B.P.Jeevan Reddy, C.J. - (1.) The Income-tax Appellate Tribunal, Allahabad, has stated the following question under Section 256(2) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that Section 104 of the Income-tax Act, 1961, was not attracted ?"
(2.) The assessee is a private limited company in which the public are not substantially interested. It manufactures sodium sulphate. It was incorporated on August 30, 1960, and started manufacturing on January 1, 1962, on which date it took over a partnership firm known as Solar Chemicals which was carrying on the said business and was assessed thereon up to the assessment year 1962-63. The first assessment year for the assessee was 1963-64, the relevant accounting year being the calendar year 1962. Assessment was completed in the first instance but later it was reopened under Section 147, since it was found that there were some factitious loans and some unexplained share capital appearing in the balance-sheet for the said year. In response to a notice under Section 148, the assessee filed a return on June 14, 1967, disclosing an income of Rs. 17,628. On December 8, 1967, however, it moved an application before the Inspecting Assistant Commissioner offering to be assessed on hundi loans amounting to Rs. 1,52,000 and unexplained capital amounting to Rs. 5,075, totalling Rs. 1,57,075. The reassessment was completed on a total income of Rs. 1,84,145. The assessee had declared a dividend of Rs. 3,666. After deducting the said amount and a small donation made by the assessee, the distributable income worked out to Rs. 90,310 on which the assessee ought to have distributed dividend to the extent of Rs. 40,640. Since that was not done, proceedings under Section 104 of the Act were initiated.
(3.) In response to a notice under Section 104, the assessee submitted various objections which were overruled and an additional tax of Rs. 23,050 was levied. It was confirmed in appeal by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal allowed the assessee's appeal and quashed the order under Section 104. The Tribunal was of the opinion that, for the purposes of Section 104, book profits alone are to be taken into consideration and not the assessed income. It, however, conceded that if the assessee concealed its income or inflated its expenses, such income could be included in determining the commercial profits of the assessee. The Tribunal further opined that since the proceedings under Section 104 are penal in nature, the requirements of the section had to be strictly complied with. The assessee found it difficult to prove the genuineness of the hundi loans ; it offered them for assessment since it did not deem it desirable to contest the said issue. From this, said the Tribunal, it could not be inferred that the assessee had admitted that the said hundi loans, or for that matter even unexplained capital, represented its concealed income. Yet another ground given by the Tribunal was that the hundi loans and unexplained capital were included in the assessment under the head "Other sources" and not under the head "Business income" and, therefore, could not have been taken into consideration for determining the profit of the assessee, The last ground given by the Tribunal was that if the assessee was required to declare a larger dividend, the directors would render themselves liable for prosecution under Section 205 of the Companies Act, 1956. Thereupon, the Revenue applied for and obtained the said reference.;