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TMI Blog1982 (4) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee was required to shift the factory and office compulsorily to some other premises for which the company had to make provision for funds to the extent of Rs. 50 to 60 lakhs. Further, it was stated that under the amendment to the Companies Act, 1974, there were some restrictions placed on the declaration of dividends. Finally, it was stated that the assessee had to pay an instalment of gratuity to the employees of over Rs. 3 lakhs. In consequence of the cumulative effect of all these factors, the assessee could not declare the dividends for the accounting period under consideration, within the statutory time limit. For the detailed reasons mentioned by the ITO in his order dated 19-3-1980, the ITO rejected the assessee's explanation and proceeded to levy additional income-tax at the rate of 25 per cent on the shortfall of Rs. 5,90,654, i.e., Rs. 1,47,663. 3. The assessee appealed before the Commissioner (Appeals) against this levy. The Commissioner (Appeals), after hearing the assessee's representative, proceeded to cancel the order passed by the ITO under section 104. Briefly, the reasons which prevailed upon the Commissioner (Appeals) were as under: Firstly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner under the Act. After the approval of the gratuity fund by the Commissioner, with effect from 29-12-1975, the assessee had to make an initial contribution of Rs. 3,12,362 before 31-3-1977. The Commissioner's order was dated 20-3-1976 and the payment had to be made before 31-3-1977. This was a very serious strain on the assessee's financial liquidity. Taking into consideration all these factors, the Commissioner (Appeals) examined the facts of the case in the light of the Supreme Court decision in the case of CIT v. Gangadhar Banerjee Co. (P.) Ltd. [1965] 57 ITR 176, and he agreed with the representative of the assessee that, in the circumstances of the case, it was not possible for the assessee to declare any dividend within the statutory time limit. 4. The revenue is in appeal against the order of the Commissioner (Appeals) cancelling the ITO's order under section 104. During the course of the hearing of the appeal, the learned departmental representative took us through the order of the Commissioner (Appeals) and he pointed out that the assessee had not established that it had to pay the bonus and gratuity liability immediately. Further, as regards the estimated cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to support the stand that the non-declaration of the larger dividend was for the purpose of future development of the company, the provisions of section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act'), corresponding to section 104 were applicable. 5. On behalf of the assessee, the learned counsel has heavily relied on the mounting pressure from the municipal corporation authorities, for shifting of the factory premises to an industrial zone. In this connection, the learned counsel has invited our attention to the letter dated 21-7-1971, from the municipal corporation of Greater Bombay to the assessee informing that the corporation had already formulated a policy for shifting non-conforming zone to conforming zone. Accordingly, about 4,000 sq. ft. of light industrial accommodation had been made available for allotment to the non-confirming industries at, sub-plot 2, TPS IV, Mahim Industrial Estate at Prabhadevi, for allotment to the assessee on certain terms and conditions. The corporation had proceeded to point out that the builders of the industrial estate had kept the offer open for a period of four weeks only. The assessee was requested to avail of this opportun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e minutes of the meeting of the board of directors has been placed before the lower authorities, as also before us. 6. Dealing with the objection on behalf of the revenue, by the learned departmental representative, regarding the advances made by the assessee to the firm in which one of the directors was a partner, it was stated that the assessee was a concern in textiles. It was purchasing the yarn from a firm wherein one of the directors of the assessee was a partner. For the purchase of yarn, the assessee was making advances to the firm and later on recovering the advance by way of purchase of yarn. It is not as if the distributable profits were being utilised for other purposes. 7. As to the law on the subject, the learned counsel has relied heavily on the Supreme Court decision in the case of Gangadhar Banerjee Co. (P.) Ltd., according to which section 23A of the 1922 Act, corresponding to section 104 of the 1961 Act, was in the nature of a penal provision and, therefore, the revenue had to strictly comply with the conditions laid down thereunder. The burden lay upon the revenue to prove that the conditions laid down therein, were satisfied before the order was passed. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between the Bombay Municipal Corporation and the assessee, right from 1971 onwards, the corporation was pressurising the assessee to get out of the Rifle Range at Ghatkopar and to go to some other area where the industries of the type carried on by the assessee were permitted. Particularly, the municipal corporation's letters threatening the assessee to shift within eight days failing which power connection would be cut off, etc., make a very dismal reading. The assessee had necessarily to make some alternative arrangement for which, apparently, it was negotiating with parties, independently of the totally inadequate plots offered by the municipality in some industrial estates here and there. Ultimately, it had succeeded in agreeing to purchase the plot on the Saki Naka Road for Rs. 4,81,100. During the accounting period itself, one of the directors had managed to secure a project report on 19-4-1976 for constructing a suitable factory building on the land proposed to be purchased at Saki Naka at a cost of Rs. 47,31,689. Assuming for a while, the project report envisaged a building much larger than the assessee's existing premises, according to the Annexure 'A' to the project re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend than that declared would be reasonable. The argument mainly centred on this part of the section. Would the satisfaction of the Income-tax officer depend only on the two circumstances, namely, losses and smallness of profit ? Can he take into consideration other relevant circumstances ? What does the expression 'profit' mean ? Does it mean only the assessable income or does it mean commercial or accounting profits ? If the scope of the section is properly appreciated the answer to the said question would be apparent. The Income-tax Officer, acting under this section is not assessing any income to tax : that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked out not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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