Per Shri B. Gupta, Accountant Member - In the various grounds in this appeal objection is taken to the order of the Commissioner (Appeals) upholding the order of the ITO under section 104 of the Income-tax Act, 1961 (the Act)
2. The appellant is an investment company. In the assessment year 1979-80 it had distributable income of Rs. 85,294 as worked out by the ITO in his order. In order to obviate the applicability of the provisions of section 104 the assesses-investment company had to distribute 90 per cent of its income as dividends within 12 months immediately following the expiry of the previous year for the assessment year 1979-80. In other words, it was to distribute dividends to the extent of Rs. 76,770 out of the distributable income of Rs. 85,294. Since it distributed dividends to the extent of Rs. 65,700 only, the shortfall worked out by the ITO was at Rs. 11,070 on which tax at the rate of 50 per cent was demanded under the provisions of section 104(1) (a). This was challenged before the Commissioner (Appeals) who had upheld the order passed by the ITO.
3. It is in the background of these facts that the assessed is in appeal contending that neither the ITO nor the Commissioner (Appeals) had any justification in imposing the liability of additional tax on the assessed under the provisions of section 104(1). Shri M. L. Dujari, chartered accountant, the learned counsel of the assessed, has taken us through a paper book and contended on the basis of the directors report to the shareholders of the assessed-company for the previous year ended on 30-6-1978 relevant to the assessment year 1979-80 that since the assessed-company had to provide Rs. 8,782 as special reserve for redemption of 10 per cent preference share capital and had also to provide a sum of Rs. 9,200 towards general reserve, there was no feasibility of distributing any among more than the amount actually distributed as dividends. Referring to the provisions of the Companies Act, 1956, Shri M. L. Dujari submits that preference share could be redeemed only out of the profits of the company which were available for distribution as dividends or out of proceeds of a fresh issue of shares made for the purposes of redemption. According to him, the assessed-company acting as a prudent and law abiding businessman had to provide for the redemption of preference shares before taking into account the surplus available for distribution as dividends. Shri M. L. Dujari further refers to us to the provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975 and submits that since the dividends proposed had exceeds 20 per cent of the paid-up capital, the company was under the above-mentioned statutory Rules bound to transfer to reserves a sum which could not be less than 10 per cent of the current profits. After referring to the above-mentioned provisions of the Company Law, the learned counsel submits that distribution of any amount larger than the amount actually distributed as dividend would have been unreasonable and, thereforee, the authorities below had no justification in invoking the provisions of section 104. In support of his contentions Shri M. L. Dujari has also relied upon the decision of the Honble Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. : 57ITR176(SC) .
4. On the other hand, Shri J. S. Rao the senior departmental representative, has supported the orders passed by the lower authorities.
5. Before deciding the issue under appeal we have instructed ourselves about the law laid down by the Honble Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra). Applying the law to the facts of the present case it appears to us that the provisions of section 104 had been justifiably invoked by the lower authorities. On looking into the balance sheet and the profit and loss appropriation account of the assessed-company we find that it had accumulated profits of the tune of Rs. 1,30,161 after providing Rs. 8,782 for redemption of preference shares, Rs. 9,200 for transfer to general reserves and after providing Rs. 65,700 for proposed dividends. Its profit for the year ending 30-6-1978 after providing for taxation was of the order of Rs. 91,532. Since it had fairly sufficient accumulation of profits, the provisions of Rs. 8,782 for redemption of preference shares cannot be considered to be a factor inhibiting the distribution of statutory percentage of dividends. As required under the provisions of the Companies (Transfer of Profits to Reserves) Rules, 10 per cent of the Income or available surplus was to be taken to the general reserves. But even after making that provisions, the company was still in a position to declare a large percentage of dividends than actually declared. The 10 per cent of the available surplus of Rs. 84,962, i.e., Rs. 8,496 could at the best be reduced under the aforementioned Rules and, thus, the distributable surplus would remain at Rs. 76,466. In accordance with the statutory requirement of section 104/109 of the Act, the assessed was under an obligation to distribute at least 90 per cent of the distributable surplus as dividend. In other word, it had to distribute at least Rs. 68,820 as dividends in order that it could claim compliance of the provisions of section 104/109. Since it had declared dividends of only Rs. 65,700 and since there were no mitigating circumstances as mentioned in the decision of the Honble Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra) or as mentioned in section 104(2) we would consider that the authorities below were justified in imposing the liability of additional tax upon the assessed under the provisions of section 104.
6. The impugned order of the Commissioner (Appeals) is upheld and the appeal filed by the assessed is dismissed.