Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order made under Section 104 of the Income-tax Act, 1961 ?"
(2.) The assessment year involved in this reference is the assessment year 1968-69 for which the relevant previous year ended on 31st December, 1967. The assessee was assessed on a total income of Rs. 1,14,980. After deducting the statutory amounts, it was left with a distributable income of Rs. 38,981. Since it was an investment company, it was obliged to declare 90 per cent. of the distributable income amounting to Rs. 35,082 as dividends to avoid application of Section 104 of the I.T. Act, 1961. The dividend actually distributed was only Rs. 5,012 with a shortfall of Rs. 30,070. It was asserted on behalf of the assessee before the ITO that a larger dividend could not he declared as the assessee was required to repay its loan to M/s. Binani Investment Co, (P.) Ltd. as the creditor was pressing hard for its repayment. It was contended that, faced with this situation, the directors of the company did not think it proper to fritter away its resources by declaring a higher dividend. The ITO did not accept this explanation. He, therefore, subjected it to an additional super-tax of Rs. 16,990. It may not be inappropriate to refer to the ITO's finding in the assessment order. The ITO observed, inter alia, as follows : "3. The arguments advanced by the company for non-declaration of dividend up to the statutory percentage prescribed in the Act are not convincing. The total receipts of the company for the year were Rs. 1,90,764. After deduction of the necessary expenses the company was left with Rs. 1,22,394. The company had provided Rs. 70,000 for income-tax and Rs. 45,000 were appropriated towards the general reserve. The general reserve was not intended for repayment of the loan as the cash position including bank balance as on 31st December, 1967, was only Rs. 12,156. The company has discharged the loan of M/s. Binani Investment Co. (P.) Ltd. only to the extent of Rs. 35,000. In these circumstances, the argument put forward by the company that the dividend was not declared up to the statutory percentage only with a view to enable the company to repay the loan is not convincing."
(3.) The assessee thereafter went up in appeal before the AAC. The arguments placed before the ITO were repeated before him. Although the AAC agreed with the statement that the ITO should have put himself in the armchair of the board of directors, he considered, having regard to the particular facts and circumstances of the case, a larger dividend was not unreasonable. He found that the principal creditor, M/s. Binani Investment Co. (P.) Ltd., was an associate concern of the assessee. It would be better to refer to the actual observations of the AAC on this aspect of the matter. He observed, inter alia, as follows : "5. The solitary ground on which further dividend was not declared was the loan of Rs. 2,65,000 outstanding on account of Binani Investment Co. Ltd. This outstanding liability was said to be causing anxiety to the directors and the creditor was said to be pressing for early repayment of the loan. At this stage, I should mention that the appellant's income was derived from the house properties at 38, Strand Road, and 81, N. S. Road, Calcutta, which were acquired by the company out of borrowed funds. The principal creditor was Binani Investment Co. Ltd. It was conceded that the directors of Binani Investment Co. Ltd. and the appellant-company were common and both the companies were controlled and managed by the same directors. It was also conceded that the majority of shareholders of both the companies were common. In this peculiar situation, there was no question of the creditor pressing for the repayment of the loan advanced to the appellant. No evidence was made available by Shri Bhide to show that Binani Investment Co. was asking for return of loan and this was worrying the directors of the appellant-company. 6. Another interesting development was the amalgamation of the appellant-company with Binani Investment Co. with effect from 1st January, 1970. When the appellant-company was merged with the Binani Investment Co. there was still an outstanding loan of Rs. 2,50,000. In this situation, the loan theory stands shattered. No other reason was adduced for non-declaration of dividend larger than Rs. 5,013. It is in the light of, this situation, the test of reasonableness or unreasonableness should be looked into. Having regard to the facts and circumstances of the case, the ITO was quite justified in applying the provisions of Section 104(1) and charging additional super-tax of Rs. 16,990.";