1990 (12) TMI 49 - HC - Income Tax

Court clarifies Income-tax Act on actual profits vs. book profits for closely held companies

The High Court of Allahabad ruled in a case concerning the interpretation of Section 104 of the Income-tax Act, 1961. The Court held that only actual ... Additional Tax, Closely Held Company, Company, Distributable Income Issues:Interpretation of Section 104 of the Income-tax Act, 1961 in relation to book profits and assessable income.Analysis:The judgment by the High Court of Allahabad involved a question raised by the Income-tax Appellate Tribunal regarding the applicability of Section 104 of the Income-tax Act, 1961. The case revolved around a private limited company, not substantially interested by the public, engaged in manufacturing sodium sulphate. The company faced reassessment under section 147 due to fictitious loans and unexplained share capital in its balance sheet. The Tribunal, in response to the company's objections, overruled them and levied additional tax. However, the Appellate Tribunal later allowed the company's appeal, quashing the order under section 104. The Tribunal's reasoning included that only book profits should be considered for section 104, not the assessed income, and strict compliance with the section is required due to its penal nature.The judgment discussed the purpose of Section 104, which aimed to prevent tax avoidance by closely held companies accumulating profits without distributing dividends. It was noted that the actual profit determined on commercial principles should be considered, distinct from assessable income under the Act, as per Supreme Court precedent. The Court highlighted that the Tribunal's view that only business income is relevant for section 104 was erroneous and that there is no such limitation in the section. Additionally, the Court disagreed with the Tribunal's stance that unproved loans should not be treated as part of commercial profits, emphasizing that fictitious claims should not be rewarded.Furthermore, the Court pointed out that other relevant considerations under section 104, such as smallness of profits or past losses, were not addressed in this case. Ultimately, the Court answered the question in favor of the Revenue, indicating that the company was liable for the additional tax under section 104. The judgment emphasized the importance of interpreting section 104 strictly and considering actual profits determined on commercial principles rather than just book profits or assessable income.