D.V. Junnarkar, Accountant Member -
(1.) THE revenue has filed this appeal against the order of the Commissioner (Appeals) cancelling the order passed by the ITO under Section 104 of the Income-tax Act, 1961 ('the Act').
(2.) The assessee is an Indian industrial company in which public is not substantially interested. Further, it is not a subsidiary of such a company. Its income for the year under consideration amounted to Rs. 22,62,445, after giving effect to the order of the Commissioner (Appeals). Deducting therefrom, the income-tax and surtax liability of Rs. 16,71,791, the company had distributable profits of Rs. 5,90,654. Since the company failed to distribute any dividend within the statutory time limit of 12 months after the close of the accounting period, i.e., 30-4-1975, the ITO called upon the assessee to show cause why additional tax should not be levied on the company under Section 104. The assessee explained that the assessee was required to shift the factory and office compulsorily to some other premises for which the company had to make provision for funds to the extent of Rs. 50 to 60 lakhs. Further, it was stated that under the amendment to the Companies Act, 1974, there were some restrictions placed on the declaration of dividends. Finally, it was stated that the assessee had to pay an instalment of gratuity to the employees of over Rs. 3 lakhs. In consequence of the cumulative effect of all these factors, the assessee could not declare the dividends for the accounting period under consideration, within the statutory time limit. For the detailed reasons mentioned by the ITO in his order dated 19-3-1980, the ITO rejected the assessee's explanation and proceeded to levy additional income-tax at the rate of 25 per cent on the shortfall of Rs. 5,90,654, i.e., Rs. 1,47,663.
The assessee appealed before the Commissioner (Appeals) against this levy. The Commissioner (Appeals), after hearing the assessee's representative, proceeded to cancel the order passed by the ITO under Section 104. Briefly, the reasons which prevailed upon the Commissioner (Appeals) were as under :
Firstly, he accepted the argument on behalf of the assessee that under the Companies (Temporary Restrictions on Dividends) Act, 1974, the assessee was not permitted to declare dividends in excess of one-third of the profits, whereas under Section 104, the assessee was expected to declare 45 per cent of the profits. If the assessee were to comply with the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974, it had necessarily to refrain from complying with the provisions of Section 104.
Secondly, the assessee's total income was determined at Rs. 22,88,760 after making disallowances of Rs. 1,70,140, being the bonus liability of the assessee, donations of Rs. 1,100, travelling expenses of Rs. 1,469, interest payments of Rs. 891 and entertainment expenses of Rs. 2,491. Though these moneys were expended by the assessee, they were disallowed for the purpose of determination of total income for the purpose of levy of income-tax. According to the assessee, as accepted by the Commissioner (Appeals), these amounts had to be kept out of consideration.
The third ground which appealed to the Commissioner (Appeals) was that the assessee's factory was housed in a rented premises. According to the master plan for the Bombay City, these premises were situated in a non-factory zone. The Municipal Corporation authorities were pressing the assessee hard, for getting out of this non-factory zone to another permitted zone. In fact, the assessee had actually purchased a plot of land for the purpose, prepared a project report, estimated the cost of shifting and this cost was nearly Rs. 47 lakhs. The Commissioner (Appeals) was of the opinion that a minimum of Rs. 20 lakhs would be required for shifting. The next major difficulty brought by the assessee to the notice of the Commissioner (Appeals) was that the assessee's banker, viz., the Central Bank of India had curtailed the bill discounting facilities by 20 per cent margin in the case of the assessee. According to the assessee, these factors had very seriously affected the liquidity potential of the assessee. Necessary evidence was produced before the Commissioner (Appeals). The Commissioner (Appeals) accepted this argument on behalf of the assessee. Finally, it was argued before the Commissioner (Appeals) about the impending gratuity liability, due to the delay in the approval of the gratuity fund by the Commissioner under the Act. After the approval of the gratuity fund by the Commissioner, with effect from 29-12-1975, the assessee had to make an initial contribution of Rs. 3,12,362 before 31-3-1977. The Commissioner's order was dated 20-3-1976 and the payment had to be made before 31-3-1977. This was a very serious strain on the assessee's financial liquidity. Taking into consideration all these factors, the Commissioner (Appeals) examined the facts of the case in the light of the Supreme Court decision in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd.  57 ITR 176, and he agreed with the representative of the assessee that, in the circumstances of the case, it was not possible for the assessee to declare any dividend within the statutory time limit.
(3.) THE revenue is in appeal against the order of the Commissioner (Appeals) cancelling the ITO's order under Section 104. During the course of the hearing of the appeal, the learned departmental representative took us through the order of the Commissioner (Appeals) and he pointed out that the assessee had not established that it had to pay the bonus and gratuity liability immediately. Further, as regards the estimated cost of the shifting of the factory, there was no resolution of the assessee-company to the effect that this was one of the reasons which prevented the assessee from declaring any dividends. In fact, the factory has not even been shifted till today. THE undistributed profits amounted to Rs. 5 lakhs and odd. In the accounts they were merely carried to the balance sheet. THEse profits were not utilised for any of the purposes mentioned before the Commissioner (Appeals) as a result of which the assessee could not declare dividends. In fact, out of the funds available, the assessee had advanced an amount of Rs. 4,54,317 to a firm in which a director of the company was a partner of the assessee. In the previous year, an amount of Rs. 1,47,307 was advanced to this firm. During the year, further amount of Rs. 3,07,000 was advanced. Further, during the next year, the advances to this firm went to the extent of Rs. 11 lakhs. THE assessee has not shifted its factory outside the municipal limits. As on 30-4-1974, it had merely reserved to the extent of Rs. 6,64,012. In the year under consideration, the undistributed profits rose to Rs. 12,20,000. Gradually, at the end of April 1978, the reserves have risen to Rs. 15,17,490. THE learned departmental representative has relied heavily on the Madras High Court decision in the case of Indo-Ceylon Dental & Surgical Co. Ltd. v. CIT  98 ITR 536, wherein the learned judges of the Madras High Court had held that, the mere fact that there was a developmental activity proposed by the company would not show that the company wanted to build up reserves for such activity for all the future years and it was for that reason a lesser dividend was declared. According to the learned judges, unless there was positive material to show that the board of directors or the general body resolved to declare a lesser dividend with a view to build up sufficient reserves to be utilised for such developmental activity, it was not possible to assume that the declaration of a lesser dividend was for the reason that the board of directors or the general body required finance for the developmental activity. From the mere declaration of a lesser dividend, it could not be automatically inferred that the directors wanted to create a reserve for the future expansion of the company. In that case, the learned judges found that as no material was placed by the assessee to support the stand that the non-declaration of the larger dividend was for the purpose of future development of the company, the provisions of Section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act'), corresponding to Section 104 were applicable.;