STEEL ROLLING MILLS OF HINDUSTHAN PRIVATE LIMITED vs COMMISSIONER OF INCOME TAX.

SUHAS CHANDRA SEN, J. :

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 ?"

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. 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 formed 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 of 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 ended 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 M/s. Aminchad 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 dividend 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 rival 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 Directors report to the shareholders either before 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 M/s. 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 years expansion programme or other business needs of the assessee company. The rulings of the Hon''ble Supreme Court in the case of Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., . CIT vs. Asistic Textiles Ltd. (1971) 87 ITR 816 or of the Hon''ble High Court of Calcutta in the case of COMMISSIONER OF Income Tax, WEST BENGAL I Vs. BANGODAYA COTTON MILLS LTD., , therefore, do not come to the assessees 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 jurisdiction 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 justified. Coming to the alternative plea raised by the learned counsel for the assessee-company Shri Bagadthey 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."

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 Directors 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 Directors report before the Tribunal. The audited balance-sheet presented to the shareholders usually is prefaced by the Directors report. Therefore, this is not a case of mere non-production but a suppression of the Directors report.

Moreover, the minutes that were produced did not indicate that there was any financial commitment for any expansion plan of the assessee-company. This finding of fact has not been challenged in any way.

The Tribunal next came to the conclusion that, in any event, the assessee company had sufficient funds in its hands for the alleged financial commitment for expansion.

The Tribunal examined the balance sheet of the company and found that the development rebate reserves stood at Rs. 13,40,531 which were more than the outlay for the expansion programme of the year of account. The Tribunal further noted the fact that the assessee-company had lent a sum of Rs. 18,12,195 in that year to its sister concern M/s. Amin Chand Payarelal. The Tribunal came to the conclusion from all these facts that there was no shortage of funds with the assessee-company for the current expansion programme, the commitment for the subsequent years expansion programme or other business needs of the assessee company.

Dr. Pal, appearing on behalf of the assessee-company, has strenuously argued that the Tribunal was in error in taking into consideration the amounts standing to the credit of development rebate reserve for the purpose of deciding the question of reasonableness of non-declaration dividend. Strong reliance was placed on the case of Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., in support of his contention. In that case, it was held by the Supreme Court that though the object of s. 23A of the Indian IT Act 1922, was to prevent evasion of tax, the provisions must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick was that of a prudent businessman. The reasonableness or the unreasonableness of the amounts distributed as dividends was to be judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others.

In the case of Gangadhar Banerjee (supra) the balance-sheet of the company for the relevant year showed a sum of Rs. 1,05,950 as "capital reserve brought forward". A sum of Rs. 5,73,161 as taxation reserve and a sum of Rs. 56,000 as estimated tax. It was argued on behalf of the Department that the financial condition of the company was sufficiently sound to warrant an order under s. 23A of the Act.

This argument was countered by the advocate, appearing on behalf of the assessee, who argued that for the purposes of testing the smallness of profit, the ITO had to take into consideration not the assessable income but the commercial profits of the company. Having regard to the commercial profits, a declaration of higher dividend would be unreasonable. He also argued that should the Court hold that the ITO could establish that the reserves were more than the liabilities, the assessee should also be permitted to prove that its real commercial profits and the reserves were far less than the demands.

The Supreme Court approved the tests laid down in the case of Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., where it was observed that "Smallness of the profit in s. 23A has to be adjusted in the light of commercial principles and not in the light of total receipts, actual or fictional. This view appears to have been taken by the High Courts in India without any dissentient of opinion".

The Supreme Court applied that test in the case of Gangadhar Banerjee (supra) and observed that the balance-sheet of a company was not final for the purpose of s. 23A of the Act, or even form the assessment. Nothing prevented the parties in a suitable case to establish by cogent evidence that certain items were either by mistake or design, inflated or deflated or there were some omissions. The Supreme Court noted that no attempt was made before the Tribunal to canvass the correctness of the figures either on the debit side or credit side and the Supreme Court did not think it fit to allow the parties another opportunity in this regard.

The Supreme Court also observed after referring to the case of CIT vs. Bipinchand Maganlal & Co. Ltd. (supra) that "if the assessable income was the test and if the commercial profits were small, the learned Judge pointed out the company would have to fall back either upon the reserves or upon its capital which, in law, it could not do".

This observation of the Supreme Court does not really support the contention of Dr. Pal in this case. The assessee-company is not being called upon to distribute dividends out of its reserves any is not being called upon to distribute dividends out of its reserves. The AAC as well as the Tribunal have pointed out that there were large reserves of the company to meet the financial commitments, if any, for the expansion programme of the company.

It was observed in Gangadhar Banerjees case (supra) by the Supreme Court that "there is no evidence on the record that the real commercial profits were artificially reduced in the balance sheet. Not is there evidence to show what part of the income assessed represents commercial profits, and what part the notional income ? In the circumstances, it must be assumed that the amounts mentioned in the balance sheet correctly represented the commercial profits."

But in the instant case, it has been admitted by the assessee that the real commercial profits were not shown in the balance-sheet. It will appear from the balance sheet that a sum of Rs. 4,60,736 was carried to the development rebate reserve, and a net profit of Rs. 3,81,318 was by that process turned into a net loss of Rs. 79,418. This, however, was not the entire income of the year. In course of the assessment proceedings, the concealed income outside the account books was detected. This led to the assessee-companys filing of a disclosure petition under s. 271(4A) and a revised return for the asst. yr. 1964-65 admitting a total income of Rs. 15,88,237.

The assessed total income on the basis of disclosure petition, therefore, came to Rs. 8,55,803. This assessment was reduced as a result of various appellate proceedings and was ultimately brought down to Rs. 17,96,165.

It is to be noted that the income that was computed was on the basis of assessees disclosure petition and not on any artificial notion of any deemed income nor is it a case of the assessees failure to prove the nature and source of cash credit. The assessee in his assessment proceedings for the asst. yr. 1964-65 declared a loss of Rs. 63,218. Thereafter the assessee admitted concealment of income and filed a disclosure petition of Rs. 15,88,237.

It was held by the Supreme Court in the case of Gobald Motor Service (P.) Ltd. Vs. Commissioner of Income Tax, Madras, that "the commercial or accounting profits which have to be taken into consideration are the real commercial or accounting profits. If an item is deliberately, omitted from the accounts, it cannot be said that the commercial principles prevent that amount being added to the profits in order to arrive at real commercial or accounting profits".

What has been disclosed by the assessee itself as its concealed income must be added back to its income disclosed in the balance sheet for the purpose of arriving at commercial profits.

In fact, the advocate, appearing for the assessee, admitted before the Tribunal that there would be a commercial profit available for distribution as dividend but the assessee company had undertaken an expansion programme in which investments were made to the tune of Rs. 12,00,000 in that very year of account and there was a commitment for further expansion in the next year which would be of the order of about 14,00,000. In the context of these expenditures and commitments for further expansion, it would be unreasonable to expect the assessee-company to declare dividends to the detriment of its expansion programme.

This was the only real controversy raised before the Tribunal and also the AAC. The AAC observed.

"I asked the learned counsel for the appellant specifically to produce the minutes book of the company to support his contention that the appellant company had already incurred heavy commitments in earlier years due to which it would not be commercially expedient to declare any dividend during the year and to show that the matter was at all considered by the Directors leading to a resolution not to declare any dividend out of the income of the asst. yr. 1964-65 due to smallness of profit. The learned counsel produced the minutes book before me. I find that the minutes book does not contain any discussion or resolution regarding any expansion programme of the business or regarding the reasons for not declaring any dividend. Thus the appellant has failed to make out any cause before me to accept the second objection."

The Directors report was not produced even before the Tribunal and the Tribunal also examined the minutes book and agreed with the AAC that the minutes book of the company did not support the contention of the company.

Another important factor noted by the Tribunal was that the assessee company had sufficient funds in its hand. It lent a sum of Rs. 18,12,195 in this very year to its sister concern. M/s. Amin Chand Payarelal. Dr. Pal invited this Court to remit the case back to the Tribunal to re-examine the issue. Dr. Pals contention is that this was not really a loan but a commercial debt owed by the sister concern to the assessee-company.

This argument was not made before the AAC or even before the Tribunal. This is a pure question of fact prima facie, the copy of the balance-sheet annexed to the paper book does not support the contention of Dr. Pal. The loan is shown not in the column of "Debts Owed" to the company but in the column of "Loans and Advances". In any event, this is a pure question of fact which was not raised before the ITO, the AAC or the Tribunal and we do not propose to go into this controversy at this stage.

The question referred, therefore, is answered in the negative and in favour of the Revenue.

There will be no order as to costs.

BABOO LALL JAIN, J. :

I agree.