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TMI Blog1982 (3) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,10,034. The ITO, however, referred to the decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT [1961] 42 ITR 57 and held that the penal interest could not be deducted for ascertaining the amounts available. The ITO further looked into the balance sheet of the company and found that the assessee had made a provision for taxation to the extent of Rs. 21,86,619 out of which tax to the extent of Rs. 13,64,800 had been paid leaving a balance of Rs. 8,21,819 and after adjustment of taxes paid between 31-1-1975 and 31-10-1975 the balance in the provision account came to Rs. 7,21,819. The ITO found that this amount was higher than the tax liability in respect of the earlier years and, therefore, he found that the provision for taxes was sufficient to take care of the earlier years' tax demands. 2. The ITO accepted the plea of the assessee that a prudent businessman would consider the past tax liability before declaring dividend. The ITO was of the view that advance tax which was due to be paid on 15th March was after the end of the accounting year, and could not be taken into consideration. The ITO found that the profit as per profit and loss account was Rs. 10,34,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining the smallness of profit. The Commissioner (Appeals) was of the view that all the taxes which were payable for the current year had to be taken into consideration for finding out the availability of funds for distribution of dividend. The Commissioner (Appeals) proceeded to consider the plea of the assessee that though interest under sections 215 and 217 could not be allowed as a deduction for the purpose of determining the distributable income, the liability itself had to be kept in view while considering the question of smallness of profit. The Commissioner (Appeals) then proceeded to consider the total amount available by way of provision for taxes and considered the tax liability including the interest in respect of the earlier years as well as the current year. Thus he found that as against the provision for taxes of Rs. 8,21,819, there was a total tax liability (including current year's liability) at Rs. 11,63,026. This figure he arrived at in the following manner: &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1,00,000 ----------------- &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------- Thus, the Commissioner (Appeals) held that the total tax liability which the assessee had to meet out of the current year's income was Rs. 3,41,207 and if this amount was adjusted with the commercial profit, the amount available for distribution would be Rs. 7,19,675. In view of this position, be held that the dividend declared by the company was much below the statutory percentage and upheld the action of the ITO. 6. The learned counsel for the assessee submitted before us that the learned Commissioner (Appeals) should have proceeded to consider the commercial profits in order to ascertain the profit which was available for the purpose of declaring dividend. He contended that the conclusion arrived at by the Commissioner (Appeals) in para 5 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Rs. "The commercial profit 10,34,427 Less: Tax for the current year (as finally ascertained) &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,41,207" 8. The departmental representative, on the other hand, submitted that the learned Commissioner (Appeals) has considered the overall tax liability of the assessee including the tax liability for the current year. He submitted that in para 11 of his order the learned Commissioner (Appeals) had not only considered the interest under sections 215 and 217 but he had also taken into consideration the tax liability of the current year which was still to be paid on the last day of the accounting period and had been shown at Rs. 5,35,590. It was explained that certain payments by way of advance tax had already been made befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of this Act before making any deduction under Chapter VIA of the Act. In other words, it is not the commercial profits or assessable profits but assessed profits and that too without making any straight deduction provided for in sections 80A to 80VV of the Act. 10. The 'statutory percentage' has also been defined and different percentages have been fixed for different types of companies or different types of incomes. Whenever the ITO finds that the basic conditions of section 104 are fulfilled, he has to consider the applicability of section 104 having regard to the other provisions made in this regard. It is at the second stage when the ITO has to exercise his jurisdiction and various considerations have to be kept in mind. Once the ITO, after satisfying himself with the various considerations, comes to the conclusion that the additional tax has to be imposed, then the third stage of computation of tax arrives. 11. At the first stage and the third stage the figures have to be worked out on the basis of the figures available as per assessment with the necessary adjustments but at the second stage the ITO has to take into consideration the financial conditions of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the first stage is concerned, there is no dispute that the dividend declared at Rs. 63,770 was less than the statutory percentage of the distributable income of the company if the distributable income is considered in accordance with the definition as given in section 109. The main question for consideration, however, is whether the ITO should have exercised his discretion under section 104(2) in favour of the company having regard to the smallness of profits made in the previous year. It is at this stage that the financial condition of the company has to be ascertained in the light of the position shown in the balance sheet and the facts brought on record by the assessee-company. For the purpose of ascertaining whether the profits were small we have to adopt the commercial profits of the company. The learned Commissioner (Appeals) has adopted the figure at Rs. 10,60,802 whereas the assessee has sought its reduction by Rs. 26,455 on account of the difference in depreciation. We have perused the decision of the Bombay High Court in the' case of Natwar Transport Co. and in view of the ratio laid down in the above case we are inclined to accept the contention of the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities for the assessment years 1970-71, 1971-72 and 1972-73 4,07,033 Interest under sections 215, 217 and 220(2) for the above years 1,20,403 Tax liability for the assessment year 1973-74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not include the income-tax liability for the current assessment year as that has been taken into consideration for finding out the funds available out of current income. 15. Now the position of the provisions for taxes account will be as under: Rs. "Provisions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; -------------------- ------------------ Balance 10,33,569 Less: Tax liability for earlier years as discussed above &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient for meeting it and no funds had to be drawn from the current year's surplus for the payment of taxes for earlier years. 16. In this connection, a reference may be made to the working given in the order of the Commissioner (Appeals) which has also been extracted in the earlier part of this order. The difference between the working given in the Commissioner (Appeals)'s order and the working given above is due to the fact that while the Commissioner (Appeals) has taken into consideration the current tax liability for the assessment year 1975-76 to the extent of Rs. 5,35,590+Rs. 2,11,750=Rs. 7,47,340 while working out the total tax liability, this amount had been excluded in the above working. This is done to show that the provisions for taxes was sufficient to meet the tax liabilities for the earlier years and after that also some provision remains. If we add the tax liability for the current year also in the above working, we would arrive at the figure of Rs. 3,41,207, which would represent the total tax liability (including current tax liability) in excess of the provision as per balance sheet as reduced by payment actually made up to 31-1-1975. The difference between th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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