Cit vs Union Co. (Motors) (P) Ltd. on 6 February, 2002

ORDER

V.S. Sirpurkar, J.

The questions referred to us are as follows :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the levy of additional tax under section 104 of the Income Tax Act, 1961 is not justified in the present case?

2. Having found that the assessee was required to declare dividend to the extent of 90 per cent of the distributable investment income and 60 per cent of income relating to business and that the dividend declared by the assessee was not sufficient to meet the statutory conditions for the assessment year 1984-85, the Tribunal was right in cancelling the additional tax levied under section 104 based upon the dropping of proceedings under section 104 by the assessing officer for the assessment year 1983-84?”

2. The facts are as follows. The assessee is a company which carries on the business of distribution of motor cars and manufacture and sale of automobile spareparts. It also has income from other sources. The income of the assessee was computed and was later on revised to Rs. 8,51,010. While the distributable income was assessed at Rs. 5,47,176, the dividend declared was Rs. 3,08,385. The assessing officer found that the assessee should have been held as an ‘investment company’ within the meaning of section 109(ii) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and, therefore, it should have declared the dividend at 90 per cent of the distributable income. The assessing officer, therefore, concluded that there was a shortfall of Rs. 1,84,073 between the dividend declared and the dividend ought to have been distributed. Therefore, taking recourse to section 104, the assessing officer came to the conclusion that the company was bound to pay the additional tax at 50 per cent, i.e., to the tune of Rs. 1,19,396. The contention of the assessee even before the assessing officer was that it was not an ‘investment company’, but was a ‘trading company’ as, contemplated under section 109(iia) and, therefore, it was bound to distribute only 60 per cent of the distributable income, which works out to Rs. 3,17,565 whereas it had distributed Rs. 3,08,385 leaving a balance of Rs. 9,180, which was only marginal. Therefore, on that count, it claimed that the proceedings under section 104 were liable to be dropped.

2. The facts are as follows. The assessee is a company which carries on the business of distribution of motor cars and manufacture and sale of automobile spareparts. It also has income from other sources. The income of the assessee was computed and was later on revised to Rs. 8,51,010. While the distributable income was assessed at Rs. 5,47,176, the dividend declared was Rs. 3,08,385. The assessing officer found that the assessee should have been held as an ‘investment company’ within the meaning of section 109(ii) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and, therefore, it should have declared the dividend at 90 per cent of the distributable income. The assessing officer, therefore, concluded that there was a shortfall of Rs. 1,84,073 between the dividend declared and the dividend ought to have been distributed. Therefore, taking recourse to section 104, the assessing officer came to the conclusion that the company was bound to pay the additional tax at 50 per cent, i.e., to the tune of Rs. 1,19,396. The contention of the assessee even before the assessing officer was that it was not an ‘investment company’, but was a ‘trading company’ as, contemplated under section 109(iia) and, therefore, it was bound to distribute only 60 per cent of the distributable income, which works out to Rs. 3,17,565 whereas it had distributed Rs. 3,08,385 leaving a balance of Rs. 9,180, which was only marginal. Therefore, on that count, it claimed that the proceedings under section 104 were liable to be dropped.

3. In an appeal, the appellate authority, however, came to the conclusion that the assessee could not be held to be a ‘trading company’ as its income attributable to the trading was less than 51 per cent of the gross total income. The appellate authority, therefore, held the assessee as an investment company’ and came to the conclusion that the finding written by the assessing authority was correct.

3. In an appeal, the appellate authority, however, came to the conclusion that the assessee could not be held to be a ‘trading company’ as its income attributable to the trading was less than 51 per cent of the gross total income. The appellate authority, therefore, held the assessee as an investment company’ and came to the conclusion that the finding written by the assessing authority was correct.

4. On a further appeal before the Tribunal, the Tribunal found that the assessee would be well covered under section 109(iii)(3) and more particularly the Explanation thereof. It found that the company had the income both from the investments as also from trading. It further deduced that the assessee should have declared the dividend to the extent of 90 per cent of the distributable income relating to investment and 60 per cent of the distributable income relating to trading. It recorded a finding that the assessee had not declared sufficient dividend to meet the conditions. However, the Tribunal relying upon the Apex Court’s judgment in CIT v. Gangadhar Banerjee & Co. (P) Ltd (1965) 57 ITR 176 (SC), came to the conclusion that the company was justified in distributing the amount that it had actually distributed. It accepted the case of the assessee-company that considering the prudence of the business and considering the other relevant factors under section 104, it did not transgress the limits of section 104 and, therefore, no action was liable to be taken under section 104.

4. On a further appeal before the Tribunal, the Tribunal found that the assessee would be well covered under section 109(iii)(3) and more particularly the Explanation thereof. It found that the company had the income both from the investments as also from trading. It further deduced that the assessee should have declared the dividend to the extent of 90 per cent of the distributable income relating to investment and 60 per cent of the distributable income relating to trading. It recorded a finding that the assessee had not declared sufficient dividend to meet the conditions. However, the Tribunal relying upon the Apex Court’s judgment in CIT v. Gangadhar Banerjee & Co. (P) Ltd (1965) 57 ITR 176 (SC), came to the conclusion that the company was justified in distributing the amount that it had actually distributed. It accepted the case of the assessee-company that considering the prudence of the business and considering the other relevant factors under section 104, it did not transgress the limits of section 104 and, therefore, no action was liable to be taken under section 104.

5. The questions were referred at the instance of the revenue, which is dissatisfied with the order of the Tribunal. It is pointed out before us that the Tribunal should not have exercised its discretion and dropped the action under section 104, particularly, when it had recorded a specific finding that the assessee had not declared sufficient dividend to meet the conditions. It was reiterated before us that the case of the assessee that it was a ‘trading company’ and as such was liable only to declare 60 per cent of its income as dividend, was found to be incorrect as the profits from trading were not more than 51 per cent and in fact majority of the profits were from the investments. If that was so, then obviously the action under section 104 was called for.

5. The questions were referred at the instance of the revenue, which is dissatisfied with the order of the Tribunal. It is pointed out before us that the Tribunal should not have exercised its discretion and dropped the action under section 104, particularly, when it had recorded a specific finding that the assessee had not declared sufficient dividend to meet the conditions. It was reiterated before us that the case of the assessee that it was a ‘trading company’ and as such was liable only to declare 60 per cent of its income as dividend, was found to be incorrect as the profits from trading were not more than 51 per cent and in fact majority of the profits were from the investments. If that was so, then obviously the action under section 104 was called for.

6. It is to be now, therefore, seen as to whether the Tribunal was right in quashing the action under section 104 in spite of the fact that it had found that the assessee had not declared sufficient dividend. It is obvious that before the Tribunal it was represented by the assessee that no action was liable to be taken under section 104 particularly because, not to distribute more income was more or less a business decision. It is clear from the order of the Tribunal that the assessee had specifically pleaded that during the year its turnover had gone up to Rs. 1,417.40 lakhs from Rs. 951.50 lakhs for the assessment year 1983-84. However, the business profit during that year had substantially reduced to Rs. 3.26 lakhs as against the business profit for the year 1983-84 at Rs. 7.19 lakhs. It was also pointed out that the income from other sources had gone up to Rs. 9.93 lakhs. It was then pointed that similar situation had arisen in the earlier assessment year also, when an action under section 104 was sought to be taken when the assessee-company had declared dividend at the rate of 12 per cent on equity. The assessee pointed out to the Tribunal that this time, however, the dividend was declared at the rate of 15 per cent which was more, though actually the profits had gone down from Rs. 7.19 lakhs to Rs. 3.26 lakhs. The Tribunal seems to have accepted this argument as, in its opinion, it would not have been prudent to declare more dividend than what was already declared considering the reduction of the profits from Rs. 7.19 lakhs to Rs. 3.26 lakhs.

6. It is to be now, therefore, seen as to whether the Tribunal was right in quashing the action under section 104 in spite of the fact that it had found that the assessee had not declared sufficient dividend. It is obvious that before the Tribunal it was represented by the assessee that no action was liable to be taken under section 104 particularly because, not to distribute more income was more or less a business decision. It is clear from the order of the Tribunal that the assessee had specifically pleaded that during the year its turnover had gone up to Rs. 1,417.40 lakhs from Rs. 951.50 lakhs for the assessment year 1983-84. However, the business profit during that year had substantially reduced to Rs. 3.26 lakhs as against the business profit for the year 1983-84 at Rs. 7.19 lakhs. It was also pointed out that the income from other sources had gone up to Rs. 9.93 lakhs. It was then pointed that similar situation had arisen in the earlier assessment year also, when an action under section 104 was sought to be taken when the assessee-company had declared dividend at the rate of 12 per cent on equity. The assessee pointed out to the Tribunal that this time, however, the dividend was declared at the rate of 15 per cent which was more, though actually the profits had gone down from Rs. 7.19 lakhs to Rs. 3.26 lakhs. The Tribunal seems to have accepted this argument as, in its opinion, it would not have been prudent to declare more dividend than what was already declared considering the reduction of the profits from Rs. 7.19 lakhs to Rs. 3.26 lakhs.

7. The wording of section 104(2) is clear to suggest that an order under section 104 would not be made if the authority is satisfied that, owing to the losses or smallness of the profits, the payment of larger dividend was not possible. There are two other conditions contemplated under sub-section (2) to section 104, with which we would not be concerned presently. However, the condition at section 104(2)(1) would be a relevant condition and it does appear that the assessee’s profit had substantially gone down and yet it had declared the dividend at 15 per cent, which was much more than the earlier declared dividend of 12 per cent. The Tribunal has also noted that though in the earlier year the dividend was 12 per cent and though it was on the basis of that dividend that an action was taken against the company under section 104, that action was dropped.

7. The wording of section 104(2) is clear to suggest that an order under section 104 would not be made if the authority is satisfied that, owing to the losses or smallness of the profits, the payment of larger dividend was not possible. There are two other conditions contemplated under sub-section (2) to section 104, with which we would not be concerned presently. However, the condition at section 104(2)(1) would be a relevant condition and it does appear that the assessee’s profit had substantially gone down and yet it had declared the dividend at 15 per cent, which was much more than the earlier declared dividend of 12 per cent. The Tribunal has also noted that though in the earlier year the dividend was 12 per cent and though it was on the basis of that dividend that an action was taken against the company under section 104, that action was dropped.

8. In our opinion, this could not be a case where the action under section 104 will be justified and, therefore, the Tribunal was right in taking the view that it took. It seems that the Tribunal has relied upon the judgment of the Supreme Court in Gangadhar Banerjee & Co. (P) Ltd.’s case (supra), where the observations of the Supreme Court are to the following effect :

8. In our opinion, this could not be a case where the action under section 104 will be justified and, therefore, the Tribunal was right in taking the view that it took. It seems that the Tribunal has relied upon the judgment of the Supreme Court in Gangadhar Banerjee & Co. (P) Ltd.’s case (supra), where the observations of the Supreme Court are to the following effect :

“In deciding whether the payment of a dividend or a larger dividend than that declared by the company would be unreasonable, the Income Tax Officer can take into consideration circumstances other than losses and smallness of profit. The statute, by the words used, while making sure that ‘losses and smallness of profits’ are never lost sight of, requires all matters relevant to the question of unreasonableness to be considered….”

9. The fact that there was more profit and yet less dividend in the last year and less profit and more dividend in the assessment year can certainly be such a fact which has been taken into consideration. The other relevant fact also would be that the action under section 104 for the last preceding assessment year was also dropped. In our opinion, therefore, the Tribunal has correctly held that the action can be and should have been dropped. We are also fortified in taking the same view as was expressed in Gangadhar Banerjee & Co. (P) Ltd.s case (supra), which was followed by the Division Bench of this court in CIT v. Southern Ancillaries (P) Ltd. (1999) 235 ITR 64 (Mad). The Division Bench, in the aforementioned case, has reiterated the observations in Gangadhar Banerjee & Co. (P) Ltd.s case (supra) to the effect that,

9. The fact that there was more profit and yet less dividend in the last year and less profit and more dividend in the assessment year can certainly be such a fact which has been taken into consideration. The other relevant fact also would be that the action under section 104 for the last preceding assessment year was also dropped. In our opinion, therefore, the Tribunal has correctly held that the action can be and should have been dropped. We are also fortified in taking the same view as was expressed in Gangadhar Banerjee & Co. (P) Ltd.s case (supra), which was followed by the Division Bench of this court in CIT v. Southern Ancillaries (P) Ltd. (1999) 235 ITR 64 (Mad). The Division Bench, in the aforementioned case, has reiterated the observations in Gangadhar Banerjee & Co. (P) Ltd.s case (supra) to the effect that,

“… the reasonableness or the unreasonableness of the amount distributed as dividend should be 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 other considerations.

An overall picture of the financial position of the business should be taken into account before levying additional tax under section 104 of the Act on the company.”

10. We see from the orders passed by the first two authorities below that no such overall picture was taken into account and it was only by way of mechanical formula that the company was held as an ‘investment company’ by the appellate authority and that it directed the action to be taken under section 104 deducing that the company was bound to pay the dividend at the rate of 90 per cent. As rightly held by the Division Bench of this court in the aforementioned case of Southern Ancillaries (P) Ltd.s case (supra), the action under section 104 is a penal action. The language has to be strictly construed and the conditions laid down under section 104 would have to be strictly complied with. That was not the case in the orders passed by the assessing authority or the appellate authority.

10. We see from the orders passed by the first two authorities below that no such overall picture was taken into account and it was only by way of mechanical formula that the company was held as an ‘investment company’ by the appellate authority and that it directed the action to be taken under section 104 deducing that the company was bound to pay the dividend at the rate of 90 per cent. As rightly held by the Division Bench of this court in the aforementioned case of Southern Ancillaries (P) Ltd.s case (supra), the action under section 104 is a penal action. The language has to be strictly construed and the conditions laid down under section 104 would have to be strictly complied with. That was not the case in the orders passed by the assessing authority or the appellate authority.

11. In our opinion, the Tribunal has correctly held that this was a case where the action under section 104 could not be justified. We, accordingly, affirm the order of the Tribunal and answer the reference against the department and in favour of the assessee.

11. In our opinion, the Tribunal has correctly held that this was a case where the action under section 104 could not be justified. We, accordingly, affirm the order of the Tribunal and answer the reference against the department and in favour of the assessee.