ITR/124/1995 1/8 JUDGMENT 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 ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution 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 BHATT for 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 2/8 JUDGMENT . . , Mr Manish R Bhatt learned counsel for the . . Revenue None for the respondent The Office Report . shows that the respondent is served by Direct Service . 2 , At the instance of the Revenue the Income Tax , , , Appellate Tribunal Ahmedabad Bench Ahmedabad has ; referred the following question for opinion of this Court , 'Whether in law and on facts the Appellate Tribunal is right in confirming ( ) the view taken by the CIT A in cancelling the additional tax levied by . . , the ITO under section 104 of the I T Act 1961 ?' . 3 , , The facts for disposal of the present matter in , nutshell are that the assessee is an investment company , , which had a subsidiary company namely New Rajpur Mills . ., - Co Ltd and had submitted counter guarantee to the Bank for various arrangements of the subsidiary Company to the . , , , /-. - , tune of Rs 4 90 22 640 In the Assessment Year 1983 84 . the assessee company had distributable income of Rs , , /-, . 1 22 449 they did not distribute dividend Therefore the Income Tax Officer issued a notice to the assessee to show . , /- cause why additional tax of Rs 61 224 should not be . levied under Section 104 of the Income Tax Act The ITR/124/1995 3/8 JUDGMENT Assessing Officer rejected the submission of the assessee . and imposed the tax as proposed Being aggrieved by the , said order the assessee took up the matter in appeal to . the Commissioner of Income Tax The Commissioner of , , , Income tax in his turn observed his earlier order in - relation to Assessment Year 1982 83 between the same , . parties held that the additional tax could not be levied , , The matter was thereafter taken to the Tribunal by the . . . .( ). Revenue The Tribunal confirmed the order of C I T A The matter was allowed to rest there and no application for . Reference was made by the Revenue . 4 - For the year 1983 84 when the very same , / controversy arose the Income Tax Officer Assessing Officer , passed the very same order the matter was taken to the ( ), Commissioner of Income Tax Appeals at the instance of , , , the assessee who in his turn allowed the Appeal and the order was confirmed by the Tribunal in Income Tax Appeal . / / . , No 900 And 1987 This time being dissatisfied by the , . order the Revenue made Reference Application No / / , , 809 Ahd 1990 the Tribunal holding that a referable question , arises from the order passed by the Tribunal referred the . abovequoted question to this Court for its opinion . 4 A , , Section 104 of the Income Tax Act 1961 , virtually is pari materia - to Section 23 A of the Indian , . Income Tax Act 1922 In the celebrated Judgment by the ITR/124/1995 4/8 JUDGMENT Supreme Court in the case of - , Commissioner of Income Tax . .( ) ., West Bengal v Gangadhar Banerjee And Co Private Ltd 57 , ITR Page 176 ; the Supreme Court had observed ' - , The Income tax Officer in considering whether the payment of a dividend or a larger dividend than that declared by a company would be unreasonable within the meaning of - , section 23A of the Indian Income tax Act , 1922 does not assess any income to . tax He only 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 provision must be worked not from the standpoint of the tax collector but from . that of a businessman The reasonableness or unreasonableness of the amount distributed as dividends is , judged by business considerations such , as the previous losses the present , profits the availability of surplus money and the reasonable requirements of the . - future and similar others The Income ITR/124/1995 5/8 JUDGMENT tax Officer must take an overall picture . of the financial position of the business He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective . approach In deciding whether the payment of a dividend or a larger dividend than that declared by the company would be , - unreasonable the Income tax Officer can take into consideration circumstances . other than losses and smallness of profit , , The statute by the words used while making sure that 'losses and smallness , of profits' are never lost sight of requires all matters relevant to the question of unreasonableness to be . , , considered Capital losses if established . would be one of them' . 5 From the aforesaid observations made by the , Apex 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 6/8 JUDGMENT . be worked out from the angle of a businessman It would , also be clear that while considering the question relating to , distributable income the Income Tax Officer should take an , , overall picture of the financial position of the business and , while doing so he should put himself in the position of a prudent businessman or the Director of a Company and deal with the problem with a sympathetic and objective . approach The observations made by the Supreme Court make it imperative for the Income Tax Officer to consider the case from the standpoint of a businessman and to take a sympathetic approach taking into consideration the overall financial position of the Company and other problems . which it may or may not face . 6 , In a given case where a Company puts some amount in reserve to meet the future unforseen , contingency then it cannot be straightway said that such . amount was not an action of a prudent businessman If the Revenue is of the opinion that the action is bad or is with the ulterior motive or is to avoid distribution of distributable , income then such facts are required to be brought on record and notice of such facts must be given to the assessee to controvert the allegations levelled against the . conduct of the assessee . 7 , , In the present case the Assessing Officer but for ITR/124/1995 7/8 JUDGMENT ( referring to the language of Section 104 as applicable prior ), . to 1986 has not dealt with any other matter . 8 , True it is that Section 104 is couched in , particular words but when the said words are interpreted , by the Apex Court then the law is to be understood as . interpreted by the Apex Court . 9 , , Even otherwise it is to be seen that for the - , / Assessment Year 1982 83 the submission explanation made by the assessee was accepted by the Commissioner of Income Tax and the Tribunal had confirmed the view of the ( ). , Commissioner of Income Tax Appeal If the assessee relying upon the earlier years' action had followed the very same in the next year and the earlier year's action is , approved by the highest Revenue Tax Tribunal then it would be fallacious to say that the action of the assessee was motivated or was to achieve some illegal or sinister . object . 10 , Taking into consideration the totality of the , circumstances and the overall picture of the facts we are of , the opinion that the Tribunal was not unjustified in confirming the order of Commissioner of Income Tax ( ) . . . ( ) Appeals and the C I T Appeals was also justified in , accepting the explanation submitted by the assessee and directing that no tax would be payable under Section 104 of ITR/124/1995 8/8 JUDGMENT , . the Income Tax Act 1961 The Reference is answered . against the interests of the Revenue It shall stand . . disposed of accordingly No costs [ R.S. Garg, J. ] [ M.R. Shah, J. ] RMR.