TMI Blog2005 (9) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of Rs. 25 lakhs. - ITO was perfectly justified in seeking the approval of the Inspecting Assistant Commissioner as envisaged u/s 107 to levy an additional tax. However, the Income-tax Officer while subtracting the dividend from the distributable profit ought to have deducted or subtracted Rs. 1,30,000 and not Rs. 65,000 only. As such correct recalculation would be necessary – thus, held that shortfall in declaring dividend would carry additional income-tax as required by section 107 – question is answered in favour of the assessee - - - - - Dated:- 30-9-2005 - Judge(s) : V. C. DAGA., A. S. AGUIAR. JUDGMENT The judgment of the court was delivered by V. C. DAGA J.-This reference under section 256(1) of the Income-tax Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter was taken up in appeal by the assessee, the Commissioner of Income-tax (Appeals) held that considering that the assesseecompany was burdened with the distribution of Rs. 1,30,000 on account of cummulative payment of dividend on preference shares along with the liability on account of payment of income-tax in the sum of Rs. 68,250 for the earlier years, the declaration of larger dividends would have been unreasonable. The Commissioner of Income-tax (Appeals) was also of the opinion that utilisation of the reserves created for declaration of dividend could not have been the proper decision from the point of view of the prudent businessman. The Commissioner of Income-tax (Appeals), therefore, cancelled the order passed under section 104 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which the assessee-company could not declare larger dividends. On the other hand, the profit and loss appropriation account of the assessee-company shows that the assessee-company has added Rs. 2,00,000 to the general reserve in this very year. Considering all these and looking to the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that no case has been made out why the distribution of larger dividends would have been unreasonable and the levy of additional income-tax on undistributed income was perfectly justified. 6. We now deal with the alternative submission that in working out the undistributed income on which additional income-tax was to be levied, the entire dividend distributed during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of the Companies Act. Ms. Vissanji to reinforce her submission contends that as per the provisions of the Companies Act, share capital is of two types, i.e., (1) preference share capital; and (2) equity share capital. Preference shares again are of two types, i.e., (a) cumulative shares; and (b) non-cumulative preference shares. If the right to dividend lapses, then the shares are called non-cumulative preference shares and shares in respect of which the dividend goes on accumulating, then such shares are called cumulative preference shares. Whether they are of one category or other, depends upon the terms of issue. Unless there is a term against accumulation, preference shares are presumed to be cumulative. Reliance is placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrears of dividend down to the commencement of the winding up whether earned or declared or not in priority to the ordinary shares but shall not confer the right to any further participation in profits or assets and upon any increase of capital the company is to be at liberty to issue any new shares with any preferential, deferred, qualified or special rights privileges or conditions attached thereto." The above clause unequivocally goes to show that the preference shares issued by the company have conferred a right to a fixed cumulative preferential dividend at the rate of 5 per cent. per annum, subject to the terms mentioned therein. Thus, one can safely reach the conclusion, on the facts of this case, that the shares in question on w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement considering the capital of Rs. 25 lakhs. The directors having regard to the profits made by the assessee-company and its general reserve should have declared dividend much higher than that actually declared. In that view of the matter, the Income-tax Officer was perfectly justified in seeking the approval of the Inspecting Assistant Commissioner (Com.), Range-I, Bombay, as envisaged under section 107 of the Act to levy an additional tax. However, the Income-tax Officer while subtracting the dividend from the distributable profit ought to have deducted or subtracted Rs. 1,30,000 and not Rs. 65,000 only. As such correct recalculation would be necessary in the light of this judgment and order. Thus, the shortfall in declaring dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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