CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
SECTION 106 — PERIOD OF LIMITATION FOR MAKING ORDERS UNDER SECTION 104
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 106 was omitted by the Finance Act, 1987, with effect from 1 April 1988.
Life of the provision: Part of the original Chapter XI of the 1961 Act; it fixed the outer time-limit within which an order under section 104 could be made. Omitted w.e.f. 1-4-1988.
Predecessor: section 23A of the Indian Income-tax Act, 1922 (in its post-Finance Act, 1955 form, under which the additional tax fell on the company itself rather than being deemed a dividend in the shareholders' hands). The bulk of the case law on the Chapter is therefore reported under section 23A and applies directly to sections 104–109, which re-enacted the scheme.
Finance Act, 2026 impact: None. The section was omitted in 1988; the Finance Act, 2026 makes no change to an already-omitted provision. Retained here for completeness of the treatise and for residual litigation, limitation and historical-assessment situations.
A. SECTION COMMENTARY
A.1 Function — a limitation safeguard
Section 106 was a procedural safeguard. An order under section 104 was a serious additional charge, and Parliament confined the Officer's power to a defined period, after which the company could not be visited with the additional tax on the undistributed income of a given previous year. The provision thus protected companies from indefinite exposure and gave finality to the distribution decisions of earlier years.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file): section 106 barred the making of a section 104 order after the expiry of the prescribed period reckoned with reference to the relevant assessment year. Like all limitation provisions it operated as a jurisdictional fetter: an order made beyond time was without authority, irrespective of the merits of the underlying distribution question.
A.3 Doctrinal themes
The governing principles are the general principles of limitation in fiscal statutes: a limitation bar is mandatory and jurisdictional, it is for the Revenue to show that the order was made within time, and an order made out of time is a nullity. These principles dovetail with the Supreme Court's repeated insistence (in the section 104 / section 23A line) that the burden of bringing a case within the charging machinery lies on the Revenue. Because Chapter XI was a self-contained code, the section 106 limitation was distinct from — though it interacted with — the limitation governing the underlying assessment under sections 143 and 144; the additional-income-tax order under section 104 was an order over and above the regular assessment, and section 106 supplied its own outer time-limit.
A.4 Repeal
Omitted by the Finance Act, 1987 w.e.f. 1-4-1988; no change by the Finance Act, 2026.
B. STATUTORY POSITION (verbatim heading & omission note; scheme summarised editorially)
Reproduced verbatim from the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025):
Period of limitation for making orders under section 104.
106. [Omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
Chapter note (verbatim): [Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
C. CASE LAW — CLUSTERED BY ISSUE
Candid note (accuracy discipline): Section 106 was a limitation provision and did not generate a distinct, separately-reported Supreme Court corpus of its own; limitation disputes were resolved on general principles and on the dates of the particular assessment. Accordingly Cluster C-1 sets out the settled limitation principles through analogous Supreme Court authority (expressly cited as analogous principle, not as decisions on section 106), and Cluster C-2 cross-refers the substantive charge to which the limitation attaches. No authority has been invented to fill a gap.
Cluster C-1 : Limitation as a jurisdictional bar (analogous principle)
S.S. Gadgil v. Lal & Co. (1964) 53 ITR 231 (SC).
Facts: Action was sought to be taken against the assessee in the capacity of agent of a non-resident; by the time the notice was issued the period of limitation prescribed by the Act for such action had already expired, and the Revenue relied on an amendment that had enlarged the limitation period.
Issue: Whether an amendment extending the period of limitation, enacted after the original period had expired, can revive a proceeding that has already become time-barred.
Held: The Supreme Court held that once the period of limitation expired, the Income-tax Officer's authority to act came to an end and the assessee acquired a vested right to be free from the proceeding; an amendment enlarging the period, made after the bar had operated, did not revive the dead remedy in the absence of clear retrospective language.
Ratio / why it matters: A limitation bar under the Act is jurisdictional and creates a vested right in the assessee; it is not revived by a subsequent extension unless the statute clearly so provides.
Relevance to this section: Analogous to section 106 (cited as analogous principle, not as a decision on section 106): an order under section 104 made beyond the prescribed period would be a nullity, and the bar could not be circumvented by a later extension of time.
Source: Supreme Court of India · (1964) 53 ITR 231 · landmark on limitation as a jurisdictional bar (added in the June 2026 revision; cited as analogous principle).
K.M. Sharma v. Income-tax Officer (2002) 254 ITR 772 (SC).
Facts: The validity of a reassessment was challenged on the ground that the time-limit for initiating the proceeding had expired; the Revenue relied on enabling provisions to support action for years that were otherwise barred.
Issue: Whether a fiscal limitation provision is to be read strictly, and whether an enabling provision authorises action for years for which the period of limitation has already lapsed.
Held: The Supreme Court held that a provision of limitation in a fiscal statute must be construed strictly; the time-limit for initiating reassessment must be observed, and an enabling provision does not authorise action in respect of years already barred unless the statute, in clear and express terms, so provides.
Ratio / why it matters: Limitation under a fiscal statute is strictly construed in favour of the assessee; barred years are not reopened save by clear and express statutory language.
Relevance to this section: Analogous to section 106 (cited as analogous principle): the Revenue must establish that any order under section 104 was made within the prescribed period, the time-bar being read strictly against the Revenue.
Source: Supreme Court of India · (2002) 254 ITR 772 · authority on strict construction of fiscal limitation (added in the June 2026 revision; cited as analogous principle).
Cluster C-2 : The substantive charge to which the limitation attaches (cross-referenced from section 104)
Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd. (1965) 57 ITR 176 (SC).
Facts: A private limited company declared a modest dividend for the relevant accounting year. The Income-tax Officer, taking the view that a larger dividend could and should have been declared, invoked section 23A and levied the additional super-tax on the shortfall in distribution.
Issue: What is the correct standard for deciding whether the payment of a dividend (or a larger dividend) would be 'unreasonable'; what profits and circumstances the officer must weigh; and how the tax liability of the company is to be treated in arriving at the distributable surplus.
Held: The Supreme Court laid down that the Income-tax Officer, in deciding whether the declared dividend is unreasonable, must put himself in the position of a prudent businessman or a director of the company and deal with the matter from the businessman's point of view and not that of the tax-gatherer. He is to take an overall view of the company's financial position — losses of earlier years, the present profits, the reasonable requirements of the business and like commercial considerations. Where the regular assessment has been completed, the actual tax assessed (not the estimated tax or the figure in the balance-sheet) is to be deducted in computing the commercial/distributable profits. The provision operates as a burden and the onus lies on the Revenue to establish that its conditions are satisfied before an order is made.
Ratio / why it matters: The reasonableness of a dividend under the undistributed-profits regime is a businessman's question answered on the company's commercial profits and overall financial picture; assessed tax is deductible in arriving at distributable profit; and the onus is on the Revenue.
Relevance to this section: The leading authority on the working of section 104 — it supplies the 'prudent businessman' test, the overall-circumstances enquiry and the rule for deducting assessed tax that section 109's 'distributable income' computation presupposes.
Source: Supreme Court of India · (1965) 57 ITR 176 · verified via Indian Kanoon.
Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC).
Facts: A company in which the public were not substantially interested distributed dividends below the statutory measure. The dispute turned on the figure against which the shortfall (and the question of 'smallness of profit') was to be tested — the assessed total income, or the company's real, commercial profits. The assessable income had been swollen by notional and statutory adjustments (for example the balancing charge brought to tax on the sale of depreciable assets, and the disallowance of expenditure actually incurred), so that the income exigible to tax substantially exceeded the profit a businessman would regard as available for distribution.
Issue: Whether, for the purpose of section 23A of the 1922 Act, the 'smallness of profit' and the reasonableness of the dividend are to be judged by reference to the assessed income or by reference to the company's commercial (accounting) profits.
Held: The Supreme Court held that the 'smallness of profit' must be adjudged in the light of commercial or accounting profits, and not the assessable income. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred and may, in computing income, include many items on a notional basis; profits assessed for tax are therefore not the same thing as the commercial profits out of which alone a dividend can in fact be paid. It is the latter that govern the reasonableness enquiry.
Ratio / why it matters: Commercial profits — not the assessed total income — are the touchstone for testing 'smallness of profit' and the reasonableness of a dividend under the undistributed-profits regime. This is the foundational proposition later carried into the working of section 104.
Relevance to this section: Directly governs section 104 (and the definition of 'distributable income' in section 109): the additional-tax enquiry begins from real, distributable commercial profit, not from the assessment figure.
Source: Supreme Court of India · (1961) 41 ITR 290 · verified via Indian Kanoon / CaseMine.
D. PRACTITIONER'S NOTE
(1) In any residual/historical section 104 matter, the first line of defence is limitation under section 106 — establish the relevant date and test whether the order was within time; an out-of-time order is a nullity and the point is jurisdictional (Gadgil; K.M. Sharma).
(2) Pair the limitation objection with the section 107 approval objection: both are pre-conditions to a valid order, and either failing defeats the order independently of the merits.
(3) The principle endures. Strict, jurisdiction-defining limitation now governs sections 149 (reassessment notice), 153 (completion of assessment / reassessment) and 153B (search assessments); the Gadgil and K.M. Sharma principles are applied across all of these.
E. SOURCES & CITATIONS
Statutory composition verified against the Income-tax Act, 1961 (Bare Act as amended by the Finance Act, 2025), Chapter XI, which records: “[Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]” The marginal headings and omission notes quoted in Part B are reproduced verbatim from that source.
Finance Act, 2026: the in-house Finance Act 2026 Amendment Tracker records no item touching sections 104 to 109 or Chapter XI; the chapter having been omitted in 1988, the Finance Act, 2026 effects no change.
Case citations: the eight load-bearing authorities (Gangadhar Banerjee, Bipinchandra Maganlal, Asiatic Textiles, Williamson Diamonds; Raghuvanshi Mills, Jubilee Mills, East Coast Commercial, Sahu Jain) were web-verified (June 2026) against publicly reported sources (Indian Kanoon, CaseMine, CourtKutchehry and the Income Tax Reports as cited) and recur across the section files by design. The authorities added in the June 2026 revision (Sardar Baldev Singh; and, as analogous principle for the machinery sections, S.S. Gadgil, K.M. Sharma, Chhugamal Rajpal and Sirpur Paper Mills) are well-established Supreme Court decisions cited from their ITR/AIR reports; the precise report should be confirmed before filing.
Caveat: this material is treatise-style commentary for practitioners and academic use on a historic, omitted Chapter; it is not legal advice. Section 104 and its predecessor section 23A produced a large body of authority — the decisions selected are the leading and representative ones. Nothing here is invented; where a particular section number generated no distinct reported corpus, that is stated plainly.
CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
SECTION 106 — PERIOD OF LIMITATION FOR MAKING ORDERS UNDER SECTION 104
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 106 was omitted by the Finance Act, 1987, with effect from 1 April 1988.
Life of the provision: Part of the original Chapter XI of the 1961 Act; it fixed the outer time-limit within which an order under section 104 could be made. Omitted w.e.f. 1-4-1988.
Predecessor: section 23A of the Indian Income-tax Act, 1922 (in its post-Finance Act, 1955 form, under which the additional tax fell on the company itself rather than being deemed a dividend in the shareholders' hands). The bulk of the case law on the Chapter is therefore reported under section 23A and applies directly to sections 104–109, which re-enacted the scheme.
Finance Act, 2026 impact: None. The section was omitted in 1988; the Finance Act, 2026 makes no change to an already-omitted provision. Retained here for completeness of the treatise and for residual litigation, limitation and historical-assessment situations.
A. SECTION COMMENTARY
A.1 Function — a limitation safeguard
Section 106 was a procedural safeguard. An order under section 104 was a serious additional charge, and Parliament confined the Officer's power to a defined period, after which the company could not be visited with the additional tax on the undistributed income of a given previous year. The provision thus protected companies from indefinite exposure and gave finality to the distribution decisions of earlier years.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file): section 106 barred the making of a section 104 order after the expiry of the prescribed period reckoned with reference to the relevant assessment year. Like all limitation provisions it operated as a jurisdictional fetter: an order made beyond time was without authority, irrespective of the merits of the underlying distribution question.
A.3 Doctrinal themes
The governing principles are the general principles of limitation in fiscal statutes: a limitation bar is mandatory and jurisdictional, it is for the Revenue to show that the order was made within time, and an order made out of time is a nullity. These principles dovetail with the Supreme Court's repeated insistence (in the section 104 / section 23A line) that the burden of bringing a case within the charging machinery lies on the Revenue. Because Chapter XI was a self-contained code, the section 106 limitation was distinct from — though it interacted with — the limitation governing the underlying assessment under sections 143 and 144; the additional-income-tax order under section 104 was an order over and above the regular assessment, and section 106 supplied its own outer time-limit.
A.4 Repeal
Omitted by the Finance Act, 1987 w.e.f. 1-4-1988; no change by the Finance Act, 2026.
B. STATUTORY POSITION (verbatim heading & omission note; scheme summarised editorially)
Reproduced verbatim from the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025):
Period of limitation for making orders under section 104.
106. [Omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
Chapter note (verbatim): [Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
C. CASE LAW — CLUSTERED BY ISSUE
Candid note (accuracy discipline): Section 106 was a limitation provision and did not generate a distinct, separately-reported Supreme Court corpus of its own; limitation disputes were resolved on general principles and on the dates of the particular assessment. Accordingly Cluster C-1 sets out the settled limitation principles through analogous Supreme Court authority (expressly cited as analogous principle, not as decisions on section 106), and Cluster C-2 cross-refers the substantive charge to which the limitation attaches. No authority has been invented to fill a gap.
Cluster C-1 : Limitation as a jurisdictional bar (analogous principle)
S.S. Gadgil v. Lal & Co. (1964) 53 ITR 231 (SC).
Facts: Action was sought to be taken against the assessee in the capacity of agent of a non-resident; by the time the notice was issued the period of limitation prescribed by the Act for such action had already expired, and the Revenue relied on an amendment that had enlarged the limitation period.
Issue: Whether an amendment extending the period of limitation, enacted after the original period had expired, can revive a proceeding that has already become time-barred.
Held: The Supreme Court held that once the period of limitation expired, the Income-tax Officer's authority to act came to an end and the assessee acquired a vested right to be free from the proceeding; an amendment enlarging the period, made after the bar had operated, did not revive the dead remedy in the absence of clear retrospective language.
Ratio / why it matters: A limitation bar under the Act is jurisdictional and creates a vested right in the assessee; it is not revived by a subsequent extension unless the statute clearly so provides.
Relevance to this section: Analogous to section 106 (cited as analogous principle, not as a decision on section 106): an order under section 104 made beyond the prescribed period would be a nullity, and the bar could not be circumvented by a later extension of time.
Source: Supreme Court of India · (1964) 53 ITR 231 · landmark on limitation as a jurisdictional bar (added in the June 2026 revision; cited as analogous principle).
K.M. Sharma v. Income-tax Officer (2002) 254 ITR 772 (SC).
Facts: The validity of a reassessment was challenged on the ground that the time-limit for initiating the proceeding had expired; the Revenue relied on enabling provisions to support action for years that were otherwise barred.
Issue: Whether a fiscal limitation provision is to be read strictly, and whether an enabling provision authorises action for years for which the period of limitation has already lapsed.
Held: The Supreme Court held that a provision of limitation in a fiscal statute must be construed strictly; the time-limit for initiating reassessment must be observed, and an enabling provision does not authorise action in respect of years already barred unless the statute, in clear and express terms, so provides.
Ratio / why it matters: Limitation under a fiscal statute is strictly construed in favour of the assessee; barred years are not reopened save by clear and express statutory language.
Relevance to this section: Analogous to section 106 (cited as analogous principle): the Revenue must establish that any order under section 104 was made within the prescribed period, the time-bar being read strictly against the Revenue.
Source: Supreme Court of India · (2002) 254 ITR 772 · authority on strict construction of fiscal limitation (added in the June 2026 revision; cited as analogous principle).
Cluster C-2 : The substantive charge to which the limitation attaches (cross-referenced from section 104)
Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd. (1965) 57 ITR 176 (SC).
Facts: A private limited company declared a modest dividend for the relevant accounting year. The Income-tax Officer, taking the view that a larger dividend could and should have been declared, invoked section 23A and levied the additional super-tax on the shortfall in distribution.
Issue: What is the correct standard for deciding whether the payment of a dividend (or a larger dividend) would be 'unreasonable'; what profits and circumstances the officer must weigh; and how the tax liability of the company is to be treated in arriving at the distributable surplus.
Held: The Supreme Court laid down that the Income-tax Officer, in deciding whether the declared dividend is unreasonable, must put himself in the position of a prudent businessman or a director of the company and deal with the matter from the businessman's point of view and not that of the tax-gatherer. He is to take an overall view of the company's financial position — losses of earlier years, the present profits, the reasonable requirements of the business and like commercial considerations. Where the regular assessment has been completed, the actual tax assessed (not the estimated tax or the figure in the balance-sheet) is to be deducted in computing the commercial/distributable profits. The provision operates as a burden and the onus lies on the Revenue to establish that its conditions are satisfied before an order is made.
Ratio / why it matters: The reasonableness of a dividend under the undistributed-profits regime is a businessman's question answered on the company's commercial profits and overall financial picture; assessed tax is deductible in arriving at distributable profit; and the onus is on the Revenue.
Relevance to this section: The leading authority on the working of section 104 — it supplies the 'prudent businessman' test, the overall-circumstances enquiry and the rule for deducting assessed tax that section 109's 'distributable income' computation presupposes.
Source: Supreme Court of India · (1965) 57 ITR 176 · verified via Indian Kanoon.
Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC).
Facts: A company in which the public were not substantially interested distributed dividends below the statutory measure. The dispute turned on the figure against which the shortfall (and the question of 'smallness of profit') was to be tested — the assessed total income, or the company's real, commercial profits. The assessable income had been swollen by notional and statutory adjustments (for example the balancing charge brought to tax on the sale of depreciable assets, and the disallowance of expenditure actually incurred), so that the income exigible to tax substantially exceeded the profit a businessman would regard as available for distribution.
Issue: Whether, for the purpose of section 23A of the 1922 Act, the 'smallness of profit' and the reasonableness of the dividend are to be judged by reference to the assessed income or by reference to the company's commercial (accounting) profits.
Held: The Supreme Court held that the 'smallness of profit' must be adjudged in the light of commercial or accounting profits, and not the assessable income. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred and may, in computing income, include many items on a notional basis; profits assessed for tax are therefore not the same thing as the commercial profits out of which alone a dividend can in fact be paid. It is the latter that govern the reasonableness enquiry.
Ratio / why it matters: Commercial profits — not the assessed total income — are the touchstone for testing 'smallness of profit' and the reasonableness of a dividend under the undistributed-profits regime. This is the foundational proposition later carried into the working of section 104.
Relevance to this section: Directly governs section 104 (and the definition of 'distributable income' in section 109): the additional-tax enquiry begins from real, distributable commercial profit, not from the assessment figure.
Source: Supreme Court of India · (1961) 41 ITR 290 · verified via Indian Kanoon / CaseMine.
D. PRACTITIONER'S NOTE
(1) In any residual/historical section 104 matter, the first line of defence is limitation under section 106 — establish the relevant date and test whether the order was within time; an out-of-time order is a nullity and the point is jurisdictional (Gadgil; K.M. Sharma).
(2) Pair the limitation objection with the section 107 approval objection: both are pre-conditions to a valid order, and either failing defeats the order independently of the merits.
(3) The principle endures. Strict, jurisdiction-defining limitation now governs sections 149 (reassessment notice), 153 (completion of assessment / reassessment) and 153B (search assessments); the Gadgil and K.M. Sharma principles are applied across all of these.
E. SOURCES & CITATIONS
Statutory composition verified against the Income-tax Act, 1961 (Bare Act as amended by the Finance Act, 2025), Chapter XI, which records: “[Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]” The marginal headings and omission notes quoted in Part B are reproduced verbatim from that source.
Finance Act, 2026: the in-house Finance Act 2026 Amendment Tracker records no item touching sections 104 to 109 or Chapter XI; the chapter having been omitted in 1988, the Finance Act, 2026 effects no change.
Case citations: the eight load-bearing authorities (Gangadhar Banerjee, Bipinchandra Maganlal, Asiatic Textiles, Williamson Diamonds; Raghuvanshi Mills, Jubilee Mills, East Coast Commercial, Sahu Jain) were web-verified (June 2026) against publicly reported sources (Indian Kanoon, CaseMine, CourtKutchehry and the Income Tax Reports as cited) and recur across the section files by design. The authorities added in the June 2026 revision (Sardar Baldev Singh; and, as analogous principle for the machinery sections, S.S. Gadgil, K.M. Sharma, Chhugamal Rajpal and Sirpur Paper Mills) are well-established Supreme Court decisions cited from their ITR/AIR reports; the precise report should be confirmed before filing.
Caveat: this material is treatise-style commentary for practitioners and academic use on a historic, omitted Chapter; it is not legal advice. Section 104 and its predecessor section 23A produced a large body of authority — the decisions selected are the leading and representative ones. Nothing here is invented; where a particular section number generated no distinct reported corpus, that is stated plainly.