TaxTMI 
TaxTMI 
TaxTMI 
2003 (3) TMI 4
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....2,580 72,130 2. Less : taxes payable thereon 2,20,160 49,228 3. Distributable surplus 1,02,420 22,902 4. Dividends that ought to have been declared by the company, i.e., 90 per cent. 92,223 20,612 5. Dividend declared by the assessee-company Nil Nil 6. Debit balance in the profit and loss account 91,472 20,508 7. Capital reserve shown in the balance-sheet 7,45,109 7,45,109 The petitioner's business of agricultural activities had resulted in losses year after year and the accumulated losses at the commencement of the year 1974-75 was Rs. 3,93,610 and for the year 1975-76 the loss was Rs. 91,472. During the year 1962 certain agricultural land belonging to the appellant-company was compulsorily acquired. There was a long drawn litigation with regard to the compensation payable to the appellant. The appellant was awarded a sum of Rs. 7,64,787 as compensation towards the acquired land on which an amount of Rs. 2,94,844 became payable as interest. This amount of interest was paid on different dates during February, 1973. Since the compensation was payable immediately upon acquisition of the land, the appellant-assessee took the view that the interest earned on the c....
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....nal resulted in full relief to the appellant as the Tribunal agreed with the contentions of the appellant and held that the provisions of section 104 of the Act could not be invoked by the Income-tax Officer in both the assessment years, i.e., 1974-75 and 1975-76. At the instance of Revenue a reference was made under section 256(1) of the Income-tax Act, 1961, to the High Court of the following questions of law: "1. Whether, on the facts, and in the circumstances of the case, the Tribunal was right in law in holding that the capital gains of Rs. 7,45,109 could not be considered for purposes of computing the distributable income of the assessee-company for the purposes of section 104 of the Income-tax Act, 1961? and 2. If the answer to the first question is in the negative, whether the Tribunal was right in cancelling the orders passed by the Income-tax Officer under section 104 of the Act for the two assessment years 1974-75 and 1975-76?" By a common judgment dated May 25, 2001, the High Court answered both the questions against the assessee and in favour of the Revenue and also disposed of another reference pertaining to assessment year 1976-77, by taking the same view. Hence,....
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.... in the manner indicated in the fasciculus of sections 45 to 55A. Learned counsel for the appellant urged the following contentions in support of the appeal: (a) That the sale proceeds of agricultural land are totally exempt from the charge of tax under section 45 of the Act by reason of section 47(viii); hence, the capital gains accruing as a result of the compensation paid could never have formed part of the "total income" of the appellant-assessee; (b) That capital gains are not commercial or business profits, nor are they income in the true sense of the term, although by legislative fiction they have been included within the scope of "income" and made subject to tax. (c) In any event, the Income-tax Officer cannot act as a super director and sit in appeal over the business decision taken by the board of directors of the appellant-company not to distribute dividend during the relevant assessment years having regard to the past losses, the meagerness of the profits made in the relevant years and the necessity to stabilise the finances of the company. For the Revenue, learned counsel joins issue on all the three contentions and supports the view taken by the High Court as ful....
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.... scope for entertaining a doubt that the capital gains form part of the gross total income of the company within the meaning of section 109 of the Act. We are afraid that the point has been entirely missed. In neither judgment of the Kerala High Court relied upon was there advertence as to what would happen if the capital asset transferred was agricultural land. In Cardamom case [1986] 158 ITR 621 (Ker), the only argument urged was that the capital gains were not part of the business profits, and therefore, could not be taken into account in reckoning the distributable income. This contention was rejected by the Kerala High Court by pointing out that section 109(i), while defining "distributable income", specifically takes in and includes the gross total income of the company as reduced by, inter alia, losses under the head "Capital gains" relating to the capital asset, other than short term capital assets. On the second contention, as to whether capital gains, not being commercial profits in the strict sense, could be treated as part of the gross total income for the purpose of distribution of dividends, there is apparent divergence of opinion amongst the High Courts. In CIT v.....
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....in in a particular case is to be treated as profits available for distribution under section 23A or as a capital return would depend on the facts and circumstances of each case. In certain cases capital gain would be in the nature of return of capital itself and in those cases they would not be considered for exceptional cases, it was held that the Revenue would be justified in considering the amounts received by way of capital gains as forming part of the profits of an assessee while exercising the powers under section 23A of the 1922 Act. In our view, there is really no conflict of opinion amongst the decisions of the High Courts. The consensus appears to be that there cannot be a hard and fast rule that capital gains ought or ought not to be treated as commercial or business profits on which dividends could be distributed. It would ultimately depend on the facts and circumstances of each case based upon which the board of directors take a commercial decision as to whether dividend should be distributed thereupon or not. In any event, it appears to us that nothing turns on the second contention as far as the present appeals are concerned. The third contention urged by the appel....
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.... directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business." The words "having regard to" used in the section do not restrict the consideration only to two matters indicated in the section as it is impossible to arrive at a conclusion as to the reasonableness by considering only the two matters mentioned isolated from other relevant factors. It is neither possible nor advisable to lay down any decisive tests for the guidance of the Income-tax Officer. The satisfaction depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and his sympathetic and objective approach to the diffic....