Per Shri P. J. Goradia, Accountant Member - This appeal filed by the assessee is directed against the order of the Commissioner (Appeals).
Against the same order of the Commissioner (Appeals) the revenue has also filed cross-appeal taking the following ground : "The learned Commissioner (Appeals) had erred in law and on facts in holding that gratuity liability of Rs. 83,036 is deductible under section 109(i) (g) for determination of distributable income under section 104 of the Act." 1.1. For the sake of convenience, both the appeals are disposed of by this common order.
2. The chief objections of the assessee are firstly, the Commissioner (appeals) has travelled beyond jurisdiction in reforming the entire order under section 104 of the Income-tax Act, 1961 (the Act) and secondly, in confirming that the company was liable to pay additional tax. Without prejudice to the above grounds, the assessee has also objected to the amount of computation of its distributable income in respect of certain payments and expenditure.
3.1 The assessee is a limited company carrying on business of manufacturing and selling of chemicals and pharmaceuticals. For the assessment year 1977-78 corresponding to the previous year ended on 31-3-1977, the profit as per profit and loss account was Rs. 23.52 lakhs. As per the revised return of income, the return was filed for Rs. 28,60,731. Because of disallowance of certain expenditure the ITO finally determined the income at Rs. 47,71,702 and the tax payable thereon was Rs. 27,74,286. The assessee did not make any provision for distribution of dividend in order to declare any dividend and, therefore, the ITO issued notice under section 104 as the assessee being an industrial company was expected, according to him, to distribute not less than 45 percent of its distributable income which came to Rs. 8,98,200.
3.2 The assessee made written submissions, which briefly stated that considering availability of funds and commitments the issue involved was required to be considered. The ITO came to the conclusion that considering the three situations as provided under section 104(2) the facts on record justified the levy of additional tax and, accordingly, proceeded to levy the tax at the rate of 25 per cent being Rs. 4,99,005 on shortfall of Rs. 19,96,018. The ITO passed the order after obtaining the IACs permission as was necessary.
3.3 On appeal, the Commissioner (Appeals) confirmed the levy of penalty but directed the ITO to modify his order so as to allow further deduction of gratuity liability of Rs. 83,036 and the companys guest house expenses of Rs. 40,396 while computing the distributable income.
He rejected the submissions of the assessee that it was prevented from declaring any dividend on account of smallness of its profits. He also rejected the submission that the company had on hand a programme of capital expenditure involving an outlay of around Rs. 62 lakhs and the capital needs were also expected to increase. The materials placed before him in respect of pending commitments and figures of cash-flow, etc., were rejected. He also rejected the reliance placed on various Court decisions especially the one of the Bombay High Court in the case of CIT v. Gagalbhai Jute Mills (P.) Ltd. (1980) 126 ITR 191 where the point regarding capital expenditure programme and the commitments was considered in respect of the issue under consideration. This decision was not acceptable to him because factually the programme undertaken by the assessee in that case decided by the Bombay High Court was in respect of rehabilitation programme. He further observed that in none of the cases relied upon by the assessee, it was held that needs of future expansion of business or enhancement in industrial capacity or recycling of the profits itself was a reasonable cause for not declaring any dividend.
4. At the time of hearing, the learned counsel appearing on behalf of the assessee submitted a compilation and reiterated the arguments placed before the authorities below. It was also submitted that all the materials place before us were considered by all the authorities below.
In fact, the various statements in respect of capital commitments, actual expenditure on capital account, cash-flow statements for the period 1-11-1977 to 31-3-1978 were prepared at the instance of the IAC for the purpose of appraising the correct situation. At page 2 he brought to our notice the break-up of the capital commitments which were to be met immediately after the close of the year but could not be met before 31-3-1978. This included payment in respect of royalty of Rs. 12 lakhs for the September quarter, which was overdue. Amount of Rs. 22 Lakhs was also outstanding in respect of service bills for electricity, water, etc., for two months and amount of Rs. 12 lakhs was in respect of advance tax liability to be met in December 1977 and March 1978. Aggregate of the commitments came to Rs. 152 lakhs against which the funds available at the beginning of November 1977 were only Rs. 4.63 lakhs. In addition to this, the company had also to have cushion for contingency needs and amounts to meet day-to-day operations. He then drew our attention to page 7 wherein various data in respect of sales, turnover of the company, etc., was given by stating that the sales of the company had been rising and according to the printed accounts, the sales increased to Rs. 547 lakhs from Rs. 445 lakhs in the earlier years. It was also submitted that the company is having a foreign equity participation of American firm which held at relevant time 48 per cent equity. The firm had also representation on the board of directors and they concurred with the decision of the board of directors in respect of passing over of dividend. He then also brought to our notice, report of the board of directors where the following mention was noteworthy : "With a view to improving the manufacturing facilities, the company has taken on hand a programme of capital expenditure involving an outlay of around Rs. 62 lakhs during the year 1977-78. Working capital needs also are expected to increase.
The credit squeeze and tight money policy of the Government in consonance with anti-inflationary measures undertaken by the Government continues. As such, the additional finance required has to be found internally. Taking all these factors into consideration and with a view to conserve cash resources of the company, your Directors regret their inability to recommend payment of any dividend during the year under report." Coming to the approach of the authorities below, it was commented that the two factors in respect of losses incurred by the company as also the smallness of the profits are only illustrative factors. Actually there are many tests factors which are required to be considered while considering the provisions of section 104 and its this aspect has also been taken note of by various Courts including the Supreme Court. He then drew our attention to pages 19 to 28 where various data in respect of capital expenditure of various departments with necessary details have been furnished. According to page 28, it was submitted that as on 28-11-1977 the capital commitments of the assessee in terms of money were to the extent of Rs. 55,95,156 as against which advances were made only to the extent of Rs. 14,45,922 and, therefore, the balance amount of commitment was to the extent of Rs. 41,49,234.
4.1 Coming to the aspect of legality of additional tax, it was submitted that the section has been held to be penal in nature and, therefore, the necessary burden regarding willful default was on the revenue and in this direction the revenue has not at all made any efforts. For this reliance was placed on the decision of the Supreme Court in the case of CIT v. Anwar Ali (1070) 76 ITR 696 as also Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC). A copy of the decision in the case if Pawagad Investments (P.) Ltd. (IT Appeal No. 2268 (Ahd.) of 1981, dated 21-3-1983 where similar issue was considered was also submitted for our consideration. In respect of the principal of illustrative case laws reliance was placed on the following decisions-CIT v. Williamson Diamonds Ltd. (1959) 35 ITR 290 (PC), CIT v. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC), CIT v. Gangadhar Banerjee & Co. (P.) Ltd. (1965) 57 ITR 176 (SC), CIT v. Asiatic Textiles Ltd. (1971) 82 ITR 816 (SC), Indian Commerce & Industries Co. Ltd. v. CIT (1966) 60 ITR 229 (Mad.), CIT v. Jubilee Mills Ltd (1968) 68 ITR 630 (SC), Gagalbhai Jute Mills (P.) Ltd.s case (supra), CIT v. Best & Co. (Pondicherry). (P.) Ltd. (1981) 131 ITR 361 (Mad.), CIT v. Sarpi Kajoria Coal Mines (P.) Ltd. (1977) 106 ITR 858 (Cal.), CIT v. Jananamandal Ltd. (1977) 106 ITR 976 (All.), Indian Express Newspapers (Bombay) (P.) Ltd. v. CIT (1979) 120 ITR 249 (Bom.) and Shrinivas Banking Co. Ltd. v. CIT (1965) 58 ITR 89 (Cal.).
4.2 Coming to the aspect of computation of distributable income, it was submitted that expenditure claimed as laid out wholly and exclusively for the purposes of business but disallowed by the ITO in assessment should have been considered while considering the provisions of section 109 of the Act and if so considered, the distributable amount should come only to Rs. 3,85,792 in place of Rs. 19,97,416 determined by the ITO.5. The learned department representative relied upon the orders of the authorities below. In respect of the appeal of the revenue it was stated that the Commissioner (Appeals) should not have directed the ITO to delete the gratuity liability of Rs. 83,036 as deductible under section 109(i) (g) while determining distributable income under section 104. He fairly stated that the decision of the Calcutta High Court in CIT v. Jugantar (P.) Ltd. (1981) 127 ITR 477 was against the revenue.
6. The learned counsel in reply submitted that the decision of the Calcutta High Court on gratuity liability as relied upon by the Commissioner (Appeals) was the only decision and there was no contrary decision of any other High Court.
7. We accept the submissions made by the learned counsel for the assessee and delete the additional amount of tax levied by the authorities below. Our reasons are as follows : 7.1 The authorities below have failed to give importance to the decisions the board of directors and the commitments subsisting with the assessee. These days when the Government is asking the corporate sector to rely upon more and more on internal accruals and ploughing back the liquid funds for expansion activities instead of approaching the Government, banks and financial institutions for monetary help, it is contradiction in terms not to give weight to this type of disciplined approach of the assessee in accordance with the Government philosophy. In fact, a prudent businessman has to take clue from such philosophy of the Government and base decisions anticipating what is to be in store for future. Again, after asking the assessee to submit various data regarding financial commitments and month-wise cash-flow statements for period after general meeting of members, it will not be a sound and judicious approach to disregard the same without finding fault with those data. The judicial pronouncements concerning the issue under consideration can only be illustrative and not exhaustive, because the smallness of profits is a term of highly subjective satisfaction and, therefore, to find fault with the assessee on such issue is bound to be fatal in most cases if the inquiry is misdirected because it is only the assessee who knows best the implication of various decisions. These aspects would be amply clear from the ratios of various decisions cited on behalf of the assessee. We shall deal with only a few, which are most relevant. In the case of Williamson Diamonds Ltd. (supra) it was held that losses previously incurred and smallness of profits are not the only two matters which are to be taken into consideration but all matters relevant to the question of unreasonableness are to be considered and capital loss, if established, would be one of them. In the case of Bipinchandra Maganlal & Co. Ltd. (supra) it was held that the Legislature has ultimately used the expression smallness of profits and not smallness of assessable income.
Smallness of profit under section 23A of the Indian Income-tax Act, 1922 (the 1922 Act) has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional.
In the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra) it was held that the principles laid down by the privy Council of India are in terms followed by the Supreme Court of India in Gangadhar Banerjee & Co. (P.) Ltd.s case (supra). Section 23A was in the nature of a penal provision and, therefore, the revenue had strictly to comply with the conditions laid thereunder. The burden of proof was upon the revenue to prove that the condition laid down thereunder were satisfied before an order was made. 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 the director of a company and deal with the problems with a sympathetic and objective approach. In the case of Asiatic Textiles Ltd. (supra) it was held that whether in a particular year dividend should be declared or not is a matter primarily for the directors of a company. The ITO can step in under section 23A (1) only if the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the ITO to constitute himself as a super director. 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. In the case of Indian Commerce & Industries Co. Ltd. (supra) it was held that computation of profit for the purpose of section 23A should be on the basis of commercial exigencies and in making the said computation, one should not confine to the to factors specifically mentioned in section 23A. In the case of Gagalbhai Jute Mills (P.) Ltd. (supra) it was held that in view of the big rehabilitation programme and acquisition of new machinery, the company had not acted unreasonably in declaring only small amount of dividend which actually did. In the case of Jananamandal Ltd. (supra) it was held that consideration of the nature and purpose of the object for which the assessee proposed to utilise its profit is very material for the purpose of section 23A. The decision of the Tribunal to the effect that having regard to the smallness of the profit, viewed in the light of its future requirement, viz., the contemplated purchases of rotary machinery and construction of factory building etc., at a cost exceeding Rs. 7 lakhs, it would not have been reasonable for it to pay any dividend was confirmed. It was further held that it would not have been reasonable for such expenses as had to be incurred by the company in the near future, would not be taken into account in considering whether it was reasonable to declare a dividend made out of its profit (sic). In the case of Indian Express Newspapers (Bombay) (P.) Ltd. (supra) it was held that future requirement of a company, which has an expansion programme, would be a circumstance which would be relevant in determining whether the profits in the relevant year are small or high having regard to the financial implications of the expansion of the company. In the case of Srinivas Banking Co. Ltd. (supra) it was held that smallness of profit is a relative or comparative concept; it may be with reference to numerous tests or standards, such as, for instance, the assessees capital structure, its projects of development, actual payment of taxes to be provided for and anticipated against and many other business and commercial considerations. There is no abstruct conception of reasonableness and each case must depend on its own facts.
7.2 On a close look at the printed accounts, we find the following notes at page 21 which are worth appreciating though our attention was not drawn to the same : "Provision for taxation in respect of earlier years falls short by Rs. 12,76,600 in view of the demands raised by tax authorities, against which the company has preferred appeals.
In view of the financial commitments and prevailing financial conditions the directors have considered it reasonable not to recommend any dividend on equity shares for the year. In the opinion of the directors, such non-declaration of dividends should not entail any liability for additional tax under section 104 of the Income-tax Act, 1961, and, accordingly, no provision has been made in this regard." On the basis of the material produced before us, we find that the assessee was perfectly justified in passing over the dividend and hold that additional tax under section 104 was not justifiably levied.
7.3 Because of our above decision we are not deciding the submission regarding quantum of distributable income based on disputed deductions.
7.4 We have also considered the case of CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. (1975) 101 ITR 764 (SC) under section 23A where it was held that section 23A was clearly penal in nature. In the case of CIT v. Meccano Floorings (P.) Ltd. (1973) 92 ITR 352 (Mad.), their Lordships observed that section 23A of the 1922 Act and section 104 of the 1961 Act had similarity regarding prevention of avoidance of tax and one must try to find out where there is any attempt at avoiding the tax. We, therefore, entirely agree with the submission of the counsel that the revenue has not discharged burden of proof regarding invoking the penal provision while the assessee did prove by evidence that such burden on the revenue could not be discharged even if tried. We, therefore, hold that proceedings under section 104 were not legally completed.
7.5 Even with regard to the revenues appeal, we decide the issue in favour of the assessee especially because no decision contrary to the one relied upon by the assessee is cited before us and in view of the binding force of the High Court decision as clarified in CIT v. Smt.
Godavaridevi Saraf (1978) 113 ITR 589 (Bom.), we dismiss the appeal of the revenue.
8. In the result, the assessees appeal is allowed. The revenues appeal is dismissed.