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income-tax Officer Vs. Kashiram Textile Mills (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1983)6ITD158(Ahd.)
Appellantincome-tax Officer
RespondentKashiram Textile Mills (P.) Ltd.
Excerpt:
.....the name suggests, is engaged in textile industry. the assessment year is 1976-77 and the relevant previous year ended on 30-6-1975. (b) prior to 1-4-1976, the provisions of section 104 were not applicable to a company which was engaged in the manufacturing or processing of goods, by virtue of sub- section (4) of that section. (c) by the taxation laws (amendment) act, 1975 (hereinafter referred to as the amendment act, 1975), sub-section (4) of section 104 was substituted with effect from 1-4-1976 whereby the provisions of section 104 were made applicable even to a company engaged in the manufacturing or processing of goods. (d) for the year under appeal, the assessee filed two returns wherein originally it had shown total income of rs. 20,26,540 which was revised to rs. 13,89,329. (e).....
Judgment:
1. The only point involved in this appeal as well as the cross-objections pertains to the applicability of the provisions of Section 104 of the Income-tax Act, 1961 ('the Act').

2. The assessee is a company and as the name suggests, is engaged in textile industry. The assessment year is 1976-77 and the relevant previous year ended on 30-6-1975.

(b) Prior to 1-4-1976, the provisions of Section 104 were not applicable to a company which was engaged in the manufacturing or processing of goods, by virtue of Sub- Section (4) of that section.

(c) By the Taxation Laws (Amendment) Act, 1975 (hereinafter referred to as the Amendment Act, 1975), Sub-Section (4) of Section 104 was substituted with effect from 1-4-1976 whereby the provisions of Section 104 were made applicable even to a company engaged in the manufacturing or processing of goods.

(d) For the year under appeal, the assessee filed two returns wherein originally it had shown total income of Rs. 20,26,540 which was revised to Rs. 13,89,329.

(e) The 1TO framed the assessment on total income of Rs. 24,91,027 vide his order dated 30-3-1979.

(f) The assessee did not distribute any dividend within 12 months immediately following the expiry of the previous year.

4. On the aforesaid facts, the ITO enquired of the assessee as to why an order under Section 104 should not be passed requiting it to pay additional income-tax for not distributing the income by way of dividend to its shareholders. In its letter, dated 8-9-1979, addressed to the ITO, the assessee stated as under : This has reference to the proposed action which you desire to take under Section 104. In this respect, we submit as under : (1) That the company returned a figure of total income at Rs. 13,89,329 which was increased to Rs. 24,91,027 in the assessment passed. If the tax payable and other deductions are considered as mentioned in your letter, the distributable surplus comes to nil.

(2) Further, being expanding concern, the company thought it fit to create the general reserve instead of distributing the amount as dividend which can very easily be proved by the investment made by the company during the ensuing years for its expansion.

(3) Further, it is submitted that the action, which you proposed to take under Section 104, may kindly be kept in abeyance as the assessee has preferred an appeal against the additions made.

We hope, your honour would be convinced with the above and drop the idea of taking action under Section 104.

5. On 21-12-1979, the assessee wrote a letter to the 1AC representing that he should not give his approval to the ITO to pass an order under Section 104. In the said letter, the assessee, inter alia, contended that : 5. That the amendment to the charging portion of Section 104 came into force with effect from 1-4-1976 and the same were notified on 5-9-1975, i.e., much after the accounting year of the company which ended on 30-6-1975.

6. That as per Section 104, the charging portion clearly suggests that the section is related to the previous year and not the assessment year like Section 4 of the Act. Hence, the amended section shall apply, in our opinion, only to the accounting year ended after 1-4-1976 and if it does not, at least the provisions of the amended Section would apply to the concern where accounting year ended after 5-9-1975, the date on which the notification was published in the Official Gazette.

The ITO, however, was of the view that the contentions raised by the assessee were untenable. For disposing of the present appeal, it is not necessary to revert to the ITO's reasonings as they deal with the issue as to whether the assessee had distributable income or not, with reference to Sub-Section (2) of Section 104. The ITO, therefore, raised additional income-tax of Rs. 7,54,059, vide his order, dated 4-3-1980, passed under Section 104, after taking necessary approval of the IAC.6. In appeal before the Commissioner (Appeals), the assessee, inter alia, took up the following legal grounds : The additional tax provision were made applicable to the company vide the Taxation Laws Amendment Act, 1975, which was notified in September, 1975, i.e., well after the close of the accounting year of the company .

Section 104, a charging Section for the imposition of the additional tax, applies with reference to previous year only. Hence, the amended section shall apply only to the accounting year ended after 1-4-1976.

Apart from making oral submissions, the assessee also filed elaborate written submission dated 23-12-1980 before the Commissioner (Appeals), wherein it took up a stand that as the amended provisions of Sub-Section (4) of Section 104 came into force from 1-4-1976, i.e., well after the end of the previous year relevant to the assessment year under consideration, the same was not applicable to it. Therefore, the ITO could not have raised additional income-tax of Rs. 7,54,059 by passing an order under Section 104. According to the assessee, the provisions of Sub- Section (1) of Section 104 refer to only 'previous year', the amendment made by the Amendment Act, 1975, would be applicable to the previous year beginning or following after 1-4-1976 and not to the assessment year commencing from 1-4-1976. The Commissioner (Appeals) forwarded the written submissions of the assessee to the ITO for his comments. The ITO communicated his comments to the Commissioner (Appeals) vide his letter dated 4-3-1981.

Thereafter, the Commissioner (Appeals) sent a copy of the ITO's comments to the assessee for further elucidation of the matter. Vide its letter, dated 22-3-1981, the assessee gave reply to the ITO's comments, point by point. Reproducing the relevant portion from the assessee's letter, dated 22-3-1981, in his order under appeal, the Commissioner (Appeals) disposed of the appeal as under : 3. I fully agree with the above contention of the appellant. The amended provision does not apply to the appellant company for this assessment year. As the appellant company, an Indian company, whose business consists mainly in the manufacture and processing of goods within the meaning of clause (a) of Sub-section (4) of Section 104, prior to the amendment the provisions of the Section 104 will not apply to the appellant company.

4. As I have held that Section 104 is not applicable, I have not considered the other grounds for non-declaration of dividend.

7. Being aggrieved by the order of the Commissioner (Appeals), the revenue has come up in appeal before the Tribunal with a grievance that the Commissioner (Appeals) was not justified in holding that the Amendment made by the Amendment Act, 1975 in Section 104 was applicable to the previous year beginning from 1-4-1976 and, therefore, for the year under appeal, the provisions of Section 104 were not applicable to the assessee. The assessee has filed cross-objection as it was aggrieved by the action of the Commissioner (Appeals) in not dealing with other grounds taken up before him in respect of the merits of the case.

8. The learned representative for the department, vehemently argued that since the provisions of Section 104 were procedural in nature, the Commissioner (Appeals) was not justified in accepting various submissions made by the assessee in respect of the amendment brought in Section 104 by the Amendment Act, 1975. He further submitted that since the assessee had failed to distribute income by way of dividend within 12 months immediately following the expiry of the previous year, the assessee had committed a default after the commencement of the amended provisions of Sub-section (4) of Section 104. In this view of the matter, the ITO was fully justified in raising additional income-tax of Rs. 7,54,059. He further submitted that amended provisions of Sub-section (4) of Section 104 were rightly applied by the ITO in view of the fact that under the scheme of the Act, the amendments made in the Act would come into force for the assessment year concerned irrespective of the date on which the previous year ended. In support of these submissions, he relied on the decisions in the cases of CIT v.T.V. Sundaram Iyengar & Sons {P.) Ltd. [1976] 102 ITR 264 (Mad.), CIT v. Ramchand Kundanlal Saraf [1975] 981TR 474 (MP), CGTv. C.Muthukumaraswamy Mudaliar [1975] 98 ITR 540 (Mad.), CIT v. Tezpur Automobiles [1970] 75 ITR 722 (Assam & Nagaland), Gobald Motor Service (P.) Ltd. v. CIT [1966] 60 ITR 417 (SC), CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 (SC), MM. Sugar Mills (P.) Ltd. v. ITO [1965] 56 ITR 322 (All.) and Gautam Sarabhai v. CIT [1964] 52 ITR 921 (Guj.). He, therefore, urged that the order of the Commissioner (Appeals) be set aside and that of the ITO be restored.

9. The learned counsel for the assessee, on the other hand, strongly supported the order of the Commissioner (Appeals). In this connection, he explained to us the scheme of the provisions of Section 104 and submitted that Section 104 was neither charging section nor procedural section but it is in the nature of substantive or penal provision and, therefore, it cannot be applied to the assessment year but is applicable to the relevant previous year. He further submitted that since the amendment in Sub-section (4) of Section 104 was brought by the Amendment Act, 1975, and since sub Section (1) of Section 104 talks about 'previous year', the provisions of the amended Sub-section (4) of Section 104 were applicable to the relevant previous year and not to the assessment under consideration. In this connection, he further submitted that there is a difference in the amendment made by the Annual Finance Act and the Amendment Act, 1975. He further submitted that since the assessee's previous year had ended on 30-6-1975, i.e., much before the amendment brought in Sub-section (4) of Section 104, the assessee could not be asked to pay additional tax, as during the relevant previous year it was exempt from the purview of Section 104.

In this connection, he also referred to the detailed written submissions filed before the Commissioner (Appeals) (pages 21 to 36 of the paper book). He also invited our attention to pages 734 and 735 of the Commentary of Kanga and Palkhivala on The Law and Practice of Income-tax, Vol. 1, 7th edition. He, therefore, urged that since the provisions of Section 104 were not applicable to the assessee in respect of the previous year ended on 31-3-1976, the Commissioner (Appeals) was fully justified in deciding the appeal in favour of the assessee. Relying strongly on the decision of the Hon'ble Calcutta High Court in the case of CITw. Bombay Photo Stores (P.) Ltd. [1970] 76 ITR 84, the learned counsel for the assessee submitted that the Commissioner (Appeals) had rightly decided the assessee's case in its favour. The learned counsel for the assessee, alternatively, submitted that if we decide the legal issue in favour of the revenue, the matter has to be sent back to the Commissioner (Appeals) as the Commissioner (Appeals) has not given his decision on the merits of the case.

10. We have carefully considered the rival submissions of the parties as well as the material placed before us and we find considerable force in the submissions made on behalf of the revenue. It is pertinent to note that what is subjected to tax under Section 104 is not income, profits and gains of the previous year but an amount ascertained in the manner provided in the said Section for the default on the part of the assessee to distribute statutory percentage of -dividends. We have carefully gone through the decision in the case of Bombay Photo Stores (P.) Ltd. (supra) and at first blush, it appeared to us that the assessee's case is fully covered by the said decision. However, looking closely to the facts and circumstances obtaining in that case, we are of the view that the ratio laid down in that decision has no application to the facts and circumstances obtaining in the present case. In order to appreciate the ratio laid down in that case, it would be necessary to refer to the facts summarised which reads as under : ... The assessee, Bombay Photo Stores (P.) Ltd., is a private limited company to which the provisions of Section 23A are applicable. In the present case, the assessment year is 1960-61 for which the previous year ended on June 30, 1959. The assessee's net profit accounts came up to Rs. 72,959. The Income-tax Officer determined the assessee's total income at Rs. 87,103 and tax payable thereon at Rs. 39,196, leaving a balance of Rs. 47,907 available for distribution as dividend. According to the Income-tax Officer, the effective statutory percentage applicable to the company was 57.5 per cent and on this basis the minimum distribution of dividend required for complying with Jthe provisions of Section 23A was Rs. 27,546. The actual distribution made by the company was Rs. 20,295.

The shortfall was therefore more than 5 per cent of the distributable surplus. The Income-tax Officer accordingly passed an order under Section 23A with the previous approval of the Inspecting Assistant Commissioner of Income-tax levying additional super-tax at the rate of 37 per cent on the undistributed balance of Rs. 27,612.

On appeal before the Appellate Assistant Commissioner, there was an interim order dated December 13, 1962, by which he asked for a report from the Income-tax Officer. The Income-tax Officer submitted his remand report on January 24, 1963.

The statement of the case also makes it clear that the assessee carried on two activities : (1) developing and printing ; and (2) trading. The Income-tax Officer adopted 50 per cent in respect of the first part and 65 per cent in respect of the second part of the business and this resulted in the average statutory percentage of 57.5 per cent. The assessee's contention then was that having declared a dividend of Rs. 20,295 in March, 1960, when the statutory precentages were 45 per cent and 60 per cent, respectively, for these two activities, the average would be only 52.5 per cent. In fact the assessee claimed to be entitled to be given an opportunity for declaring additional dividends. The Appellate Assistant Commissioner negatived the contention and held that the statutory percentages would be 50 per cent and 65 per cent as enacted by the Finance Act of 1959 and therefore the assessee was not entitled to an opportunity to declare additional dividends. It was further held by the Appellate Assistant Commissioner that further distribution of dividends was not impossible. In the result, the Appellate Assistant Commissioner upheld the Income-tax Officer's order under Section 23A. Before the Tribunal the main contention was that the percentage of 50 per cent and 65 per cent would be effective on and from the 1st April, 1960, and for distributions prior to that date the applicable statutory percentages were 45 per cent in respect of manufacture, etc., and 60 per cent in respect of trading. The Tribunal came to the conclusion that the exposure of the film was one of the stages of taking and producing of the photograph and that when admittedly developing of the exposed film was processing, there was every justification to treat the exposure of the film itself as part of the proceeding. On that basis the assessee's net profit consisted of Rs. 67,006 arising from processing and Rs. 5,953 for trading. The Tribunal applied 45 per cent and 60 per cent to these two activities of the business, and came to the conclusion that the shortfall worked out to be less than 5 per cent of the distributable surplus.

The conclusion of the Tribunal, there-was that the assessee should be afforded an opportunity to make a further distribution of dividends to raise it up to the requisite statutory percentage . . .

.

After going through the provisions of Section 23A of the Indian Income-tax Act, 1922, as well as the relevant provisions of the Finance Act, 1959, the Hon'ble High Court held that since the statutory percentages were substituted from 1-4-1960 and since the assessee's previous year in that case ended on 30-6-1959, the old statutory rates were applicable in that case. On the reading of that decision of the Hon'ble Calcutta High Court, we are of the view that the assessee in that case got the benefit as the higher statutory rates were substituted after the end of the relevant previous year. In the instant case, we are not concerned with the statutory percentage prescribed under Section 109 of the Act but we are concerned with the basic issue as to whether the amendment brought by the Amendment Act, 1975, would be applicable to the assessment year 1976-77 or to the assessment year 1977-78 onwards. The assessee has taken a stand that since Sub-section (1) of Section 104 deals with 'previous year', the amendment made by the Amendment Act, 1975, would be applicable to the previous year beginning from 1-4-1976 and not to the previous yea.which ended on or before 31-3-1976, The revenue, on the other hand, has taken a stand that since any amendment made in the Act would be applicable to the assessment year concerned,the fact that the exemption granted to the companies like the assessee was withdrawn by the Amendment Act, 1975, would not be of any consequence with reference to the language of Sub-section (1) of Section 104. In this connection the following observations of the Hon'ble Calcutta High Court quoted in the decision of Bombay Photo Stores (P.) Ltd. (supra) is very illuminating : The next case relied on by Mr. Pal was the decision of the Supreme Court in Union of India v. Madan Gopal Kabra [1954] 25 ITR 58, where Patanjali Sastri CJ., at page 70, observed as follows : Nor can it be said, in strictness, that the Finance Act, 1950, is retroactive legislation. That Act, as already noticed, purports by Section 2 to charge income-tax and super-tax at specified rates 'for the year beginning on the 1st day of April, 1950'. The case is thus one where the statute purports to operate only prospectively, but such operations, as, under the scheme of the Indian income-tax law, could take into account income earned before the statute came into force. Such an enactment cannot, strictly speaking, be said to be retroactive legislation, though its operation may affect acts done in the past.

The third case on which the revenue relied is again one of the Supreme Court in CIT v. H.E.H. Mir Osman Ali Bahadur [1966] 59 ITR 666, where Subba Rao J., at page 677, observed as follows : The legal position as we apprehend may be stated thus : under the Act, an individual is assessed to income-tax on the income of the previous year at the rate or rates fixed for the year by the annual Finance Act. The total income of the assessee during the previous year is computed in accordance with the provisions of the Income-tax Act after giving the relevant allowances and deductions therefrom.

If during the assessment year an individual is assessable to tax, the fact that during the previous year he was not liable to tax at all because there was no Income-tax Act in the area to which the Act was extended or because that under an Income-tax Act in force therein during that year his income was exempted from tax or because of any other law, including International law, he was so exempt from tax, would not be of any relevance.

11. It would, thus, appear from the above, that the amendment made in a particular Section would be applicable to the assessment year concerned irrespective of the fact as to when the relevant previous year ended or whether such amendment made in the Act came into force prior or subsequent to the end of the relevant previous year. In this view of the matter, we are of the considered opinion that the amendment made by the Amendment Act, 1975 in Sub-section (4) of Section 104 would be applicable to the year under appeal and, therefore, the Commissioner (Appeals) was not justified in accepting the submissions made on behalf of the assessee. It is pertinent to note that the exemption withdrawn by the Amendment Act, 1975, was again introduced by the Finance (No. 2) Act of 1977 and the amended provisions of Sub-section (4) of Section 104 were made applicable to the assessment year 1978-79. If we were to accept the submissions made on behalf of the assessee, then the entire concept of previous year, assessment year, etc., etc., will have to be changed which, in our opinion, should be avoided. As stated earlier, what is subjected to tax under Section 104 is not the income, profits and gains of the previous year but an amount ascertained in the manner laid down under that Section. The amendment made by the Amendment Act, 1975 clearly shows that the provisions of Sub-section (4) of Section 104, as amended, would come into effect from 1-4-1976. Since the assessee's previous year ended on 30-6-1975, the amended provisions would be applicable to the assessment year 1976-77. Under these circumstances, we are not in a position to uphold the order of the Commissioner (Appeals) on the legal issue. Since the Commissioner (Appeals) has not given his decision on the merits of the case and since the assessee's learned counsel has stated before us that even on merits the assessee has good case, we would set aside the order of the Commissioner (Appeals) and restore the case once more to his file with a direction to give his decision on the merits of the case after giving an opportunity of being heard to both the parties in this regard.

12. In the result, the appeal filed by the revenue is allowed and the cross-objection filed by the assessee is allowed for statistical purposes.


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