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TMI Blog2001 (5) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... shall cover both the references. The factual position, in a nutshell, is as follows: The assessee, at the relevant point of time, was a private limited company carrying on business in agricultural activities and dairy farming. The previous years for the two assessment years ended on June 30, 1973, and June 30, 1974, respectively. The question that arose for consideration related to levy of tax under section 104 of the Act. The assessee's stand before the Income-tax Officer, was that having regard to accumulated past losses and the smallness of profits, payment of dividend by the assessee would be unreasonable within the meaning of section 104(2)(i) of the Act, and, therefore, the provisions of section 104(1), were not to be invoked in its case for the two assessment years. The Income-tax Officer, however, did not agree with the stand of the assessee. It was noted, that the assessee had made substantial capital gains, which were reflected in the capital reserve of Rs.7,45,109 and the same was available to the assessee for declaring dividend. The assessee did not require the aforesaid capital reserve for any of its business requirements and this was established from the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable surplus, as computed by the Income-tax Officer in both the years, there was hardly any scope for dispute regarding the applicability of section 104(1) of the Act. The further question, according to it, was whether it would be unreasonable for the assessee to declare a dividend having regard to the losses incurred by it in the earlier years and/or to the smallness of profits made in the previous year within the meaning of section 104(2)(i) of the Act. Though it was noticed that there was no unanimity in view as regards the question whether capital gains could form-part of the profits, it was held that the view, which leans in favour of the assessee, was to be preferred. Accordingly, it was held that the provisions of section 104(1) of the Act could not be invoked by the Income-tax Officer. On being moved for reference, the questions, as set out above, have been referred for the opinion of this court. We have heard learned counsel for the parties. According to learned counsel for the Revenue, a bare reading of the provisions contained in section 104, the position is clear that capital gains can be taken into account while deciding the question as to whether dividend o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions as may be specified therein, exempt any class of companies to which the provisions of this section apply from the operation of this section. (4) Without prejudice to the provisions of section 108, nothing contained in this section shall apply to- (a) an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation of distribution of electricity or any other form of power; (b) a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India. Explanation. --For the purposes of clause (a) of this sub-section, the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included, in its gross total income, for the relevant previous year is not less than fifty-one per cent. of such total income." Section 104, in essence, re-enacts section 23A of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidends actually distributed, if any. (2) No order under sub-section (1) shall be made,- (i) in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments which has distributed not less than eighty per cent. of its total income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) of sub-section (1) ; or (ii) in the case of any other company, whose distribution falls short of the statutory percentage by not more than five per cent. of its total income as reduced by the amounts, if any, aforesaid ; or (iii) in any case where according to the return made by a company under section 22, it had distributed not less than the statutory percentage of its total income as reduced by the amounts, if any, aforesaid, but in the assessment made by the Income-tax Officer under section 23 a higher total income is arrived at and the difference in the total income does not arise out of the application of the proviso to section 13 or sub-section (4) of section 23 or the omission by the company to disclose its income fully and truly; unless the company, on receipt of a notice from the Income-tax Officer that he p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent. of the assessable income of the company of the previous year less the amount of income-tax and super-tax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholder. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or 'the smallness of the profit made', the payment of a dividend or a larger dividend than that declared would be reasonable." In the background of what has been stated by the apex court, the Assessing Officer has the jurisdiction to proceed vis-a-vis the assessable income or distributable income, as defined in the Act. Then, the said income is to be judged in the light of losses of previous years or smal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Officer to act under the provision; (ii) it provides for the exercise of that jurisdiction; and (iii) it relates to the computation of extra tax. The ingredients necessary for bringing an application of the provision are as follows: The Income-tax Officer must be satisfied on the following aspects: (a) in respect of any previous year; (b) the profits and gains distributed as dividends by a company; (c) within 12 months immediately following the expiry of the relevant previous year ; and (d) were less than the statutory percentage of its distributable income for that previous year. Levy of additional tax is not automatic. The requisite conditions must be satisfied before bringing in application of the provision. Once the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividend by any closely held company within the 12 months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of that previous year and that it would not be unreasonable to distribute a larger dividend than the declared one, an order in terms of section 104 has to be pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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