COMMISSIONER OF INCOME TAX V. PRAVIN INVESTMENT LTD.

ITR/124/1995

AI Insights

The case revolves around the interpretation and application of Section 104 of the Income Tax Act, 1961, concerning the additional tax on undistributed profits by companies. Pravin Investment Ltd., an investment company, had not distributed dividends in the Assessment Year 1983-84 despite having a distributable income, leading the Income Tax Officer to impose an additional tax. The assessee contested this, and the matter escalated through various appellate stages, ultimately reaching the High Court. The core legal issue was whether the Tribunal was correct in confirming the cancellation of the additional tax by the CIT(A), based on the business rationale provided by the assessee.

• Counselvise Citation: [2006] 140 COUNSELVISE.COM (IT) 733864 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 03-08-2006
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax, West Bengal v Gangadhar Banerjee And Co Private Ltd
• Laws Referred To: Income Tax Act 1961, Indian Income Tax Act 1922
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NOTICE SERVED BY DS
• Assessee Lawyers: MANISH BHATT
• Keywords: Additional tax; Dividend distribution; Investment company; Subsidiary-company; Tax evasion prevention; Distributable income
• Section: 104; 23A

Judgement Text

"ITR/124/1995 1/8 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 124 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus PRAVIN INVESTMENT LTD. - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant(s) : 1, NOTICE SERVED BY DS for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 03/08/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG) ITR/124/1995 2/8 JUDGMENT . . , Mr Manish R Bhatt learned counsel for the . . Revenue None for the respondent The Office Report . shows that the respondent is served by Direct Service . 2 , At the instance of the Revenue the Income Tax , , , Appellate Tribunal Ahmedabad Bench Ahmedabad has ; referred the following question for opinion of this Court , 'Whether in law and on facts the Appellate Tribunal is right in confirming ( ) the view taken by the CIT A in cancelling the additional tax levied by . . , the ITO under section 104 of the I T Act 1961 ?' . 3 , , The facts for disposal of the present matter in , nutshell are that the assessee is an investment company , , which had a subsidiary company namely New Rajpur Mills . ., - Co Ltd and had submitted counter guarantee to the Bank for various arrangements of the subsidiary Company to the . , , , /-. - , tune of Rs 4 90 22 640 In the Assessment Year 1983 84 . the assessee company had distributable income of Rs , , /-, . 1 22 449 they did not distribute dividend Therefore the Income Tax Officer issued a notice to the assessee to show . , /- cause why additional tax of Rs 61 224 should not be . levied under Section 104 of the Income Tax Act The ITR/124/1995 3/8 JUDGMENT Assessing Officer rejected the submission of the assessee . and imposed the tax as proposed Being aggrieved by the , said order the assessee took up the matter in appeal to . the Commissioner of Income Tax The Commissioner of , , , Income tax in his turn observed his earlier order in - relation to Assessment Year 1982 83 between the same , . parties held that the additional tax could not be levied , , The matter was thereafter taken to the Tribunal by the . . . .( ). Revenue The Tribunal confirmed the order of C I T A The matter was allowed to rest there and no application for . Reference was made by the Revenue . 4 - For the year 1983 84 when the very same , / controversy arose the Income Tax Officer Assessing Officer , passed the very same order the matter was taken to the ( ), Commissioner of Income Tax Appeals at the instance of , , , the assessee who in his turn allowed the Appeal and the order was confirmed by the Tribunal in Income Tax Appeal . / / . , No 900 And 1987 This time being dissatisfied by the , . order the Revenue made Reference Application No / / , , 809 Ahd 1990 the Tribunal holding that a referable question , arises from the order passed by the Tribunal referred the . abovequoted question to this Court for its opinion . 4 A , , Section 104 of the Income Tax Act 1961 , virtually is pari materia - to Section 23 A of the Indian , . Income Tax Act 1922 In the celebrated Judgment by the ITR/124/1995 4/8 JUDGMENT Supreme Court in the case of - , Commissioner of Income Tax . .( ) ., West Bengal v Gangadhar Banerjee And Co Private Ltd 57 , ITR Page 176 ; the Supreme Court had observed ' - , The Income tax Officer in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of - , section 23A of the Indian Income tax Act , 1922 does not assess any income to . tax He only does what the directors should have done putting himself in their . place 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 The reasonableness or unreasonableness of the amount distributed as dividends is , 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 The Income ITR/124/1995 5/8 JUDGMENT tax Officer must take an overall picture . of the financial position of the business He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective . approach In deciding whether the payment of a dividend or a larger dividend than that declared by the company would be , - unreasonable the Income tax Officer can take into consideration circumstances . other than losses and smallness of profit , , The statute by the words used while making sure that 'losses and smallness , of profits' are never lost sight of requires all matters relevant to the question of unreasonableness to be . , , considered Capital losses if established . would be one of them' . 5 From the aforesaid observations made by the , Apex Court it would be clear that the object of the Section , is to prevent evasion of tax and the provision must not be worked out from the standpoint of tax collector but should ITR/124/1995 6/8 JUDGMENT . be worked out from the angle of a businessman It would , also be clear that while considering the question relating to , distributable income the Income Tax Officer should take an , , overall picture of the financial position of the business and , while doing so he should put himself in the position of a prudent businessman or the Director of a Company and deal with the problem with a sympathetic and objective . approach The observations made by the Supreme Court make it imperative for the Income Tax Officer to consider the case from the standpoint of a businessman and to take a sympathetic approach taking into consideration the overall financial position of the Company and other problems . which it may or may not face . 6 , In a given case where a Company puts some amount in reserve to meet the future unforseen , contingency then it cannot be straightway said that such . amount was not an action of a prudent businessman If the Revenue is of the opinion that the action is bad or is with the ulterior motive or is to avoid distribution of distributable , income then such facts are required to be brought on record and notice of such facts must be given to the assessee to controvert the allegations levelled against the . conduct of the assessee . 7 , , In the present case the Assessing Officer but for ITR/124/1995 7/8 JUDGMENT ( referring to the language of Section 104 as applicable prior ), . to 1986 has not dealt with any other matter . 8 , True it is that Section 104 is couched in , particular words but when the said words are interpreted , by the Apex Court then the law is to be understood as . interpreted by the Apex Court . 9 , , Even otherwise it is to be seen that for the - , / Assessment Year 1982 83 the submission explanation made by the assessee was accepted by the Commissioner of Income Tax and the Tribunal had confirmed the view of the ( ). , Commissioner of Income Tax Appeal If the assessee relying upon the earlier years' action had followed the very same in the next year and the earlier year's action is , approved by the highest Revenue Tax Tribunal then it would be fallacious to say that the action of the assessee was motivated or was to achieve some illegal or sinister . object . 10 , Taking into consideration the totality of the , circumstances and the overall picture of the facts we are of , the opinion that the Tribunal was not unjustified in confirming the order of Commissioner of Income Tax ( ) . . . ( ) Appeals and the C I T Appeals was also justified in , accepting the explanation submitted by the assessee and directing that no tax would be payable under Section 104 of ITR/124/1995 8/8 JUDGMENT , . the Income Tax Act 1961 The Reference is answered . against the interests of the Revenue It shall stand . . disposed of accordingly No costs [ R.S. Garg, J. ] [ M.R. Shah, J. ] RMR. "