COMMISSIONER OF INCOME TAX Vs. SERCON PRIVATE LIMITED

JUDGEMENT

(1.) THE facts giving rise to this reference need be stated so as to appreciate the rival contentions urged on behalf of the parties on the questions referred to us.

(2.) THE relevant assessment year is 1965 -66 and the corresponding previous year is the financial year ending 31st March, 1965. It is common ground that the assessee -company is a trading company. A question arose in the course of the proceedings for assessment of the said year as to whether the Income -tax Officer was competent to make an order under section 104 of the Income -tax Act, 1961. He could have justifily made the order, provided the accumulated profits and reserves representing accumulated past profits exceeded the aggregate of the paid up capital of the company and any loan capital which is the property of the shareholders. According to the Income -tax Officer, the accumulated profits and reserves representing accumulation of past profits amounted to Rs. 8,02,692 while the paid up capital amounted to Rs. 7,00,149. It was contended on behalf of the assessee before the Income -tax Officer that an amount of Rs. 1,00,000 being the amount of loan advanced by the shareholder on 31st March, 1965, should be treated as loan capital, it being the property of the shareholders and, therefore, should be added to the capital account of Rs. 7,00,149 calculated by the Income -tax Officer. It was also contended, inter alia, that an amount of Rs. 6,436, being the amount of surplus representing the difference between the cost price of the agricultural land of the assessee -company situated in village Vastrapur and the amount of compensation paid for acquisition thereof, should not be included as part of the accumulated profits. None of the contentions find favour with the Income -tax Officer with result that he applied sub -clause (4) if clause (iii) of section 109 of the Income -tax Act and found that the statutory percentage of distributable income was 90%. In that view that of the matter, he was of the opinion that the assessee -company ought to have declared or distributed dividends of Rs. 1,16,861, as the distributable surplus of the company was found to Rs. 1,29,846. Since the assessee -company declared the dividends to Rs. 77,140, the Income -tax Officer found that there was a shortfall in the distribution of dividends by Rs. 39,721. He therefore, by his order of December 10, 1969, purported to have been made under section 104 of the Income -tax Act imposed additional tax of Rs. 19,501.

(3.) THE assessee -company being aggrieved with the said order carried the matter in the further appeal before the Income -tax Appellate Tribunal. The department had not filed any appeal against the order of the Appellate Assistant Commissioner so far as he reversed the finding of the Income -tax Officer to include the amount of Rs. 6,436 being the surplus in Vastrapur land account. The Tribunal, however, accepted the contention of the assessee that a loan simpliciter from a shareholder should be treated as a loan capital of the assessee -company and it was not necessary that it should be either on a long -term basis or that its payment being secured and such conditions should not be imported in construing the term 'loan capital' in sub -clause (4) of clause (iii) of section 109. The Tribunal, therefore, was of the opinion that the amount of Rs. 1,00,000 taken as a loan on 31st March, 1965, should be treated as a loan capital and accordingly directed the Income -tax Officer to include the said amount in computing the capital account for purposes of determining whether an order should be made under section 104 for additional tax. In the course of the hearing of the appeal before the Tribunal, it was sought to be contended on behalf of the revenue, though it had not preferred an appeal against the order of the Appellate Assistant Commissioner holding that the amount of Rs. 6,436 was not liable to be included as part of accumulated profit, that the said amount ought to have been included as a part of past profits. The assessee -company resisted that contention by urging that the revenue was not entitled to raise this contention since it had not filed appeal or for that matter any cross -objection in the appeal of the assessee. The Tribunal rejected the objection of the assessee since in its opinion the respondent in appeal could always defend his case even on the basis of the material which had gone against him in the lower court. The Tribunal, however, on the facts agreed with the view of the Appellate Assistant Commissioner that surplus of Vastrapur land account should not be included in the accumulated past profits since it was merely a capital accretion and was not the commercial profits of the company. The Commissioner of Income -tax, therefore, sought this reference on the following three questions to us for our opinion. The assessee has also sought reference of the fourth question as its objection as to the competency of the revenue to raise a question without filing an appeal or cross -objection was rejected by the Tribunal. The question referred to us at the instance of the Commissioner of Income -tax are :