Section 104 exemption turns on gross total income composition after set-off; inadequate profits plea rejected.

Section 104 additional tax applied where the statutory distribution requirement was not met, and the manufacturing or mining exception under section 104(4)(a) depended on whether income from those activities formed at least 51 per cent of gross total income after statutory computation and set-off of losses and unabsorbed depreciation. Because the assessee's qualifying manufacturing income was reduced to nil for the relevant year, the exemption was unavailable. The plea that dividends could not be declared for want of profits or resources was also rejected, as the company had substantial free reserves and no debit balance in the profit and loss account. Partial relief was confined to correction of the tax computation.

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Issues: (i) Whether the assessee-company was entitled to the exemption from additional tax under section 104 on the ground that it was a company engaged mainly in the manufacture or processing of goods or in mining; (ii) whether the assessee could avoid the levy on the ground of inadequacy of profits and resources for dividend distribution.

Issue (i): Whether the assessee-company was entitled to the exemption from additional tax under section 104 on the ground that it was a company engaged mainly in the manufacture or processing of goods or in mining.

Analysis: Section 104 imposed additional tax where the statutory percentage of distributable income was not distributed. The exception in section 104(4)(a), read with the Explanation, applied only if the income attributable to manufacturing, processing, or mining formed not less than 51 per cent of the gross total income for the relevant previous year. Gross total income meant income computed in accordance with the Act before Chapter VI-A deductions, and the computation had to be made after giving effect to set-off and carry forward provisions. Since the assessee's manufacturing income stood reduced to nil in the relevant year after set-off of losses and unabsorbed depreciation, the gross total income did not include qualifying income from the exempted activity in the required manner.

Conclusion: The assessee was not entitled to exemption under section 104 on the footing that it was a manufacturing or mining company.

Issue (ii): Whether the assessee could avoid the levy on the ground of inadequacy of profits and resources for dividend distribution.

Analysis: The assessee's reserves were substantial and the liquid position was not weak. The profit and loss account did not show a debit balance. The existence of free reserves and the overall financial position negatived the plea that dividends could not be declared because of insufficient profits or resources.

Conclusion: The plea of inadequacy of profits and resources was rejected.

Final Conclusion: The additional-tax provision was held applicable, but the tax computation required correction to the extent indicated by the Tribunal, so the assessee obtained only partial relief.

Ratio Decidendi: For section 104, the manufacturing or mining exception depends on the composition of gross total income in the relevant previous year after statutory computation and set-off, and not merely on the company's dominant object or incorporation history.

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