Section 104 dividend levy not justified where surplus was small and dividend capacity was negligible

Section 104 of the Income-tax Act was considered in the context of a trading company with a small post-tax surplus and only negligible dividend capacity. After examining returned and assessed income, including disallowances and notional additions, the available surplus was found to be insufficient to support any meaningful dividend. On that basis, non-declaration of dividend was treated as a prudent business decision rather than conduct attracting the levy. The cancellation of the section 104 orders was upheld, and the Revenue's appeals failed.

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Issues: Whether the levy under section 104 of the Income-tax Act, 1961, was rightly cancelled on the ground that, having regard to the assessee's profits, capital structure and the insignificant dividend that would have been distributable, no dividend was required to be declared.

Analysis: The assessee was a trading company with paid-up capital of Rs. 10 lakhs divided into 10,000 shares of Rs. 100 each. For both assessment years, the difference between returned and assessed income was examined, including disallowances and notional additions such as profit on sale of car under section 41(2). On that basis, the available surplus after provision for taxes was found to be small, and any dividend that could have been declared would have been negligible per share. In these circumstances, the non-declaration of dividend was treated as a prudent business decision rather than a case warranting levy under section 104.

Conclusion: The cancellation of the orders passed under section 104 was upheld and the Revenue's appeals failed.

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