M.R.M. Plantations P. Ltd. vs Commissioner of Income Tax

M.N. Chandurkar, C.J.—For the assessment year 1974-75, the gross total income of the assessee company which is an investment company in terms of section 109(ii) of the Income Tax Act, 1961, was computed at Rs. 5,27,283. Deducting the tax payable, the distributable income came to Rs. 2,64,216. The Income Tax Officer took the view that the declared dividend was less than the prescribed percentage, the dividend declared being Rs. 1,17,912. He, therefore, levied additional Income Tax at 50% of Rs. 1,46,304, the additional tax coming to Rs.

73,152.

Admittedly, the profit and loss account which the Tribunal examined for the year ending December 31, 1974, as also the 23rd annual report and the statement of account for the year ending March 31, 1974, showed a profit of Rs. 10,33,029.30 out of which the profits from the sale of the house properties alone amounted to Rs. 7,16,138.57.

The contention raised before the Income Tax Officer as well as the appellate authority and the Tribunal on behalf of the assessee was that the capital gains on the sale of the house property and rubber estate in Penang should not be considered for the purpose of section 104 of the Income Tax Act, 1961, in view of the decision of the Bombay High Court in Commissioner of Income Tax (Central), Bombay Vs. Gannon Dunkerley and

Co. Ltd., . The Income Tax Officer and the Appellate Assistant Commissioner rejected the contention. The Tribunal also found following the decision of this court in Factors (P.) Ltd. Vs. Commissioner of Income Tax, , that any dividend declared out of the amount of profits from the sale of properties did not affect the capital. Arising out of this order of the Tribunal, the following two questions have been referred to this court for opinion u/s 256(1) of the Income Tax Act :

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income Tax Officer had correctly passed an order under the provisions of section 104 of the Income Tax Act, 1961, in respect of the assessment for the year 1974-75 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profit made by the assessee on the sale of certain properties in Malaysia should be included for the purpose of considering the distributable profits for declaration of dividends ?

When this reference was taken up for hearing, we were informed by the parties that there have been subsequent proceedings under sections 154 and 147(b) of the Income Tax Act, 1961. But it appears to us that those proceedings do not affect the questions referred because even so far as the Income Tax Officer is concerned, the order initially made by him u/s 104 still appears to be effective. We have, therefore, proceeded to hear the reference.

Taking question No. (ii) first, the learned counsel for the assessee urged that the Tribunal had not gone into the question whether the articles of association of the company placed any restriction in the matter of distribution of dividend and it is argued that the business of the assessee company is a plantation business which necessitates building up of reserves and, in the instant case, the balance of the profit having been taken to the reserve account, the mere fact that the profit and loss account included the amount of profits from the sale of Penang properties should not be construed as meaning that that amount was available for distribution as dividend. Learned counsel has placed reliance on a decision of the Bombay High Court in Commissioner of Income Tax (Central), Bombay Vs. Gannon Dunkerley and Co. Ltd., and a decision of the Calcutta High Court in Commissioner of Income Tax Vs. N. Guin and Co. (P.) Ltd., . In the decision in Commissioner of Income Tax (Central), Bombay Vs. Gannon Dunkerley and Co. Ltd., , the Bombay High Court held that, according to commercial principles, amounts received as capital gains are profits intended to be distributed amongst the shareholders, but, in ordinary circumstance, directors of business experience would never distribute amounts received by way of capital gain and these amounts would ordinarily be reserved for the purpose of replacement of the assets sold, so as to carry on the business of the concerned company in the normal manner. The Calcutta High Court in Commissioner of Income Tax Vs. N. Guin and Co. (P.) Ltd., , took the view that when a company disposes of any of its capital asset and realises a price higher than its cost price resulting in a surplus, then it will be for the directors to decide if such surplus could be treated as part of the profit of the company and so could be included in the distributable surplus. However, in the same case, the Bench observed that if the directors of the company decide to treat the capital gains as part of the profits of the Company and the amount is put back in the profit and loss account and thereafter if only a part of such gains is distributed as dividend, it would be open to the Income Tax Officer to go into the question whether a greater proportion of such gains should have been distributed. It was pointed out that where the entire surplus is channelled into reserves, it is not for the Income Tax Officer to lay down that it should be treated as part of the business profit of the assessee company in order to determine the reasonableness of the dividend declared by it u/s 23A of the Act.

Now, undoubtedly the decision of the Bombay High Court and a part of the observations in the decision of the Calcutta High Court referred to above seem to be in favour of the assessee. Unfortunately for the assessee, however, there are two decisions of this court which conclude the matter against the assessee. The first decision is in Factors (P.) Ltd. Vs. Commissioner of Income Tax, . This court laid down in that decision that the manner in which a company's profits are to be divided among the shareholders must be determined in accordance with the memorandum and articles of association of the company and how profits available for distribution as dividend are to be reckoned would also depend upon the nature of the particular company and its memorandum and articles of association. It was pointed out that though profits arising from the ordinary business of the company are ordinarily distributable as dividend, the availability of the profits realised by dealing with the fixed capital and forming accretions to capital would depend upon the articles and when the articles do not restrict the distribution of the same, they might also be distributed. Relying on these observations, the learned counsel contended that the Tribunal has not gone into the question whether there are any restrictions which are to be found in the articles of association in the matter of distribution of profits as dividend. It is difficult to see how such a contention can be raised in this reference. If the assessee wanted to agitate the question that the Tribunal's order is vitiated by its failure to refer to the articles of association, then this could be done only by raising a question in the proper form. In any case, it does not appear that at any stage it was the case of the assessee that there were any restrictions with regard to the distribution of profits by way of dividend in the articles of association of the company.

Indeed, no such restriction is pointed out even today by the learned counsel for the assessee. The view taken by the Division Bench that profits arising out of sale of capital assets might also be distributable by way of dividend is binding on us. The later decision of this court in Commissioner of Income Tax Vs. Amalgamations (P.) Ltd., also appears to fully cover the controversy raised in the instant case. In that case, the company had included the capital gains derived by sale of investments in its profit and loss account and distributed the same as dividend and the court held that in such a case, no question can arise as to whether it was commercial profit available for distribution as dividend.

In the instant case, the profit and loss account expressly referred to profits from the sale of Penang properties. The surplus of the profits has been transferred to the balance-sheet and when the board of directors and the company themselves have treated these profits as commercial profits, it is difficult to see how they can now resist the application of section 104 of the Income Tax Act, 1961. The observations of the Calcutta High Court referred to above also, in our view, go against the assessee. As already observed, the Calcutta High Court has taken the view that if the directors of the company decide to treat the capital gains as part of the profits of the company and the amount is put back in the profit and loss account, and thereafter if only a part of such gains is distributed as dividend, it would be open to the Income Tax Officer to go into the question whether a greater proportion of such gains should have been distributed. This is exactly what the Income Tax Officer has done in the instant case.

The assessee having thus treated the profits as commercial profits, it is not now open to them to contend that they should not be considered for the purpose of section 104 of the Income Tax Act, 1961. Accordingly, question No. (ii) is answered in the affirmative and against the assessee.

Consequently, question No. (i) has also to be answered in the affirmative and against the assessee. The questions are answered accordingly.

Assessee to pay the costs of this reference. Costs Rs. 500.