K.C. Srivastava, Accountant Member -
(1.) THIS appeal by the assessee is against the order of the Commissioner (Appeals), Ludhiana, upholding the order of the ITO under Section 104 of the Income-tax Act, 1961 ('the Act'), for the assessment year 1975-76. The ITO was of the view that having regard to the distributable income of the assessee-company, the dividend declared by the company in the year following the end of the relevant assessment year at Rs. 63,770 was much below the statutory percentage as required under law. The ITO had worked out the distributable income at Rs. 3,29,050, after deducting from the income, finally assessed, the amount of tax payable for the current year and after adjusting the expenses, which had been disallowed in the assessment. The assessee had pleaded before the ITO that the assessee had to pay certain arrears of tax for the assessment years 1970-71, 1971-72 and 1972-73 to the extent of Rs. 6,10,034. The ITO, however, referred to the decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT  42 ITR 57 and held that the penal interest could not be deducted for ascertaining the amounts available. The ITO further looked into the balance sheet of the company and found that the assessee had made a provision for taxation to the extent of Rs. 21,86,619 out of which tax to the extent of Rs. 13,64,800 had been paid leaving a balance of Rs. 8,21,819 and after adjustment of taxes paid between 31-1-1975 and 31-10-1975 the balance in the provision account came to Rs. 7,21,819. The ITO found that this amount was higher than the tax liability in respect of the earlier years and, therefore, he found that the provision for taxes was sufficient to take care of the earlier years' tax demands.
(2.) The ITO accepted the plea of the assessee that a prudent businessman would consider the past tax liability before declaring dividend. The ITO was of the view that advance tax which was due to be paid on 15th March was after the end of the accounting year, and could not be taken into consideration. The ITO found that the profit as per profit and loss account was Rs. 10,34,427 and yet a dividend of only Rs. 63,770 had been declared and he held that this could not be considered to be reasonable even by a prudent businessman. The ITO, therefore, proceeded to levy the additional tax under Section 104 by holding that 60 per cent of the distributable income was Rs. 1,97,430 and the dividend declared was only Rs. 63,770. He, therefore, imposed tax at 25 per cent of the difference.
Before the Commissioner (Appeals), it was contended that having regard to the smallness of the profit made, payment of a large dividend could be unreasonable. It was contended that the ITO had not considered all the tax liabilities before holding that the distributable surplus was available for declaration of further dividend. It was also contended that the ITO should have deducted interest payable under Sections 215 and 217 of the Act in respect of the earlier years which totalled to Rs. 1,03,001. Before the Commissioner (Appeals) the total surplus available with the assessee-company was worked out at Rs. 11,23,582. After providing for the current year's taxes and after adjusting provision for taxes which showed a surplus of Rs. 8,21,819, it was submitted that against this the liability of the assessee was Rs. 19,58,906.
(3.) EXPLAINING the position before the Commissioner (Appeals); it was submitted that the distributable income of Rs. 3,29,050 had been worked out without considering the interest of Rs. 23,723. The Commissioner (Appeals), however, did not accept this plea and in this connection referred to the decision of the Supreme Court in the case of Bhor Industries Ltd. (supra). The assessee had also pleaded about the smallness of profit. The Commissioner (Appeals) found that profit as per profit and loss account amounted to Rs. 10,34,427 and the income finally assessed came to Rs. 10,73,499. He found that the difference was mainly due to the difference in depreciation and whereas the depreciation as per profit and loss account amounted to Rs. 1,32,398 the depreciation actually allowed amounted to Rs. 1,05,943. The Commissioner (Appeals) was of the view that the difference of Rs. 26,455 was to be adjusted with the commercial profits and after such adjustment he determined the commercial profits at Rs. 10,60,802.;