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TMI Blog1992 (1) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... which the public are not substantially interested and for the assessment year 1972-73, the Income-tax Officer found that the total income of the assessee as computed came to Rs. 8,47,894 and deducting the taxes, bonus, etc., the distributable income arrived at was at Rs. 6,50,322. The assessee should have distributed 90 per cent. out of the distributable income, which came to Rs. 5,85,228, but it distributed in the assessment year 1972-73 only Rs. 1,20,000 and the Income-tax Officer took proceedings under section 104 of the Act and after obtaining the approval of the Inspecting Assistant Commissioner, levied a sum of Rs. 2,32,644 as additional tax. For the assessment year 1973-74, the assessee's income was arrived at Rs. 8,29,496 and the distributable income at Rs. 4,85,896 and the assessee should have distributed 90 per cent. of it, which came to Rs. 4,37,310, but had distributed only Rs. 40,000 within twelve months immediately following the previous year and there was thus a shortfall of Rs. 3,97,310, which led to initiation of proceedings under section 104 of the Act, resulting in the levy of additional income-tax of Rs. 1,98,655 by the Income-tax Officer. Aggrieved by this, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the previous year ; but those are not the, only two factors to be considered, which would mean that the Income-tax Officer should take an overall view of the financial position of the company and decide on the reasonableness of the dividend. It was also further contended that in the profit and loss appropriation account, the assessee had deducted Rs. 6.87 lakhs representing the provision for taxation made in the earlier years and had carried forward the same to the current year and the assessee had an amount of Rs. 11 lakhs in the general reserve. The deficit of Rs. 6.87 lakhs carried from the earlier years, according to counsel, related to the provision for taxation and ordinarily taxes raised in a particular year are expected to be paid out of the profits of the year, though there may be some exceptional cases in which the outstanding demand of tax in respect of the earlier years will be relevant, if the assessee established that due to special circumstances, the tax demand in respect of the earlier years had to be made out of the profits of the year in question, but that, in the present case, the assessee had not shown the existence of any such special circumstances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le income was negligible and there was thus no case made out for levying additional income-tax under section 104 of the Act. It was also contended that before applying section 104 of the Act, the Income-tax Officer should have taken into account the smallness of the profits of the current year, loss of the earlier years and should not look into the reserve position and that though, to comply with the provisions of the Companies Act, for purposes of preparation of the balance-sheet, in the earlier years, a provision for taxation was shown as a deduction under general reserve, no entries as such were made in the books of account and the Income-tax Officer should have taken an overall view of the financial position of the company to decide on the reasonableness or otherwise of the dividend. Learned counsel also pointed out that the payment of outstanding demand of tax in respect of the earlier years would be relevant in determining the distributable profits of the current year, especially when the arrears are attributable to disallowance of certain expenditure as capital in nature and the assessee, a I according to counsel, had established the circumstances under which the tax demand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment years prior to 1988-89. The object behind section 104 of the Act is to prevent avoidance of tax by the shareholders of the company in which public are not substantially interested and, for that purpose, the Income-tax Officer has to ascertain how much of the income of the previous year has been distributed as dividend by the company within twelve months immediately following the expiry of that previous year and if the sum so distributed as dividend amongst all the classes of the shareholders aggregated to less than the statutory percentage of 90 of the distributable income of the company in the previous year, the provisions of section 104 would stand attracted, unless the assessee established certain special circumstances, to escape from the rigour of this provision. "Distributable -income " and " statutory percentage " are defined respectively by clauses (i) and (iii) of section 109 of the Act. However, if the Income-tax Officer is satisfied that the payment of a dividend or a larger dividend than that declared within the period of 12 months would be unreasonable, having regard to the losses incurred by the company in the earlier years or, to the smallness of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which the company could, on the date of declaration of dividend, have reasonably anticipated as is likely to become payable. Even arrears of tax of earlier years and anticipated tax liability on the reopening of a past assessment, have to be taken into account in determining the distributable commercial profits, The loss incurred in the earlier years, should also be taken into account even if there are past accumulated reserves or the company had adjusted the loss by reducing its paid-up capital or had declared dividends during the past years despite losses. It is pertinent in this connection to note that the Supreme Court in CIT v. Jubilee Mills Ltd. [1968] 68 ITR 630 at 631 laid down that a company which had overcome its losses for some years and made a profit in the subsequent year might theoretically be in a position to distribute the whole of the 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: Under section 104(2) of the Act, the Income-tax Officer should have regard to the losses incurred in the earlier years or to the smallness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable income, has, therefore, to be deducted as a provision of the year to the extent it is provided and further provision for income-tax liability has to be made to the required extent, when it is known after receipt of the demand notice, etc. The extra liability to tax in these cases pertained to the earlier years and not owing to any unforeseen circumstances and the liability arose owing to the . disallowance of certain items of expenditure. For the assessment year 1972-73, after deduction of the provision for tax, taking into account the demand made on the assessee for Rs. 12,46,833 the assessee was left with only a sum of Rs. 95,000 for declaration of dividend. Drawing a sum of Rs. 25,000 from the general reserve, the assessee had declared a dividend of Rs. 1,20,000. In the assessment year 1973-74, in declaring a dividend of Rs. 30,000 against the available amount of Rs. 28,318, the assessee had withdrawn amounts from the general reserve. It is the case of the assessee that in making provision for income-tax for any year, sometimes deficit may occur and the deficit had to be made good and paid as and when the actual demands were made and on account of this, income of the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id would not justify an order under section 23A. Further, in CIT v. Meccano Floorings(P) Ltd. [1973] 92 ITR 352 (Mad), the assessable profit was Rs. 25,841 and, after deduction of taxes, there was a distributable balance of Rs. 12,533 out of the assessable income, but the company did not declare a dividend And it was pointed out by the Revenue that a sum of Rs. 12,600 was available under the dividend equalisation reserve and if the amounts were properly worked out, there would be sufficient profit for distribution as dividend. In dealing with this contention, this court, following the decision of the Supreme Court in CIT v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290, held that it is not open to the Income-tax Officer to take the dividend equalisation reserve and to add it to the profit earned during the year and hold that the non-distribution of a larger dividend was unreasonable. In the case of Indo-Ceylon Dental and Surgical Co. Ltd. v. CIT [1975] 98 ITR 536 (Mad), the assessee did not place any material to support the stand that the non-declaration of a larger dividend was for the purpose of future development of the company and this was held sufficient to justify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking any distribution or making an unreasonable distribution of dividends. Similarly, in Alavai Industries P. Ltd. v. CIT [1970] 76 ITR 310, this court, while considering the provisions of section 23A of the Indian Incometax Act, 1922, pointed out that the view that creation of reserves amounted only to appropriation and cannot have any relevance in determining the applicability of section 23A cannot be applied to a nascent company which in the second year of its operation created some reserves for its future preservation and for its future good, and the profits were diverted only for essential commercial reasons. In CIT v. McDill (R.) and Co. (P) Ltd. [1983] 144 ITR 415 (Cal), it was pointed out that the onus of proving that the assessee had not distributed the requisite percentage of dividend under section 23A of the Indian Income-tax Act, 1922, is on the Department and in the absence of material to show that the real commercial profits were artificially reduced in the balance-sheet or to indicate what part of the income represented commercial profits, it has to be assumed that the net profits shown in the balance-sheet correctly represented the commercial profits. In the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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