Commissioner of Income Tax vs Jacobs Pvt. Ltd.

T.L. Viswanatha Iyer, J.—The Income Tax Appellate Tribunal, Cochin Bench, has referred the following question of law for the opinion of this court u/s 256(2) of the Income Tax Act, 1961, at the instance of the Revenue, namely :.

" Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the levy of additional Income Tax of Rs. 1,84,450 on undistributed profits u/s 104 of the Income Tax Act, 1961, is not justified ?"

The facts leading to the reference are as follows :

The assessee is a private limited company. The assessment year concerned is 1976-77 corresponding to the accounting year ending March 31, 1976. The assessee had a total income of Rs. 27,86,230. According to the Income Tax Officer, the assessee had a balance distributable income of Rs. 6,08,764. Section 104 of the Income Tax Act requires the assessee to declare and distribute 60 per cent. of this amount as dividend subject to the provisions of sections 105 106 107 and 107A. That means the assessee had to distribute an amount of Rs. 3,65,258 as dividend. But the assessee distributed dividend of only Rs. 1,10,250. This according to the Income Tax Officer was inadequate and there were no reasonable grounds for declaring a lesser amount by way of dividend. Accordingly, the Income Tax Officer passed an order on February 23, 1979, making the assessee liable for a tax of Rs. 1,84,450 on the undistributed amount of the distributable income.

The assessee challenged this order in appeal before the Commissioner who accepted the assessee''s case and cancelled the assessment. The Commissioner''s order was affirmed in appeal by the Tribunal. The law relating to the obligation of private limited companies to distribute dividends for purposes of Section 104 has been declared by the Supreme Court in Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., . The court said that the Income Tax Officer, in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of Section 23A of the Indian Income Tax Act, 1922, does not assess any income to tax. He only does what the directors should have done putting himself in their place. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. The Income Tax Officer 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 problem with a sympathetic and objective approach. These principles were reiterated in Commissioner of Income Tax, (Central), Calcutta Vs. Asiatic Textiles Ltd., . It was with reference to these principles that the Tribunal came to the conclusion that the dividend distributed by the assessee-company was reasonable and that it was not liable for levy of any tax on the alleged undistributed dividend.

The assessee had stated before the assessing authority when he called upon the assessee to show cause, that it did not have sufficient funds to make a declaration of further amounts by way of dividend than what had been done. It was, inter alia, pointed out that the assessee had to borrow on the pledge of fixed deposit certificate of Rs. 3 lakhs, a sum of Rs. 2,16,076 and on the closing stock of Rs. 2,99,285. The assessee required substantial funds and had incurred substantial expenditure of Rs. 2,79,042.52 for the construction of an office building during the year. The result was that the assessee had only a bank balance of Rs. 46,029 in current account and a balance of about Rs. 84,000 in fixed deposits. These were insufficient to justify a declaration of a higher dividend. Before the Commissioner of Income Tax, a further ground was urged by the assessee in support of his plea of insufficiency of funds, namely, the necessity to provide for tax liabilities. It was pointed out that the assessee had a liability of Rs. 2,39,565 towards Income Tax due for the years 1973-74 and 1974-75 which was paid subsequent to the accounting period in question. It had also a liability of Rs. 1,26,051 by way of dues arising out of the reassessments for the years 1973-74 to 1975-76. These reassessments were cancelled only on November 29, 1976. In view of the existence of these tax liabilities for the years 1973-74 to 1975-76, the assessee could not declare any higher amount by way of dividend. The Income Tax Officer who was present at the hearing of the appeal did not dispute the existence of these tax liabilities as at the close of the previous year. It was in the light of these circumstances and the circumstances relied on before the Income Tax Officer himself that the Commissioner held that the assessee acted prudently in not declaring any higher amount by way of dividend. These findings have been reiterated by the Tribunal as well.

As stated in Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., , for considering whether the dividend declared was reasonable or not the Income Tax Officer has to put himself in the place of the assessee and consider whether as a prudent businessman the assessee could have declared a higher amount than what has been done. On the facts of this case, we are satisfied that the assessee has acted as any other prudent businessman would have done in the circumstances. It is true that it had a fixed deposit of Rs. 3 lakhs. But the assessee had already drawn over Rs, 2,16,000 out of the fixed deposits by way of loans leaving only about Rs. 84,000 as balance. The assessee had put up a substantial structure during the assessment year in question incurring large expenditure. It had also huge liabilities by way of Income Tax, part of which was paid during the subsequent year and part of which was deleted by reason of the appellate orders passed on November 29, 1976. It was only prudent for the assessee in these circumstances to provide for these liabilities which may arise in future instead of draining all its resources to the dregs by declaring a higher dividend. Section 104 does not oblige an assessee to drain out all its resources in order to comply with its requirements thereby depleting funds which it may require for meeting its existing liabilities or even future liabilities. The matter has been considered in the proper perspective by the Tribunal and we do not find any reason to take a different view of the matter on the facts of this case.

Standing counsel for the Revenue submitted with reference to the decision in IRC v. Thompson Bros. (London) Ltd. [1973] 49 TC 110 quoted at page 1020 of Kanga and Palkhivala''s The Law and Practice of Income Tax, Eighth edition, that an assessee cannot take into account events subsequent to the declaration of the dividend. We do not find any applicability for this decision to the facts of this case. The accounting period ended on March 31, 1976, and the declaration of the dividend would have been done only thereafter. It was with reference to the liabilities which admittedly existed as on the closing of this accounting period that the Tribunal came to the conclusion that the amount of dividend declared was reasonable. No event which took place subsequent to the declaration of the dividend has been taken into account for arriving at its decision.

Another contention which was vehemently urged by standing counsel was that the plea based on the liabilities to Income Tax, relied on by the Commissioner (Appeals) and the Tribunal, was not raised before the Income Tax Officer. This, according to standing counsel, cast a doubt on the existence of the liabilities and, therefore, according to him, this factor should not have been taken into account in considering the reasonableness of the dividend declared. We do not, however, find any substance in this plea for the reason that this fact had been put forward before the Commissioner at the time of hearing of the appeals when the Income Tax Officer was present and as noted by the Tribunal in paragraph 3 of its order, the existence of the liabilities was not disputed at any time.

No other contentions are raised before us. We are in agreement with the view taken by the Tribunal, The question referred to us is, therefore, answered in the affirmative, that is, in favour of the assessee and against the Revenue. There will be no order as to costs.

Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income Tax Appellate Tribunal, Cochin Bench, for information.