'Distributable income' is defined in section 109(i); and 'statutory percentage' is defined in section 109(iii) of the Income-tax Act. The first respondent considered that the fact that the company did not make any profits according to its balance-sheet or that it is prohibited by section 205 of the Companies Act from declaring any dividend from its profits without proceeding for direction as required by the said section does not affect the liability to be assessed under section 104 of the Income-tax Act. He accordingly obtained the approval of the second respondent, the Inspecting Assistant commissioner of Income-tax, Range 1, Ernakulam, for proceeding against the company under section 104 of the Income-tax Act; and after giving a reasonable opportunity to the company for bring heard, he passed an order, exhibit P-10, dated February 28, 1969, assessing the company to an additional super-tax of Rs. 42,446. This writ petition has been filed to quash the above order of assessment.
The company has filed an appeal from the impugned order of assessment; and the appeal is pending. Counsel for the revenue raised a preliminary objection that this writ petition should not be entertained in view of the tendency of the appeal, which gives an adequate remedy to the company. The companys counsel submitted that the appeal is not an adequate remedy in view of the fact that the case involves the interpretation of section 205 of the Companies Act, 1956, which is in conflict with the relevant provisions of the Income-tax Act, 1961, and that the income-tax authorities can decide such a matter only in accordance with the provisions of the Income-tax authorities can decide such a matter only in accordance with the provisions of the Income-tax Act, as they are creatures of that statute. I do not agree with this submission. However, if this case involved only a pure question of law on undisputed facts, I would have decided it, instead of leading the parties to have it fought out before the two appellate authorities, and finally come to this court by a reference.
Counsel for the company raises three point before me against the validity of the impugned order of assessment. The first is that section 104(1) of the Income-tax Act applies only to a company which has distributed dividends out of its profits and gains in the previous year; and that the petitioner-company cannot be assessed under the above provision, as it has not distributed and such dividend. This argument is based on the phraseology employed in the first part of sub-section (1). From a reading of the whole of this sub-section, it is clear that the charge thereunder is on to amount of short distribution of the statutory percentage of the distributable income. The contention of counsel for the company would lead to the result, that if the company distributed any dividend, it would be liable to pay the tax on the difference between the statutory percentage of the distributable income and the amount it distributed; but if it did not distribute any dividend at all, there is no liability under section 104(1). This would be an absurd result. This interpretation sought to be given by counsel for the company is not warranted by the language of the section; and it is also contrary to the obvious object of the said provision.
The second point is that the tax under section 104 is penal in character, and that liability thereunder arises only on the failure of the company to distribute the statutory percentage of the distributable income. Counsel submits that in this case, by virtue of section 205 of the Companies Act, 1956, the company is prohibited from distributing any dividend, and that the liability under section 104(1) of the Income-tax Act is not, therefore, attracted. Section 105 of this Act provides that in the case of any short distribution, an assessment under section 104(1) shall not be made unless the company fails to distribute within three months from receipt of a notice from the Income-tax Officer its profits and gains so that the total distribution is not less than the statutory percentage of the distributable income. Counsel submits that this provision indicates that the liability under section 104(1) is only in respect of an income which the company is permitted to distribute. On the other hand, counsel for the revenue submits that the levy under section 104 is not a penalty for not distributing the whole of the statutory percentage of the distributable income, but it is a levy on that part of the statutory percentage of the distributable income which has not been distributed as dividends, and that the question whether the whole or any part of the statutory percentage of the distributable income is permissible under law to be distributed is not relevant. He submits that the failure to distribute may be due to negligence, deliberate omission or any legal bar. Section 105 may not apply to a case of legal bar; and in any event it does not affect the liability to assessment under section 104(1). I do not propose to decide this question, as the third point raised by counsel for the company is one which involves the exercise of discretion by the Income-tax Officer on the facts and circumstances of the case. That is a matter which has to be left to the authorities under the Income-tax Act to decide; and it would not be proper to dispose of this case without an adjudication on that question by the revenue.
The third point raised by counsel for the company is that the company is not liable for assessment under section 194(1) of the Income-tax Act, by virtue of the provisions contained in sub-section (2) of the said section. Counsel submits that, in determining whether distribution of a dividend or a larger dividend than that declared would be unreasonable, the Income-tax Officer should have regard not only to the losses incurred by the company in earlier years or the smallness of the profits made in the previous year which are the two things specifically mentioned in clause (i) of section 104(2), but also to other relevant circumstances. In support of that contention he relies on the decision of the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. P. Ltd. This decision supports the above contention. It further holds that the commercial profits of the company is a relevant factor. Counsel submits that the fact that the declaration of the dividend could not be lawfully made by virtue of the prohibition contained in section 205 of the Companies Act is also a relevant factor. Counsel for the revenue submits that loss shown in the balance-sheet of the company is not a true amount; but it has been manipulated in order to evade the liability under section 104(1) of the Income-tax Act. These are matters which involve a consideration of various facts and exercise of proper discretion by the authorities under the Income-tax Act. I, therefore, decline to interfere under article 226 of the constitution. This writ petition is accordingly dismissed. There will be no order as to costs.