Inspecting Assistant ... vs Indrama Investment (P.) Ltd.
1989 Latest Caselaw 614 Del

ORDER

Per K. S. Viswanathan, Vice President - In this Departmental appeal, the objections is taken against the cancellation of the order under section 104. The assessed is treated as an Investment Company. The Company had dividend income of Rs. 12,12,540 which, incidentally, is its only source of income. In the accounts, they had provided for Rs. 2,30,000 provisions for taxation and Rs. 8,03,889 towards interest, which left a net profit of Rs. 1,53,329. No dividend was declared out of this profit. For the assessment purposes, a return was filed showing a profit of Rs. 1,38,240 and the assessment was completed on a gross total income of Rs. 4,08,651 and, after deduction under section 80M, the taxable income was Rs. 1,78,715. This was further reduced on appeal and the final taxable income was Rs. 1,53,716.

2. The ITO initiated proceedings under section 104 for not distributing dividends. The assessed submitted that the company was incorporated in 1979 with a paid up capital of Rs. 50,000 only. They had to borrow heavily and there was an obligations towards payment of interest and return of principal annually. The borrowings at the end of this year were Rs. 45.7 lakhs. Their only income was dividend from a Ltd. Company. At the time of consideration of declaration of dividends, the Directors took note of the financial results and the liabilities and held that no dividends could be declared. It also passed a Resolution of this effect because any payment of dividend would adversely affect the companys capacity to meet its loan payment commitments.

3. The ITO was not satisfied with this explanation. He passed on order imposing additional tax under section 104 amounting to Rs. 1,27,699.

4. The assessed appealed. The CIT (Appeals) was impressed by the submission that there were pressing financial commitments for return of the advances. In this background, he held that the company had given reasons for not declaring dividends. He allowed the appeal.

5. The Department is in appeal. We have heard both the parties. The company was incorporated in February 1979 and the first assessment was for the year 1980-81. The subscribed capital was only Rs. 50,000. The intention of the company was to hold shares of other companies and receive income by way of dividends only Rs. 50,000 being too small an amount, the company had approached M/s Grindlays Bank Ltd. for providing credit facilities to enable them to acquire shares in companies. After certain discussions, the bank had, in July 1979, agreed to advance loan Rs. 30 lakhs, but there was one condition, as the letter state :

"Further to our letter of 4th instant, we would wish to advise that the demand loan of Rs. 30 lakhs has been sanctioned on the condition that no dividends will be declared by you until the loan is fully repaid".

It is under these circumstances that the assessed had been able to invest in the shares of Sita World Travel (India) P. Ltd.

6. We enquired, whether the assessed had kept up their contract regarding utilisation of the income towards the repayment of loans. We have also examined the balance sheet of the company from this angle. As on 31-3-1981, the balance sheet showed loan of Rs. 36 lakhs from Grindlays Bank. But this had been reduced to Rs. 24,11,000 next year. However, the assessed-company had taken another loan from Laxmi Commercial Bank and the outstanding in respect of that loan were Rs. 10,30,762. Thus, as against Rs. 45.6 lakhs, which was the outstanding amount from the banks as on 31-3-1981, the outstandings one year later were Rs. 40.72 lakhs. By 31-3-1983, the loans from Grindlays Bank stood at Rs. 35.24 lakhs inclusive of interest and the total loans were only Rs. 38.24 lakhs. Thus, it would appear that the assessed had utilised their funds in repayment of loans from the banks.

7. We have also enquired to ascertain, whether the assessed had diverted its funds elsewhere. We do not find any such diversion as reflected in the assets side of the balance sheet. The main item is the shares in the Ltd. company and some shall advances and loans.

8. Now, the question is, whether, under these circumstances, an order under section 104 could be assed. It is not necessary to repeat the guidelines laid down by the Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176. The Supreme Court has held that in considering whether the payment of a dividend would be unreasonable, the ITO does what the Directors should have done putting himself in their place. Though the object of the section is to prevent evasion of tax, the provisions must be worked not from the standpoint of tax-collector, but from that of a businessman. The reasonableness or unreasonableness of the amount distributed as divided is to be judged by business considerations, such as previous losses, present profits, availability of surplus and the reasonable requirement of the future and similar other factors. The ITO must take an overall picture of the financial position of the business. So the question is, whether taking all these into consideration could be company have declared any dividend at all. After giving anxious consideration to the issue, we have come to the finding that a declaration of dividend on the facts of this case would have been inadvisable. Firstly, the company had a subscribed capital of only Rs. 50,000. Their assets, however, were more than Rs. 50 lakhs showing clearly that the entire acquisition of the shares have been from borrowed funds. When a company is being run on practically borrowed funds, it is very necessary that, for the continuation of the company, the conditions of the banker have to be accepted and adhered to. We have already noted that the Grindlays Bank, after the survey of the assesseds financial position, had stipulated that no dividends would be declared until the loans were fully repaid. The assessed cannot lightly disregard this condition, because their entire investment is borrowed funds only. Business prudence, therefore, required the repayment of at least a reasonable part of the loan before declaring any dividend.

9. This decision does not mean that every assessed can declare a moratorium on dividends merely because some loans are to be repaid. If such a condition were to be laid down before declaration of dividend, no company in this world would ever declare any dividend, because all businesses are now-a-days run on borrowed funds from banks and financial institutions. Such a carte blanche should not be given to companies. However, what must be seen is, whether the conditions on which loans were taken were such that a declaration of dividend would be reasonable or not. In this case, we find that the declaration of dividend was not reasonable.

10. In this connection, we may refer to the decision of the Calcutta High Court in the case of CIT v. Binani Investment (P.) Ltd. [1982] 138 ITR 845/9 Taxman 13. That was also an investment company and the failure to declare dividend was attributed to the requirement of repayment of liabilities. The Calcutta High Court, after considering all the facts of the case agreed with the assessed that it would be unreasonable to declare any dividend.

11. Miss Krishna Sahai, for the Department, submitted that if the company could not declare the dividend, they ought to have approached the Central Board of Direct Taxes, as given under section 107A. In our opinion, this is not available to the assessed, because the assessed is an Investment Company.

12. In the result, we dismiss the Departmental appeal.