M.C. Agarwal, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad Bench, has referred the following questions stated to be of law and to arise out of its order dated January 2, 1981, passed in ITA No. 298 (All.) of 1980, for the assessment year 1976-77 for the opinion of this court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in interpreting the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974 (Act 35 of 1974), particularly after the insertion of Section 5A in the said Act ?
(2.) WHETHER, on the facts and in the circumstances of the case, the provisions of Section 104 of the Income-tax Act, applied to the assessee-company when the Companies (Temporary Restrictions on Dividends) Act, 1974, was in force ?" 2. We have heard Sri Vikram Gulati, learned counsel for the assessee, and Sri Ashok Kumar, learned standing counsel for the Commissioner. The assessee is a private limited company engaged in the business of production of goods, i.e, printing cheques, etc., for various banks. It was, thus, engaged in an industrial activity and the question is whether the company was obliged to comply with the provisions of Section 104 of the Income-tax Act, 1961, and whether additional income-tax could be levied if the dividends declared fell short of the distributable profits of the company. Section 104 provides that if the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay additional income-tax at certain rates. Sub-section (2) of Section 104 specifies the circumstances under which the Income-tax Officer was required not to make an order for the levy of additional tax. They are- "(i) that, 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 than that declared would be unreasonable ; or (ii) that the payment of a dividend or a larger dividend than that declared would not have resulted in a benefit to the Revenue ; or (iii) that at least seventy-five per cent, of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under Section 11."
(3.) FOR the year under consideration, the Assessing Officer gave the following details in the order passed by him under Section 104 : JUDGEMENT_507_ITR242_2000Html1.htm The case set up by the assessee was that in view of the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974 (the 1974 Act), it was not obliged to declare dividends in accordance with Section 104 and that in any case for various reasons like past losses and outstanding loans, etc., it was not feasible to declare higher dividends. This explanation was not accepted and additional income-tax amounting to Rs. 39,500 was levied. The assessee appealed to the Commissioner of Income-tax (Appeals) who held that the provisions of the 1974 Act were applicable to the asses-see-company and, therefore, Section 104 of the Income-tax Act, 1961, could not be enforced against the company as the provisions of the 1974 Act had overriding effect. The Commissioner of Income-tax (Appeals) also held that because of what has been described by him as the first set of circumstances, declaration of a higher dividend could not have been reasonable. Those circumstances are stated in his order as under : "(i) That the company raised, as evident from the balance-sheet of the financial years 1974, 1975 and 1976, a secured loan from the Industrial Credit and Investment Corporation of India Ltd. of Rs. 14,72,724 and it was liable to pay in the year under consideration a sum of Rs. 2,27,320 towards its payment. (ii) The aforesaid loan was raised for the purposes of purchase of machinery which was purchased for a sum of Rs. 23,82,980 as evident from the balance-sheet of the financial year 1974. (iii) That the entire paid up capital and the aforesaid loan capital of the company was locked up in fixed assets that amounted to Rs. 35,21,994. (iv) The company had received an export order from Rafidain Bank, Iraq, of nearly Rs. 50 lakhs in the year under consideration and it had for that purpose to purchase paper, etc., that involved investment. The contract was executed by the company in the following year." ;