1994 (4) TMI 95 - AT - Income Tax

Additional Tax Assessment Year Capital Asset Capital Gains Commercial Profit Distributable Income Undistributed Profits

Summary

Issues:
1. Assessment of distributable income for declaring dividend.
2. Application of section 104 of the Income Tax Act, 1961.
3. Treatment of long-term capital gains in computing distributable income.
4. Interpretation of judicial decisions in determining distributable income.
5. Consideration of capital gains as commercial profits for dividend distribution.

Analysis:

Issue 1: Assessment of Distributable Income
The case involved an appeal by the Revenue against the order of the CIT (Appeals) for the assessment year 1984-85. The Assessing Officer noted that the assessee, an investment company, had not distributed dividends of Rs. 2,53,907. The main contention was whether the assessee had positive distributable income for declaring dividends.

Issue 2: Application of Section 104
The Assessing Officer imposed additional tax under section 104 of the Income Tax Act, 1961, as the assessee had not distributed any dividends. The assessee argued that it had no positive distributable income for declaring dividends, leading to a dispute over the application of section 104.

Issue 3: Treatment of Long-Term Capital Gains
The assessee claimed that long-term capital gains should be excluded from the gross total income assessed for computing distributable income. The Assessing Officer rejected the claims of deduction made by the assessee, leading to a debate on the treatment of long-term capital gains in determining distributable income.

Issue 4: Interpretation of Judicial Decisions
The CIT (Appeals) referred to judicial decisions, including the Bombay High Court's decision in the case of Gannon Dunkerley & Co. Ltd., to support the assessee's position. The CIT (Appeals) concluded that the Assessing Officer had not rightly computed the distributable income under section 109 and ignored the judicial decisions pointed out by the assessee.

Issue 5: Consideration of Capital Gains as Commercial Profits
The case involved a discussion on whether capital gains arising on the transfer of capital assets should be considered as commercial profits for dividend distribution. The appellate authority considered various judicial decisions, including those of the Madras High Court and the Bombay High Court, to determine that capital gains should not be regarded as commercial profits in normal circumstances.

In conclusion, the appellate tribunal dismissed the appeal, agreeing with the CIT (Appeals) that the additional tax levied by the Assessing Officer was not justified. The tribunal emphasized the treatment of capital gains, the application of judicial decisions, and the interpretation of provisions under the Income Tax Act in determining distributable income for dividend declaration.