CHAPTER XI

[R1]Omitted section 104, as amended by the Finance Act, 1964, w.e.f. 1-4-1964, the Finance Act, 1965, w.e.f. 1-4-1965, the Finance Act, 1966, w.e.f. 1-4-1966, the Finance (No. 2) Act, 1967, w.e.f. 1-4-1968, the Finance Act, 1973, w.e.f. 1-4-1974, the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976 and the Finance (No. 2) Act, 1977, w.e.f. 1-4-1978, read as under:

“(1) Subject to the provisions of this section and of sections 105, 106, 107 and 107A, where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the 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 Income-tax Act the rate of—

(a) fifty per cent, in the case of an investment company,

(b) thirty-seven per cent, in the case of a trading company, and

on the distributable income as reduced by the amount of dividends actually distributed, if any, within the said period of twelve months.

(2) The Income-tax Officer shall not make an order under sub-section (1) if he is satisfied—

(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 within the period of twelve months referred to in sub-section (1) would be unreasonable; or

(ii) that the payment of a dividend or a larger dividend than that declared within the period of twelve months referred to in sub-section (1) 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.

(3) If the Central Government is of opinion that it is necessary or expedient in the public interest so to do, it may, by notification in the Official Gazette, and subject to such conditions as may be specified therein, exempt any class of companies to which the provisions of this section apply from the operation of this section.

(4) Without prejudice to the provisions of section 108, nothing contained in this section shall apply to—

(a) an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power;

(b) a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India.

Explanation.—For the purposes of clause (a) of this sub-section, the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included in its gross total income for the relevant previous year is not less than fifty-one per cent of such total income.”

[R2]Omitted section 105, as amended by the Finance Act, 1973, w.e.f 1-4-1974, stood as under:

‘(1) No order under section 104 shall be made,—

(i) in the case of an investment company which has distributed, within the period of twelve months referred to in sub-section (1) of section 104, not less than eighty per cent of its distributable income; or

(ii) in the case of any other company whose distribution, within the period of twelve months referred to in sub-section (1) of section 104, falls short of the statutory percentage by not more than ten per cent of its distributable income; or

(iii) in any case where according to the return made by a company under section 139 it has distributed, within the period of twelve months referred to in sub-section (1) of section 104, not less than the statutory percentage of its distributable income, but in the assessment made by the Income-tax Officer under section 143 or section 144 a higher total income is arrived at and the difference in the total income does not arise out of the application of the proviso to sub-section (1) of section 145 or sub-section (2) of section 145 or section 144 or the omission by the company to disclose its income fully and truly; or

(iv) in the case of a company where a reassessment is made under the provisions of clause (b) of section 147 and the sum distributed as dividends falls short of the statutory percentage of the distributable income determined on the basis of the reassessment;

unless the company, on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice, a further distribution of its profits and gains so that the total distribution made is not less than the statutory percentage of the distributable income.

Explanation.—For the purposes of clause (iv) of this sub-section, “the sum distributed as dividends” means,—

(a) where in relation to the assessment made under section 143 or section 144, any further distribution of dividends was made by the company in pursuance of a notice under this sub-section, the aggregate of the following sums, namely:—

(i) the sum distributed as dividends, within the period of twelve months referred to in sub-section (1) of section 104, and

(ii) the sum distributed as dividends within the period of three months from the receipts of the said notice;

(b) where an order under section 107A has been made by the Board in relation to the assessment made under section 143 or section 144, the sum distributed as dividends within the period determined by the Board under the provisions of sub-section (4) of section 107A;

(c) in any other case, the sum distributed as dividends within the period of twelve months referred to in sub-section (1) of section 104.

(2) Any further distribution made under sub-section (1) shall not be taken into account in deciding whether the provisions of section 104 apply in respect of the previous year in which the further distribution is made.’

[R3]Omitted section 106, as amended by the Finance Act, 1964, w.e.f. 1-4-1964 and substituted by the Finance Act, 1975, w.e.f. 1-4-1975, stood as under:

“No order under section 104 shall be made at any time after—

(a) the expiry of—

(i) four years from the end of the assessment year relevant to the previous year referred to in sub-section (1) of that section, where such assessment year is an assessment year commencing on or before the 1st day of April, 1974;

(ii) two years from the end of the assessment year relevant to the previous year referred to in sub-section (1) of that section, where such assessment year is an assessment year commencing after the 1st day of April, 1974; or

(b) the expiry of one year from the end of the financial year in which the assessment or reassessment of the profits and gains of the previous year referred to in sub-section (1) of that section is made,

whichever is later:

Provided that the period of limitation specified in this section shall not apply in a case where the company has made an application to the Board under section 107A.”

[R4]Omitted section 107, as amended by the Finance Act, 1964, w.e.f. 1-4-1964, stood as under:

“Except in cases where a decision is given by the Board under sub-section (4) of section 107A, no order shall be made by the Income-tax Officer under section 104 unless the previous approval of the Inspecting Assistant Commissioner has been obtained, and the Inspecting Assistant Commissioner shall not give his approval to any order proposed to be made by the Income-tax Officer until he has given the company concerned an opportunity of being heard.”

[R5]Omitted section 107A, as amended by the Finance (No. 2) Act, 1977, w.e.f. 10-7-1978, stood as under:

“(1) If any company to which the provisions of section 104 apply (not being an investment company) considers that, having regard to the current requirements for the development of its business, it would not be possible or advisable for it to declare or pay a dividend of an amount larger than that already declared or paid or proposed to be declared or paid by it, it may make an application to the Board for reduction of the amount of the minimum distribution required under this Chapter.

(2) Every application under sub-section (1) shall be in the prescribed form and shall be verified in the prescribed manner and shall be made within the period of twelve months referred to in sub-section (1) of section 104 or, where the Income-tax Officer has served on the company a notice under sub-section (1) of section 105 of his intention to make an order under section 104, within thirty days of the receipt of such notice.

(3) Every application under sub-section (1) shall be accompanied by a fee of one hundred rupees.

(4) If the Board is satisfied that a distribution equal to the statutory percentage of the distributable income of the company concerned would be unreasonable, it may reduce the amount of minimum distribution required of the company under this Chapter by such amount, not exceeding twenty per cent of the statutory percentage of its distributable income, as it may consider fit and further determine the period within which such distribution shall be made.

(5) The Board shall not reject an application made under sub-section (1) without giving the company concerned an opportunity of being heard and its decision shall be final as respects matters concluded by it.

(6) Where an application is made by the company after receipt of a notice from the Income-tax Officer under sub-section (1) of section 105 and a further distribution is made in accordance with the decision thereon of the Board, such further distribution shall not be taken into account in deciding whether the provisions of section 104 apply in respect of the previous year in which the further distribution is made.

(7) Where an application is made by a company under this section, the Income-tax Officer shall not make any order under section 104 until the decision is given by the Board on that application:

Provided that where a company is required to make a distribution or further distribution of its profits and gains in accordance with the decision of the Board and fails to make such distribution or further distribution within the period determined thereunder, the Income-tax Officer shall make an order under section 104 as if no reduction of the amount of minimum distribution had been made by the Board under this section.

(8) If the Central Government is of opinion that it is necessary or expedient in the public interest so to do, it may, by notification in the Official Gazette, declare that the provisions of this section shall not apply to any class of companies or in regard to the whole or any part of the profits and gains of any class of companies.

(9) Notwithstanding anything contained in section 246, no appeal shall lie to the Commissioner (Appeals) against an order of the Income-tax Officer under section 104 in a case where a decision has been given by the Board.

(10) The Board may, by notification in the Official Gazette, direct that, subject to such conditions, if any, as may be specified in the notification, the powers exercisable by it under this section shall also be exercisable by any Commissioner in respect of such companies or classes of companies as may be specified therein and thereupon in respect of such companies or classes of companies the provisions of this section and sections 106 and 107 shall have effect as if references in the said sections to the Board were references to such Commissioner.”

[R6]Section 108, prior to its omission, stood as under:

“Nothing contained in section 104 shall apply—

(a) to any company in which the public are substantially interested ; or

(b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.”

[R7]Omitted section 109, as amended by the Finance (No.2) Act, 1962, w.e.f. 1-4-1962, the Finance Act, 1964, w.e.f. 1-4-1964, the Finance Act, 1965, w.e.f. 1-4-1965, the Finance Act, 1966, w.e.f. 1-4-1966, the Finance (No.2) Act, 1967, w.e.f. 1-4-1968, the Finance Act, 1968, w.e.f. 1-4-1969, the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976, the Finance (No.2) Act, 1977, w.e.f. 1-4-1978 and the Finance Act, 1983, w.e.f. 1-4-1984, stood as under:

‘For the purposes of sections 104, 105 and 197A and this section,—

(i) “distributable income” means the grass total income of a company as reduced by—

(a) the amount of income-tax payable by the company in respect of its total income, but excluding the amount of any income-tax payable under section 104;

(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income;

(d) losses under the head “Capital gains” relating to the capital assets, other than short-term capital assets;

(e) income arising outside India in a country the laws of which prohibit or restrict the remittance of money to India :

Provided that, when the prohibition or restriction is subsequently removed, any reduction allowed under this provision shall be deemed to be a part of the distributable income of the previous year in which the prohibition or restriction is removed;

(f) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 (10 of 1949);

(g) any expenditure actually incurred for the purposes of the business, but not deducted in computing the income chargeable under the head “Profits and gains of business or profession” being—

(1) a bonus or gratuity paid to an employee,

(2) legal charges,

(3) any such expenditure as is referred to in clause (c) of section 40,

(4) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such an not resulting in the creation of an asset or enhancement in the value of an existing asset;

(h) any expenditure wholly and exclusively incurred for the purpose of making or earning any income (other than income chargeable under the head “Profits and gains of business or profession”) included in the gross total income but not allowed to be deduction in computing such income and not resulting in the creation of an asset or enhancement in the value of an existing asset;

(ia) [***]

(ib) “consultancy service company” means an Indian company whose business consists wholly in the provision of technical know-how, or in the rendering of services in connection with the provisions of technical know-how, to other persons.

Explanation.—In this clause and in sub-clause (3) of clause (iii), the expression “provision of technical know how” means,—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design secret formula or process or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or similar property;

(iii) the use of any patent, invention, model design, secret formula or process or similar property;

(iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill;

(ii) “investment company” means a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”;

(iia) “trading company” means a company whose business consists mainly in dealing in goods or merchandise manufactured, produced or processed by a person other than that company and whose income attributable to such business included in its gross total income is not less than fifty-one per cent of the amount of such gross total income;

(iii) (iii) “statutory percentage” means,—

(1)in the case of a consultancy service company	45%;
(2)in the case of any investment company, other than an investment company which falls under sub-clause (3) of his clause	90%
(3)in the case of an Indian company, not being an Indian company referred to in clause (a) of sub-section (4) of section 104 or a consultancy service company, a part of whose gross total income consists of profits and gains attributable to—
(i)the business of construction of ships or of manufacture or processing of goods or of mining or of generation or distribution of electricity or any other form of power; or
(ii)the business of provision of technical know-how, or of rendering services in connection with the provision of technical know-how, to other persons—
(a)in relation to that part of its gross total income as is attributable to the business referred to in item (i) of this sub-clause	Nil;
(b)in relation to that part of its gross total income as attributable to the business referred to in item (ii) of this sub-clause	45%;
(c)in relation to the remaining part of its gross total income—
(1)if it is an investment company or a company which satisfies the conditions specified in sub-clause (4)(a) of this clause	90%;
(2) in any other case	60%.
Explanation.—The provisions of this Chapter shall apply as if each of the aforesaid parts of the gross total income of the company were the gross total income of the company in relation to that part and as if the amount of dividends actually distributed and the distributable income were also similarly apportioned for the purposes of section 104 and this section;
(4)In the case of any other company not referred to in the preceding clauses,—
(a)where the accumulated profits and reserves (including depreciation reserves and any amounts capitalised from the earlier reserves) representing accumulations of past profits which have not been the subject of an order under section 104 or the corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922), exceed—
Either
I. the aggregate of—
(i) the paid-up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under section 104, and
(ii) any loan capital which is the property of the shareholders; or
II. the value of the fixed assets as shown in the books of the company, whichever of these is greater	90% :
Provided that in the case of such company, not being a trading company, sub-clause (a) shall have effect as if for the words “exceed”, the words “exceed twice the amount of” were substituted;
(b) where sub-clause (a) does not apply	60%
(iv) “gross total income” , means the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A.’

Reduction of minimum distribution in certain cases