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1986 Supreme(Cal) 319
High Court Of Calcutta
D.K.Sen & Monjula Bose, JJ.
Commissioner Of Income-Tax
Vs.
Chemical Agents (P.) Ltd.
Income-tax Reference 64 of 1978
Decided on : July 30, 1986
Advocate Appeared:
A.N.Bhattacharya, R.N.Dutt, Amicus Curiae
The mere failure of the assessee to prove the genuineness of a loan transaction, while giving the Revenue a right to add back the amount to the income of the assessee for assessment, would not justify a finding that the amounts added back were available for distribution, as dividend for the purpose of Section 104 of the Income-tax Act, 1961.
Headnote:
INCOME TAX - SECTION 104 - ADDITION TO INCOME - GENUINENESS OF LOANS - COMMERCIAL INCOME - DISTRIBUTABLE SURPLUS - PENAL NATURE OF SECTION - BURDEN OF PROOF ON REVENUE.
Fact of the Case:
The assessee, M/s. Chemical Agents (P) Ltd., showed a loss of Rs. 2,975 in its return for the assessment year 1962-63. The Income-tax Officer made an addition of Rs. 1,15,679 to the income of the assessee, treating certain deposits as income from undisclosed sources. The assessee claimed that the deposits represented loans from managing directors and claimed deduction of interest paid to creditors. The Income-tax Officer rejected the explanation and treated the deposits as income from undisclosed sources. The Appellate Assistant Commissioner sustained the addition. The Income-tax Officer initiated proceedings under Section 104 of the Income-tax Act, 1961, and levied additional super-tax of Rs. 22,586. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The assessee appealed to the Tribunal, which allowed the appeal and cancelled the additional super-tax. The Revenue applied to the Tribunal under Section 256(2) of the Income-tax Act, 1961, and the Tribunal was directed to refer the following question to the High Court: "Whether, on the facts and in the circumstances of the case, and having held that the sum of Rs. 1,15,679 had been rightly included in the total income as the assessee's income from undisclosed sources for the assessment year 1962-63, the Tribunal is right or justified in law in holding that the said sum could not be treated as a part of the commercial profits of the assessee-company and hence the imposition of additional super-tax under Section 104 was not called for."
Finding of the Court:
The High Court held that the Tribunal was right in holding that the addition to the income of the assessee could not be treated as a part of the commercial profits of the assessee-company and hence the imposition of additional super-tax under Section 104 was not called for. The High Court followed its earlier decisions in CIT v. Universal Fertiliser Co. (P.) Ltd., CIT v. National Razors and Blades (P.) Ltd., and CIT v. Industry Side (P.) Ltd., which held that the mere failure of the assessee to prove the genuineness of a loan transaction, while giving the Revenue a right to add back the amount to the income of the assessee for assessment, would not justify a finding that the amounts added back were available for distribution, as dividend for the purpose of Section 104 of the Income-tax Act, 1961.
Issues: Whether the Tribunal was right in holding that the addition to the income of the assessee could not be treated as a part of the commercial profits of the assessee-company and hence the imposition of additional super-tax under Section 104 was not called for.
Ratio Decidendi: The High Court held that the Tribunal was right in holding that the addition to the income of the assessee could not be treated as a part of the commercial profits of the assessee-company and hence the imposition of additional super-tax under Section 104 was not called for. The High Court followed its earlier decisions in CIT v. Universal Fertiliser Co. (P.) Ltd., CIT v. National Razors and Blades (P.) Ltd., and CIT v. Industry Side (P.) Ltd., which held that the mere failure of the assessee to prove the genuineness of a loan transaction, while giving the Revenue a right to add back the amount to the income of the assessee for assessment, would not justify a finding that the amounts added back were available for distribution, as dividend for the purpose of Section 104 of the Income-tax Act, 1961.
Final Decision: The High Court answered the question referred in the affirmative and in favour of the assessee. The Revenue was directed to pay the costs of the reference to the assessee for the negligent manner in which the paper book had been prepared and filed.
Dipak Kumar Sen, J.
1. IT appears that the paper book prepared in this reference by the Revenue is incomplete. The order of the Income-tax Officer and the order of the Appellate Assistant Commissioner in appeal from the order of the Income-tax Officer in the proceedings under Section 104 of the Income-tax Act, 1961, in respect of which questions have been directed to be referred by this court have not been included in the paper book. IT also appears that the order of the Tribunal rejecting the application of the Revenue under Section 256(1) of the Income-tax Act, 1961, as also the order of this court passed under Section 256(2) of the Act directing the Tribunal to refer the questions are also not included.
2. IN spite of the aforesaid, learned advocate for the Revenue and Mr. R.N. Dutt, learned advocate, who was appointed by us as amicus curiae, as no one was appearing for the assessee, submitted that the question can be answered on the basis of the order of the Tribunal where the orders of the INcome-tax Officer and the Appellate Assistant Commissioner had been dealt with.
Accordingly, we have taken up the hearing of this reference.
3. THE material facts are, inter alia, that in the assessment year 1962-63, the relevant accounting year ending on April 12, 1962, M/s. Chemical Agents (P) Ltd. the assessee, was assessed to income-tax. THE assessee had shown a loss of Rs. 2,975 in its return. THE Income-tax Officer made an addition of Rs. 1,15,679 to the income of the assessee. Certain deposits appearing in the accounts of the assessee were claimed by the assessee to represent loans from managing directors of the assessee. THE assessee had also claimed deduction of interest paid to creditors. THE Income-tax Officer rejected the explanation of the assessee and treated the said deposits as income from undisclosed sources.
4. ON appeal, the addition was sustained by the Appellate Assistant Commissioner. Subsequent thereto the Income-tax Officer initiated proceedings under Section 104 of the Income-tax Act, 1961. It was contended that the said Rs. 1,15,679 was the commercial income of the assessee and should be taken into account in ascertaining the distributable surplus for the purpose of declaration of dividend. It was found that the assessee in the relevant assessment year did not distribute any dividend and, therefore, the Income-tax Officer levied additional super-tax of Rs. 22,586 under Section 104 of the Act.
5. BEING aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner. It was contended on behalf of the assessee in the appeal that the addition did not represent the commercial income of the assessee and the same should not be taken into account in determining the distributable surplus for the purpose of declaration of dividend. The Appellate Assistant Commissioner rejected this contention of the assessee and affirmed the order of the Income-tax Officer.
6. BEING aggrieved, the assessee went up in further appeal before the Income-tax Appellate Tribunal. It was reiterated before the Tribunal that the addition did not represent commercial income of the assessee and further that Section 104 of the Income-tax Act, 1961, being penal in nature it was for the Revenue to prove that the addition represented commercial income which the Revenue failed to do. It was contended further that, in fact, there was a commercial loss in the assessment year in question and the assessee was not required to distribute any dividend. The Tribunal accepted the contentions of the assessee. The Tribunal held that apart from the failure of the assessee to establish the genuineness of the loans, there was no material collected or produced by the Revenue to establish that the additions actually represented commercial income of the assessee. The Tribunal held that the Revenue was not entitled to treat the said amount as commercial income in the absence of proof. The appeal of the assessee was allowed and the additional
