Undisclosed income is not automatically commercial profit for dividend distribution; the Department must prove distributable income independently.

An amount assessed as income from undisclosed sources does not, by itself, become commercial profit available for dividend distribution under section 104 of the Income-tax Act, 1961. Because proceedings under section 104 are penal in character, the Department must independently prove that the sum represented distributable commercial income; an assessment addition alone does not discharge that burden. Where such character is not established, the foundation for a section 104 order fails and cancellation of the order follows.

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Issues: (i) Whether income added as undisclosed sources could be treated as commercial profits for applying section 104 of the Income-tax Act, 1961. (ii) Whether the Department bore the onus to prove that the amount represented commercial income for dividend declaration purposes under section 104 of the Income-tax Act, 1961. (iii) Whether the order made under section 104 of the Income-tax Act, 1961 was liable to be cancelled.

Issue (i): Whether income added as undisclosed sources could be treated as commercial profits for applying section 104 of the Income-tax Act, 1961.

Analysis: A sum added back in assessment on account of undisclosed sources may justify an addition for assessment purposes, but it does not automatically become commercial profit available for distribution as dividend. Proceedings under section 104 are penal in character, and the character of the amount must be independently established for the purpose of dividend distribution.

Conclusion: The question was answered in the negative and in favour of the assessee.

Issue (ii): Whether the Department bore the onus to prove that the amount represented commercial income for dividend declaration purposes under section 104 of the Income-tax Act, 1961.

Analysis: Since section 104 proceedings are penal in nature, the burden remained on the Department to prove that the disputed sum was commercial income of the assessee and not merely an amount added in assessment on the basis of unexplained source. The assessment addition by itself did not discharge that burden.

Conclusion: The onus was on the Department, and the issue was decided in favour of the assessee.

Issue (iii): Whether the order made under section 104 of the Income-tax Act, 1961 was liable to be cancelled.

Analysis: Once the disputed amount could not be treated as commercial income and the Department failed to establish availability of distributable commercial profits, the foundation for the section 104 order failed.

Conclusion: The cancellation of the section 104 order was upheld in favour of the assessee.

Final Conclusion: The reference was decided against the Revenue and the assessee succeeded on all referred questions, with no order as to costs.

Ratio Decidendi: An amount added in assessment as income from undisclosed sources does not, by that fact alone, constitute commercial profit available for dividend distribution under section 104 of the Income-tax Act, 1961; the Department must independently prove its character as distributable commercial income.

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