CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
SECTION 107 — APPROVAL OF INSPECTING ASSISTANT COMMISSIONER FOR ORDERS UNDER SECTION 104
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 107 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 required the prior approval of the Inspecting Assistant Commissioner before 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 supervisory safeguard
Section 107 inserted a layer of senior supervision into the section 104 process. Because an order under section 104 imposed an additional charge on the company on the footing that its directors had unreasonably withheld dividend, Parliament required that the Income-tax Officer obtain the prior approval of the Inspecting Assistant Commissioner before passing such an order. The requirement was a check against arbitrary or insufficiently-considered invocations of a harsh power.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file): no order under section 104 was to be made by the Income-tax Officer except with the previous approval of the Inspecting Assistant Commissioner. The approval was a condition precedent to the exercise of the power.
A.3 Doctrinal themes
The governing principles are those applicable to every statutory 'previous approval' requirement in the Act (compare the approval requirements elsewhere in the assessment and penalty machinery): the approval is mandatory and jurisdictional; it must be a real and not a mechanical application of mind (Chhugamal Rajpal); the approving authority must exercise its own independent judgment and not act under dictation (Sirpur Paper Mills); and an order made without the required approval, or on an approval given without genuine consideration, is invalid. The safeguard reinforces the Supreme Court's theme that the section 104 power, being a burden strictly construed, must be exercised only on the conditions Parliament prescribed (Gangadhar Banerjee; East Coast Commercial).
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):
Approval of Inspecting Assistant Commissioner for orders under section 104.
107. [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 107 was a 'previous approval' safeguard and did not produce a distinct, separately-reported Supreme Court corpus under its own number; challenges to approval were decided on the general law governing mandatory statutory approvals. Cluster C-1 therefore sets out that general law through analogous Supreme Court authority (expressly cited as analogous principle, not as decisions on section 107), and Cluster C-2 cross-refers the strictly-construed charge that the approval guards. No authority has been invented to fill a gap.
Cluster C-1 : Mandatory prior approval and application of mind (analogous principle)
Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC).
Facts: Reassessment proceedings were initiated and the statutory sanction of the Commissioner was recorded merely by the word 'Yes' against the proposal, without reasons or any indication that the material had been examined.
Issue: Whether such a sanction satisfies a statutory requirement of approval by a superior authority.
Held: The Supreme Court held that the mechanical recording of 'Yes' disclosed no application of mind: the Commissioner had not examined the material or reached his own satisfaction, and the sanction — and the proceedings founded upon it — were therefore invalid.
Ratio / why it matters: A statutory sanction or approval must reflect a real and independent application of mind; a mechanical or rubber-stamp approval is no approval in law.
Relevance to this section: Analogous to the section 107 approval (cited as analogous principle): an Inspecting Assistant Commissioner's approval given without genuine consideration of the company's circumstances would not satisfy section 107, and an order founded on such approval would be liable to be quashed.
Source: Supreme Court of India · (1971) 79 ITR 603 · leading authority on mechanical sanction / application of mind (added in the June 2026 revision; cited as analogous principle).
Sirpur Paper Mills Ltd. v. Commissioner of Wealth-tax (1970) 77 ITR 6 (SC).
Facts: A quasi-judicial power was exercised in circumstances suggesting that the authority had acted on the view or direction of another authority rather than upon its own independent judgment.
Issue: Whether an authority required to form its own opinion may act under the dictation or instructions of a superior, or must exercise an independent judgment.
Held: The Supreme Court held that an authority on whom a statute confers the duty to form its own opinion must exercise an independent judgment and cannot abdicate that function by acting mechanically under the dictation or instructions of another authority; an order so made is vitiated.
Ratio / why it matters: A quasi-judicial discretion must be exercised independently and on the authority's own satisfaction; acting under dictation, or without application of mind, vitiates the order.
Relevance to this section: Analogous to the section 107 approval (cited as analogous principle): the Inspecting Assistant Commissioner's approval had to be a genuine, independent application of mind, not a formal or dictated endorsement.
Source: Supreme Court of India · (1970) 77 ITR 6 · authority on independent application of mind / no dictation (added in the June 2026 revision; cited as analogous principle).
Cluster C-2 : The strictly-construed charge that the approval guards (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 v. East Coast Commercial Co. Ltd. (1967) 63 ITR 449 (SC).
Facts: A closely-held company whose shareholders stood in an intimate relationship, with no evidence of internal disagreement and a continuous, smoothly-run management. The Revenue treated it as a company controlled by a block and applied section 23A.
Issue: How a 'controlling group acting in concert' is to be ascertained — by direct proof of concerted action, or by inference from the circumstances.
Held: The Supreme Court held that the test is not whether the members of the group have in fact acted in concert, but whether the circumstances are such that, judged by ordinary human experience, it can safely be taken that they must be acting together. Intimate relationship, absence of any disagreement, the ordinary expectation of individual profit and the well-organised unity of management may, together, establish a controlling block of 'one paramount mind'. The section being penal in character, the burden lies on the Revenue, and the proper authority must apply this correct test; deciding on an erroneous test is an error of law.
Ratio / why it matters: 'Acting in concert' may be inferred from the surrounding circumstances by the standard of ordinary human experience; actual proof of concerted voting is not indispensable.
Relevance to this section: Completes, with Jubilee Mills and Sahu Jain, the section 108 'public substantially interested' group of authorities that fixes the boundary of the section 104 charge.
Source: Supreme Court of India · (1967) 63 ITR 449 · verified via Indian Kanoon / CourtKutchehry.
D. PRACTITIONER'S NOTE
(1) For any old section 104 order, verify on the record that the prior IAC approval under section 107 was obtained and was a genuine application of mind; its absence — or a mechanical, rubber-stamp approval — renders the order invalid (Chhugamal Rajpal; Sirpur Paper Mills).
(2) Read section 107 together with section 106 (limitation): both are jurisdictional pre-conditions, and either failing defeats the order independently of the merits.
(3) The principle endures. Mandatory superior approval now appears in sections 151 (sanction for reassessment notice) and 153D (approval for search assessments) and in the faceless-assessment approval mechanisms; the application-of-mind / no-dictation principles are applied to 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 107 — APPROVAL OF INSPECTING ASSISTANT COMMISSIONER FOR ORDERS UNDER SECTION 104
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 107 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 required the prior approval of the Inspecting Assistant Commissioner before 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 supervisory safeguard
Section 107 inserted a layer of senior supervision into the section 104 process. Because an order under section 104 imposed an additional charge on the company on the footing that its directors had unreasonably withheld dividend, Parliament required that the Income-tax Officer obtain the prior approval of the Inspecting Assistant Commissioner before passing such an order. The requirement was a check against arbitrary or insufficiently-considered invocations of a harsh power.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file): no order under section 104 was to be made by the Income-tax Officer except with the previous approval of the Inspecting Assistant Commissioner. The approval was a condition precedent to the exercise of the power.
A.3 Doctrinal themes
The governing principles are those applicable to every statutory 'previous approval' requirement in the Act (compare the approval requirements elsewhere in the assessment and penalty machinery): the approval is mandatory and jurisdictional; it must be a real and not a mechanical application of mind (Chhugamal Rajpal); the approving authority must exercise its own independent judgment and not act under dictation (Sirpur Paper Mills); and an order made without the required approval, or on an approval given without genuine consideration, is invalid. The safeguard reinforces the Supreme Court's theme that the section 104 power, being a burden strictly construed, must be exercised only on the conditions Parliament prescribed (Gangadhar Banerjee; East Coast Commercial).
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):
Approval of Inspecting Assistant Commissioner for orders under section 104.
107. [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 107 was a 'previous approval' safeguard and did not produce a distinct, separately-reported Supreme Court corpus under its own number; challenges to approval were decided on the general law governing mandatory statutory approvals. Cluster C-1 therefore sets out that general law through analogous Supreme Court authority (expressly cited as analogous principle, not as decisions on section 107), and Cluster C-2 cross-refers the strictly-construed charge that the approval guards. No authority has been invented to fill a gap.
Cluster C-1 : Mandatory prior approval and application of mind (analogous principle)
Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC).
Facts: Reassessment proceedings were initiated and the statutory sanction of the Commissioner was recorded merely by the word 'Yes' against the proposal, without reasons or any indication that the material had been examined.
Issue: Whether such a sanction satisfies a statutory requirement of approval by a superior authority.
Held: The Supreme Court held that the mechanical recording of 'Yes' disclosed no application of mind: the Commissioner had not examined the material or reached his own satisfaction, and the sanction — and the proceedings founded upon it — were therefore invalid.
Ratio / why it matters: A statutory sanction or approval must reflect a real and independent application of mind; a mechanical or rubber-stamp approval is no approval in law.
Relevance to this section: Analogous to the section 107 approval (cited as analogous principle): an Inspecting Assistant Commissioner's approval given without genuine consideration of the company's circumstances would not satisfy section 107, and an order founded on such approval would be liable to be quashed.
Source: Supreme Court of India · (1971) 79 ITR 603 · leading authority on mechanical sanction / application of mind (added in the June 2026 revision; cited as analogous principle).
Sirpur Paper Mills Ltd. v. Commissioner of Wealth-tax (1970) 77 ITR 6 (SC).
Facts: A quasi-judicial power was exercised in circumstances suggesting that the authority had acted on the view or direction of another authority rather than upon its own independent judgment.
Issue: Whether an authority required to form its own opinion may act under the dictation or instructions of a superior, or must exercise an independent judgment.
Held: The Supreme Court held that an authority on whom a statute confers the duty to form its own opinion must exercise an independent judgment and cannot abdicate that function by acting mechanically under the dictation or instructions of another authority; an order so made is vitiated.
Ratio / why it matters: A quasi-judicial discretion must be exercised independently and on the authority's own satisfaction; acting under dictation, or without application of mind, vitiates the order.
Relevance to this section: Analogous to the section 107 approval (cited as analogous principle): the Inspecting Assistant Commissioner's approval had to be a genuine, independent application of mind, not a formal or dictated endorsement.
Source: Supreme Court of India · (1970) 77 ITR 6 · authority on independent application of mind / no dictation (added in the June 2026 revision; cited as analogous principle).
Cluster C-2 : The strictly-construed charge that the approval guards (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 v. East Coast Commercial Co. Ltd. (1967) 63 ITR 449 (SC).
Facts: A closely-held company whose shareholders stood in an intimate relationship, with no evidence of internal disagreement and a continuous, smoothly-run management. The Revenue treated it as a company controlled by a block and applied section 23A.
Issue: How a 'controlling group acting in concert' is to be ascertained — by direct proof of concerted action, or by inference from the circumstances.
Held: The Supreme Court held that the test is not whether the members of the group have in fact acted in concert, but whether the circumstances are such that, judged by ordinary human experience, it can safely be taken that they must be acting together. Intimate relationship, absence of any disagreement, the ordinary expectation of individual profit and the well-organised unity of management may, together, establish a controlling block of 'one paramount mind'. The section being penal in character, the burden lies on the Revenue, and the proper authority must apply this correct test; deciding on an erroneous test is an error of law.
Ratio / why it matters: 'Acting in concert' may be inferred from the surrounding circumstances by the standard of ordinary human experience; actual proof of concerted voting is not indispensable.
Relevance to this section: Completes, with Jubilee Mills and Sahu Jain, the section 108 'public substantially interested' group of authorities that fixes the boundary of the section 104 charge.
Source: Supreme Court of India · (1967) 63 ITR 449 · verified via Indian Kanoon / CourtKutchehry.
D. PRACTITIONER'S NOTE
(1) For any old section 104 order, verify on the record that the prior IAC approval under section 107 was obtained and was a genuine application of mind; its absence — or a mechanical, rubber-stamp approval — renders the order invalid (Chhugamal Rajpal; Sirpur Paper Mills).
(2) Read section 107 together with section 106 (limitation): both are jurisdictional pre-conditions, and either failing defeats the order independently of the merits.
(3) The principle endures. Mandatory superior approval now appears in sections 151 (sanction for reassessment notice) and 153D (approval for search assessments) and in the faceless-assessment approval mechanisms; the application-of-mind / no-dictation principles are applied to 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.