- 30-6-1979 1980-81 1,87,526 -- 30-6-1980 1981-82 1,09,611 -- 30-6-1981 1982-83 3,200 -- 30-6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier years including the loss and profits made in the last ten years. It appears from the Tribunal's order that what weighed with the Tribunal for setting aside the order of the Commissioner of Income-tax (Appeals) was excess provision for taxation. Since the provision for taxation made by the assessee was Rs. 3,30,000 for income-tax and Rs. 20,000 for wealth-tax and ultimately the tax assessed as payable by the assessee was found to be Rs. 2,66,047 as income-tax and Rs. 13,580 as wealth-tax, the Tribunal has held that the difference was available distributable surplus to the tune of about Rs. 79,000 and on this ground alone the Tribunal has set aside the order of the Commissioner of Income-tax (Appeals) without at all dealing with the reason given by the Commissioner of Income-tax (Appeals) that the past losses were required to be taken into consideration. Merely because the position that the assessee had made excess provision for taxes was undisputed, in view of the difference between the provision made for taxation and the tax ultimately held to be payable, it cannot be said that the assessee had not taken into consideration the past losses. On the contrary, the reply date ..... 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