Commissioner Of Income Tax - Applicant(S v. Pravin Investment Ltd. - Respondent(S

ITR/124/1995 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 124 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH =========================================================1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?2To be referred to the Reporter or not ?1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?2To be referred to the Reporter or not ? 3[Whether their Lordships wish to see the fair copy ]of the judgment ?Whether this case involves a substantial question of law as to the interpretation of the 4constitution of India, 1950 or any order made thereunder ?5[Whether it is to be circulated to the civil judge ]? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s)Versus PRAVIN INVESTMENT LTD. - Respondent(s) ========================================================= Appearance : MR MANISH R BHATTfor Applicant(s) : 1,NOTICE SERVED BY DS for Respondent(s) : 1,========================================================= CORAM :HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 03/08/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG) ITR/124/1995 2/8JUDGMENT Mr. ManishR. Bhatt, learnedcounselfortheRevenue. Nonefortherespondent. TheOfficeReportshows that the respondent is served by Direct Service. 2.At the instance of the Revenue, the Income TaxAppellateTribunal, AhmedabadBench, Ahmedabad, hasreferred the following question for opinion of this Court; 'Whether, in law and on facts theAppellate Tribunal is right in confirmingtheviewtakenbytheCIT ( ) Aincancellingtheadditionaltaxleviedbythe ITO under section 104 of the I T Act . . ,1961 ?' 3.The facts, for disposal of the present matter, innutshell, are that the assessee is an investment companywhich had a subsidiary company, namely, New Rajpur Mills-Co Ltd.., and had submitted counter guarantee to the Bankfor various arrangements of the subsidiary Company to the-tune of Rs. ,4 90 22 640,,/-. In the Assessment Year 1983 84,theassesseecompanyhaddistributableincomeofRs.1 22 449,,/-, they did not distribute dividend. Therefore theIncome Tax Officer issued a notice to the assessee to showcausewhyadditionaltaxofRs. 61 224,/- shouldnotbeleviedunderSection104oftheIncomeTaxAct. The ITR/124/1995 Assessing Officer rejected the submission of the assesseeand imposed the tax as proposed. Being aggrieved by thesaid order, the assessee took up the matter in appeal totheCommissionerofIncomeTax. TheCommissionerofIncometax, inhisturn, observedhisearlierorder, in-relationtoAssessmentYear1982 83betweenthesameparties, held that the additional tax could not be levied.The matter was, thereafter, taken to the Tribunal by theRevenue. The Tribunal confirmed the order of C I T A . . .( ). Thematter was allowedtorest there andnoapplication forReference was made by the Revenue. 4.Fortheyear1983 84-whentheverysamecontroversy arose, the Income Tax Officer Assessing Officer/passed the very same order, the matter was taken to theCommissioner of Income Tax (Appeals), at the instance ofthe assessee, who, in his turn, allowed the Appeal and theorder was confirmed by the Tribunal in Income Tax AppealNo. 900 And 1987//. Thistime, beingdissatisfiedbytheorder, theRevenuemadeReferenceApplicationNo.809 Ahd 1990 the Tribunal holding that a referable question//, , arises from the order passed by the Tribunal, referred theabovequoted question to this Court for its opinion. 4 A.Section104oftheIncomeTaxAct, 1961,-virtually, isparimateriatoSection23 AoftheIndianIncome Tax Act, 1922. In the celebrated Judgment by the -Supreme Court in the case ofCommissioner of Income Tax,West Bengal v Gangadhar Banerjee And Co Private . .() Ltd., 57ITR Page 176,the Supreme Court had observed; 4 A.Section104oftheIncomeTaxAct, 1961,-virtually, isparimateriatoSection23 AoftheIndianIncome Tax Act, 1922. In the celebrated Judgment by the -Supreme Court in the case ofCommissioner of Income Tax,West Bengal v Gangadhar Banerjee And Co Private . .() Ltd., 57ITR Page 176,the Supreme Court had observed; 'TheIncome tax-Officer,inconsideringwhetherthepaymentofadividend or a larger dividend than thatdeclaredbyacompanywouldbeunreasonablewithinthemeaningof-section 23A of the Indian Income tax Act,1922, doesnotassessanyincometotax. He onlydoes what the directorsshould have done putting himself in theirplace. Though the object of the sectionistopreventevasionoftax, theprovision must be worked not from thestandpoint of the tax collector but fromthatofabusinessman. Thereasonablenessorunreasonablenessoftheamountdistributedasdividendsisjudged by business considerations, suchasthepreviouslosses, thepresentprofits, the availability of surplus moneyand the reasonable requirements of the-future and similar others. The Income tax Officer must take an overall pictureof the financial position of the business.He should put himself in the position ofa prudent businessman or the director ofa company and deal with the problemwithasympatheticandobjectiveapproach. In deciding whether the payment ofa dividend or a larger dividend than thatdeclaredbythecompanywouldbe-unreasonable, the Income tax Officer cantakeintoconsiderationcircumstancesother than losses and smallness of profit.Thestatute, bythewordsused, whilemaking sure that 'losses and smallnessofprofits'areneverlostsightof,requiresallmattersrelevanttothequestionofunreasonablenesstobeconsidered. Capital losses if established, ,would be one of them'. 5.FromtheaforesaidobservationsmadebytheApex Court it would be clear that the object of the Section, is to prevent evasion of tax and the provision must not be, worked out from the standpoint of tax collector but should ITR/124/1995 be worked out from the angle of a businessman. It wouldalso be clear that while considering the question relating to, distributable income, the Income Tax Officer should take anoverall picture of the financial position of the business and, ,while doing so, he should put himself in the position of aprudentbusinessmanortheDirectorofaCompanyanddealwiththeproblemwithasympatheticandobjectiveapproach. The observations made by the Supreme Courtmake it imperative for the Income Tax Officer to considerthecase from the standpoint of a businessman and to takea sympathetic approach taking into consideration the overallfinancialpositionoftheCompanyandotherproblemswhich it may or may not face. 6.In a given case, where a Company puts someamountinreservetomeetthefutureunforseencontingency, then it cannot be straightway said that suchamount was not an action of a prudent businessman. If theRevenue is of the opinion that the action is bad or is withthe ulterior motive or is to avoid distribution of distributableincome, thensuchfactsarerequiredtobebroughtonrecordandnoticeofsuchfactsmustbegiventotheassessee to controvert the allegations levelled against theconduct of the assessee. In the present case the Assessing Officer but for, , referring to the language of Section 104 (as applicable priorto 1986), has not dealt with any other matter. 8.Trueitis, thatSection104iscouchedinparticular words, but when the said words are interpretedby the Apex Court, then the law is to be understood asinterpreted by the Apex Court. 9.Evenotherwise, itistobeseenthat, forthe-Assessment Year 1982 83, the submission explanation made/bytheassesseewasacceptedbytheCommissionerofIncome Tax and the Tribunal had confirmed the view of theCommissionerofIncomeTax (Appeal). Iftheassessee,relying upon the earlier years' action had followed the verysameinthenextyearandtheearlieryear'sactionisapprovedbythehighestRevenueTaxTribunal, thenitwould be fallacious to say that the action of the assesseewas motivated or was to achieve some illegal or sinisterobject. referring to the language of Section 104 (as applicable priorto 1986), has not dealt with any other matter. 8.Trueitis, thatSection104iscouchedinparticular words, but when the said words are interpretedby the Apex Court, then the law is to be understood asinterpreted by the Apex Court. 9.Evenotherwise, itistobeseenthat, forthe-Assessment Year 1982 83, the submission explanation made/bytheassesseewasacceptedbytheCommissionerofIncome Tax and the Tribunal had confirmed the view of theCommissionerofIncomeTax (Appeal). Iftheassessee,relying upon the earlier years' action had followed the verysameinthenextyearandtheearlieryear'sactionisapprovedbythehighestRevenueTaxTribunal, thenitwould be fallacious to say that the action of the assesseewas motivated or was to achieve some illegal or sinisterobject. 10.Takingintoconsideration, thetotalityofthecircumstances and the overall picture of the facts we are of, theopinionthat, theTribunalwasnotunjustifiedinconfirmingtheorderofCommissionerofIncomeTax(Appeals) andtheC I T. . . (Appeals) wasalsojustifiedinaccepting the explanation submitted by the assessee, anddirecting that no tax would be payable under Section 104 of ITR/124/19958/8 JUDGMENT theIncome Tax Act, 1961. The Reference is answeredagainsttheinterestsoftheRevenue. Itshallstanddisposed of accordingly. No costs. [ R.S. Garg, J. ] RMR. [ M.R. Shah, J. ]