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Income Tax Officer v/s Ashok Organic Industries Private Limited

    ITA. Nos. 2665 (Bom) & 2666 (Bom) of 1979 Asst. yrs. 1974-75 to 1975- 76, Dt. 11 December 1980

    Decided On, 11 December 1980

    At, Income Tax Appellate Tribunal ITAT Bombay


    S.Krishnan : V.H. Patil

Judgment Text

The Order of the Court was as follows :


These two Departmental appeals relating to orders passed u/s 104 in the case of the same assessee for two successive assessment years were heard together and are disposed of by a common order for the sake of convenience. The assessment years involved are 1974-75 and 1975-76 and the corresponding previous years are the years ended 31st Dec., 1973 and 31st Dec., 1974 respectively.

2. The assessee was incorporated on 13th Feb., 1973. The object was to manufacture and sell certain chemicals.

However, pending the setting up of the industrial unit, the assessee undertook some trading activity in the year ended 31st Dec., 1973. It made a profit of about Rs. 2, 74, 000. It made a provision for income-tax of Rs. 2, 27, 000, declared a dividend of Rs. 30, 000 and transferred the balance of about Rs. 17, 000 to the reserve.

3. Its paid up capital in 1973 was only Rs. 1, 50, 000. In 1974 it set about setting up the industrial unit. It increased the paid up capital to Rs. 9, 00000 and raised fresh loans of about Rs. 4, 00, 000.

The profit was about Rs. 4, 92, 000 out of which it made a provision for depreciation of about Rs. 17, 000 and a provision for taxation of Rs. 3, 45, 000. This left the assessee-company with a balance of about Rs. 1, 30, 000 which it carried to the reserve without declaring any dividend.

In the relevant report of the Directors to the members dt. 24th June, 1975 it is stated as below:

"Your Directors are of the view that it is necessary for the Company to retain the year's earnings in order to meet the needs of its manufacturing programme. The Directors have therefore, not recommended any dividend for the year ended 31st Dec., 1974."

4. The assessee not having declared dividend at the prescribed rate in both the years, the provisions of s. 104(1) are prima facie attracted.However, the CIT (A) has found that the declaration of a dividend or a larger dividend, as the case may be, was not reasonable having regard to the smallness of the profits. This finding of the CIT (A) is the main issue in the two appeals now under consideration.

In this connection we have considered the relevant facts and circumstances and the rival submissions.

5. It is well settled that we have to consider such matters from the angle of a businessman and Directors of a company. Therefore, we have to see whether it was prudent for the company to declare any dividend or larger dividend, as the case may be.

Now, from the facts and the course of events set out by us earlier, it is manifest that the industrial unit of the company was in its period of gestation and that the Directors consciously took the decision to plough back the profits of the Company for the facility of setting up its manufacturing business. It is significant that it was borrowing loans and increasing its paid-up capital at the same time.

Sri S. Krishnan, the ld. Deptl. Rep., pointed out that the accounts of the assessee-company showed that it paid out donations and suggested that this shows that it could have declared a dividend or a larger dividend. In our opinion, it is not as if the company exercised the choice between giving the donation and declaring a dividend. The donation is given at a point of time when the matter of declaring dividend is not under consideration and it is for the businessman to consider whether making of such a donation was prudent from the a

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ngle of the company's resources and its business. Merely because some small amounts were paid out by way of donation, we are not prepared to accept that the declaration of a dividend or a larger dividend as the case may be, was reasonable. 6. Having regard to all the facts and circumstances of the case, we reject the contention of the Department. The appeals are dismissed.