1. This tax reference raises a simple point about the application of s. 104 of the I.T. Act, 1961. The section empowers the ITO to levy an additional income-tax on companies in which the public are not substantially interest on that part of their income which is not distributed as dividends.
2. The assessee in this case is a company in which the public are not substantially interest. For the year ended February 28, 1966, the assessee had on its hands distributable profits of Rs. 47,167, but it did not distribute any dividends at all for the year. The ITO, accordingly, applied s. 104 to this company.
3. The assessee relied on sub-s. (2) of the section and urged that the order should not be made. The assessee pointed out that it had carry forward losses of prior years amounting to Rs. 2,41,718. Viewed against these losses, it was urged, the assessee's decision not to distribute any dividends cannot be regarded as unreasonable.
4. The ITO did not accept the position that there were losses in the previous years. He relied on the findings on the orders of regular assessment made on the assessee for those years and held that the losses were fictitious and the correct treading results for those years must be taken to be realisation of substantial profits, as found by the assessing officer. The estimated figures of income found in those assessment orders were adopted as reflecting the correct position.
5. The question is thus reduced within a narrow compass. The question is, are we do adopt the book figures or to rely on the relevant assessments in order to find out whether the assessee had incurred losses in prior years which dissuaded it from proceeding to declare a dividend out of the current year's income Section 104(2) does not say that the book figures must be adopted. Nor does it say that the assessment figures cannot be adopted. It only refers to 'losses incurred by the company in earlier years'. The expression at once excludes fictitious losses, or losses not actually incurred. It also places on the ITO the responsibility to take note if genuine losses alone. In this process, can the ITO adopt the findings in the relevant assessment orders of past years The Supreme Court answered the question, in a sense, in the affirmative. In Gobald Motor Service case : 60ITR417(SC) , the argument addressed on the assessee's side assessable income made on an estimated basis cannot afford a safe basis for administering a special provisions of this kind. Estimated additions, it was urged, were of 'national' income, and they cannot be taken as reflecting the assessee's true commercial income. The Supreme Court rejected this contentions.
6. The position may, therefore, be taken to be that it is open to the ITO to rejected the assessee's claim that there were losses in prior years by showing that in the relevant assessments the losses had not been proved to the actual losses. The ITO in this case was not wrong in principle in referring to the concerned assessment orders and basing his conclusion about the genuineness of the losses on the findings rendered in those assessments.
7. It, however, came to pass in this case that the estimated assessment in which the assessee's claim for losses had been rejected by the ITO had been subsequently interfered with by the Tribunal in appeals which had been preferred by the assessee against those assessments. The Tribunal's appellate orders, however, happened to be passed after the ITO had passed his order under s. 104. In their appellate orders against the regular assessments for the two prior years, the Tribunal held that there were no materials in support of any of the adverse finding in the assessment orders. The Tribunal, accordingly, set aside all but Rs. 5,000 of the estimated additions made by the officer. With this decision of the Tribunal, the claim that the assessee had incurred losses in the prior years was virtually accepted even in the relevant assessments themselves.
8. This was the position when the assessee carried in appeal before the Tribunal the order passed bye ITO under s. 104. The Tribunal had to examine the assessee's claim about the prior years' losses. The Tribunal had before them their own appellate orders against the regular assessments for those years. They, accordingly, took note of those orders and ultimately came to the conclusion that on the basis of the correct trending results of the assessee in those years, it must be held that the assessee had really incorrect losses in the prior years. The Tribunal reckoned the accumulated prior years' losses in the sum of Rs. 84,010 as at the beginning of the current year. In the Tribunal's opinion, it was a prudent decision of the assessee's board of directors to desist from declaring a dividend in the current year even though there was a distributable surplus in that year. The Tribunal observed that it would have been an unreasonable corporate decision to declare a dividend, when the prior years, accumulated losses were more than the current income could absorb. In this view, the Tribunal set aside the levy of additional income-tax on the undistributed income of the assessee.
9. The present reference before us has been made at the instance of the I.T. dept. Their learned counsel contested the Tribunals decision on the basis of the following questions of la :
'1. Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the application of section 104 of the Act was not warranted
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee had incurred losses in previous years, when according to the assessment order, the assessee had derived profits in the years concerned ?'
10. Although there are two questions, the one and only controversy before us is whether the Tribunal was right in holding that prior years' losses in this case provided a reasonable ground for non-distribution of dividend. The question fairly answers itself on the Tribunal's finding that there were losses in the prior year and those losses amounted to Rs. 84,010. This finding must be regarded as one of fact. The Second questions of law, as framed, however, raises some discussion on a point of principles or procedure. The assumption behind the question seems to be that for determining the jurisdictional fact under s. 104(2) whether the company had or had not incurred losses in earlier years, we are wedded to the findings in the relevant assessment orders passed by the assessing officer. If the suggestion is that the assessment orders have got to be taken as final and conclusive, that would render the statutory provisions relating to appeals, revisions and the like, devoid of any meaning. The decision of the Supreme Court in Gobald Motor's case : 60ITR417(SC) is order cannot be dismissed out of hand as a notional or unreal income in proceedings relating to the levy of additional income-tax on the undistributed income. Where an assessing officer had gone into the accounts and other material facts at the stage of regular assessment and had fixed the assessee's income on that basis, there is no harm in the department adopting those findings in collateral proceedings taken against the very company for levy of additional income-tax on its undistributed income. This is a good workable doctrine, considering that additional income-tax on undistributed profits of certain companies is a fiscal measure incorporated into the general framework of the general tax on income. But it would undermine the very basis of this doctrine if, undeterred by an appellate decision which sets aside the findings in the prior years assessments, it were still though open to the department to proceed as though the ITO's assessment orders were the last word on the subject. Section 104(2) enjoins the ITO to withhold the levy of additional income-tax where he considers the non-distribution of dividend to be a not unreasonable decision to taken in the context of the losses incurred by the assessee in the earlier years. The duty of the officer is to see if there were losses in the earlier years. His duty is to apply his finding as to losses for adjudging the reasonableness of the assessee's decision not to declare a dividend. For rendering a findings about the truth and the extent of the prior losses the ITO may accept the assessee's books. Or he may reject them and render a different finding. But in all cases, he must have evidence on which to act. He is not obliged to rely on the findings in the prior years' assessment orders. He may do so, and if he does so, his decision cannot be found fault with. But the findings in the assessment orders must be findings which are extent. Where they happen to have been set aside or modified in appeal or revision, then the findings as reviewed by the appellate or revisional authority would alone be relevant. It cannot be that findings in an assessment order will lose their finality for purposes of levy of regular income-tax on the company's total income in case they are revised in appeal or revisions, but they will still retain their finality for purposes of proceedings for levy of additional income-tax under s. 104 on the very assessee's income to the extent it is not distributed as dividend.
11. We are, therefore, satisfied that the Tribunal acted aright in ignoring the assessment orders of the prior years and placing reliance one appellate decisions in those assessments for arriving at a findings as to the reality and extent of the assessee's losses in the earlier years for adjudging the reasonableness or otherwise of the assessee's decision in not declaring dividends out of the income of the current years.
12. The question of law are accordingly answered against the department. The Commissioner of Income-tax will pay the costs of the assessee. Counsel's fee Rs. 500.