High Court Of Delhi
CIT vs. Delhi Cattle Breeding Farms (P)Ltd.
Sections 104, 109
Asst. Year 1974-75, 1975-76
Arijit Pasayat, C.J. & D.K. Jain, J.
IT Ref. Nos. 301 & 302 of 1981
25th May, 2001
R.D. Jolly with Ms. Premlata Bansal, for the Petitioner : B.R. Aggarwal, for the Respondent
ARIJIT PASAYAT, C.J. :
At the instance of Revenue, following questions have been referred for opinion of this Court under s. 256(1) of the IT Act, 1961 (in short, âthe Actâ) by the Income-tax Appellate Tribunal, Delhi Bench âDâ (in short, “the Tribunal”). (i) “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the capital gains of Rs. 7,45,109 could not be considered for purposes of computing the commercial profits of the assessee-company for the purposes of s. 104 of the IT Act, 1961 ?” (ii) “If the answer to the first question is in the negative, whether the Tribunal was right in cancelling the orders passed by the ITO under s. 104 of the Act for the two asst. yrs. 1974-75 and 1975-76 ?” Dispute relates to the asst. yrs. 1974-75 and 1975-76 and this judgment shall cover both the references.
2. Factual position, in a nutshell, is as follows : Assessee, at the relevant point of time, was a private limited company carrying on business in agricultural activities and dairy-farming. Previous years for the two assessment years ended on 30th June, 1973, and 30th June, 1974, respectively. Question that arose for consideration related to levy of tax under s. 104 of the Act. Assesseeâs stand before the ITO was that having regard to accumulated past losses and the smallness of profits, payment of dividend by the assessee would be unreasonable within the meaning of s. 104(2)(i) of the Act, and therefore, provisions of s. 104 (1) were not to be invoked in its case for the two assessment years. The ITO, however, did not agree with the stand of assessee. It was noted that assessee had made substantial capital gains, which were reflected in the capital reserve of Rs. 7,45,109 and the same was available to the assessee for declaring dividend. Assessee did not require the aforesaid capital reserve for any of its business requirements and this was established from the fact that there was no utilization of this reserve in any of the accounting years. The ITO, therefore, levied tax @ 15 per cent on the distributable surplus worked out in the following manner : Assessee carried the matter in appeals before the Commissioner of Income-tax (Appeals) [in short, âCIT(A)â]. It was contended before CIT(A) that capital gains should not be considered for the purpose of determining the commercial profits of assessee, and therefore, declaration of dividend in these two assessment years would be unreasonable, having regard to past losses of the company as well as smallness of its profits in the two assessment years, CIT(A) did not accept the stand. He, therefore, held that despite its past losses, assessee had sufficient distributable funds and the conclusion of ITO was justified. It was also observed that losses, if any, sustained for the asst. yr. 1975-76 was irrelevant for determining the applicability of s. 104 of the Act in respect of the two assessment years. Matter was carried in further appeal before the Tribunal. Stand of the assessee before the forums below was reiterated. Tribunal held that with reference to the facts and figures relating to distributable surplus, as computed by ITO in both the years, there was hardly any scope for dispute regarding applicability of s. 104(1) of the Act. Further question, according to it, was whether it would be unreasonable for assessee to declare a dividend having regard to losses incurred by it in the earlier years and or to the smallness of profits made in the previous year within the meaning of s. 104(2)(i) of the Act. Though it was noticed that there was no unanimity in view as regards the question whether capital gains could form part of the profits, it was held that the view, which leans in favour of assessee, was to be preferred. Accordingly, it was held that provisions of s. 104(1) of the Act could not be invoked by ITO.
1. On being moved for reference, question as set out above, have been referred for opinion of this Court.
2. We have heard learned counsel for the parties. According to learned counsel for the Revenue, a bare reading of the provisions contained in s. 104, the position is clear that capital gains can be taken into account while deciding the question as to whetherdividend ought to have been declared. Learned counsel for assessee, on the other hand, contended that capital gains cannot be treated to be a part of commercial profits and more particularly when it related to agricultural land, income from which is exempt from tax, and therefore, the view of the Tribunal is in order. At this juncture, it would be appropriate to quote s. 104 of the Act, which is the pivotal provision and around which the dispute revolves : “Sec. 104. Super-tax on undistributed income of certain companies :â(1) Subject to the provisions of sub-s. (2) and of ss. 105, 106 and 107, where the ITO is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the ITO shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under s. 143 or s. 144, be liable to pay super-tax at the rate ofâ (a) fifty per cent, in the case of an investment company, (b) thirty-seven per cent, in the case of a trading company, and (c) twenty-five per cent, in the case of any other company. (2) The ITO shall not make an order under sub-s. (1), if he is satisfied,â (i) that, having regard to the losses incurred, by the company in earlier years, or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared within the period of twelve months referred to in sub-s. (1), would be unreasonable; or (ii) that, the payment of a dividend or a larger dividend than that declared within the period of twelve months referred to in sub-s. (1) would not have resulted in a benefit to the Revenue; or (iii) that at least seventy-five per cent of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under s. 11. (3) If the Central Government is of opinion that it is necessary or expedient in the public interest so to do, it may, by notification in the Official Gazette and subject to such conditions as may be specified therein, exempt any class of companies to which the provisions of this section apply from the operation of this section. (4) Without prejudice to the provisions of s. 108, nothing contained in this section shall apply toâ (a) an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power; (b) a company which is neither an Indian company nor a company which has made the prescribedarrangements for the declaration and payment of dividends within India.
Explanation : For the purposes of cl. (a) of this sub-section, the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included, in its gross total income, for the relevant previous year is not less than fifty-one per cent of such total income.” Sec. 104, in essence, re-enacts s. 23A of the Indian IT Act, 1922 (in short, â1922 Actâ). The said provision so far as relevant read as follows : “Sec. 23A. Power to assess-companies to super-tax on undistributed income in certain cases.â(1) Where the ITO is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by,â (a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section; (b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income; and (c) in the case of a banking company, the amount actually transferred to a reserve fund under s. 17 of the Banking Companies Act, 1949 (X of 1949); the ITO shall, unless he is satisfiedâ (i) that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable; or (ii) that the payment of a dividend or a larger dividend that declared would not have resulted in a benefit to the Revenue; or (iii) that at least seventy-five per cent of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in the taxable territories for a charitable purpose the income whereof is exempt under cl. (i) of sub-s. (3) of s. 4 : make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under s. 23, be liable to pay super-tax at the rate of fifty per cent in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven per cent in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in cl. (a), cl. (b) or cl. (c) and the dividends actually distributed, if any. (2) No order under sub-s. (1) shall be madeâ (i) in the case of a company, whose business consists wholly or mainly in the dealing in or holding of investments which has distributed not less than eighty per cent of its total income as reduced by the amount, if any, referred to in cl. (a), cl. (b) or cl. (c) of sub-s. (1); or (ii) in the case of any other company, whose distribution falls short of the statutory percentage by not more than five per cent of its total income as reduced by the amounts, if any, aforesaid; or (iii) in any case where according to the return made by a company under s. 22, it had distributed not less than the statutory percentage of its total income as reduced by the amounts, if any, aforesaid, but in the assessment made by the ITO under s. 23 a higher total income is arrived at and the difference in the total income does not arise out of the application of the proviso to s. 13 or sub-s. (4) of s. 23 or the omission by the company to disclose its income fully and truly; under the company, on receipt of a notice from the ITO that he proposes to make such an order, fails to make within three months of the receipt of such notice a further distribution made is not less than the statutory percentage of the total income of the company as reduced by the amounts, if any, aforesaid. xxx xxx xxx xxx xxx”
6. As per s. 104(1), additional tax is leviable in case dividend is distributed at a figure less than the statutory percentage of distributable income. Sec. 109 of the Act defines both “distributable income” and “gross total income”. According to definition of “distributable income” in s. 109 of the Act, âit is the gross total income as reduced by the income-tax payable and certain other items of income expenses specifiedâ. Gross total income defined in s. 109 of the Act means âtotal income as computed in accordance with provisions of the Actâ. Sec. 2(45) of the Act defines “total income” to mean âtotal amount of incomeâ. Under s. 2(24) of the Act, income has been defined in an inclusive manner and it is stated to include inter alia capital gain chargeable under s. 45 of the Act. While determining distributable income in terms of s. 109 of the Act, long-term capital loss has been provided to be set off for the reason that any computation of total income, same is permitted to be set off only it is a long-term capital gain.
7. Assesseeâs stand is that since capital gain had arisen from agricultural land transferred in 1962, which was not a part of the gross total income, there is no scope for its inclusion in distributable income, as defined in s. 109 of the Act. Reliance is placed on s. 47(viii) of the Act to contend that agricultural income being exempted under the said provision, there was no scope for inclusion of capital gains. On the contrary, the stand of learned counsel for Revenue is that merely because the income from agricultural land is exempt from income-tax that would be of no consequence while considering capital gains in respect of agricultural land. Learned counsel for both the parties relied on the decision of the apex Court in CIT vs. Gangadhar Banarjee & Co. Ltd. (1965) 57 ITR 176 (SC) : TC 24R.647. The said case related to s. 23A of the 1922 Act. Relevant observations made in the said case are as follows : “To act under this section the ITO has to be satisfied that the dividends distributed by the company during the prescribed period are less than the statutory percentage, i.e., 60 per cent of the assessable income of the company of the previous year less the amount of income-tax and supertax payable by the company in respect thereof. Unless there is a deficiency in the statutory percentage, the ITO has no jurisdiction to take further action thereunder. If that condition is complied with, he shall make an order declaring that the undistributed portion of the assessable income less the said taxes shall be deemed to have been distributed as dividends amongst the shareholder. But before doing so, a duty is cast on him to satisfy himself that, having regard to the losses incurred by the company in earlier years or the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be reasonable.”
8. In the background of what has been stated by the apex Court, the AO has the jurisdiction to proceed viz-a-viz the assessable income or distributable income, as defined in the Act. Then, the said income is to be judged in the light of losses of previous years or smallness of profit. For adjudicating the question whether declaration of higher amount of dividend could be reasonable, what has to be kept in view is smallness of profit, which is relatable to actual accounting profits in comparison to assessable profits of the year. Assessable income may include several fictional receipts, deductions and allowances. Accounting profits and assessable profits are, therefore, conceptually different. [See CIT vs. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC) : TC 24R.713].
9. While acting under s. 104 of the Act., AO has to consider the point of view of the Board of Directors and if a prudent decision for business considerations has been taken holding that higher dividends should not be declared, AO should not take a view that higher dividend ought to have been declared by the company. [See CIT vs. Asiatic Textiles Ltd. 1973 CTR (SC) 463 : (1971) 82 ITR 816 (SC) : TC 24R.736]. It was observed as follows : “It is not open for the ITO to constitute himself as a super director.”
10. Several High Courts have taken the view that capital gain was part of assessable income of assessee. [See Indira Singh & Sons vs. CIT (1958) 33 ITR 341 (Cal) : TC 24R.696, Factors (P) Ltd. vs. CIT (1975) 98 ITR 105 (Mad) : TC 24R.764, CIT vs. Amalgamations (P) Ltd. (1977) 109 ITR 115 (Mad) : TC 24R.721, Cardamom Marketing Company (Trav), Ltd. vs. CIT (1986) 52 CTR (Ker) 292 : (1986) 158 ITR 621 (Ker) : TC 24R.766, M.R.M. Plantations (P) Ltd. vs. CIT (1986) 55 CTR (Mad) 56 : (1986) 160 ITR 213 (Mad) : TC 24R.767 and CIT vs. South India Corporation Ltd. (1990) 183 ITR 361 (Ker) : TC 24R.768]. Learned counsel for assessee wanted to bring out a distinction submitting that capital gain may have been held to be a part of profit for declaration of dividend, but in none of these cases, the question related to capital gains from sale of agricultural land, income from which is exempted from tax.
11. It needs no reiteration that provisions of s. 104 are penal in nature and have to be strictly construed. It has also to be noted that s. 104 is not a charging section and orders under s. 104 are not orders of assessment. The provision does not seek to impose a tax on income, which it itself has to bear under the Act. Object of its enactment is to avoid the exploitation of the juristic personality of a company by the individuals. Sec. 104 consists of three distinctive partsâ(i) it defines the scope of the jurisdiction of the ITO to act under the provision; (ii) it provides for the exercise of that jurisdiction; and (iii) it relates to the computation of extra tax. The ingredients necessary for bringing an application of the provision are as follows : ITO must be satisfied on the following aspects : (a) in respect of any previous year; (b) the profits and gains distributed as dividends by a company; (c) within 12 months immediately following the expiry of the relevant previous year; (d) were less than the statutory percentage of its distributable income for that previous year. Levy of additional tax is not automatic. The requisite conditions must be satisfied before bringing in application of the provision. Once the ITO is satisfied that in respect of any previous year the profits and gains distributed as dividend by any closely-held company within the 12 months immediately following the expiry of that previous year is less than the statutory percentage of the distributable income of that previous year and that it would not be unreasonable to distribute a larger dividend than the declared one, an order in terms of s. 104 has to be passed.
1. That brings us to the scope of s. 104(2). In substance, the said provision involves a consideration as to the reasonableness of the conduct of the assessee in declaring a lower dividend or not declaring any dividend due to business considerations. Sec. 104(2) speaks of two thingsâ(i) losses incurred by the company in earlier years; and (ii) the smallness of profits made in the previous year.
2. Learned counsel for the assessee questioned the scope of including capital gains. Sec. 109(ii) of the Act defines “distributable income” to mean the gross total income of a company as reduced by the various items mentioned in sub-cls. (a) to (h). Sub-cl. (d) relates to âlossesâ under the head âcapital gainsâ relating to capital assets other than certain capital assets. If such losses as are referred to in cl. (d) are deductible from the gross total income, there is no scope for entertaining a doubt that the capital gains received form part of the gross total income of the company within the meaning of s. 109 of the Act. This position was highlighted by the Kerala High Court in Cardamom Marketing Co. (Trav.) Ltd.âs case (supra). The position was again reiterated by the said High Court in South India Corporation (P) Ltd.âs case (supra). We are in agreement with the view.
3. According to learned counsel for the assessee, even if it is held that capital gains are to be reckoned, yet capital gains accruing on sale of agricultural land, income from which is non- taxable, cannot be taken into consideration. We find no substance in this plea. While computing capital gains, further distinction is sought to be made by categorizing the properties into two, i.e., (i) where income from property is taxable, and (ii) income from property is not taxable. Such a distinction is neither prescribed nor permissible and, therefore, the position that the capital gains related to a property, income from which was not taxable, is hardly of any consequence.
4. Above being the position, Tribunalâs view holding that no order was required to be passed under s. 104 of the Act is not legally tenable. Our answer to the first question is in the negative, in favour of the Revenue and against the assessee. Consequentially, the second question is answered in the negative, in favour of the Revenue and against the assessee. Reference are accordingly disposed of.
[Citation : 253 ITR 114]