1. This appeal is directed against an order passed under Section 104 of the Income-tax Act, 1961 ('the Act'). The assessee is a private limited company. In the previous year ended 30-6-1977, relevant to the assessment year 1978-79, the assessee had made a book profit of Rs. 24,577. But, after setting off the loss of the previous year amounting to Rs. 30,084, the assessee had no distributable income for declaring any dividend. However, while making the assessment the ITO took the net profit at Rs. 24,577 but added back a sum of Rs. 1,28,243, being the amount of cost of production which could not be deducted for this assessment year and had to be carried forward to the next assessment year in accordance with Rule 19A of the Income-tax Rules, 1962 ('the Rules'), with the result that even after setting off the loss of the earlier assessment year 1977-78 amounting to Rs. 49,807, the total income determined came to Rs. 71,080. Consequently, the ITO deducted the tax payable amounting to Rs. 48,785 out of that amount and determined the distributable income at Rs. 22,695 to impose additional income-tax at 25 per cent thereof amounting to Rs. 5,674 under Section 104(1). This was confirmed by the Commissioner (Appeals). The Commissioner (Appeals) rejected the contention of the assessee that it was an industrial company and, therefore, Section 104 cannot be applied. He also brushed aside the contention that factually the assessee had no distributable income.
2. In the appeal before us, it was contended on behalf of the assessee that when on actual facts the assessee had no distributable income, an order under Section 104 could not be passed on the basis of the assessed income. On the other hand, it was contended on behalf of the revenue that under the provisions of Section 109 of the Act, the computation of distributable income has to be only on the basis of the gross total income as determined under the provisions of the Act and giving the deductions as prescribed under the definition of distributable income. No doubt, Section 104 provides that if the ITO is satisfied that dividends declared are less than the statutory percentage of the distributable income, then additional income-tax can be levied. Section 109 defines distributable income to mean the gross total income as reduced by certain items listed therein, such as income-tax paid by the assessee. Again, gross total income has been defined to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A of the Act. If we follow the letter of these definitions, it would seem that the computation made by the ITO was correct. But we cannot ignore the fact that while determining the gross total income, the ITO has added back an expenditure which was actually incurred by the assessee, thus, artificially increasing the income of the assessee when, in fact, the assessee had no income at all. The spirit of Section 104 is that the assessee should not retain available surplus of the commercial profits, as has been repeatedly enunciated by the Supreme Court. We do not think that the letter of the definitions of distributable income and gross total income could be utilised for imposing an additional tax on the assessee for not distributing the artificial distributable income which was never available with the assessee in actual fact for distribution. The satisfaction, which is required under Section 104, in our opinion, would also include a satisfaction as to whether such a distribution was, in fact, possible. Since it would be an impossibility for the assessee to have distributed any dividends, when in actual facts there was no distributable income, it would be perverse to impose additional tax burden for the fault of not carrying out an impossibility. In the circumstances, we cancel the order passed under Section 104.