Decided on April 04,1994



T.V.K. Natarajachandran, Vice-President - (1.) THIS is an appeal by the Revenue, which is directed against the order of the CIT (Appeals) relating to assessment year 1984-85 for which the accounting year ended on 31-3-1984.
(2.) The assessee is an investment company. It carries on the business of clearing and forwarding, supply of cotton bales to textile mills and also new line of leasing. For the assessment year 1984-85 income returned was Rs. 7,45,316 as per the revised return filed but the total income was determined at Rs. 8,23,940 as per assessment order dated 30-12-1986. In this background, the Assessing Officer noted that the assessee has not distributed dividends of Rs. 2,53,907. Hence, he issued show-cause notice on 16-12-1987 and after considering the assessee's counsel's letter, the Assessing Officer imposed additional tax of Rs. 1,54,860 under Section 104 of the I.T. Act, 1961. In short, the case of the Assessing Officer was that the assessee has not distributed any dividend and hence additional tax was levied. The case of the assessee was that it had no positive distributable income for declaring dividend. Assessee's computation of distributable income was modified after claiming deduction of six fold items of expenditure enumerated in the impugned order. The Assessing Officer rejected with reasons, the claims of deduction made by the assessee. The main plank of the assessee's case was based on the fact that the long-term capital gains which amounted to Rs. 7,00,000 should be excluded from the gross total income assessed for computing the distributable income as long-term capital gains were taken to the profit & loss account. Reliance was placed on the decision of the Bombay High Court, in the case of CIT v. Gannon Dunkerley & Co. Ltd. [1971] 79 ITR 637. On appeal, the CIT (Appeals) noted that the assessee has acquired ownership property worth Rs. 3.75 lakhs in Pune and it was later on leased out. She has also noted that the assessee has purchased ownership premise at Bombay for Rs. 7,16,005 and also spent Rs. 20,148 for office premise at Vashi, New Bombay. The assessee's counsel relied on the decision of the Calcutta High Court in the case of CIT v. N. Guin & Co. (P.) Ltd. [1979] 116 ITR 475 which laid down that the choice is left to the company concerned either to transfer the capital gains to the profit and loss account and thereafter deal with the amount as profits or to transfer the amount to reserve account and treat it as a reserve and where the entire surplus is channelled into reserve, it is not for the Assessing Officer to lay down that it should be treated as commercial profits. In para 4 of the appellate order, the CIT (Appeals) stated that the assessee has transferred the long-term capital gains to reserve and also acquired assets out of the capital gains. When once it has been treated as a reserve and it has been utilised for acquiring assets, the question of treatment of the capital gains as commercial profits did not arise. The CIT (Appeals) also held that the statute barred debts should have been taken into account for the purpose of computation of distributable income. She has also stated that the capital expenditure incurred in the flat which was used for business purposes was also to be taken into consideration. In short, the CIT (Appeals) concluded that the Assessing Officer has not rightly computed the distributable income under Section 109 and ignored the judicial decision pointed out by the assessee. For all these reasons, she held that the provisions of Section 104 were not applicable and the additional tax levied was accordingly cancelled.
(3.) AT the time of hearing, the learned D.R. heavily relied on the decision of the Madras High Court, in the case of Factors (P.) Ltd. v. CIT [1975] 98 ITR 105 wherein it was held that the issue whether the capital gains arising on transfer of capital assets are to be included for the purpose of determining distributable income for declaring dividend would depend upon the Articles & Memorandum of Association of the company and also the fact whether the capital gain received is part of capital return or capital gains. He also relied on the decision of the Assessing Officer levying additional tax.;

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