SUHAS CHANDRA SEN, J. - (1.) THE Tribunal has referred the following question of law as directed by this Court by an order dt. 23rd May, 1978 passed under S. 256(2) of the IT Act, 1961: "Whether, on the facts and in the circumstances of the case, particularly having regard to its commitments, the profits of the assessee-company for the asst. yr. 1964-65 were small within the meaning of 'Smallness of profits' in S. 104(2) of the IT Act, and that declaration of any dividend by the company would have been unreasonable ?"
(2.) THE facts found by the Tribunal have been stated in the statement of case and is as under : "The assessee is a company in which the public are substantially interested. It filed the return of income for the year 1964-65 claiming a loss of Rs. 79,418. This loss was arrived at by claiming from the net profit of Rs. 3,71,318 development rebate of Rs. 4,60,736. In the course of assessment proceedings, concealed income outside the books of account was detected and the assessee-company filed a disclosure petition before the CIT in August, 1968. A revised return showing a total income of Rs. 15,88,237 was also filed. The ITO made an assessment on a total income of Rs. 18,55,803. The ITO further found that after considering the income-tax and super- tax on the total income of the assessee, the distributable income worked out to Rs. 6,97,952. As the company had not declared any dividend in respect of the profits of this year, the ITO imposed additional super-tax on the undistributed income as profit under S. 104 of the IT Act. The assessee-company went up in appeal before the AAC. It was contended that the provisions of s. 104 were not attracted and the ITO had not considered the smallness of profit of the assessee- company and its programmes for expansion. The assessee also challenged the correctness of the computation of distributable income at Rs. 6,97,952, and the levy of additional super-tax at Rs. 2,58,205. The AAC found that the total income as reduced in appeal finally came to Rs. 17,96,165. He rejected the plea of the assessee that the provisions of S. 104 were not attracted on the ground that it was an Indian company engaged in business of manufacture or processing of goods. After considering the various figures about its income, the AAC held that the provisions of S. 104 were attracted in this case. The AAC further considered the contention that no dividend could be declared in view of the smallness of profit and the expansion programme of the company. It was claimed that the company had ploughed back more than Rs. 12,00,000 in the factory building, plant and machinery, etc. during the year ending 31st Jan., 1964 and Rs. 14,76,209 in similar fixed assets, during the year ending 31st March, 1965. The AAC however, found that on looking into the balance sheet for the accounting period ending 31st March, 1964 that a very substantial part of the income of the assessee-company was used for making advance to a firm in which some of the Directors of this company were interested. He found that out of the current assets, amounting to Rs. 1,15,64,665, a sum of Rs. 18,12,195 had been advanced to Aminchand Payarelal as on 31st March, 1964. The AAC observed that on his requiring the assessee to produce the minutes book of the company to support his contention that the assessee-company had also incurred heavy commitments in earlier years due to which it was not commercially expedient to declare any divided during the year and to show that the matter was at all considered by the Directors leading to a resolution not to declare dividend out of the income of this year due to smallness of profit, the minutes book was produced but it did not contain any discussion or resolution regarding any expansion programme of the business or regarding the reasons for the declaring any dividend. In view of this the contention of the assessee was rejected by the AAC and he allowed consequential relief to the assessee as a result of reduction of its total income. On further appeal to the Tribunal, same contentions as was raised before the AAC were advanced by the assessee. The Tribunal held: "We have considered the real submissions. It is not under dispute that there is no mention in the minutes book of the assessee-company why dividends were not to be declared. Besides, the assessee-company did not even file copy of the Director's report to the shareholders either the ITO or before the AAC or even before us at the time of hearing. Even according to the balance sheet of the assessee-company, the reserves stood at Rs. 13,40,531 which were more than the outlay on the expansion programme of the current year. Besides, the mere fact that the assessee-company lent Rs. 18,12,195 in this year to its sister concern Amin Chand Payarelal itself showed that there was no shortage of funds with the assessee-company for the current expansion programme, the commitment for the subsequent year's expansion programme or other business needs of the assessee company. The rulings of the Hon'ble Supreme Court in the case of CIT Vs. Gangadhar Banerjee and Co. (P) Ltd. (1985) 57 ITR 176 (SC), CIT vs. Asiatic Textiles Ltd. (1971) 87 ITR 816 (SC) or of the Hon'ble High Court of Calcutta in the case of CIT vs. Bangodaya Cotton Mills Ltd. (1968) 69 ITR 812 (Cal). therefore, do not come to the assessee's help. Taking all these facts into consideration we are of the view that looking to the totality of facts and circumstances of the present case there was no justification for the assessee-company in not declaring any dividends in respect of the profits of this year and the levy of additional super-tax on undistributed income was was justified. Coming to the alternative pea raised by the learned counsel for the assessee- company Shri Bagad they that deduction should be allowed also of the surtax liability finally assessed under the Companies (Profits) Surtax Act, 1964, in determining the distributable income and consequently the additional super-tax on undistributed income, we hold that in view of the provisions of sub-cl. (b) of cl. (i) of S. 109 of the IT Act, 1961, the deduction should be allowed. The ITO is directed to work out the distributable income and the additional super-tax on undistributed income accordingly."
(3.) IT will be seen from the facts set out hereinabove that the assessee could not prove before the Tribunal the existence of any plan for expansion or any financial commitment for future expansion undertaken by the assessee in the relevant year of account. It is also not clear why the assessee did not produce the Director's Report before the ITO or the AAC. In spite of adverse remarks made by the AAC, the assessee did not think it fit to produce the Director's report before the Tribunal. The audited balance sheet presented to the shareholders usually is prefaced by the Director's report. Therefore, this is not a case of mere non-production but a suppression of the Director's report.;