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TMI Blog1982 (12) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... of the gross total income of Rs. 4,43,181 as determined by the ITO, the distributable income of the company was determined at Rs. 1,44,299. The assessee-company was required to distribute 45 per cent of its income as dividend which would amount to Rs. 64,938. As against the said amount of dividend which the assessee was required to distribute, it actually declared dividend of Rs. 30,000 only. In view of the shortfall in regard to distribution of dividend, the ITO called upon the assessee to show cause why additional tax should not be levied in accordance with the provisions of section 104. The assessee's contention in this regard was that it was required to make a provision for excise liability amounting to Rs. 1,64,150 and if this liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act within the period of one year. It was pointed out that if this liability was excluded, then the shortfall in distribution of dividend will be covered by section 105(1)(ii) of the Act. It was also emphasised that in order to determine commercial profits the assessee was bound to take into consideration the aforesaid excise liability as also other items like doubtful debts and the tax liability for earlier years. The Commissioner (Appeals), for the reasons stated in detail in his order, held firstly, that the liability to pay Central excise duty was a contingent liability and secondly, the said liability did not exist on the date of the general body meeting and there was no reason, therefore, to consider the said liability as a factor in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reserve up to a period of one year as the order of the Assistant Collector was subject to revision. Now Shri Shah submits that in the light of this advice it would not have been prudent on the part of the assessee to distribute dividend out of any portion of the said amount which was earmarked for probable liability to excise duty. In other words, Shri Shah's contention was that whether the amount in question was allowable as a deduction in computing the distributable income or not, the question would still remain as to whether it would have been prudent on the part of the assessee-company to have declared any portion of dividend out of the said amount. If this factor was duly taken note by the director, then it would have been unreason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The order of the Superintendent in the subsequent period was upheld by the Assistant Collector in appeal. Therefore, the question whether the item in question was an excisable item or not was a matter of serious dispute. Therefore, the assessee sought legal advice as stated earlier and decided to keep the amount in abeyance and did not distribute dividend out of it. 5. We have carefully considered the rival submissions. It is true that on the basis of the distributable income as determined by the ITO the assessee's case, prima facie, falls within the mischief of section 104. The crux of the matter is whether the assessee was justified in not considering the amount of excise duty liability which in effect was extinguished by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors should have done putting himself in their place. Though the object of the section is to prevent evasion of tax, provision must be worked not from the standpoint of the tax collector but from that of a businessman. The reasonableness or 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. The Income-tax Officer must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with sympathetic and objective approach. " I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid then the shortfall based on 45 per cent of distributable income vis-a-vis the amount actually distributed would work out to Rs. 4,151, i.e., less than 10 per cent of its distributable income. In which case the ITO would be required to follow the procedure laid down in section 105(1)(ii). 7. In the light of the above discussion, therefore, the only point which now survives for consideration is declaration of dividend in regard to the shortfall of Rs. 4,151 which is determined on the basis of the distributable income exclusive of excise liability and the dividends actually declared. So far as this shortfall is concerned, in our opinion the provisions of section 105(1)(ii) would come into play and the ITO is directed to proceed in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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