income-tax Officer Vs. Milling Trading Co. Ltd. - Court Judgment

Excerpt:
1. as all the four appeals concern the same assessee and involve a common point, they are being disposed of together for the sake of convenience.2. the assessee filed the return showing an income of rs. 4,08,407. the return of income included loss from kanisha steel & ghansham steels at rs. 17,82,947. the assessing officer made various additions to the total income and the same was taken in appeal before the cit(a). the assessing officer was of the opinion that after deducting the taxes and other items deductible under section 109 of the act, the assessee had a distributable income of rs. 5,69,902. when the matter was taken to the cit(a), he set aside the assessment order on the basis of which this order under section 104 was passed with a direction to the assessing officer to pass a.....

Judgment:
1. As all the four appeals concern the same assessee and involve a common point, they are being disposed of together for the sake of convenience.

2. The assessee filed the return showing an income of Rs. 4,08,407. The return of income included loss from Kanisha Steel & Ghansham Steels at Rs. 17,82,947. The Assessing Officer made various additions to the total income and the same was taken in appeal before the CIT(A). The Assessing Officer was of the opinion that after deducting the taxes and other items deductible under section 109 of the Act, the assessee had a distributable income of Rs. 5,69,902. When the matter was taken to the CIT(A), he set aside the assessment order on the basis of which this order under section 104 was passed with a direction to the Assessing Officer to pass a fresh order after allowing the assessee an opportunity of being heard. Later on the total income was computed under section 143(3) read with section 147A at Rs. 12,79,370. After deduction of income-tax and other deductibles under section 109, the distributable income was worked out by the Assessing Officer at Rs. 5,77,972. When the Assessing Officer further issued a show-cause notice, the assessee submitted as follows : (a) That the profit as per the statement of the income enclosed with the return was only Rs. 4,08,407 and after adjusting the income-tax liability, the balance was only Rs. 1,29,000.

(b) That the assessee had started a manufacturing division, namely, Trupti Casting. The assessee had to enter into an agreement with Bank of Baroda for placing orders for the new machineries. The Bank of Baroda made a stipulation that the assessee-company shall not declare dividends without obtaining the prior permission from the Bank.

(c) That the assessee approached the Bank inviting their attention to the provisions of section 104 of the Act and submitted that in case it does not declare any dividend, it was liable to be penalised with additional income-tax.

(d) The current liabilities as per the balance sheet were more than the current assets.

In view of the above situation, it was submitted that the assessee could meet its obligation to the Bank only out of the activities of the Trading Division.

3. The Assessing Officer was of the opinion that if the assessee found that in view of the current requirement for development of its business, it would not be possible or advisable for it to declare or pay any dividend, then it should have moved an application to the Board for reduction of amount for the minimum distribution as provided under section 107A of the Act. As the assessee has not done so, it cannot take shelter behind the plea that it was prevented by the Bank from declaring the dividend. He was of the opinion that this was a private agreement which could not override the written provisions of the Income-tax Act. He was of the opinion that the decision of the Hon'ble Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 is not applicable to the facts of the case.

4. The Assessing Officer proceeded to look into the consolidated balance sheet for the previous year to this assessment year and came to a conclusion that the reserves and surplus during the year went from Rs. 12,94,306 to Rs. 24,66,848. He was also of the opinion that the figure of the current assets and the current liabilities alone do not serve as a barometer for deciding the financial soundness of any concern. He further held that total income of Rs. 12,70,370 represents entire income from trading and investments. He found that the trading profit of Rs. 21,32,295 was reduced due to loss in the manufacturing division. He, therefore, held that it was a trading company for the purpose of provisions of section 104. He, accordingly, sent a draft order to the IAC, Central, Baroda for his-approval. The IAC supported the order of the Assessing Officer and held that the profits during the year are not small and the assessee did not suffer any continuous losses to claim the exemption under the Act. He held that the Bank could not restrain the assessee from declaring the dividend. The Assessing Officer, therefore, held that the assessee was liable to pay 60% tax of the distributable income of Rs. 5,77,972. Tax of Rs. 3,46,783 was assessed @ 37% as additional income tax.

5. For this assessment year, the total income under section 143(3) read with section 147(a) was computed at Rs. 9,21,312. After deduction of taxes and other items under section 109, the distributable income was worked out at Rs. 4,68,125. As in assessment year 1978-79, the objections of the assessee were overruled by the Assessing Officer and he directed to pay additional income-tax of Rs. 1,03,923 @ 37% on the 60% of the distributable income of Rs. 4,68,125.

6. For the assessment year 1981-82, the distributable income was worked out at Rs. 6,85,421. From this preference dividend of Rs. 40,360 was deducted and 37% of the balance was charged as additional income-tax.

7. For the assessment year 1983-84, the distributable income was worked out at Rs. 15,38,218. After deducting the preference dividend of Rs. 40,360, the distributable income was worked out at Rs. 14,79,858 and the additional income-tax @ 37% amounting to Rs. 5,54,207 was charged.

8. When the matter was taken to the CIT(A), he disagreed with the Assessing Officer and held that the assessee under no circumstances could declare dividend in view of the restrictions placed by Bank of Baroda. He also held that the contention of the ITO that the liabilities of the appellant-company including those of Banks are more than adequate on a/c of the value of various assets and hence, the assessee should have declared dividend, was not correct. He held that any financial institution is more concerned about the recovery of its loans and interest and while granting such facilities, it may stipulate certain conditions and unless such a stipulations are found to be unlawful it had to be enforced. He further held that later on when the assessee had taken a loan of Rs. 10 lacs from the Co. Op. Bank, it did so with a view to enter into another capital venture. He, accordingly, cancelled the order imposing additional income-tax for all the four years and the department is in appeals.

9. The ld. DR. mainly emphasised the fact that the agreement between the assessee and the Bank of Baroda was a private agreement and could not override the provisions of the Indian Income-tax Act which was the law of the land. He submitted that if the persons are permitted to enter into such agreements which may result into tax avoidance, then provisions of the Income-tax Act can be easily defeated. It was submitted that the financial position of the assessee for all the four years depicted that it was not only in a position to pay the interest and bank charges to the Bank, but it was also in a position to declare dividend as all the liabilities shown in the balance sheet were properly covered by the assets as per its market value. He in particular invited our attention to the remarks of the IAC for the assessment year 1983-84 while approving the draft order of the Assessing Officer. The IAC for that year found out that the assessee-company has financed construction of a posh complex on the agricultural land belonging to Shri Prayasvin B. Patel who was son of Shri Bhanubhai I. Patel, Chairman and Managing Director of Elecon Engg.

Co. Ltd. It was submitted that a company which was in a position to divert its reserves for construction of a house property was very well in a position to declare dividend and to avoid payment of additional income-tax. He submitted that the financial position of the assessee was sound and it had no reason not to declare dividend and the agreement with Bank of Baroda was not legally enforceable agreement and as such, could not hinder the assessee from declaration of any dividend. He relied upon the decisions in Steel Rolling Mills of Hindusthan (P.) Ltd. v. CIT and Kold Hold Industries (P.) Ltd. v. CIT [1991] 192 ITR 62 (Delhi).

9.1 The counsel for the assessee, on the other hand, submitted that the assessee was doing well in trading activities but was suffering losses in the manufacturing activity. It was with a view to increase the manufacturing activities that the assessee entered into an agreement with Bank of Baroda for grant of various loans. Our attention was invited to pages 39 to 41 of the paper-book which included the letter by Bank of Baroda giving the terms and conditions for grant of loan. As per this letter dated 28-2-1977, the assessee was permitted to avail of various facilities like fresh term loan, hypothecation of new movable machinery to be purchased, margin of 30% on new machineries and D.P.Note signed by the firm and its proprietor. Various other conditions appear on pages 40 & 41 of the assessee's paper-book including asking for an undertaking to the effect that the proprietor company will utilise the cash generated out of trading activities 100% for expansion of business and will not declare any dividend.

9.2 It was submitted that the assessee on 25-4-1978 again approached to the Bank that it may be permitted to declare dividend on the basis of certain working given by it to them. It was submitted that in spite of giving and showing its intention for declaration of dividend, the bank insisted that it was not in a position to declare any dividend. Our attention was invited to further fact that on 3-5-1980 the assessee again wrote to the Bank in this regard. The bank on 30-6-1980 informed the assessee as follows : "Under all the above circumstances, you cannot divert your funds in payment of Equity dividend. Kindly pay all our outstanding liabilities first and regularise the cash credit amount. If you will declare the dividend to equity shareholders, we will be compelled to withdraw all the facilities given to you which may please be noted." Our attention was also invited to the financial position of the assessee to submit that though the liabilities of the assessee were protected by the adequate assets as per its market value, it was submitted that if the assessee wanted to declare dividend it could have done only by revaluing the assets resulting in further creation of tax liability under the head 'Capital gain' under section 41(2) and almost closure of the business. It was submitted that this could have resulted in company suffering heavy set back. It was submitted that it was wrong to say that the condition prescribed by the Bank of Baroda was contrary to law of land. It was submitted that whenever a creditor advances money, it always wants to have control over the resources of the debtor, so that it is always in a position to recover the loans and liabilities. He in particular invited our attention to the decision of the Hon'ble House of Lords in the case of Fattorini (Thomas) (Lancashire) Ltd. v. IRC [1943] 11 ITR 50 to submit that the department cannot prevent the assessee from entering into agreement with the Bank and in fact, it is seen that the assessee has used the amount available to it due to non-distributable dividend in expansion of business of the assessee. The assessee further relied on the following decisions reported in : CIT v. Williamson Diamonds Ltd. [1959] 35 ITR 290 (PC), CIT v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290 (SC), CIT v. Asiatic Textiles Ltd. [1971] 82 ITR 816 (SC), Indian Commerce & Industries Co. Ltd. [1966] 60 ITR 229 (Mad.), CIT v. Jubilee Mills Ltd. [1968] 68 ITR 630 (SC), CIT v. Gagalbhai Jute Mills (P.) Ltd. [1980] 126 ITR 191 (Bom.), CIT v. Best & Co. (Pondicherry) (P.) Ltd. [1981] 131 ITR 361 (Mad.), CIT v. Sarpi Kajoria Coal Mines (P.) Ltd. [1977] 106 ITR 858 (Cal.), CIT v. Jananamandal Ltd. [1977] 106 ITR 976 (All.), Indian Express Newspapers (Bombay) (P.) Ltd. [1979] 120 ITR 249 (Bom.), Srinivas Banking Co. Ltd. v. CIT [1965] 58 ITR 89 (Cal.), Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC), CIT v. Binani Investment Co. (P.) Ltd. [1982] 138 ITR 845 (Cal.) to submit that the CIT(A) was justified in accepting the plea of the assessee in allowing the appeals. In reply, the DR further submitted that as the assessee was in a position to make payments to the bankers on account of interest without liquidating the resources, the assessee could have declared the dividend.

10. We have heard the parties and we are of the opinion that the CIT(A) was justified in cancelling the charge of additional income-tax which has been held by the various High Courts as being penal in nature. The assessee is basically a trading company, which decided to expand its business by establishing a manufacturing factory. That factory was running into losses and was in fact reducing the profit earned by the assessee from trading activities. The assessee found it difficult to invest only the profit arising out of the trading activities and expanded the business further in the manufacturing side. It, therefore, entered into an agreement with Bank of Baroda for advancement of certain loans on certain terms and conditions. The Bankers had a detailed discussion and the loans were approved by the Board of Directors consisting of very Sr. Members of the management. They after considering the assets, liabilities and business prospects of the assessee-company came to a conclusion that the assessee had to utilise all its resources in expanding the manufacturing business and, therefore, they imposed the conditions that the cash generated out of the trading activities should utilised 100% for expansion of the business in addition to the loans granted by the Bank. Even if it is accepted for argument's sake that the agreement was not enforceable in law, the assessee could have declared the dividend only at a tremendous risk. The Bankers insisted on the return of all the loans before declaration of any such dividend. It is notable that the Bank was not a private bank, but was a Nationalised Bank like Bank of Baroda. If the assessee had returned all the loans to the bankers, its all expansion activities would have come to a standstill. It is doubtful whether the assessee could have survived. Even if the company had survived, it would have survived at a cost of no future of the company. In our opinion, therefore, the Board of Directors have taken into consideration the various pros and cons to come to a conclusion as a prudent businessman to accept the advice of the Bankers and not to distribute any dividend. The very fact that the assessee made several attempts to persuade the bankers for declaration of dividend shows that the assessee had bona fide intention for declaring the dividend.

However, the Bankers thought it fit to stop the assessee from declaration of dividend as, their creditors. In our opinion, therefore, it was a conscious decision by the prudent Board of Directors of the assessee-company not to declare any dividend. We have also gone through the financial requirements given by the Board of Directors for different years. In the financial year ending 31-10-1977, mention of setting up foundry by the name of Trupti Castings Division has been made. It has also been mentioned that Kanisha Steels Division was incurring losses. It was this division which required particular help from the bankers. In assessment year 1978-79, the Kanisha Steels Division again showed losses and Trupti Castings had only started the business. Thus, in both the years, there is clear mention of expansion activities of the assessee-company. In assessment year 1980-81, M/s.

Kanisha Steels showed profit in that year but M/s. Trupti Castings showed losses. For assessment year 1981-82 similar was the situation and M/s. Kanisha Steels made profit while M/s. Trupti Castings continued showing losses. Similar was the position for assessment year 1983-84. Thus, it is obvious that even if in any year the assessee had earned profit, the same had to be adjusted against the losses brought forward of that unit and the performance of every unit had to be attended. As held by various High Courts, the provisions of Section 104 are penal in nature and the decisions of the Hon'ble Supreme Court in the case of CIT v. Anwar Ali [1970] 76 ITR 696 and Hindusthan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 have to be taken into consideration. Reliance of the department on the decision of the Hon'ble Calcutta High Court in the case of Steel Rolling Mills of Hindustan (P.) Ltd. (supra) is not helpful. It is notable that in that case the issue was whether the assessee was liable to pay the additional income-tax on the concealed income later on disclosed. The minute book of the assessee in that case did not support its contention. Therefore, the Hon'ble Calcutta High Court rejected the plea of the assessee. In Delhi High Court decision in the case of Kold Hold Industries (P.) Ltd. (supra), the only contention that was raised was that there was future expansion programme and, hence, dividend could not be declared. The Tribunal gave a clear finding that there was no expansion programme envisaged at that point of time. Interpolations were found in the assessee's minute book as well in that case.

10.1 We find that the Hon'ble Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra) at particular page 184 clearly held that section 23A of the Act of 1922 (corresponding to section 104 of 1961 Act) is in the nature of penal provision. In that decision, the Hon'ble Supreme Court held that the burden lies on the Revenue to prove that the conditions laid down in section 104 were satisfied before any order was made. It was this decision which has been commented upon by us earlier and which was relied upon by the ITAT, Ahmedabad in ITA No.2268/Ahd/1981 dated 21-3-1983. Once we start with the presumption that proceedings under section 104 are penal proceedings in nature, then there is only one conclusion and that is that whether we charge tax in the name of additional tax or in the nature of penalty it will not make any difference. Under the facts and in the circumstances of the case, it is clear that the creditor of the assessee, the Bank of Baroda threatened the assessee for withdrawal of all the facilities in case the dividend was declared. With the expansion programme as discussed above-mentioned in the Director's report, the assessee had no alternative but to agree with the proposal of the Bank. The only thing that the assessee could do was to invite the attention of the Bank to the provisions of the Indian Income-tax Act. The assessee did so and failed to convince the bankers. Therefore, we are of the opinion that the assessee had a reasonable cause for not declaring the dividend and as this is a reasonable cause, we are of the opinion that no additional income-tax, which is penal in nature can be charged. Whether in a particular year, dividend should be declared or not is a matter primarily for the directors of a company. The ITO can step in under section 104 only if the directors unjustifiably refrain from declaring a dividend. If the directors of a company had reasonable grounds for not declaring any dividend, it is not open for the ITO to constitute himself as a super-director. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman - Asiatic Textiles Ltd.'s case (supra). Therefore, we are of the opinion that in view of the discussion made above and in view of the particular decision of House of Lords in Fattorini (Thomas) (Lancashire) Ltd.'s case (supra), the CIT(A) was justified in cancelling the charge of additional income-tax.