JUDGMENT M.C. Agarwal, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, has referred the following questions stated to be of law and to arise out of its order dated January 2, 1981, passed in ITA No. 298 (All.) of 1980, for the assessment year 1976-77 for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in interpreting the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974 (Act 35 of 1974), particularly after the insertion of Section 5A in the said Act ?
2. Whether, on the facts and in the circumstances of the case, the provisions of Section 104 of the Income-tax Act, applied to the assessee-company when the Companies (Temporary Restrictions on Dividends) Act, 1974, was in force ?"
2. We have heard Sri Vikram Gulati, learned counsel for the assessee, and Sri Ashok Kumar, learned standing counsel for the Commissioner.
3. The assessee is a private limited company engaged in the business of production of goods, i.e, printing cheques, etc., for various banks. It was, thus, engaged in an industrial activity and the question is whether the company was obliged to comply with the provisions of Section 104 of the Income-tax Act, 1961, and whether additional income-tax could be levied if the dividends declared fell short of the distributable profits of the company.
4. Section 104 provides that if the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay additional income-tax at certain rates. Sub-section (2) of Section 104 specifies the circumstances under which the Income-tax Officer was required not to make an order for the levy of additional tax. They are-
"(i) that, having' regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year the payment of a dividend or a larger dividend than that declared would be unreasonable ; or
(ii) that the payment of a dividend or a larger dividend than that declared would not have resulted in a benefit to the Revenue ; or
(iii) that at least seventy-five per cent, of the share capital of the company is throughout the previous year beneficially held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under Section 11."
5. For the year under consideration, the Assessing Officer gave the following details in the order passed by him under Section 104 :
Rs.
Rs.
Total income 8,09,520 Less : (i) Taxes payable Income-tax 5,36,013 Surtax 26,015 5,62,028 Distributable income 2,47,492 Dividend distributable (45%) 1.11,371 Dividend distributed Shortfall 89,250 22,121 Additional income-tax to be levied 39,561
6. The case set up by the assessee was that in view of the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974 (the 1974 Act), it was not obliged to declare dividends in accordance with Section 104 and that in any case for various reasons like past losses and outstanding loans, etc., it was not feasible to declare higher dividends. This explanation was not accepted and additional income-tax amounting to Rs. 39,500 was levied. The assessee appealed to the Commissioner of Income-tax (Appeals) who held that the provisions of the 1974 Act were applicable to the asses-see-company and, therefore, Section 104 of the Income-tax Act, 1961, could not be enforced against the company as the provisions of the 1974 Act had overriding effect. The Commissioner of Income-tax (Appeals) also held that because of what has been described by him as the first set of circumstances, declaration of a higher dividend could not have been reasonable. Those circumstances are stated in his order as under :
"(i) That the company raised, as evident from the balance-sheet of the financial years 1974, 1975 and 1976, a secured loan from the Industrial Credit and Investment Corporation of India Ltd. of Rs. 14,72,724 and it was liable to pay in the year under consideration a sum of Rs. 2,27,320 towards its payment.
(ii) The aforesaid loan was raised for the purposes of purchase of machinery which was purchased for a sum of Rs. 23,82,980 as evident from the balance-sheet of the financial year 1974.
(iii) That the entire paid up capital and the aforesaid loan capital of the company was locked up in fixed assets that amounted to Rs. 35,21,994.
(iv) The company had received an export order from Rafidain Bank, Iraq, of nearly Rs. 50 lakhs in the year under consideration and it had for that purpose to purchase paper, etc., that involved investment. The contract was executed by the company in the following year."
7. The Commissioner then took the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal held that in view of section 5A of the 1974 Act, it was possible for the company to declare dividends in excess of the prescribed limit and, therefore, it could have complied with the provisions of Section 104 and the view of the Commissioner (Appeals) that Section 104 became inapplicable, was incorrect. It, therefore, set aside the order passed by the Commissioner of Income-tax (Appeals) and directed him to decide the appeal afresh as in the view of the Tribunal, the Commissioner had not decided about the dealer's explanation for not complying with the provisions of Section 104.
8. The 1974 Act was enacted to provide, in the interest of national economic development, for temporary restrictions on the power of certain companies to declare dividends out of profits and for matters connected therewith or incidental thereto. The purpose of the Act was thus to conserve capital for industrial and economic development of the country as the Legislature must have felt that formation of more capital for such purpose was necessary. The Act was to apply for a temporary period of two years from the appointed day, i.e., July 6, 1974. Section 4 of this Act placed a restriction on the declaration of dividends for a period of two years from the appointed day and provided that no company to which this Act applies, shall declare or pay dividends for any financial year except out of the profits of the company for that financial year and no such dividend shall exceed, in the aggregate, the distributable profits of the company for that financial year. Section 5 then provided that for a period of two years from the appointed day, any dividend declared or paid after the appointed day by a company to which this Act applies, in excess of its distributable profits for a financial year shall, to the extent of such excess, be void, and any amount paid by the company to any shareholder in excess of its distributable profits for that year shall be recovered by the company and no such recovery shall be waived by the company. Section 6 placed restriction on interim dividends as well. Section 7 prohibited other distribution out of its assets. It also prohibited acceptance of any liability to make distribution out of its assets and even the grant of any loan to any shareholder of the company. Section 8 provided that this Act will have overriding effect. It says "the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in the Companies Act, 1956, or in any other enactment or in any contract or instrument having effect by virtue of any enactment other than this Act." Sections 9 and 10 provided for penalties and offences. Thus, the intent and purpose of the 1974 Act was to encourage formation of capital that could be available for the economic development of the nation, and to prevent the distribution of profits to the shareholders, etc., to a certain extent. The action of a company in not declaring the dividends even to the extent provided in the 1974 Act would, therefore, have been a welcome gesture.
9. By a subsequent amendment made by the Companies (Temporary Restrictions on Dividends) Amendment Act, 1974, Section 5A was added to the 1974 Act, Sub-section (2) whereof permitted the declaration of a higher dividend but prohibited its payment during the aforesaid period of two years and provided that the payment may be made after the expiry of two years with interest at 8 per cent, per annum. It is by virtue of this amendment that the Tribunal has held that the company could have complied with the provisions of both the Acts and, therefore, non-compliance with the provisions of Section 104 was actionable by the levy of additional tax.
10. We have produced the preamble of the 1974 Act and the various provisions thereof to show that the 1974 Act had a purpose that was totally opposite to the purpose of Section 104. Section 104 was enacted to prevent loss of revenue by the companies withholding payment of dividends to their shareholders. The 1974 Act, however, wanted the formation of capital and, therefore, though it did not ban the dividends completely, the philosophy underlying this legislation was that for some time the dividends should not be paid and the money should be utilised for capital formation to encourage national economic development. The Legislature has made its intent clear by providing in Section 8 that this Act shall have overriding effect. Therefore, we are of the view that during the period the 1974 Act remained in force, the provisions of Section 104 of the Income-tax Act stood suspended and no additional tax could be levied for not distributing dividends to the extent provided therein. This is so in spite of the insertion of Section 5A which is only enabling and specifically prohibits the payment of dividend even though declared. In our view, therefore, the Tribunal was not right in holding" that by virtue of Section 5A, the company was obliged to comply with the provisions of Section 104 of the Income-tax Act, 1961.
11. We find some support for our view from a judgment of the Supreme Court in CIT v. Godavari Sugar Mills Ltd. [1967] 63 ITR 310 in which the Supreme Court was concerned with some identical provisions contained in Section 23A of the Indian Income-tax Act, 1922, and the Public Companies (Limitation of Dividends) Act, 1949. The Supreme Court held that there was a manifest repugnancy between the provisions of the Ordinance and of Section 23A of the Act and it must be taken that there is an implied repeal of Section 23A of the Act to the extent of that repugnancy created by Section 3 of the Ordinance and so long as the Ordinance remained in force. Similar is the repugnancy in the provisions and the purpose of Section 104 of the Income-tax Act, 1961, and the provisions of the 1974 Act.
12. We, therefore, answer the questions, reproduced abo.ve, by saying that by virtue of the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974, the provisions of Section 104 of the Income-tax Act, 1961, could not be invoked against the assessee for the year under consideration.
13. An authenticated copy of the judgment be forwarded to the Registrar of the Tribunal, in accordance with law.