Skip to content


income-tax Officer Vs. Universal Textiles (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1982)2ITD195(Mum.)
Appellantincome-tax Officer
RespondentUniversal Textiles (P.) Ltd.
Excerpt:
.....as regards the estimated cost of the shifting of the factory, there was no resolution of the assessee-company to the effect that this was one of the reasons which prevented the assessee from declaring any dividends.in fact, the factory has not even been shifted till today. the undistributed profits amounted to rs. 5 lakhs and odd. in the accounts they were merely carried to the balance sheet. these profits were not utilised for any of the purposes mentioned before the commissioner (appeals) as a result of which the assessee could not declare dividends. in fact, out of the funds available, the assessee had advanced an amount of rs. 4,54,317 to a firm in which a director of the company was a partner of the assessee. in the previous year, an amount of rs. 1,47,307 was advanced to this.....
Judgment:
1. The revenue has filed this appeal against the order of the Commissioner (Appeals) cancelling the order passed by the ITO under Section 104 of the Income-tax Act, 1961 ('the Act').

2. The assessee is an Indian industrial company in which public is not substantially interested. Further, it is not a subsidiary of such a company. Its income for the year under consideration amounted to Rs. 22,62,445, after giving effect to the order of the Commissioner (Appeals). Deducting therefrom, the income-tax and surtax liability of Rs. 16,71,791, the company had distributable profits of Rs. 5,90,654.

Since the company failed to distribute any dividend within the statutory time limit of 12 months after the close of the accounting period, i.e., 30-4-1975, the ITO called upon the assessee to show cause why additional tax should not be levied on the company under Section 104. The assessee explained 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, he accepted the argument on behalf of the assessee that under the Companies (Temporary Restrictions on Dividends) Act, 1974, the assessee was not permitted to declare dividends in excess of one-third of the profits, whereas under Section 104, the assessee was expected to declare 45 per cent of the profits. If the assessee were to comply with the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974, it had necessarily to refrain from complying with the provisions of Section 104.

Secondly, the assessee's total income was determined at Rs. 22,88,760 after making disallowances of Rs. 1,70,140, being the bonus liability of the assessee, donations of Rs. 1,100, travelling expenses of Rs. 1,469, interest payments of Rs. 891 and entertainment expenses of Rs. 2,491. Though these moneys were expended by the assessee, they were disallowed for the purpose of determination of total income for the purpose of levy of income-tax.

According to the assessee, as accepted by the Commissioner (Appeals), these amounts had to be kept out of consideration.

The third ground which appealed to the Commissioner (Appeals) was that the assessee's factory was housed in a rented premises.

According to the master plan for the Bombay City, these premises were situated in a non-factory zone. The Municipal Corporation authorities were pressing the assessee hard, for getting out of this non-factory zone to another permitted zone. In fact, the assessee had actually purchased a plot of land for the purpose, prepared a project report, estimated the cost of shifting and this cost was nearly Rs. 47 lakhs. The Commissioner (Appeals) was of the opinion that a minimum of Rs. 20 lakhs would be required for shifting. The next major difficulty brought by the assessee to the notice of the Commissioner (Appeals) was that the assessee's banker, viz., the Central Bank of India had curtailed the bill discounting facilities by 20 per cent margin in the case of the assessee. According to the assessee, these factors had very seriously affected the liquidity potential of the assessee. Necessary evidence was produced before the Commissioner (Appeals). The Commissioner (Appeals) accepted this argument on behalf of the assessee. Finally, it was argued before the Commissioner (Appeals) about the impending gratuity liability, due to the delay in the approval of the gratuity fund by the Commissioner 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 the shifting of the factory, there was no resolution of the assessee-company to the effect that this was one of the reasons which prevented the assessee from declaring any dividends.

In fact, the factory has not even been shifted till today. The undistributed profits amounted to Rs. 5 lakhs and odd. In the accounts they were merely carried to the balance sheet. These profits were not utilised for any of the purposes mentioned before the Commissioner (Appeals) as a result of which the assessee could not declare dividends. In fact, out of the funds available, the assessee had advanced an amount of Rs. 4,54,317 to a firm in which a director of the company was a partner of the assessee. In the previous year, an amount of Rs. 1,47,307 was advanced to this firm. During the year, further amount of Rs. 3,07,000 was advanced. Further, during the next year, the advances to this firm went to the extent of Rs. 11 lakhs. The assessee has not shifted its factory outside the municipal limits. As on 30-4-1974, it had merely reserved to the extent of Rs. 6,64,012. In the year under consideration, the undistributed profits rose to Rs. 12,20,000. Gradually, at the end of April 1978, the reserves have risen to Rs. 15,17,490. The learned departmental representative has relied heavily on the Madras High Court decision in the case of Indo-Ceylon Dental & Surgical Co. Ltd. v. CIT [1975] 98 ITR 536, wherein the learned judges of the Madras High Court had held that, the mere fact that there was a developmental activity proposed by the company would not show that the company wanted to build up reserves for such activity for all the future years and it was for that reason a lesser dividend was declared. According to the learned judges, unless there was positive material to show that the board of directors or the general body resolved to declare a lesser dividend with a view to build up sufficient reserves to be utilised for such developmental activity, it was not possible to assume that the declaration of a lesser dividend was for the reason that the board of directors or the general body required finance for the developmental activity. From the mere declaration of a lesser dividend, it could not be automatically inferred that the directors wanted to create a reserve for the future expansion of the company. In that case, the learned judges found that as no material was placed by the assessee 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 bad 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 opportunity and try to shift the assessee's industry with all benefits of expansion in area and power (sic). By a subsequent letter dated 23-11-1971, the municipal corporation offered some other plot. But here the offer was open for only four weeks. Yet another intimation was received on 26-6-1973, in which the municipality had proceeded to state that the permission was granted to continue in the present premises purely on a temporary basis, taking into consideration that the assessee would shift the factory to the confirming zone, which was offered to the assessee earlier. As the assessee did not shift its factory to the said premises, the corporation offered some alternative site. The letter closed with a warning that if no reply was received within eight days, further renewal of permit period would not be entertained and the power connection would be disconnected without notice. Substantial further correspondence has been brought to our notice right through the accounting period up to the last date when the assessee could have finally declared the dividend, i.e., 30-4-1976. The letters from the corporation were assuming more and more urgent tone and less and less conciliatory. Further, it was pointed out to us that it was not as if the assessee was doing nothing for shifting the factory. In fact, the assessee had proceeded to enter into an agreement with Mrs. Mangala Hasmukh Meghani and two others on 2-12-1975 for the purchase of a plot of land on the Saki Naka Road in village Tungwa in Andheri East in Bombay, measuring 21,270 sq. mts., for an amount of Rs. 4,81,100, for which the assessee had already paid an earnest money of Rs. 13,230 on the date of the agreement. The final sale deed was executed on 31-8-1981. The assessee applied for a no-objection certificate in August 1976, and received it from the Directorate of Industries of the Government of Maharashtra on 24-9-1980. In the meanwhile one of the directors had also got busy studying the prospects of shifting and setting up of the assessee's factory at Saki Naka Road. The report was actually received on 19-4-1976, according to which the cost of machinery would be Rs. 6,42,300 and the cost of construction of the new premises would be Rs. 47,31,689. This report was placed before the board of directors on 31-7-1976. Thereafter, the directors decided not to declare any dividends. An extract from the record of the 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 Bcmerjee & Co.

(P.) Ltd. (supra), 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. According to the provisions of this section, the ITO had to consider whether the payment of the dividend or a larger dividend than that declared by the assessee, would be unreasonable within the meaning of Section 23 of the 1922 Act. For this purpose, the ITO must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or a director of a company and deal with the problem with sympathy and an objective approach. Further, reliance is placed on the Calcutta High Court decision in the case of Cooch Behar Trading Co.

(P.) Ltd. v. CIT [1978] 112 ITR 150, which also throws considerable light on the application of this penal provision, to the facts of any case.

8. We have carefully considered the facts and circumstances of the case and the submissions on either side. The facts briefly are. that the assessee's total income during the year, after reduction by the Commissioner (Appeals) was Rs. 22,62,445. After deducting taxes payable therefrom, the distributable profits were Rs. 5,90;654. The assessee was, in the normal circumstances, expected to distribute a minimum dividend of 45 per cent of the total income within 12 months of the end of the accounting period, unless it was prevented by some of the circumstances mentioned in Section 104. The circumstances laid down in Section 104 are, losses incurred by the assessee in earlier years or the smallness of the profits made in the previous year, in which circumstances, the payment of dividend or larger dividend than declared within the period of 12 months, as aforesaid, would be unreasonable. We are not concerned here with the circumstances laid down in Section 104(2)07) or (HI) of the Act. We are mainly concerned with the circumstances laid down in Section 104(2)(i), because the assessee has merely rested its case on this provision for refraining from the declaration of dividends for the accounting period under consideration.

As stated earlier, in the first place, the restrictions laid down by the Companies (Temporary Restrictions on Dividends) Act, 1974, did not permit the assessee to distribute more than 33 per cent of profits. The assessee was caught between the devil and the deep sea. Either it contravened the Companies (Temporary Restrictions on Dividends) Act, 1974 or it contravened Section 104. That apart, from the correspondence going on between the Bombay Municipal Corporation and the assessee, right from 197) 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 report even a structure comparable to the assessee's existing premises would have cost Rs. 19,06,593. Further, the liability on account of the bonus and the gratuity were very much in existence. No doubt the ITAT Bombay Bench 'B' in IT Appeal No. 2571 (Bom.) of 1979 decided on 5-11-1980, had held that the bonus liability of Rs. 1,70,140 in that case did not represent any accrued liability of the year under consideration. But the assessee had, with its understanding of law, considered it as an existing liability and provided for the same in its books of account. Further, the gratuity liability had also crystallised as a result of the order of the Commissioner, approving the gratuity fund and, in fact, payment had to be made within next two years.

9. In these circumstances, we have to consider whether the assessee was rightly subjected to penal action under Section 104. For the purpose, we have to examine the provisions of Section 104 which lays down the circumstances in which the penal provision would apply. The only exception made under Section 104 is in respect of the assessee having losses of the earlier years or smallness of the profit for the year under consideration. At least, that is the excuse advanced on behalf of the assessee. But are these the only circumstances in which the assessee could be excused from distributing no dividend, or small dividend during the year The learned counsel for the assessee has relied heavily on the Supreme Court decision in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra). Though rendered in the context of the 1922 Act, the relevant section thereof is Section 23A, which is in part materia with Section 104, which we are called upon to interpret. We find that the learned judges of the Supreme Court have expressed the following views in this context: . . .Unless there is a deficiency in the statutory percentage, the Income-tax Officer has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholders. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or 'the small-ness of the profit made", the payment of a dividend or a larger dividend 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 small-ness 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 reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible nor advisable to lay down and decesive tests for the guidance of the Income-tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the difficult problem that arises in each case. We find it difficult to accept the argument that the Income-tax Officer cannot take into consideration any circumstances other than losses and smallness of profits. This argument ignores the expression 'having regard to' that precedes the said words.

If we have to take guidance from the ruling of the Supreme Court and particularly from the portion emphasised, to our mind the decision is obvious. On the one hand, the Companies (Temporary Restrictions on Dividends) Act, 1974, restrains the assessee from declaring requisite dividends, on the other hand the bonus and gratuity liabilities were there, next, the necessity for shifting out of the present premises and to shift to some other premises after setting-up of its own factory structure-with all these factors put together, the directors could not have done anything other than to conserve as much of company's profits as possible, for its future needs.

10. As regards the argument on behalf of the revenue, on the basis of the Madras High Court decision in the case of Indo-Ceylon Dental & Surgical Co. Ltd. {supra), may be, the assessee did not pass the normal resolution stating that it did not declare the dividends because of the aforesaid circumstances, but the evidence in the nature of the correspondence with the municipal corporation and bonus and the gratuity liabilities, is overwhelming to indicate the extent of the assessee's financial commitments. Regarding the argument that the assessee was advancing accumulated profits to its sister concern, to our mind, the assessee has already furnished the necessary explanation, namely, that these were not advanced to the sister concern for its requirements, but these were advances for the purchase of raw material for the assessee's own business, i.e., yarn. As regards the argument on behalf of the revenue that the assessee has not yet shifted and the assessee is going on building up its general reserve, it has been brought to our notice that the assessee has purchased the land on 31-8-1981, for which the negotiations have been proved to be in progress in the accounting period itself. The assessee has obtained the on-objection certificates from the Industries Department on 18-6-1980 and 29-4-1980. The necessary efforts were being made for which the funds were in the process of accumulation and gradual utilisation, as for the purchase of land, etc.

11. To sum up, in the circumstances discussed at length above, in our opinion, the assessee could not have declared any dividend during the year under consideration. Applying the test laid down by the Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra), the order of the Commissioner (Appeals) vacating the order passed by the ITO under Section 104 calls for no interference. It is hereby upheld.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //