JUDGMENT
M.U. Isaac, J.
1. The petitioner is a private limited company ; and it is an investment company as denned in Sub-section (ii) of Section 109 of the Income-tax Act, 1961. For the assessment year 1963-64 relating to the previous year ending on August 16, 1962, the company was assessed to income-tax by the first respondent, the Income-tax Officer, Company Circle, Trivandrum, by his order, exhibit P-1, dated November 30, 1967. Its total income was determined at Rs. 2.66,770; and the tax payable was determined at Rs. 30,357, Section 205 of the Companies Act, 1956, provides as follows :
” No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government. …”
2. This sub-section has some provisos ; and it is not necessary to read them for the purpose of this case. Sub-section (2) provides for computation of depreciation. The main source of income for the company is its house property. Only a small part of the house property is used for the company’s own business. In computing the income from house property, the Income-tax Act allows only some deductions from the annual value of the property, except in the case of house property used for the assessee’s business in which case depreciation is allowed. The profit and loss account of the company is drawn up after allowing depreciation for the whole house property. Apparently, it has to be done in the above manner, in view of Section 205 of the Companies Act. This makes a considerable difference between the total income as computed under the Income-tax Act and the profit or loss as determined on a commercial basis for the purpose of the business. Exhibit P-2 is the audited statement of accounts of the company for the year ended August 16, 1962. This shows a net loss of Rs. 27,792. The company could not, therefore, declare any dividend for the year ended August 16, 1962. Sub-sections (1) and (2) of Section 104 of the Income-tax Act, 1961, as they stood at the relevant time, provide as follows:
” 104. Super-tax on undistributed- income of certain companies.–(1) Subject to the provisions of Sub-section (2) and of Sections 105, 106 and 107, where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that’ the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay super-tax at the rate of-
(a) fifty per cent., in the case of an investment company, and
(b) thirty-seven per cent., in the case of any other company, on the distributable income as reduced by-
(i) the amount of dividends actually distributed, and
(ii) any expenditure actually incurred bona fide for the purposes of the business, but not deducted in computing the income chargeable under the head ‘ profits and gains of business or profession ‘ being-
(a) a bonus or gratuity paid to an employee,
(b) legal charges,
(c) any such expenditure as is referred to in Clause (c) of Section 40,
(d) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or enhancement in the value of an existing asset.
(2) The Income-tax Officer shall not make an order under Sub-section (1) if he is satisfied-
(i) that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable; or
(ii) that the payment of a dividend or a larger dividend than that declared would not have resulted in a benefit to the revenue ; or
(iii) that ~at least seventy-five per cent, of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under Section 11. ”
3. ” Distributable income ” is defined in Section 109(i); and “statutory percentage ” is defined in Section 109(iii) of the Income-tax Act. The first respondent considered that the fact that the company did not make any profits according to its balance-sheet or that it is prohibited by Section 205 of the Companies Act from declaring any dividend from its profits without providing for depreciation as required by the said section does not affect the liability to be assessed under Section 104 of the Income-tax Act. He accordingly obtained the approval of the second respondent, the Inspecting Assistant Commissioner of Income-tax, Range 1, Ernakulam, for proceeding against the company under Section 104 of the Income-tax Act; and after giving a reasonable opportunity to the company for being heard, he passed an order, exhibit P-10, dated February 28, 1969, assessing the company to an additional super-tax of Rs. 42,446. This writ petition has been filed to quash the above order of assessment.
4. The company has filed an appeal from the impugned order of assessment ; and the appeal is pending. Counsel for the revenue raised a preliminary objection that this writ petition should not be entertained in view of the pendency of the appeal, which gives an adequate remedy to the company. The company’s counsel submitted that the appeal is not an adequate remedy in view of the fact that the case involves the interpretation of Section 205 of the Companies Act, 1956, which is in conflict with the relevant provisions of the Income-tax Act, 1961, and that the income-tax authorities can decide such a matter only in accordance with the provisions of the Income-tax Act, as they are creatures of that statute. I do not agree with this submission. However, if this case involved only a pure question of law on undisputed facts, I would have decided it, instead of leaving the parties to have it fought out before the two appellate authorities, and finally come to this court by a reference,
5. Counsel for the company raises three points before me against the validity of the impugned order.of assessment. The first is that Section 104(1) of the Income-tax Act applies only to a company which has distributed dividends out of its profits and gains in the previous year; and that the petitioner-company cannot be assessed under the above provision, as it has not distributed any such dividend. This argument is based on the phraseology employed in the first part of Sub-section (1). From a reading of the whole of this sub-section, it is clear that the charge thereunder is on the amount of short distribution of the statutory percentage of the distribute able income. The contention of counsel for the company would lead to the result, that if the company distributed any dividend, it would be liable to pay the tax on the difference between the statutory percentage of the distributable income and the amount it distributed; but if it did not distribute any dividend at all, there is no liability under Section 104(1). This would be an absurd result. The interpretation sought to be given by counsel for the company is not warranted by the language of the section ; and it is also contrary to the obvious object of the said provision.
6. The second point is that the tax under Section 104 is penal in character and that liability thereunder arises only on the failure of the company to distribute the statutory percentage of the distributable income. Counsel submits that in this case, by virtue of Section 205 of the Companies Act, 1956, the company is prohibited from distributing any dividend, and that the liability under Section 104(1) of the Income-tax Act is not, therefore, attracted. Section 105 of this Act provides that in the case of any short distribution, an assessment under Section 104(1) shall not be made unless the company fails to distribute within three months from receipt of a notice from the Income-tax Officer its profits and gains so that the total distribution is not less than the statutory percentage of the distributable income. Counsel submits that this provision indicates that the liability under motion 104(1) is only in respect of an income which the company is permitted to distribute. On the other hand, counsel for the revenue submits that the levy under Section 104 is not a penalty for not distributing he whole of the statutory percentage of the distributable income, but it is a levy on that part of the statutory percentage of the distributable income which has not been distributed as dividends, and that the question whether the whole or any part of the statutory percentage of the distributable income is permissible under law to be distributed is not relevant. He submits that the failure to distribute may be due to negligence, deliberate omission or any legal bar. Section 105 may not apply to a case of legal bar ; and in any event it does not affect the liability to assessment under Section 104(1). I do not propose to decide this question, as the third point raised by counsel for the company is one which involves the exercise of discretion by the Income-tax Officer on the facts and circumstances of the case. That is a matter which has to be left to the authorities under the Income-tax Act to decide; and it would not be proper to dispose of this case without an adjudication on that question by the revenue.
7. The third point raised by counsel for the company is that the company is not liable for assessment under Section 104(1) of the Tncome-tax Act, by virtue of the provisions contained in Sub-section (2) of the said section. Counsel submits that, in determining whether distribution of a dividend or a larger dividend than that declared would be unreasonable, the Income-tax Officer should have regard not only to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year which are the two things specifically mentioned in Clause (i) of Section 104(2), but also to other relevant circumstances. In support of that contention he relies on the decision of the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. P. Ltd., [1965] 57 I.T.R. 176 ; [1965] 3 S.C.R. 439 (S.C.). This decision supports the above contention. It further holds that the commercial profits of the company is a relevant factor. Counsel submits that the fact that the declaration of the dividend could not be lawfully made by virtue of the prohibition contained in Section 205 of the Companies Act is also a relevant factor. Counsel for the revenue submits that loss shown in the balance-sheet of the company is not a true amount; but it has been manipulated in order to evade the liability under Section 104(1) of the Income-tax Act. These are matters which involve a consideration of various facts and exercise of proper discretion by the authorities under the Income-tax Act. I, therefore, decline to interfere under Article 226 of the Constitution. This writ petition is accordingly dismissed. There will be no order as to costs.