Arbee Construction Co. Pvt. Ltd. vs Commissioner of Income Tax

Suhas Chandra Sen, J.—The following question of law has been referred to this court by the Tribunal u/s 256(2) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, any larger dividend than that declared by the assessee-company could reasonably be distributed within the meaning of Section 104 of the Income Tax Act. 1961, and the application of Section 104 of the Income Tax Act, 1961, was in accordance with law ?"

The assessment year involved in this reference is the assessment year 1975-76 for which the relevant accounting period is the year ending on March 31, 1975.

The assessee''s case is that the Tribunal has failed to take into consideration the provisions of Section 205A of the Companies Act, 19.56, which imposes a duty upon companies to create a reserve and there is a penalty clause for any default. The assessee is right in its contention that the Tribunal could not reasonably expect the assessee-company to disregard the provisions of the Companies Act. Reasonableness of the distribution of the dividends must be decided keeping in mind the legal obligations of the company.

In this case, the Commissioner of Income Tax (Appeals) came to a finding that, even if the statutory reserve as required to be created u/s 205A of the Companies Act was created, even then the company could have distributed a larger percentage of dividend. There were sufficient funds in the hands of the company to create statutory reserves and pay the required percentage of dividends. The Income Tax Officer was also of the same view.

The Tribunal, however, has not examined the accounts to find out whether it was possible for the assessee-company to distribute a larger percentage of dividend even after complying with the provisions of the Companies Act, 1956.

It must, however, be noted that, in the balance-sheet and profit and loss accounts, included in the paper book by the company as on March 31, 1975, there is no indication of any statutory reserves having been created. However, in the directors'' report, it is mentioned that a statutory reserve was created.

In view of the aforesaid, the case is remanded to the Tribunal. The Tribunal will consider the question afresh and will also examine the accounts to find out whether any reserve was actually created. The Tribunal will find out whether, after creation of the statutory reserves, there were reasonable and sufficient funds in the hands of the company to distribute the requisite percentage of dividends.

The reference is finally disposed of as above.

The assessee-company will, however, pay the costs of this reference assessed at 30 gold mohurs to the respondent.

Bhagabati Prasad Banerjee, J.

I agree.