Income-tax---

----Company---Undistributed income---Additional tax---Profit available after meeting tax liability of current year not sufficient to discharge balance tax liability for earlier years---No tax leviable under S.104---Indian Income Tax Act, 1961, S.104.

The Board of Directors of the assessee declared dividend at the rate of 35 per cent. for the accounting year relevant to the assessment year 1975-76, and distributed a sum of Rs.63,770 by way of dividend. The Assessing Officer reduced the total income of Rs.10,73,499 (as finally determined by the Tribunal) by an amount of Rs.7,44,449 by way of income -tax payable and other adjustable expenses. The balance amount of Rs.3,29,050 was treated to be the amount of distributable income available in the hands of the company. The Assessing Officer took the view that the assessee-company should have distributed, by way of dividend at the rate of 60 per cent., the amount of Rs.1,97,430. Since the assessee-company had distributed, by way of dividend, the sum of Rs.63,770 only, additional tax at the rate of 25 per cent was levied under section 104 of the Income Tax Act 1961. The Tribunal confirmed this. On a reference:

Held that the Revenue Authorities had not properly examined the tax liability vis- -vis the provision made for taxation by the company. The company had two provisions for taxation: one in the earlier years (at Rs.12,99,369) and the other for the current year (at Rs.8,87,250). A mistaken view was taken by the Revenue Authorities that the total provision of Rs.21,86,619 was available to meet the past tax liabilities. The total amount of Rs.21,86,619 represented the provisions made in the earlier years for taxation and also the provision made during the current year out of the current year's profits. As against this the assessee's tax liability for the earlier years was Rs.17,63,084 and of the current year Rs.7,34,664. The assessee had to the current year earned profits which were finally determined at Rs.10,34,427 out of which, tax liability for the current year amounted to Rs.7,34.664. The balance profit earned, i.e., Rs.3,00,000 was not sufficient to meet the balance tax liability of Rs.4,63,715 relating to the earlier years. Therefore, no tax was leviable under section 104 of the Act inasmuch 'is the assessee-company had -tax liability relating to the earlier years to be discharged.

C.S. Aggarwal and Rajesh Bindal for the Assessee.

R.P. Sawhney, Senior Advocate and Mahavir Ahlawat for the Commissioner.

JUDGMENT

N.K. AGRAWAL, J.---The following question of law has been referred by the income-tax Appellate Tribunal, Amritsar (for short, "the Tribunal"), at the instance of the assessee under section 256(1) of the Income Tax Act, 1961 (for short, "the Act"):

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the applicability of section 104of the Income Tax Act ?''

The assessee is a private limited company engaged in transport business. The net profit of the assessee-company for the accounting period ending January 31, 1975, was shown at Rs.10.23.025. The assessment was, however made on the total income of Rs.14,30,470. vide assessment order. dated September 16, 1978, for the assessment year 1975-76. The accounting period for the aforesaid assessment year was, February 1. 1974_ to January 31, 1975. The assessee went in appeal and the income was reduced by the Commissioner of Income-tax to Rs.11,56,750. The income was, further reduced in the second appeal filed by the assessee before the Tribunal to Rs.10,73,499. The amount of tax, after giving appeal effect to the Tribunal's order, came to Rs.7,34,664.

The Assessing Officer noticed that the assesses-company had not distributed its profits by way of dividend, as required under section 104 of the Act. Under section 104, profits are required to be distributed by a company as dividend within 12 months following the expiry of the previous year and such distribution of profit should not be less than the statutory percentage of the distributable income of the company of that previous year. If the Assessing Officer as satisfied that the profits distributed as dividend are less than the statutory percentage, additional tax is required to be levied on the company. Such a tax will not be levied if, 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 is found to be unreasonable. Such a tax is again not leviable if the payment of the dividend or a larger dividend would not have resulted in a benefit to the Revenue or if 75 per cent. of the share capital of the company is found to be beneficially held by an institution or found established for charitable purposes.

The hoard of directors of the assessee-company had declared dividend at the rate of 35 per cent. on equity capital of Rs.1,82.200. It had been noticed by the board that, after deducting the amount of income-tax payable by the company, a sum of Rs.1,16,08 i only was left as profit available for distribution its dividend. Therefore dividend at the rate of 35 per cent of the equity capital was declared at Rs.(3,770. The balance profit of Rs.52,311 was carried forward to the next year. The Assessing Officer took the view that the profit distributed by way of dividend was less than the statutory percentage of the distributable income of the company o; the previous year. The Assessing Officer reduced the total income of Rs.10,73,499 (as finally determined by the Tribunal) by an amount of Rs.7,44,449 by way of income-tax payable and other adjustable expenses. The balance amount of Rs.3,29,050 was treated to be the amount of distributable income available in the hands of the company. The Assessing Officer took the view that the assessee-company should have distributed, by way of dividend at the rate of 60 per cent., the amount of Rs.1,97,430. Since the assessee-company had distributed, by way of dividend, the sum of Rs.63,770 only, additional tax at the rate of 25 per cent. was levied under section 104 of the Act. The assessee went in appeal before the Commissioner of Income-tax as well as the Tribunal but failed.

Shri C.S. Aggarwaln learned counsel for the assessee-company, has argued that the assessee-company had made certain provisions for the payment of tax in the earlier years as well as the current year. The provision for taxation made up to the preceding assessment year (as shown in the balance-sheet) as on January 31, 1975, was Rs.12,99,369 and provision for taxation for the current assessment year was made at Rs.8,87,250. Shri Aggarwal has taken pains to explain as to how the Revenue Authorities fell into error while examining the two provisions made for taxation in the balance-sheet of the assessee-company. While dealing with the provisions made for taxation, the aggregate provision of Rs.21,86,619 was taken into consideration but, thereafter, the arrears of tax paid in the earlier years as well as payable for those years were not fully taken into account. In addition, the tax payable for the current year was also not given proper adjustment against the provisions for taxation made by the assessee-company and shown in the balance-sheet.

The assessee had paid a total sum of Rs.11,53,050 by way of tax for the earlier assessment years. In addition, a sum of Rs.6,10,034 was further to be paid for the assessment years 1970-71, 1971-72 and 1972-73. If the tax already paid for the earlier years as well as the tax payable for the earlier years were aggregated, the provision for taxation, made by the company before the commencement of the current accounting year, would be found to be insufficient and, therefore, the current year's profits shall have to be reduced by the amount of tax which remains payable. The aggregate of the tax already paid (Rs.11,53,050) and the tax payable (Rs.6,10,034) for the earlier years comes to Rs.17,63,084. As against the aforesaid amount of tax for the earlier years, the assessee had only made the provision at Rs.12,99,369. A sum of Rs.4,63,715 was still required so as to clear the arrears of income-tax relating to the earlier years. The provision for taxation made at Rs.8,87,250 for the current year was needed for the discharge of the amount of tax payable at Rs.7,34,664 for the current year. Thus, there was a saving of Rs.1,52,586. As has already been seen, as against the provision for taxation made for the earlier years, the amount of tax paid and payable for those years was far in excess and a sum of Rs.4,63,715 was still required to be paid. As against that amount, the assessee had a credit balance of Rs.1,52,586 in the current year's provision for taxation. This would, therefore, show that the provision for taxation was not at all sufficient to meet the tax liability of the earlier years.

We have examined the argument of learned counsel for the assessee and we are of the view that the Revenue Authorities had not properly examined the tax liability vis- -vis the provision made for taxation by the company. Confusion and error arose from the two provisions made for taxation: one in the earlier years (at Rs.12.99,369) and the other for the current year (at Rs.8,87,250). A mistaken view was taken by the Revenue Authority that the total provision of Rs.21,86,619 was available to meet the past tax liabilities. As we have already seen, the total amount of Rs.21,86,619 represented the provisions made in the earlier years for taxation and also the provision made during the current year out of the current year's profits. Shri R.P. Sawhney, learned senior counsel for the Department. also took pains to look into the computation, worked out by the Assessing Officer as well as the Commissioner of Income-tax and the learned Members of the Tribunal but Shri Sawhney was unable to support the computation.

We have looked into the computation made by the Commissioner of Income-tax as well as the learned Members of the Tribunal and we are of the view that the two provisions for taxation, made by the company in its balance-sheet, were not taken into account for the purposes of adjustment of the past tax liabilities and the current year's tax liability. As we have already seen, the assessee had in the current year, earned profits which were finally determined at Rs.10,34,427 out of which, tax liability for the current year amounted to Rs.7,34,664. The balance profit earned, i.e., Rs.3,00,000, was not sufficient to meet the balance tax liability of Rs.4,63,715 relating to the earlier years. Thus, there is a deficit or, in other words, negative profit in this year.

In the result, in our opinion, no tax was leviable under section 104 of the Act inasmuch as the assessee-company had much tax liability relating to the earlier years to be discharged. After meeting the tax liability of the current year the balance amount of Rs.3,00,000 available in the hands of the company was not sufficient to meet the total past tax liability. The question is, therefore, answered in the negative and in favour of the assessee and against the Revenue.

M.B.A./1624/FC Order accordingly.