Section 104 and prudent businessman test support an investment company's expansion-based use of surplus funds, not tax evasion

Section 104 of the Income-tax Act was applied by placing the Income-tax Officer in the position of a prudent businessman and asking whether dividends ought to have been declared. The Tribunal found that the assessee, an investment company, invested surplus funds in units as part of its business expansion and not to evade tax. That factual finding was supported by the record, so interference was not justified. On those facts, section 104 was not attracted and the Tribunal's view was upheld in favour of the assessee.

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Issues: Whether section 104 of the Income-tax Act, 1961 applied to the assessee's case so as to justify interference with the Tribunal's finding that the company's investment of surplus funds was for expansion of its investment business and not for tax evasion.

Analysis: Section 104 was to be applied by placing the Income-tax Officer in the position of a prudent businessman and examining whether the directors ought to have declared dividends. The Tribunal had found that the assessee, being an investment company, invested in units as part of its business expansion and not with a view to evade tax. That finding was supported by the record and did not warrant interference.

Conclusion: Section 104 was not attracted on the facts, and the Tribunal's finding was upheld in favour of the assessee.

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