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1978 Supreme(Cal) 3
High Court Of Calcutta
DIPAK KUMAR SEN, C. K. BANERJEE
COMMISSIONER OF INCOME-TAX - Appellant
Versus
BHOWANIPUR MOTOR ACCESSORIES AGENCY P.LTD. - Respondent
Income-Tax Reference 25 Of 1970
Decided On : 01/03/1978
AJIT SEN GUPTA, SANJOY BHATTACHARYA, SUHAS SEN
The addition of undisclosed income should not be ignored for the purpose of Section 104 of the Income-tax Act, 1961, unless it is an artificial and notional or fictional income.
Headnote:
INCOME TAX - Addition of undisclosed income - Penalty - Section 271(1)(c) - Distribution of dividend - Section 104 - Whether addition of undisclosed income should be ignored for the purpose of Section 104 - Whether the amount added represented a part of the commercial profits of the assessee and was available to it for distribution by way of dividend.
Fact of the Case:
The assessee, a private limited company, was assessed to income tax for the assessment year 1962-63. During the assessment proceedings, the Income-tax Officer (ITO) added a sum of Rs. 40,000 to the assessee's income as undisclosed income from cash credits. The assessee appealed to the Appellate Assistant Commissioner (AAC) and the Tribunal, both of whom upheld the addition. The ITO also initiated penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961, and imposed a penalty of Rs. 11,000 on the assessee. The assessee appealed to the AAC and the Tribunal, both of whom dismissed the appeal. The ITO also initiated proceedings under Section 104 of the Act for failure to distribute dividends. The AAC and the Tribunal upheld the order of the ITO.
Finding of the Court:
The High Court held that the Tribunal was justified in holding that the imposition of penalty under Section 271(1)(c) could not be sustained on the ground that the department had not proved that the assessee had concealed particulars of its income or deliberately furnished inaccurate particulars of its income. However, the High Court held that the Tribunal erred in holding that the addition of Rs. 40,000 should be ignored for the purpose of Section 104. The High Court directed the Tribunal to consider whether the impugned additions form a part of the assessee's commercial profits genuinely estimated or is only a notional, fictional or an artificial income out of which no dividend ought to be declared by a prudent director.
Issues: 1. Whether the Tribunal was justified in holding that the imposition of penalty under Section 271(1)(c) could not be sustained on the ground that the department had not proved that the assessee had concealed particulars of its income or deliberately furnished inaccurate particulars of its income? 2. Whether the Tribunal was right in holding that the addition of Rs. 40,000 should be ignored for the purpose of Section 104.
Ratio Decidendi: 1. The High Court held that the Tribunal was justified in holding that the imposition of penalty under Section 271(1)(c) could not be sustained on the ground that the department had not proved that the assessee had concealed particulars of its income or deliberately furnished inaccurate particulars of its income, following the Supreme Court decisions in Commissioner of Income-tax v. Anwar Ali and Commissioner of Income-tax v. Khoday Eswarsa and Sons. 2. The High Court held that the Tribunal erred in holding that the addition of Rs. 40,000 should be ignored for the purpose of Section 104. The High Court held that the Tribunal ought to have considered whether the impugned additions form a part of the assessee's commercial profits genuinely estimated or is only a notional, fictional or an artificial income out of which no dividend ought to be declared by a prudent director, following the Supreme Court decisions in Commissioner of Income-tax v. Gangadkar Banerjee and Co. (Pvt.) Ltd., Gobald Motor Service (Pvt.) Ltd. v. Commissioner of Income-tax, Commissioner of Income-tax v. Avon Cycles Pvt. Ltd., and Mehar Singh and Co, (Pvt.) Ltd. v. Commissioner of Income-tax.
Final Decision: The High Court answered the first question in the affirmative and in favour of the assessee. The High Court answered the second question in the negative and in favour of the revenue. The High Court directed the Tribunal to consider whether the impugned additions form a part of the assessee's commercial profits genuinely estimated or is only a notional, fictional or an artificial income out of which no dividend ought to be declared by a prudent director.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, West Bengal-I, Calcutta, the facts found and/or admitted are as follows :
( 2 ) MESSRS. Bhowanipur Motor Accessories Agency Private Ltd. , the assessee, was assessed to income-tax for the assessment year 1962-63, the relevant accounting year being the year ending on the 13th April, 1962. The assessee had filed a return showing an income of Rs. 1,490. While examining the accounts the Income-tax Officer noticed a number of cash credits which were stated to be loans taken against hundis. At the close of the accounting year a total sum of Rs. 40,000 was shown outstanding from five persons.
( 3 ) THE Income-tax Officer called upon the assessee to prove these cash credits and also served notices under Section 131 on the alleged creditors. Only two of them appeared before the Income-tax Officer and gave evidence. The Income-tax Officer did not accept that the said two persons were moneylenders and held that they were merely name-lenders. Accordingly, the Income-tax Officer treated the sum of Rs. 40,000 as the assessee's income from undisclosed sources.
( 4 ) ON the basis of this assessment, penalty proceedings were initiated by the Income-tax Officer and the same were concluded by the Inspecting Assistant Commissioner who proceeded on the basis that there was in existence a notorious hundi racket. He held that no satisfactory evidence had been produced to show that the creditors were actually in a position to advance moneys to the assessee, and concluded that the said sums alleged to have been borrowed were the concealed income of the assessee, and, accordingly, the assessee was liable to pay penalty. He imposed a penalty of Rs. 11,000.
( 5 ) ON the basis of the said assessment the Income-tax Officer also initiated proceedings under Section 104 of the Income-tax Act, 1961. In the relevant previous year, the assessee had not distributed any dividend. The total income being finally assessed at Rs. 50,176 after the addition of the said sum of Rs. 40,000, the distributable surplus was computed at Rs, 25,088 and it was held that the assessee should have distributed dividends to the extent of 60% of that sum. An additional super-tax of Rs. 9,283 was accordingly imposed under Section 104 of the Income-tax Act, 1961, in the form then in force.
( 6 ) THERE were appeals from the order of assessment and the order under Section 104 to the Appellate Assistant Commissioner, who upheld the order of the Income-tax Officer and dismissed the same.
( 7 ) THERE were further appeals to the Tribunal from the orders of the Appellate Assistant Commissioner as also from the order of the Inspecting Assistant Commissioner imposing penalty.
( 8 ) IN the appeal from the order of assessment, the Tribunal held that the addition of Rs. 40,000 was justified. In respect of the appeal against the order of penalty the Tribunal followed the decision of this High Court in the case of Anwar Ali [1967] 65 ITR 95 (Cal) and held that mere addition to the income of the assessee was not sufficient to sustain the order of penalty and the onus was on the revenue to show that the assessee had concealed or had deliberately furnished inaccurate particulars of his income.
( 9 ) IN the appeal against the order passed under Section 104 of the Income-tax Act, 1961, it was contended before the Tribunal on behalf of the assessee that because of the smallness of its profits it could not distribute any dividend in the relevant previous year. The contrary contention of the revenue was that the profits were not small, as the real profits had to be calculated from the income shown in the books as also the income added aggregating Rs. 50,176. The decision of the Supreme Court in the ease of Gobald Motor Service Pvt. Ltd. v. Commissioner of Income-tax [1966] 60 ITR 417 was cited by the revenue.
( 10 ) THE Tribunal held that though the first p
