D.K. Mahajan, J. - (1.) IN this reference under Section 256(1) of the Income -tax Act, 1961, the only question that requires determination is whether in the circumstances of the case Section 104 is attracted ?
(2.) THE Assessee -company derives its income from interest on securities, dividends and hire -purchase business. The dispute in this case relates to the assessment year 1963 -64, accounting year ending 30th September, 1962. The total income of the Assessee -company in the year ending 30th September, 1962 was Rs. 58,336. Initially, the assessment was completed under Section 143(3) on 28th November, 1963, and the income assessed was at Rs. 58,037. It was enhanced to Rs. 58,336 by an order under Section 154, dated, 13th September, 1967. A notice under Section 105(1) of the Income -tax Act, 1961, was issued to the company on 17th June, 1965, requiring it to show cause why penal super -tax be not levied for non -distribution of the prescribed percentage of the distributable profits as dividends. The stand taken by the Assessee company in reply to the said notice was as follows: In the accounting year ending 30th September, 1962 (assessment year 1963 -64) there was a profit of Rs. 58,798. Out of this a sum of Rs. 30,000 was provided for the payment of income -tax for this very year and a further sum of Rs. 36,838.98 had to be paid as income -tax for the previous years over and above the provisions already made for those years. The deficiency of about Rs. 10,000 was met from the 'contingency fund'. There was, thus, no payment of profit left in the hands of the company to pay any dividend. The Company has shown losses during the assessment years 1957 -58, 1958 -59 and 1959 -60 on account of huge amounts of 'Bad Debts' written off by the company in those years. The learned Income -tax Officer disallowed these 'bad debts' along with other items like 'carry forward' in the vehicle account and 'loss in the sale of securities'. This resulted in the payment of heavy amount of income -tax by the company for which no provision was made or anticipated. A sum of Rs. 36,838.98 was paid from out of the profits of the year in question and the balance of about Rs. 77,000 had to be met from out of the profits of the succeeding years. Therefore, there was no question of payment of dividend to the shareholders during the year mentioned above.
(3.) THIS stand was not accepted by the Income -tax Officer and he passed an order imposing penal super -tax at the rate of 37 per cent of Rs. 29,168 amounting to Rs. 10,792. The reasons given by the Income -tax Officer for rejecting the stand taken by the Assessee were: (a) The Assessee had a 'contingency reserve' of Rs. 7,50,000 as on 1st October, 1961 and a further provision of Rs. 26,838.98 was made during the year under consideration out of profits for the year ending 30th September, 1962 as 'provision for contingency'. This shows that the financial position of the Assessee was very sound and as such it was incumbent upon the Assessee to declare the dividends. If the deficiency of Rs. 10,000 for payment of income -tax could be met out of the contingency fund, the dividends as well could be paid from the same source which is nothing else but the accumulated undistributed profits in the hands of the company. (b) No doubt the Assessee suffered business loss in 1957 -58 on account of bad debts, but this old loss was finally adjusted in the year 1962 -63 and after that the Assessee has been earning good income. Even in the earlier years the Assessee had good income from sources other than business. The company had sufficient liquid assets from which the dividends could have been easily paid.;